27th Annual Report

of the

> }~/~.Securitiesand Exchange

Commission

Fiscal Year Ended June 30, 1961

UNITED STATES GOVERNMENT PRIjNTlNG OFFICE, WASHINGTON 1962

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

Washington 25, D.C. Price $I (paper e.over)

•

-
II

SECURITIES AND EXCHANGE COMMISSION

Headquarters Office

425 Second Street NW.

Washington 25, D.C.

COMMISSIONERS

January 10, 1962

WILLIAM L. CARY, Chairman

BYRON D. WOODSIDE

J. ALLEN FREAR, JR.

MAKUEL F. COHEN

JACK M. WHITNEY II

ORVAL L. Dnfsors, Secretary
LETTER OF TRANSMITTAL

SECURITIES AND EXCHANGE COMMISSION,

TVashinqton. 25, D.C.

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

the honor to transmit to you the Twenty-Seventh Annual Report of

the Commission covering the fiscal year July 1, 1960,to June 30, 1961,

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

Exchange Act of 1934, approved Jnne 6, 1934; Section 23 of the Public Utility Holding Company Act of 1935, approved August 26,

1935; Section 46 (a) of the Investment Company Act of 1940, approved August 22, 1940; Section 216 of the Investment Advisers Act

of 1940, approved August 22, 1940; Section 3 of the act of June 29,

1949, amending the Bretton Woods Agreement Act; and Section

11(b) of the Inter-American Development Bank Act.

Respectfully,

WILLIAM L. CARY,

Ohairman.

THE PRESIDENT OF TilE SENATE,

THE SPEAKER OF THE HOUSE OF REPRESENTATIVES,

. Wa8hington, D.O.

m
Earl F. Hastings

1908-1961

We wish to express here our profound regret at the death of Earl F.

Hastings on September 8, 1961, shortly after his retirement for

reasons of health while serving his second term as a member of the

Securities and Exchange Commission.

As Director of Securities for the Arizona Corporation Commission in

the years 1949 to 1956, and thereafter as a member of this Commission, he served his State and Nation well as an able and just

administrator, bringing to the public service a broad experience in

mining and industrial engineering. His fairness in the administration of the law, his staunch advocacy of the cause of investor protection, and his dedication to the objectives for which the Commission was established have left an indelible impression upon those

members who served with him and upon the staff.

"Ve shall miss his wise and forthright counsel, and his warm and

courteous personality. To the members of his family we extend our

deepest sympathy.

William L. Cary

Byron D. Woodside

J. Allen Frear, Jr.

Manuel F. Cohen

Jack M. Whitney II

IV
TABLE OF CONTENTS

Page

Commissioners and staff offlcers; ____________________________________ XII

Regional and branch offices., ________________________________________ XIII

Biographies of Commissioners., ________________________________ ______ xv

PART I

CURRENT PROBLEMS BEFORE THE COMMISSION

The high level of activity and changing conditions in the securities

markets

Study of trading and marketing practices in the exchange and over- the-counter markets; _______ ______ _ __ 3

Study of the implications of the growth of investment companies , ___ 3

Variable annuity contracta.c , , __________________________________ 4

Enforcement activity _ _ _ _______________________________________ 4

Registration of new security offerings , ___________________________ 5

Management survey _ __________________________________________ 6

PART II

LEGISLATIVE ACTIVITIES_ _ ___ _ ___ ____ ______ __ _ 7

Statutory amendments in the 86th Congress______________________ 7

Congressional action and hearings in the 87th COngress_____________ 8

Legislative proposals in the 87th Congress________________________ 10

PART III

REVISION OF RULES, REGULATIONS, AND FORMS___________ 12

General______________________________________________________ 12

Revision of rules and forms concerning the reporting of security

holdings and transaetions.c.,., _____________________________ 12

Amendment of rules concerning disclosure of nonpublic records by

employees______________________________________________ 13

The Securities Act of 1933__ _________________ ___________________ 14

Amendment of rule 15L _ _________________________ _________ 14

Proposed rule 155_ __ ___ __ ______________ ___________________ 14

Adoption of rules 234 and 235; rescission of regulation A-R

(rules 230-233)__________________________________________ 14

Amendments to rule 472_______ ____ ____ ____________ _________ 15

Amendments to rules 473 and 478___________________________ 16

Amendment of form 8-8_____ ________ _________________ ______ 16

Proposed form 8-1L_________ _ ____ ____________ _________ 17

Amendment of form 8-12________ ________ __ __ ______________ _ 17

The Securities Exchange Act of 1934_____________________________ 17

Amendment of rule 14a-6 __ _ _______________________________ 17

Proposed rule 15d-2L __ _______ _ _______ _____ _____ 18

Proposed rule 19a2-L _ _ ___ _____ _____________ _____ 18

Amendment of form 8-K___________________________________ 19

Amendments to form 100K_________________________________ 19

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VI TABLE OF CONTENTS

REVISION OF RULES, REGULATIONS, AND FORMS-Continued Page

The Investment Company Act of 1940_ __ _ ______ ___ ___ 19

Amendment of rule 3c-L___________________________________ 19

Proposal to adopt exemptive rules applicable to licensed small

business investment oompanies , ___________________________ 20

Adoption of form N -5R_ ___________________________________ 20

Investment Advisers Act of 1940________________________________ 20

Amendment of form ADV and rule 204-1 and adoption of form

ADV-SUP______________________________________________ 20

Adoption of rule 204-2_ ____________________________________ 21

Proposed rule 206(4)-L______ _____ _____ _____ __ _ 22

PART IV

ADMINISTRATION OF THE SECURITIES ACT OF 1933__________ 24

Description of the registration process.L, , ________________________ 24

Registration statement and prospectus., ______________________ 24

Examination procedure.L,., __ ___________________ 25

Time required to complete registration; ______________________ 25

Volume of securities registered , _ ________________________________ 27

Registration statements filed, ___________________________________ 29

Stop order proceedings _________________________________________ 30

Examinations and investigations____________ ____________________ _ 39

Exemption from registration of small issues; ______________________ 40

Exempt offerings under regulation A_ ________________________ 41

Suspension of exemption_________ _______ _______________ _____ 42

Exempt offerings under regulation B_________________________ 44

Exempt offerings under regulation E_ ________________________ 45

Exempt offerings under regulation F _________________________ 45

Litigation under the Securities Act of 1933____ ____________________ 46

Participation as amicus curiae_______________________________ 50

PART V

ADMINISTRATION OF THE SECURITIES EXCHANGE ACT OF

1934___________________________________________________________ 52

Regulation of exchanges and exchange trading; __ _________________ 52

Registration and exemption of exchanges_____________________ 52

Disciplinary action , _ _ _ ____________ __ __ __ 53

Registration of securities on exchanges 53

Statistics relating to registration of securities on exehauges , ____ 54

Market value of securities traded on exchanges____________________ 55

Fiscal year share values and volumes_________________________ 56

Foreign stock on exehanges 57

Comparative exchange sta.tistics; , __ ____ __ __ __ _ ___________ 57

Comparative over-the-counter statistics 58

Reporting under section 15(d)_________ _______ ____________ 60

Delisting of securities from exchanges ____________________________ 61

Delisting proceedings under section 19(a) __ ___________________ 61

Unlisted trading privileges on exchanges 63

Applications for unlisted trading pri vileges 65

Block distributions reported by exchanges 66

Study of put and call options 67

Manipulation and stabilization 67

- - ______________________

.L; , _ _ _ _ _ _ _ __ _ _ __ _ _ _ _ _ _ _ _ _ _ _ _ _

- _______

- - - - - - - __ - - - - ____

- - - - _- ____

- _______

- ______________

- ______________
TABLE OF CONTENTS VII

ADMINISTRATION OF THE SECURITIES EXCHANGE ACT OF Page

1934-Continued

Insiders' security holdings and transactions , ______________________ 69

Ownership reports; _ _________ ____ _____ ___ ________ 69

Recovery of short-swing trading profits by issuer 70

Regulation of proxies , _ _ _______________________________________ 71

Scope of proxy regulation___________________________________ 71

Statistics relating to proxy statements____ ____________________ 71

Stockholders' proposals..c , , _______ __ ____ ______ ____ __ _____ __ _ 72

Ratio of soliciting to nonsoliciting companies__________________ 73

Proxy contests., ____ __ ________ _________ ____ _____ 73

Investigations; ________ _ ________ _ _ ________ 73

Regulation of broker-dealers and over-the-counter markets; _______ 74

Registration; __ __ ______________ ____ _ 74

Administration proeeedings , ________________________________ 74

Revocation and denial proceedinga., _____________________ 76

Suspension proceedings_________ _____ ____ __ 81

Other sanctions __ _ ____________________________________ 81

Net capital rule___________________________________________ 82

Financial statements., ______________________________________ 83

Broker-dealer inspections , __________________________________ 84

Supervision of activities of National Association of Securities Dealers,

Inc_________________________________________________________ 86

NASD disciplinary actions__________________________________ 87

Commission review of NASD disciplinary action_______________ 88

Commission review of N ASD action on membership _ _ _________ 91

Litigation under the Securities Exchange Act of 1934_ __ ___________ 92

Participation as amicus curiae__ _____________________________ 96

PART VI

ADMINISTRATION OF THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935___________________________________________ 98

Composition of registered holding company systems and progress

with respect to section 11 and other significant problems; _______ 99

Developments in individual registered systems____________________ 104

Financing of active registered public utility holding companies and

their subsidiaries , _ ___ __ __ 117

Competitive bidding , _____________________ _________________ 118

Issuance of long-term debentures by subsidiary public utility companies______________________________________________________ 120

Capitalization ratios and accounting for deferred taxes, ___________ 121

Protective provisions of first mortgage bonds and preferred stocks of

public utility companies , _____________________________________ 123

Exchange of securities pursuant to section 11 reorganizations_____ ___ 126

PART VII

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

ACT___________________________________________________________ 128

Summary of activities__________________________________________ 129

The Commission as a party to proceedings________________________ 130
VITI TABLE OF CONTENTS

PARTICIPATION OF THE COMMISSION IN CORPORATE RE- Page

ORGANIZATIONS UNDER CHAPTER X OF THE BANKRUPTCY

ACT-Continued

Matters related to the proceedings_______________________________ 130

Problems in connection with the administration of estates., _________ 132

Trustee's investigations; _ _ ____________________________________ _ 134

Intervention in chapter XI proceedings___________________________ 135

Activities with regard to allowances______________________________ 137

PART VIII

ADMINISTRATION OF THE TRUST INDENTURE ACT OF 1939__ 140

Indentures filed under the acL__________________________________ 141

Litigation under the act; _______________________________________ 141

PART IX

ADMINISTRATION OF THE INVESTMENT COMPANY ACT OF

1940___________________________________________________________ 142

Companies registered under the sct., , _______ ___ _______ __ _____ _ 142

Growth of investment company assets____________________________ 143

Inspection program; ___________________________________________ 144

Study of size of investment companies; _ _ ___ __ __ ____ _ ______ 145

Current information _ _ _________________________________________ 146

Applications and proceedings_____ ______ ____ __ ____________ 146

Variable annuity contracts__________ ________________________ 152

Litigation under the Investment Company Act of 1940_____________ 153

Participation as amicus curiae_______________________________ 156

PART X

ADMINISTRATION OF THE INVESTMENT ADVISERS ACT OF

1940___________________________________________________________ 159

Investment adviser registrations... . _____ ________ ___________ 160

Administrative proceedings , ___ _________________ __________ 160

Litigation under the Investment Advisers Act of 1940______________ 162

PART XI

OTHER ACTIVITIES OF THE COMMISSION____________________ 164

Courtpro~gs_____________________________________________ 164

Civilproceedings__________________________________________ 164

Criminal proceedings.L,., ________ __ _ ______ _ 164

Complaints and investigations____ ________ ___ ________ _____ 172

Enforcement problems with respect to Canadian securitiea, _________ 174

Canadian restricted list , _ _ _ __________ __ ___ ___________ ____ 176

Section of securities violations.L, , ____________ ___________________ 178

Applications for nondisclosure of certain information; ______________ 179

Activities of the Commission in accounting and auditing____________ 179

International Bank for Reconstruction and Development___________ 186

Inter-American Development Bank______________________________ 187

Statistics and special studies____________________________________ 188

Issues registered under the Securities Act of 1933______________ 188

New securities offerings , __ __________________ _______________ 188

Individuals' s&ving________________________________________ 188
TABLE OF CONTENTS IX

OTHER ACTIVITIES OF THE COMMISSION-Continued Page

Statistics and special studies-Continued

Corporate pension funds____ _______ _________________________ 189

Financial position of corporafions.Lc , , _______________________ 189

Plant and equipment expenditures__ ________________ ___ ___ 189

Stock market data_________________________________________ 189

Opinions of the Commission , _ _ _________________________________ 190

Dissemination of inforrnation , _ _ ___ _______ _____ ___ __ _______ 191

Information available for public inspection, ___________________ 192

Publications . . . _ _ _ _ _ _ ___ 192

Organization__________________________________________________ 193

Personnel, budget, and finance , _________________________________ 195

PART XII

APPE:r>.TDIX-STATISTICAL TABLES

Table 1. A 27-year record of registrations fully effective under the Securities Act of 1933_________________________________________ 201

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

fiscal year ended June 30, 196L___________________________ 202

Part 1. Distribution by months . _____________________________ 202

Part 2. Purpose of registration and type of security _ ____________ 202

Part 3. Purpose of registration and industry of 1egistrant . _ ______ 203

Part 4. Use of proceeds and industry of registrant; ________________ 204

Table 3. New securities offered for cash sale in the United States. _______ 205

Part 1. Type of offering; _______________________________________ 205

Part 2. Type of security ._____________ 206

Part 3. Type of issuec__________________________ 207

Part 4. Private placement of corporate securities . _____________ 208

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

securities offered for cash in the United States; 210

Part 1. All corporate . __ 210

Part 2. Manufacturing . . ___ 210

Part 3. Extractive. 211

Part 4. Electric, gas and water__________________________________ 211

Part 5. Railroad 212

Part 6. Transportation other than railroad; __ _ ___________________ 212

Part 7. Communication . _________ 213

Part 8. Financial and real estate , _ ______________________________ 213

Part 9. Commercial and other 214

Table 5. A summary of corporate securities publicly offered and privately

placed in each year from 1934 through June 196 L _ __ _ ______ 215

Table 6. Brokers and dealers registered under the Securities Exchange

Act of 1934-Effec.tive registrations as of June 30, 1961,

classified by types of organization and by location of principal

office__________________________________________________ 216

Table 7. Number of issuers and security issues on exehanges, ___________ 217

Part 1. Unduplicated number of stock and bond issues admitted to

trading on exchanges and the number of issuers involved,

as of June 30, 196L__________________________________ 217

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

number of issuers involved, as of June 30,1961.__________ 217

_

_

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- - __ - - - __ - - __ ___ __ ___

- - _____________________
x TABLE OF CONTENTS

Page

Table 8. Unlisted stocks on stock exchanges_________________________ 218

Part 1. Number of stocks on the exchanges in the various unlisted

categories as of June 30, 196L________________________ 218

Part 2. Unlisted share volume on the exchanges-calendar year 1960_ 218

Table 9. Dollar volume and share volume of sales effected on securities

exchanges in the calendar year 1960 and the 6-month period

ended June 30, 196L___________________________________ 219

Table 10 Comparative share sales and dollar volumes on exchanges,

1935-60 and 6 months to June 30, 196L__________________ 220

Table 11. Block distnbutions, 1942-1960_____________________________ 221

Table 12. Reorganization proceedings under Chapter X of the Bankruptcy Act in which the Commission participated in District

Court proceedings during the fiscal year 196L_____________ 221

Table 13. Summary of criminal cases developed by the Commission

which were still pending at June 30, 196L_________________ 223

Table 14. Summary of cases instituted in the courts by the Commission

under the Securities Act of 1933, the Securities Exchange Act

of 1934, the Public Utility Holding Company Act of 1935,

the Investment Company Act of 1940, and the Investment

Advisers Act of 1940__________________________________ 224

Table 15. Summary of eases instituted against the Commission, cases in

which the Commission participated as intervenor or amZCU8

curiae, and reorganization cases on appeal under chapter X

in which the Commission participated., ________________ 224

Table 16. Indictments returned for violation of the acts administered by

the Commission, the Mail Fraud Statute (18 U.S.C. 1341),

and other related Federal statutes (where the Commission

took part in the mvestigation and development of the case)

which were pending during the 1961 fiscal year__________ 225

Table 17. Injunctive proceedings brought by the Commission which were

pending during the fiscal year ended June 30, 196L________ 236

Table 18. Proceedings by the Commission to enforce subpoenas, pending

during the fiscal year ended June 30, 196L________________ 247

Table 19. Actions pending during fiscal year ended June 30, 1961, to

enforce voluntary plans under section lICe) to comply with

section lI(b) of the Public Utility Holdmg Company Act

of 1935________________________________________________ 248

Table 20. Actions under section 11(d) of the Public Utility Holding

Company Act of 1935 pending during the fiscal year ended

June 30, 1961, to enforce compliance with the Commission's

orders issued under section 11(b) ______________________ 250

Table 21. Contempt proceedings pending during the fiscal year ended

June 30, 196L _____ _____________________________ 251

Table 22. Petitions for review of orders of the Commission pending in

Courts of Appeals during the fiscal year ended June 30,

1961__________________________________________________ 252

Table 23. Miscellaneous actions involving the Commission or employees

of the Commission during the fiscal year ended June 30, 196L_ 255

Table 24. Cases in which the Commission participated as intervenor or

as amicus curiae, pending during the fiscal year ended

June 30, 1961__________________________________________ 256
TABLE OF CONTENTS XI

Page

Table 25. Reorganization cases under chapter X of the Bankruptcy Act

pending during the fiscal year ended June 30, 1961, in which

the Commission participated when district court orders were

challenged in appellate courts . _________________________ 258

Table 26. A 28-year summary of criminal cases developed by the Commission, fiscal years 1934-6L____________________________ 259

Table 27. A 28-year summary classifying all defendants in criminal cases

developed by the Commission, 1934 to June 30, 196L_____ 260

Table 28. A 28-year summary of all injunction cases instituted by tho

Commission, 1934 to June 30, 1961 by calendar yearc , . 261
COMMISSIONERS AND STAFF OFFICERS

(As of January 4, 1962)

Term wpire8

Commissioners June 5

WILLIAM L. CARYof New York, Chairman______________________________ 1966

BYRON D. WOODSIDEof Virginia_______________________________________ 1962

J. ALLEN FREAR, Jr., of Delaware______________________________________ 1965

MANUEL F. COHEN of Maryland_______________________________________ 1963

JACK M. 'WHITNEY II of Illinois______________________________________ 1964

Secretary: ORVALL. DuBoIS

Staff Officers

EDMUNDH. WORTHY, Acting Director, Division of Corporation Finance.

CHARLESE. SHREVE,Acting Associate Director.

ALLAN F. CONWILL,Director, Division of Corporate Regulation.

SOLOMOYFREEDMAN,Associate Director.

PHILIP A. LOOMIS,Jr., Director. Division of Trading and Exchanges.

IRVINGM. POLLACK,Associate Director.

MILTON H. COHEN, Director, Special Study of Securities Markets.

RALPH S. SAUL. Associate Director.

RICHARDH. PAUL, Chief Counsel.

PETERA. DAMMANN,General Counsel.

DAVIDFERBER,Associate General Counsel.

WALTERP. NORTH.Associate General Counsel.

ANDREWBARR,Chief Accountant.

LEONARDHELFENSTEIN.Director, Office of Opinion Writing.

W. VICTORRODIN, Associate Director.

WILLIAM E. BECKER,Management Analysis Officer.

FRANK J. DONATY,Comptroller.

ERNESTL. DESSECKER.Acting Records and Service Officer.

HARRYPOLLACK.Director of Personnel.

xu
REGIONAL AND BRANCH OFFICES

Regional Administrators

Region 1. New York, New Jersey.-Llewellyn P. Young; William D. Moran,

Associate Regional Administrator, 225 Broadway, New York 7, N.Y.

Region 2. Massachusetts, Connecticut, Rhode Island, Vermont, New Hampshire, Maine.-Philip E. Kendrick, Federal Building, Post Office Square,

Boston 9. Mass.

Region 3. Tennessee, North Carolina, South Carolina, Georgia, Alabama,

Mississippi. Florida, and that part of Louisiana lying east of the Atchll.-

falaya River.-William Green, Suite 138, 1371 Peachtree Street, NE.,

Atlanta 9, Ga.

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

Building (Room 630),105 West Adams Street, Chicago 3, Ill.

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

of the Atchafalaya River, and Kansas (except Kansas City).-0ran H.

Allred, United States Courthouse (Room 301), 10th and Lamar Streets,

Fort Worth 2, Tex.

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

Dakota, Utah.-Milton J. Blake, 802 Midland Savings Building, 444 17th

Street, Denver 2, Colo.

Region 7. California, Nevada, Arizona, Hawaii.-Arthur E. Pennekamp,

Pacific Building, 821 Market Street, San Francisco 3, Calif.

Region 8. Washington, Oregon, Idaho, Montana, Alaska.-James E. Newton, Hoge Building (9th floor), 705 Second Avenue, Seattle 4, Wash.

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

District of Columbia.-William J. Crow, Courts Building, 310 6th Street,

N.W., Washington 25, D.C.

Branch Offices

Cleveland 13, Ohio. Standard Building (Room 1628), 1370 Ontario Street.

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

Houston 2, Tex. 717Bettes Building, 201 Main Street.

Los Angeles 28, Calif. Guaranty Building (Room 309), 6331 Hollywood

Boulevard.

Miami 32, Fla. Plaza Building (Room 440), 245 South East First Street.

St. Louis, Mo. Arcade Building (Room 1025), 812 Olive Street.

St. Paull, Minn. Main Post Office and Customhouse (Room 1027), 180

East Kellogg BOUlevard.

Salt Lake City, Utah. Newhouse Building (Room 1119), 10 Exchange

Place.
COMMISSIONERS

William L. Cary, Chairman

Chairman Cary was born in Columbus, Ohio, on November 27, 1910.

He received an A.B. degree in 1931 and an LL.B. degree in 1934 from

Yale University and an M.B.A. degree from the Harvard Graduate

School of Business Administration in 1938. He is a member of Phi

Beta Kappa and Phi Delta Phi. Following admission to the Ohio

bar in 1934, he was associated with a Cleveland law firm for 2 years.

Upon completion of 2 years of graduate study at the Harvard Graduate School of Business in May 1938, he joined the legal staff of the

Securities and Exchange Commission where he served for nearly 2

years in the General Counsel's Officeand the Reorganization Division.

He served as a Special Assistant to the Attorney General in the Tax

Division of the Department of Justice from March 1940until January

1942,and as Counsel, Officeof Coordinator of Inter-American Affairs,

in Rio de Janeiro until January 1943. After World War II service

with the U.S. Marine Corps Reserve and the Officeof Strategic Services in Rumania and Yugoslavia, he became a lecturer in finance and

law at the Harvard Graduate School of Business Administration

(1946-47). From 1947 to 1955, he served as professor of law at

Northwestern University School of Law, except for service as Deputy

Department Counsellor for Procurement, Department of the Army,

during the Korean War, and at Columbia University School of Law

from 1955 to March 1961. He is coauthor of several books in the

corporate field, and until his appointment served as special counsel to

a New York law firm. He took office as a member of the Securities

and Exchange Commission on March 27, 1961, for the term expiring

June 5, 1961. His appointment also covered the succeeding 5-year

term ending June 5, 1966. He was designated Chairman of the

Commission.

Byron D. Woodside

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

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

from the University of Pennsylvania, A.M. from George 'Yashington

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

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

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

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

of that Commission which was charged with the administration of the

xv
XVI COMMISSIONERS

Securities Act of 1933. He transferred to the Securities and Exchange Commission when the Securities Exchange Act of 1934 was

enacted. In 1940 he became Assistant Director and in 1952 Director

of the Division (now Division of Corporation Finance) responsible

for administering the registration and reporting provisions of the

Securities Act, Securities Exchange Act, the Trust Indenture Act of

1939, and, in part, the Investment Company Act of 1940. For 14

months commencing in May 1948, he was on loan to the Department

of the Army and assigned to duty in Japan as a member of a five-man

board which reviewed reorganization plans of Japanese companies

under the Occupation's decartelization program; and beginning in

December 1950 he served 17 months with the National Securities Resources Board and later with the Defense Production Administration

as Assistant Deputy Administrator for Resources Expansion. He

took officeas a member of the Securities and Exchange Commission

on July 15, 1960, for the term of office expiring June 5, 1962.

J. Allen Frear, Jr.

Commissioner Frear was born on a farm near Rising Sun, Del., on

March 7, 1903, where he attended a rural school, graduated from the

Caesar Rodney High School, and obtained a B.S. degree from the

University of Delaware in 1924. He also holds an honorary degree

from Bethany College. An agriculturist by vocation, he has been

active in civic and political affairs. For the 12-year period from

January 3, 1949, he served two 6-year terms as a Senator from the

State of Delaware in the Senate of the United States. He was a

member of the Committee on Banking and Currency, which has jurisdiction over legislative and other matters affecting the Commission,

and the Committee on Finance. From 1940to 1948he was a member

of the Board of Directors, Farm Credit Administration, Second Farm

Credit District, except for a period of service with the U.S. Army

from 1943to 1946in World War II. He also served on the Delaware

Old Age Assistance Commission and on the board of trustees for

Delaware State College. At present he is a director of two banks in

Delaware, and a member of the board of trustees of the University of

Delaware. He holds membership in the Rotary Club, Sigma Nu

Fraternity, and the American Legion and the Veterans of Foreign

Wars. On March 15, 1961, he took the oath of office as a member

of the Commission for the term expiring June 5, 1965.

Manuel F. Cohen

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

1912. He holds a B.S. degree in social science from Brooklyn College of the College of the City of New York. He received an LL.B.
COMMISSIONERS XVII

degree, cum laude, in 19:36from Brooklyn LlHYSchool of St. Lawrence

University and was elected to the Philonomic Council. He is a

member of the New York bar. In 1933-1934: he served as research

associate in the Twentieth Century Fund studies of the securities

markets. He joined the Commission's staff as an attorney in 194~

after several years in private practice, serving first in the Investment

Company Division and later in the Division of Corporation Finance,

of which he was made Chief Counsel in 1953. He was named Adviser

to the Commission in 1959 and in 1960 became Director of the Division of Corporation Finance. He was awarded a Rockefeller Public Service Award by the trustees of Princeton University in 1956 and

for a period of 1 year studied the capital markets and the processes

of capital formation and of government and other controls in the

principal financial centers of "Testern Europe. In 1961 he was

appointed a member of the Council of the Administrative Conference

of the United States and received a Career Service Award of the

National Civil Service League. Since 1958 he has been lecturer in

Securities Law and Regulation at the Law School of George Washington University and is the author of a number of articles on securities regulation published in domestic and foreign professional

journals. He took office as a member of the Commission on

October 11, 1961, for the term expiring June 5, 1963.

Jack M. Whitney II

Commissioner 'Whitney was born in Huntington Beach, Calif., on

May 16, 1922. He attended Millsaps College in Jackson, Miss., for

2 years, and Northwestern University School of Commerce, from

which he received a B.S. degree in 194:3. From 1943 to 1946 he was

on active duty in the U.S. Naval Reserve, achieving the rank of

Lieutenant (junior grade) in the Supply Corps. He was graduated

from Northwestern University School of Law in 1949 with the degree

of J.D. In law school he was an editor of the law review, and he is

a member of Beta Gamma Sigma and Order of the Coif. Following

graduation he became associated with the Chicago law firm of Bell,

Boyd, Marshall & Lloyd, of which he was a member at the time of his

appointment to the Commission. His practice was primarily in the

field of corporate finance. He took officeas a member of the Commission on November 9, 1961, for the term ending June 5, 1964.

620373-'6Z---2

PART I

CURRENT PROBLEMS BEFORE THE COMMISSION

The High Level of Activity and Changing Conditions in the Securities Markets

The activity in the security markets of the Nation continued to increase and reached a new peak in fiscal year 1961. This is shown

graphically in the chart on page 2, which portrays the successive

significant increases that have occurred in recent years in the flotation

of new issues of securities for sale to the public. A similar increase

has occurred in the volume of trading on the national securities exchanges. In the fiscal year 1961 such trading reached a new peak of

1.97billion shares with a dollar volume of $57billion.

These figures reflect a marked growth of public participation in

the securities markets. A study made by the New York Stock Exchange shows that during the period 1952-59 the number of shareholders doubled, and that in the last 3 years of that period the number

increased by nearly 1113 million a year. Correspondingly there has

been a large increase in the number of broker-dealers, in the number

of their salesmen and in the number of branch officeswhich they have

opened. At the end of the 1961 fiscal year there were 5,500 brokers

and dealers registered with the Commission as compared with 3,930

in 1950. The number of customer's men registered with the New

York Stock Exchange increased from 10,608in 1950 to 27,896 in 1961

and the number of customer's men registered with the National Association of Securities Dealers, Inc., increased from 28,794 to 93,351

in the same period. The number of branch officesmaintained by

member firms of the New York Stock Exchange increased from 1,661

in 1950 to 3,166 at the end of 1960. Some member firms have trebled

their retail outlets.

Thus, concomitantly with the influx of a large number of new

and presumably inexperienced investors into the market, there has

been an influx of new and inexperienced salesmen. At the same time,

the increase in the number of branch offices has tended to result in

less effective supervision of the salesmen. The problem of supervision is aggravated by the employment of part-time salesmen and

salesmen who operate from their private residences. These factors

have made more difficult the task of the Commission and the exchange

and securities association disciplinary bodies in attempting to insure

1
2 SECURITIES AND EXCHANGE COMMISSION

45 50 55 60

NUMBER OF REGISTRATIONS

DOLLAR VOLUME

8

SECURITIES EFFECTIVELY REGISTERED WITH S.E.C.

DOLLARS BILLIONS 1935 1961

20

16

12

0

HUNDREDS

20

15

10

5

0

1935 40

(Fiscal Years)

DS.4IU,

that prospective investors receive adequate information and proper

advice as to the suitability of particular securities to meet their personal investment needs.

Investment companies have assumed an increasing importance. The

number of investment companies registered with the Commission has

increased from 366 in 1950 to 663 at the close of the 1961 fiscal year

and in the same period the estimated market value of their assets

increased from $4.7 billion to $29 billion. In the 1961 fiscal year such

companies registered $4.5 billion of new securities for sale to the

public, as compared with the total of $19 billion of new securities

issues registered for sale by all corporations. In the sale of investment company securities to a larger number of persons, door-to-door

salesmen have been utilized and plans are provided whereby such

securities may be purchased by a series of periodic payments.

-
TWENTY-SEVENTH ANNUAL REPORT 3

Another phenomenon which has manifested itself is the strong

public appeal of new issues of securities and many new issues have

moved up sharply in price above the initially established offering

price almost from the moment first marketed. In an effort to detect

any manipulative or other fraudulent practices contributing to such

price increases, the Commission has conducted more market quizzes

this year than in any prior year in its history. Detection of such

practices is made difficult by the lack of any systematic reporting of

prices and volume of transactions in the over-the-counter market such

as is available concerning transactions on security exchanges.

Study of Trading and Marketing Practices in the Exchange and Over-theCounter Markets

In view of the tremendous growth and many new developments in

the securities markets, the Commission has welcomed the authorization and special appropriation granted by H.J. Res. 438, enacted

shortly after the close of the fiscal year, directing a study of trading

and marketing practices on the national securities exchanges and in

the over-the-counter market to determine whether exchange and securities association rules, including rules for the expulsion, suspension,

or disciplining of members, are adequate for the protection of investors ill the light of present conditions, whether the administration

of these rules is sufficient and whether additional rules or legislation

are required. This study will result in the obtaining and evaluation

of much valuable overall information as to distribution and trading

practices both on and off the exchanges. The Commission is directed

to report the result of its study on or before January 3, 1963, and will

promptly submit to the Congress any recommendations for legislation

in particular areas which may be shown to be required in the course

of the study.

Study of the Implications of the Growth of Investment Companies

As reported in previous reports, the Commission entered into a

contract with the Wharton School of Finance and Commerce of the

University of Pennsylvania for the preparation of a study of the

problems created by the growth in size of investment companies. As

discussed in part IX below, a report has now been received covering

such subjects as organization and control of open-end investment

companies, growth of investment companies, portfolio company control, investment policy, performance, and impact of investment companies on the stock market. A further report dealing with the relationships between open-end investment companies and their

investment advisers and principal underwriters is expected to be

received by the end of the calendar year 1961. Itis anticipated that

the information developed in this report will assist inproviding a basis
4 SECURITIES AND EXCHANGE COMMISSION

for determination by the Commission of the action which should be

taken concerning the problems in these fields and whether specific

legislative recommendations should be made by the Commission to

the Congress.

The portion of the report yet to be received is of particular interest

in view of the stockholders suits, some 50 in number, which have been

instituted in the courts during the past 2 years against 18 registered

investment companies and in which it is alleged, inter alia, that the

management or advisory fees paid by the investment companies are

grossly excessive.

The Commission has participated in several of these suits as amicus

curiae in support of plaintiffs' position that the act affords a private

Federal right of action for violation of various provisions of the act 1

but has not taken any direct action with respect to merits of the

matters involved in the litigation.

Variable Annuity Contracts

The Commission has under study the many problems arising under

the Investment Company Act of 1940 in connection with the issuance

and sale of variable annuity contracts. On September 26, 1961, after

the close of the fiscal year, the President vetoed H.R. 7482, which

would have amended the Life Insurance Act of the District of Columbia to permit District life insurance companies to establish certain

voting and management procedures with respect to variable annuity

contracts. The passage of the bill had been opposed by the Commission. In his veto message the President pointed out that the purchaser

of a variable annuity depends largely upon the efficiency and skill of

the management in selecting and managing the underlying portfolio

securities for the return upon his investment. He stated that the bill

failed to give adequate recognition to the basic principle. recognized

in the Investment Company Act, that the investor have a voice in the

control of his company. He pointed out further that the bill did not

resolve the problems under the act and indicated his confidence that

the Commission would in the near future be in a position to offer a

suggested program for solution of the problem of reconciling with the

provisions of the Investment Company Act the operations of life

insurance companies which desire to sell variable annuities.

Enforcement Activity

The high level of public interest and participation in the securities

markets has offered a fertile field for unscrupulous operators and promoters. To counter fraudulent and other illegal practices in the sale

and purchase of securities, the Commission is pursuing a vigorous en1See the discussion of Brown v. Bullock and Brouk v. Managed Funtl8 under "Litigation

under the Investment Company Act" in pt. IX ot this report.
TWENTY-SEVENTH ANNUAL REPORT 5

forcement program. During the fiscal year, 546 antifraud and other

regulatory investigations were instituted. Injunction actions were

brought in 92 cases, a greater number than in any previous year. In

criminal prosecutions 126 convictions were obtained in 45 cases, the

largest number of convictions in any fiscal year since the earliest days

of the Commission. Inspections were made of 1,627 broker-dealer

firms, and the registrations of 55 firms "ere revoked. Examinations

or investigations were initiated in 16 cases to determine whether stop

order proceedings should be brought with respect to registration statements filed with respect to new security offerings, and 14 investigations were instituted to determine whether other information filed

with the Commission was accurate and adequate. Orders suspending the exemption from registration provided for small security issues

were issued in 54 instances. Inspections were conducted of 56 registered investment companies. The most significant of these actions

are described in the parts of this report which follow.

Operations from foreign bases continue to plague our enforcement

efforts. Despite excellent cooperation from Canadian authorities, it

is most difficult to combat fraudulent activities carried on from vantage points outside our jurisdiction.

Registration of New Security Offerings

One of the primary duties of the Commission is the examination of

registration statements filed under the Securities Act of 1933 with

respect to new security issues proposed to be offered to the public. The

unprecedented number of registration statements filed in recent years

has taxed the capacity of the Commission's staff to the utmost. The

number of such statements filed increased again in the fiscal year 1961

to a new high of 1,830, representing a 12 percent increase over last

year. This number may be compared with the total number of registration statements filed in fiscal 1950of 496.

The problem for the Commission arises not only from the volume

of statements, but more particularly from their character. Of the

1,830 statements filed in fiscal 1961, 52 percent, amounting to a record

number of 958, were filed by companies that had not previously registered a securities offering. This compares with 28 percent as recently

as 1958. The letter of comment technique whereby inadequacies

in the registration statement are called to the issuer's attention by

our staff and appropriate amendments filed is described in part IV of

this report. Needless to say this processing technique is more time

consuming where the issuer has had no previous experience in complying with the registration requirements.

The increases in the numbers and change in character of registration statements filed in recent years has far outstripped increases in

examining personnel and the median time required to process regis-
6 SECURITIES AND EXCHANGE COMMISSION

tration statements has crept upwards year by year, reaching 55

days from initial filing to effective date in fiscal 1961. For fiscal

1962, under a further increased budget, it has been possible to allocate

a personnel increase to the Division of Corporation Finance which it

is hoped will result in a decrease in the time required in the examination process.

Management Survey

During the fiscal year the management consulting firm of Booz,

Allen & Hamilton conducted a survey of the Commission under contract with the Bureau of the Budget with the consent of the Commission. The general purpose of the survey was to appraise the

Commission's organization and operations and to recommend

improvements where appropriate. The survey began on July 18, 1960,

and the factfinding aspects were completed by October 31, 1960.

Printed copies of the survey were made available by the Bureau of

the Budget on January 16, 1961,for distribution to appropriate committees of the Congress, interested members of the public, the members

and staff of the Commission, and the press.

The report contains the following principal conclusions: (1) the

Commission is effectively carrying out the mission assigned to it by

the Congress, but additional manpower is required in order to prevent

deterioration of regulatory standards; (2) there is an urgent need

for a minimum 11 percent increase in manpower above the allocation for fiscal 1961 to meet the increased workload; and (3) certain

procedural and organizational changes should be made.

The report encompasses a total of 101 recommendations, 13 outlining the need for additional manpower to permit the Commission to

process its workload, 74 relating to procedural changes, 11 pertaining

to organizational changes, and 3 pertaining to training of new

personnel.

As of August 31, 1961, 82 recommendations had been implemented

or otherwise acted upon, and the remaining 19 were under study.

It may be noted that the appropriation for fiscal 1962 provides for

an average employment approximately 14 percent above that in 1961.
PARTll

LEGISLATIVE ACTIVITIES

Statutory Amendments in the 86th Congress

At the beginning of the fiscal year, amendments to the Investment

Advisers Act of 1940 and the Trust Indenture Act of 1939 were

enacted by the 86th Congress and signed by the President, becoming

Public Laws 86-750 and 86-760, respectively.

Public Law 86-750 amends the Investment Advisers Act of 1940

by expanding the bases for disqualification of a registrant because

of prior misconduct, authorizing the Commission by rule to require

the keeping of books and records and the filing of reports, permitting periodic examination of a registrant's books and records, empowering the Commission by rule to define and prescribe means

reasonably designed to prevent fraudulent practices, extending criminal liability for a willful violation of a rule or order of the Commission, making it clear that aiders and abettors may be responsible

in injunctive and administrative proceedings, and modifying the definition of the term "control" in the statute and the conditions under

which an investment adviser may call himself an "investment

counsel."

Public Law 86-760 amends section 304( c) of the Trust Indenture

Act of 1939. Under that section the Commission was required to

grant an exemption from one or more of the provisions of the act

if, at the time the application for exemption was filed, securities were

outstanding under the indenture involved which were outstanding

within 6 months of the enactment of the act, that is by February 4,

1940, and if compliance would require consent of the holders of outstanding securities, or would impose an undue burden of the issuer,

having due regard for the public interest and the interests of investors.

As amended, section 304(c) now requires the Commission to grant the

exemption in the same situation if there are securities outstanding

under the indenture which were outstanding either on February 4,

1940, or such securities were outstanding on January 1, 1959.

The Commission had originally made a number of proposals to the

86th Congress for amendment of the Federal securities law. The proposals were intended to strengthen the safeguards and protections

afforded the public by tightening jurisdictional provisions, correcting

certain inadequacies revealed through administrative experience and

facilitating criminal prosecutions and other enforcement activities.

7
8 SECURITIES AND EXCHANGE COMMISSION

Hearings on the bills were held and modifications of the proposals

were passed by the Senate and reported out by the Committee on

Interstate and Foreign Commerce of the House of Representatives.

'Vith the exceptions noted above, however, they were not enacted into

law. The Commission's proposals and the action taken by Congress

concerning them are discussed in the 25th annual report, pages 9-11

and the 26th annual report, pages 9-10.

An amendment enacted to section 4 (a) of the Securities Exchange

Act of 1934 provides that a member of the Commission, after the

expiration of his term, shall continue in officeuntil his successor is

appointed and qualified, except that he may not continue beyond the

expiration of the next session of Congress subsequent to the expiration of his term in office.'

Congressional Action and Hearings in the 87th Congress

1. H.J. Res. -438.-0n June 27,1961, Chairman Cary and other members of the Commission appeared before the Subcommittee on Commerce and Finance of the Committee on Interstate and Foreign

Commerce, House of Representatives, to testify on H.J. Res. 438. The

resolution, which was introduced by Representative Peter Mack, provided for the amendment of the Securities Exchange Act of 1934 to

authorize and direct the Commission to make a study and investigation

of the adequacy, for the protection of investors, of the rules of national securities exchanges and national securities associations, including rules for the expulsion, suspension, or disciplining of members

for conduct inconsistent with just and equitable principles of trade.

The resolution also directed the Commission to report to the Congress

on or before January 3, 1963,the results of its study and investigation,

together with its recommendations, including recommendations for

such legislation as the Commission deems advisable. An appropriation of $750,000with which to carry out the study and investigation

was authorized and $412,000 was appropriated for this purpose for

the 1962fiscal year.

Chairman Cary testified that the Commission supported the resolution and was of the opinion that a thorough study of the over-thecounter market and of the exchanges is desirable. He pointed out

that the Commission's present budget is not enough to support such

a study and investigation and that the Commission is virtually forced

to concentrate all of its funds and manpower upon immediate

problems.

Chairman Cary discussed, as tentative areas of inquiry under the

study and investigation, the over-the-counter market generally, the

lack of information concerning over-the-counter securities, the rules

1 Public Law 86-619. A correctiug amendment relating to the salary of the Chairman

was subsequently embodied in H.R. 10366 and enacted into law. Public Law 86-771.
TWENTY -SEVENTH ANNUAL REPORT 9

of the exchanges, the growth of public participation and trading

volume, the changes in methods of distribution and marketing, and

certain problems in connection with the employment of credit in the

securities markets and distribution of securities through the facilities

of the exchanges.

A modification suggested by Chairman Cary was incorporated in

the resolution and after the end of the fiscal year it was passed by the

House of Representatives and the Senate and was signed by the

President.

2. Reorganization Plan No.1 and S. £U35.-Chairman Cary and

other members of the Commission appeared before various committees

of the Senate and House of Representatives in connection with hearings on Reorganization Plan No.1, which concerned the Commission's authority to delegate, by rule or order, any of its functions.

Testimony was given on May 18, 1961, before a subcommittee of the

Committee on Government Operations, House of Representatives, on

June 2, 1961, before a subcommittee of the Senate Committee on

Banking and Currency and on June 6, 1961, before the Committee

on Government Operations of the Senate.

In substance, Chairman Cary testified that he believed that the plan

would serve to relieve the Commission from dealing with many matters of lesser importance and thus conserve its time for the consideration of major matters of policy and planning, that under the plan the

rights of any party appearing before the Commission would continue

to be preserved, that the Commission would retain the right to review

any delegated action and that the plan would expand and clarify the

Commission's already existing powers of delegation.

Reorganization Plan No. 1 was disapproved by the Senate, and on

June 22, 1961, Senator Harrison A. Williams, Jr. (for himself and

for Senator Jacob K. Javits), introduced S. 2135, which also dealt

with the Commission's authority to delegate its functions, but which

differed in certain respects from Reorganization Plan No. 1. Although

no hearings were held on S. 2135, the Commission submitted comments on the bill in which it suggested amendments which it believed

would improve the bill, and indicated that it favored the adoption

of S. 2135 subject to the suggested amendments. On August 24,1961,

the Committee on Banking and Currency, U.S. Senate, favorably reported S. 2135 with amendments as suggested by the Commission, and

on September 1, 1961, the Senate passed the bill as reported.

3. HR. 14.-0n June 8, 1961 Chairman Cary and members of the

Commission appeared before the Committee on Interstate and Foreign

Commerce, House of Representatives, to testify on H.R. 14, a bill to

promote the efficient, fair, and independent operation of Federal regulatory agencies. The Chairman testified that the Commission is in
10 SECURITIES AND EXCHANGE COMMISSION

accord with the purposes of the bill, but that certain provisions of the

bill might create problems in connection with the operation of the

Commission.

Legislative Proposals in the 87th Congress

The following bills relating to the Federal securities laws were

introduced in the 87th Congress during the fiscal year 1961.

S. 755, introduced by Senator Homer E. Capehart, would amend

section 31 of the Securities Exchange Act of 1934, which now provides an annual fee for registration of exchanges of one fivehundredth of 1 percent of the aggregate dollar amount of stock

exchange transactions, equal to 2 cents per $1,000. Under the bill,

this registration fee would be increased to a rate of 5 cents per $1,000

and there would be a similar registration fee of 5 cents per $1,000 on

transactions effected otherwise than on a national securities exchange."

S.l117, introduced by Senator Maurine B. Neuberger, would amend

section 36 of the Investment Company Act of 1940 to provide an investigatory power in the board of directors of a registered investment

company, or the investment adviser or principal underwriter for such

a company, with respect to among other things, securities transactions and loans by an officer, director, employee, or agent of the

registered investment company or investment adviser,"

S. 18J,~,introduced by Senator John A. Carroll (for himself and

Senator Philip A. Hart), would, among other things, amend section

4 (a) of the Securities Exchange Act of 1934 to provide for a term

of 10 years for members of the Commission.

H.R. 1118, introduced by Representative J. Arthur Younger,

would, among other things, amend the Securities Exchange Act of

1934 to provide for the assessment and collection of increased fees

to cover the cost of operation of this Commission.'

H.R. 1~11,introduced by Representative Abraham Multer, would

amend section 16(a) of the Securities Exchange Act of 1934 to provide that officers and directors of any issuer of registered securities

report periodically the extent to which, and the purposes for which,

their holdings of such securities are pledged."

H.R. 1~18,also introduced by Representative Multer, would remove the exemption provided by section 3(a) (11) of the Securities

Act of 1933 for a security offering confined to the residents of the

See the Commission's 25th Annual Report, p. 12, 1lor a discussion of a slmUar proposal

in the 86th Congo

a See the Commission's 26th Annual Report, p. 10, footnote 5, for a discussion of a slmllar

proposal made In the 86th Congo

See the Commission's 26th Annual Report, p. 11, for a discussion of a similar proposal

made In the 86th Congo

An Identical blll, H.R. 1028, was Introduced by Representative Multer In the 86th Congo

See the Commission's 25th Annual Report, p. 13.

•

•

•
~ENTY-SEVENTH ANNUAL REPORT 11

state within which the issuer is both incorporated and doing business,"

HR. ~799,introduced by Representative Francis E. Walter, would

amend the Investment Company Act of 1940. The bill is substantially similar to S.1117, which is discussed above.

H.R. 6591, introduced by Representative Abraham Multer, would

amend the Securities Act of 1933 and the Investment Company Act of

1940 with respect to the status of variable annuity policies and companies which offer such policies to the public.

HR. 6863, which was also introduced by Representative Multer,

would amend the Investment Advisers Act of 1940 to require disclosure by investment advisers of transactions for their own account in

any investments of the type with respect to which they render advisory services.

A substantial amount of time was devoted to matters pertaining

to other legislative proposals referred to the Commission for comment and to congressional inquiries. During the fiscal year a total of

41 legislative proposals were analyzed. In addition, numerous congressional inquiries relating to matters other than specific legislative

proposals were reviewed and answered .

..An identical bill, H.R. 884" was introduced by Representative Multer in the 86th Cong,

See the Commission's 25th Annual Report, p. 13.
PART III

REVISION OF RULES, REGULATIONS, AND FORMS

The Commission maintains a continuing review of its rules, regulations, and forms in order to adapt them to changing conditions and

changing methods and procedures in the fields of business and finance.

Certain members of its staff are assigned to this task. Changes are

also suggested, from time to time, by other members of the staff engaged in the examination of material filed with the Commission and

by persons outside of the Commission who are subject to the Commission's requirements or who have occasion to work with those requirements in a professional capacity such as underwriters, attorneys,

accountants, and other representatives. 1Vith a relatively few exceptions, provided for by the Administrative Procedure Act, proposed

changes in rules, regulations, and forms are announced to the

public and interested persons are invited to submit their views and

comments thereon. These views and comments are carefully reviewed

by the staff and by the Commission.'

A number of changes were made during the 1961 fiscal year in the

rules, regulations, and forms under the various statutes administered

by the Commission. Other changes which the Commission announced

in preliminary form and on which it invited public comments were

pending at the end of the fiscal year. The changes made during the

fiscal year and those pending at the end of the year are described

below.

GENERAL

Revision of Rules and Forms Concerning the Reporting of Securities Holdings

and Transactions

The Commission, during the fiscal year, adopted revised forms for

reporting security holdings and transactions pursuant to section 16(a)

of the Securities Exchange Act of 1934,section 17(a) of the Public

J The rules and regulations of the Commission are published in the Code of Federal

R.~ulatlons. The rules adopted under the various statutes administered by the Commission appear in the following parts of title 17 of that code:

Securities Act of 1933, pt. 230.

Securities Exchange Act of 1934, pt 240.

!Public Utility Holding Company Act of 1935, pt. 250.

Trust Indenture Act of 1939, pt 260.

Investment Company Act of 1940, pt. 270.

Investment Advisers Act of 1940, pt. 275.

12
TWENTY-SEVENTH ANNUAL REPORT 13

Utility Holding Company Act of 1935 and section 30(f) of the

Investment Company Act of 1940.2

Previously, the following separate forms were prescribed for statements under each of the statutes referred to: Forms 4, 5, and 6 under

the Securities Exchange Act; forms U-17-1 and U-17-2 under the

Public Utility Holding Company Act; and forms N-30F-1 and

N-30F-2 under the Investment Company Act. All of these forms

were consolidated into two forms designated forms 3 and 4 which

are used, respectively, for the filing of initial statements of beneficial ownership of securities and statements of changes in such beneficial ownership under all three of these statutes. In connection

with the adoption of the revised forms the Commission adopted

certain changes in the related rules under the three statutes. The

amended rule 30f-1 under the Investment Company Act provides

that no statements need be filed pursuant to section 30(f) of that

act by an affiliated person of an investment adviser in his capacity

as such if such person is solely an employee, other than an officer,of

such investment adviser.

The draft of the proposed rule changes published for comment

contained a definition of the term "person" which would have included

in such term any group or syndicate the members of which are acting in concert with respect to the acquisition, disposition, holding or

voting of securities of an issuer. The draft also included a proposed

rule relating to the reporting of interests in securties held by corporations and business trusts. The Commission concluded that these

two proposals required further study and consideration and did not

include them in the revision.

Amendment of Rules Concerning Disclosure of Nonpnblic Records by Employees

The Commission amended the applicable provisions of its rules of

practice and related rules under the laws it administers to extend

the prohibition of the rules against disclosure by Commission employees of nonpublic information in the files of the Commission,"

Heretofore, these rules prohibited officersand employees of the Commission, without its specific authorization, from making available

to any person other than a member, officer,or employee of the Commission, whether in response to a subpoena or otherwise, any information or document obtained during the course of any private investigation conducted by the Commission. The amendment extends this

prohibition to information in "any other nonpublic records of the

Commission," whether obtained in an investigation or otherwise.

Securities Exchange Act Release No. 6487. Holding Company Act Release No. 14383.

Investment Company Act Release No. 3207 (Mar. 9. 1961).

Securities Act Release No. 4344, Securities Exchange Act Release No. 6514, Holding

Company Act Release No. 14398. Trust Indenture Act Release No. 151 (Apr. 5, 1961).

•

•
14 SECURITIES AND EXCHANGE COMMISSION

A similar amendment was made in rule 122 under the Securities

Act of 1933, rule 0-4 under the Securities Exchange Act of 1934,

rule 104 (c) under the Public Utility Holding Company Act of 1935,

and rule 0-6 under the Trust Indenture Act of 1939.

THE SECURITIES ACT OF 1933

Amendment of Rule 151

Rule 151 under the Securities Act of 1933, which defines the term

"public offering," was amended to exclude under certain conditions

the offering of the stock of small business investment companies to

small business concerns pursuant to the requirements of the Small

Business Investment Act of 1958.4

Under the former section 304(d) of the Small Business Investment

Act, whenever a small business investment company provided capital

to a small business concern, the small business investment company

was required to offer, and the small business concern was required to

purchase, a certain amount of stock of the small business investment

company. Under the provisions of section 304(c) of the Act, as

amended by Public Law 86-502, a small business concern has the

right but is not required to acquire such stock when capital is provided. The purpose of the amendment to rule 151 was to conform

the provisions of the rule to the amended provisions of the Act.

Proposed Rule 155

The Commission during the previous fiscal year published notice

that it had under consideration a proposed new rule which would be

designated rule 155.5 The purpose of this proposed rule was to make

clear that a public offering of an immediately convertible security

by persons who purchased such security from an issuer in a "private

placement," or a public offering of the underlying security received

by such persons upon conversion of the convertible security, may be

subject to the registration provisions of the Securities Act. Reference

to this matter was made in the Commission's annual report,"

The matter was still under consideration at the close of the 1961 fiscal year.

Adoption of Rules 234 and 235; Rescission of Regulation A-R (Rules 230-

233)

The Commission adopted rule 234 which provides a revised exemption from registration under the Securities Act of 1933 for certain

Securities Act Release No. 4264 (Aug. 15, 1960).

Securities Act Release No. 4162 (Dec. 2, 1959).

See 26th annual report, p. 16.

•

•

•
TVVENTY-SEVENT1I A~AL REPORT 15

notes secured by a first lien on real estate. The new rule supersedes

regulation A-R (rules 230-233) which has been rescinded/

The new rule makes clear what has been the Conunission's longstanding interpretation, that the exemption is available only for notes

directly secured by a first lien on real estate, and hence is unavailable

for collateral trust notes or participations in an underlying note, even

though such underlying note is secured by a first lien on real estate,

or for investment contracts involved in the offering of first lien notes.

The new rule also provides that the amount of first lien indebtedness

for which an exemption is available shall not exceed 75 percent of the

appraised value of the property securing the notes. This is a liberalization of the previous requirement that all indebtedness against the

property, whether secured by senior or junior liens, shall not exceed

75 percent of the appraised value of the property.

The Commission also adopted rule 235 which provides an exemption from registration under the act for securities of certain cooperative housing corporations. Stock or other securities representing

membership in a cooperative housing corporation are exempt where

the securities are issued only in connection with the sale or lease of

dwelling units in the housing project and are transferable by the purchaser only in connection with the transfer of such dwelling units,"

Amendments to Rule 472

Rule 472, which relates to the filing of amendments to registration

statements filed under the Securities Act, was amended in certain

respects during the fiscal year to facilitate the examination of such

statements.

One amendment requires that where an amendment to a registration

statement relates to financial statements not included in the prospectus,

five additional copies of the amended financial statements shall be

furnished,"

The rule was also amended to require that every amendment to a

registration statement shall be accompanied by two additional copies

of the amendment marked to indicate clearly and precisely the changes

effected in the registration statement by the amendment. If the

amendment alters the text of the prospectus or other material previously filed as a part of the registration statement, the changes must

be indicated by underscoring or in some other appropriate manner."

The purpose of the latter amendment is to avoid the necessity for

the staff, in reviewing the amendment, to reread the entire prospectus

Securities Act Release No. 4305 (Dec. 8, 1960).

8 Id.

o Securities Act Release No. 4289 (Oct. 25. 1960).

'0 Securities Act Release No. 4351 (Apr. 11, 1961).

620373--62-3

•
16 SECURITIES AND EXCHANGE COMMISSION

or other document where only a portion of the material has been

altered. The amendment to the ru1e conforms with present administrative practice.

Amendments to Rules 473 and 478

Section 8(a) of the Securities Act of 1933provides that registration

statements filed under that act shall become effective on the 20th day

after filing or such earlier date as the Commission shall determine.

The filing of an amendment to the statement establishes a new filing

date and starts the 20-day period running anew. In order to prevent

registration statements from becoming effective through the lapse of

time and before they have been amended to cure deficiencies therein, it

has been the practice of registrants to file technical or so-called

"delaying" amendments to start the waiting period running again.

The Commission has amended rule 473 to permit the filing, either

with a registration statement or at a later date, of an amendment

which will operate to delay the effective date of the statement without

the necessity of filing a delaying amendment at the expiration of each

successive 20-day waiting period." The delaying effect of such an

amendment may be terminated in either of two ways. One way is by

filing a further amendment which specifically states that the registration statement shall thereafter become effective in accordance with

section 8(a) of the act. The other way is by the Commission's granting acceleration of the effective date of the registration statement.

The Commission has also adopted an amendment to rule 478 to

permit any amendment filed pursuant to ru1e 473 to be signed by the

registrant or its agent for servioe.'"

Amendment of Form S-8

Form 8-8 is used for registration under the Securities Act of certain equity securities offered pursuant to unincorporated stock purchase or similar plans for the benefit of employees of the issuer of such

equity securities and for registration of the interests in such plans.

Issuers using this form are required to deliver a copy of the issuer's

latest annual report with the prospectus to each eligible employee.

The issuer is also required to include in the registration statement an

undertaking to transmit to all employees participating in the plan at

the time and in the manner such material is sent to such stockholders,

copies of all reports, proxy statements and other communications distributed to its stockholders generally. Copies of such material must

also be furnished to the Commission.

The foregoing requirements have been amended to provide that such

information need not be transmitted to eligible or participating em11 Securities Act Release No. 4329 (Feb. 21,1961).

»s«.
TWENTY-SEVENTH ANNUAL REPORT 17

ployees pursuant to the requirements of form S-8 where such employees are already stockholders of the issuer and receive copies of such

material as such stockholders." The requirement of furnishing copies

of such material to the Commission has also been amended to provide

that they need not be furnished pursuant to the instructions in form

S-8 where they are otherwise furnished pursuant to other requirements of the Commission. The amendments also place the duty of

complying with these requirements upon the issuer of the securities

offered pursuant to the plan; heretofore such duty was, in part, placed

upon the "employer," which might be a company other than the issuer.

Proposed Form S-11 for Securities of Certain Real Estate Companies

During the fiscal year the Commission published notice that it has

under consideration a proposed form for registration under the Securities Act of securities of certain real estate companies.> The proposed

:form, which would be designated :formS-11, would be used :forregistration of securities issued by real estate investment trusts, as defined

in the recent amendments to the Internal Revenue Code, and by real

estate syndicates, partnerships, joint ventures, and other incorporated

and unincorporated issuers whose business is primarily that of acquiring and holding real estate or interests in real estate for the purpose

o:finvestment.

A number of comments have been received in regard to the proposed

new form and the form was being further considered in the light of

such comments at the end of the fiscal year.

Amendment of Form S-12

Form S-12 is used for registration under the Securities Act of

certain American depositary receipts against outstanding foreign

securities. This form requires the inclusion in the registration statement of an undertaking to furnish to the Commission copies of annual

and other periodic reports, proxy statements, and other communications distributed to the security holders by the issuer of the underlying securities. The form of this undertaking has been amended

to call only for the furnishing of such information in cases where

it is not otherwise transmitted to the Commission."

THE SECURITIES EXCHANGE ACT OF 1934

Amendment of Rule 14a-6

Rule 14a-6 which relates to the filing of proxy statements, forms

of proxy, and other soliciting material was amended to provide that

where amended proxy material is filed with the Commission two

18 Securities Act Release No. 4328 (Feb. 20, 1961) .

.. Securities Act Release No. 4347 (Apr. 10, 1961).

1S Securities Act Release No. 4328 (Feb. 20, 1961).
18 SECURITIES AND EXCHANGE COMMISSION

copies of such material (or in the case of investment companies,

three copies) shall be marked to show the differences between it and

the material as previously filed."

The purpose of the amendment is to expedite the processing of

material by making it unnecessary in reviewing proxy material to

reread in detail material which is substantially the same as material

previously filed.

The amendment represents further action on the part of the Commission to expedite in every practicable way the examination of

material filed with it in order to reduce the backlog of unprocessed

material.

Proposed Rule 15d-21

Where interests of participation in employee stock purchase, savings, or similar plans have been registered under the Securities Act

of 1933 and the securities offered plus those outstanding amount to

$2 million or more reports for such plans are required to be filed

pursuant to section 15( d) of the Securities Exchange Act of 1934. In

the absence of any exemption, these reports are required even though

the issuer of the securities offered pursuant to the plan files reports

with the Commission pursuant to section 13 or 15(d) of that act.

Under a proposed rule 15d-21, on which public comments have been

invited, such plans would be exempt from the operation of section

15(d) of the act if the issuer files annual reports on form lO-K and

furnishes the information, :financial statements and other documents

required by that form with respect to the plan."

Proposed Rule 19a2-1

During the 1960 fiscal year the Commission invited public comments on a proposed rule 19a2-1 under the act which would provide

that the failure or refusal of an issuer or its officers, directors,

employees, or controlling persons to cooperate with the Commission

in proceedings under section 19(a) (2) or investigations under section 21 of the act with respect to compliance with section 12 or 13

of the act shall be deemed a failure to comply with the provisions

of the act or the rules and regulations thereunder for the purpose

of section 19(a) (2).1.8 The proposed rule would provide a basis for

the issuance of an order under section 19(a) (2) denying, suspending, or withdrawing the registration of a security in such cases. This

matter was pending at the end of the fiscal year.

11 Securities Exchange Act Release No. 6537 (Apr. 24, 1961).

'1Securities Exchange Act Release No. 6576 (June 13, 1961).

18 Securities Exchange Act Release No. 6297 (June 23, 1000) : see 26th annual report,

p.21.
TWENTY-SEVENTH ANNUAL REPORT 19

Amendment of Form 8-K

The Commission has invited public comments on certain proposed

amendments to form 8-K.19 These proposed amendments are designed to bring to the attention of investors promptly information

regarding material changes affecting the company or its affairs where

it appears that the changes are of such importance that they should

be reported promptly and not deferred to the end of the fiscal year.

The amendments relate to matters such as the pledging of securities

of the issuer or its affiliates, changes in the board of directors otherwise than by stockholder action, the acquisition or disposition of

significant amounts of assets, and transactions with insiders. This

matter was pending at the end of the fiscal year.

Amendments to Form 100K

Form 10-K is used for annual reports pursuant to Section 13 or

15(d) of the Securities Exchange Act of 1934. An amendment to

this form, adopted during the fiscal year, requires registrants which

are not subject to the Commission's proxy rules to furnish to the Commission for its information copies of their proxy soliciting material

in the same manner as they are required to furnish copies of their

annual reports to stockholders. Another amendment requires registrants which do not furnish annual reports or proxy material to

their stockholders to include a statement to that effect in their annual

report on form 10-K.20

In connection with the proposed rule 15d-21, described above, the

Commission also invited public comments on certain proposed amendments to form 10-K which would require disclosure with respect to

employee stock purchase, savings, or similar plans." The required

information would be furnished by the sponsoring company and the

plan itself would be exempted by the proposed rule from the duty of

filing reports with the Commission.

THE INVESTMENT COMPANY ACT OF 1940

Amendment of Rule 3c-1

The Commission during the fiscal year amended rule 3c-l under

the Investment Company Act of 1940 which defines the term "public

offerings" to exclude under certain conditions the offering of the stock

of small business investment companies to small business concerns

pursuant to the requirements of the Small Business Investment Act,

of 1958.22

,. Securities Exchange Act Release No. 59,79 (June 9, 1959) ; see 26th annual report.

p.22.

mSecurities Exchange Act Release No. 6475 (Feb. 20,1961).

:n Securities Exchange Act Release No. 6576 (June 13, 1961).

22 Investment Company Act Release No. 3095 (Aug. 15, 1960).
20 SECURITIES AND EXCHANGE COMMISSION

The purpose of the amendment to rule 3c-1 was to conform the

provisions of the rule to the amended provisions of the Small Business

Investment Act of 1958.23

Proposal to Adopt Exemptive Rules Applicable to Licensed Small Business

Investment Companies

After the close of the fiscal year 1961 the Commission was giving

consideration to the promulgation of certain rules applicable to small

business investment companies licensed by the Small Business Administration under the Small Business Investment Company Act of

1958. The Commission has previously adopted rules 3c-1, 3c-2, and

14a-1 (Investment Company Act Release Nos. 2828, 2909, and 3011,

respectively), excluding certain activities of small business investment companies or the ownership of their securities from various

provisions of section 3(c) (1) of the act and permitting the use by

a small business investment company of regulation E filings under

the Securities Act of 1933 in raising its initial capital as required

by section 14(a) of the act. The rules now under consideration

would be applicable only to licensed small business investment companies and would exempt them from various provisions of sections

17(a), 17(d), and 18(c) of the Investment Company Act.24

Adoption of Form N-5R

Shortly after the beginning of the fiscal year, the Commission

adopted form N-5R for annual reports which small business investment companies are required to file with the Commission pursuant

to section 13 or 15(d) of the Securities Exchange Act of 1934, or

pursuant to section 30(a) of the Investment Company Act of 1940.25

The adoption of this form was referred to in the 26th annual report."

INVESTMENT ADVISERS ACT OF 1940

Amendment of Form ADV and Rule 204-1 and Adoption of Form ADV-SUP

In September 1960 the Investment Advisers Act was amended in

many important respects. Among other things, it now provides new

grounds for denying, suspending, or revoking the registration of an

investment adviser. Before the amendments were adopted the provisions of section 203(d) of the act, provided, in substance, that the

Commission could deny, suspend, or revoke the registration of an

investment adviser if it found that such action was in the public interest and that the investment adviser, or any partner, officer,director,

or controlling person: (1) within 10 years of the order, was convicted

ea See statement in regard to rule 151. suora, p. 14.

Investment Company Act Release No. 3324 (Sept. 12. 1961)

.. Investment Company Act Release No. 3085 (Aug. 1" 196])

••P. 28.

'" •

•
~ENTY-SEVENTH ~AL REPORT 21

of a felony or misdemeanor involving the purchase or sale of a security or arising out of activities as an investment adviser, underwriter, broker, or dealer, or as an affiliated person or employee of an

investment company, bank, or insurance company; or (2) was subject

to an injunction based upon similar conduct or activity; or (3) had

willfully made any untrue statement or misleading omission of a

material fact in any application or report filed with the Commission.

As amended, the act now provides additional bases for denial,

suspension, or revocation of registration: (1) conviction of a felony

or misdemeanor involving mail fraud; fraud by wire, telephone, radio,

or television; or embezzlement, fraudulent conversion, or misappropriation of funds or securities; (2) willful violation of any provision of the Securities Act of 1933, the Securities Exchange Act of

1934, the Investment Advisers Act of 1940, or any rule or regulation

under any of such acts; or (3) aiding or abetting any other person's

violation of any of such acts, rules, or regulations. The amendments

also provide that any of the above disqualifications on the part of a

controlled person, as well as a partner, officer,director, or controlling

person, may be a basis for denial, suspension, or revocation.

Effective May 1, 1961, the Commission amended form ADV, the

form of application for registration and to amend such an application, to require the furnishing of information to disclose whether

any of the persons mentioned above is subject to any disqualification

under the act, as amended; to obtain certain additional information;

to clarify the instructions; to simplify its use; and to simplify its

processing by the Commission. Rule 204-1 under the act was also

amended to require every investment adviser whose registration is

effective on May 1, 1961, and every investment adviser who has an

application for registration pending on that date, to file a new form

ADV-SUP as a supplement to his application not later than June 30,

1961. Form ADV -SUP requires the same information as form ADV

as amended."

Adoption of Rule 204-2

Section 204-2 of the act, as amended, provides that every investment adviser (other than one specifically exempted from registration

pursuant to section 203(b)) shall make, keep, and preserve such accounts, correspondence, memoranda, papers, books, and other records,

and make such reports, as the Commission by rules and regulations

may prescribe as necessary or appropriate in the public interest or

for protection of investors. Under this section such books and other

records are subject to inspection by Commission representatives.

In Investment Advisers Act Release No. 112.
22 SECURITIES AND EXCHANGE COMMISSION

On May 25, 1961, the Commission adopted rule 204-2, effective

July 1, 1961, to require investment advisers subject to registration to

maintain specified books and records relating to their business. In

addition to the usual journals and ledgers, the rule requires the maintenance of records with respect to memoranda of orders given and

instructions received for the purchase, sale receipt or delivery of

securities, and originals or copies of certain communications received

or sent by the investment adviser. Additional requirements are applicable to investment advisers who have custody or possession of

any funds or securities of any client, and to investment advisers who

render any snpervisory or management service to any client. The

rule specifies the period during which such books and records must

be preserved and also provides that an investment adviser, before

ceasing to conduct business, must arrange for and be responsible for

the preservation of his books and records for the remainder of the

period specified in the rule, and must notify the Commission of the

place where such books and records will be maintained during such

period."

Proposed Rule 206(4)-1

Section 206 of the Investment Advisers Act of 1940, as amended,

contains a Hew subsection (4) which prohibits an investment adviser

from engaging in any act, practice, or course of business which is

fraudulent, deceptive, or manipulative, and gives the Commission

the power by rules and regulations to define and prescribe means

reasonably designed to prevent such acts, practices, and courses of

business.

On April 4, 1961, the Commission announced its proposal to adopt

rule 206(4)-1 to define certain advertisements by investment advisers

to be fraudulent, deceptive, or manipulative within the meaning of

section 206(4) of the act. The proposed rule is intended to implement the statutory mandate by foreclosing the use of advertisements

which have a tendency to mislead or deceive clients or prospective

clients.

The proposed rule would prohibit advertisements which contain

testimonials or which call attention to specific past recommendations

made by the investment advisers which would have been profitable.

Such advertisements are generally misleading because by their very

nature they emphasize the comments and activities favorable to the

adviser and ignore those which are unfavorable. Other provisions

of the rule would specify the circumstances under which advertisements offering graphs, charts, formulas, etc. could be used, and would

2S Investment Advisers Act Release No. 114.
TWENTY -SEVENTH ANNUAL REPORT 23

prohibit advertisements which represent that any report, analysis,

or other service can be obtained free or without charge unless it is

entirely free and subject to no conditions or obligations. The rule

would also include a general prohibition against the use of advertisements containing untrue or misleading statements. 29

The Commission has received many comments and suggestions on

this proposal and these are being studied to determine what changes

should be made before any further action is taken on the proposal.

"" Investment Advisers Act Release No. 113.
PART IV

ADMINISTRATION OF THE SECURITIES ACT OF 1933

The Securities Act of 1933 is primarily a disclosure statute designed

to provide investors with material facts concerning securities publicly

offered for sale by use of the mails or instrumentalities of interstate

commerce, and to prevent misrepresentation, deceit, or other fraudulent practices in the sale of securities. The issuer of such securities

is required to file with the Commission a registration statement which

includes a prospectus containing significant information about the

issuer and the offering. The registration statement is available for

public inspection as soon as it is filed. After the statement is filed,

the securities may be offered by means of a prospectus supplying the

information required by the act. Sales may not be made, however,

until the registration statement has become "effective." A copy of

the prospectus must be furnished to each purchaser at or before the

sale or delivery of the security. The registrant and the underwriter

are responsible for the contents of the registration statement. The

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

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

terms of its distribution. Its action in permitting a registration

statement to become effective does not constitute approval of the securities, and any representation to a prospective purchaser of securities to the contrary is made unlawful by section 23 of the act.

DESCRIPTION OF THE REGISTRATION PROCESS

Registration Statement and Prospectus

Registration of securities under the act is effected by filing with the

Commission a registration statement on the applicable form containing the prescribed disclosure. When a registration statement relates,

generally speaking, to a security issued by a corporation or other

private issuer, it must contain the information, and be accompanied

by the documents, specified in schedule A of the act; when it relates

to a security issued by a foreign government, the material specified

in schedule B must be supplied. Both schedules specify in considerable detail the disclosure which should be made available to an investor in order that he may make an informed decision whether to

buy the security. In addition, the act provides flexibility in its ad24
TWENTY-SEVENTH ANNUAL REPORT 25

ministration by empowering the Commission to classify issues, issuers,

and prospectuses, to prescribe appropriate forms, and to increase, or

in certain instances vary or diminish, the particular items of information required to be disclosed in the registration statement, as the

Commission deems appropriate in the public interest or for the protection of investors.

In general the registration statement of an issuer other than a

foreign government must describe such matters as the names of persons who participate in the direction, management, or control of the

issuer's business; their security holdings and remuneration and the

options or bonus and profit-sharing privileges allotted to them; the

character and size of the business enterprise, its capital structure,

past history and earnings, and its financial statements, certified by

independent accountants; underwriters' commissions; payments to

promoters made within 2 years or intended to be made; acquisitions

of property not in the ordinary course of business, and the interest

of directors, officers and principal stockholders therein; pending or

threatened legal proceedings; and the purpose to which the proceeds

of the offering are to be applied. The prospectus constitutes a part

of the registration statement and presents the more important of the

required disclosures.

Examination Procedure

The staff of the Division of Corporation Finance examines registration statements for compliance with the standards of accurate and

fair disclosure established by the act and usually notifies the registrant by an informal letter of comment of any material respects in

which the statement appears to fail to conform to those requirements.

The registrant is thus ordinarily afforded an opportunity to file a curative amendment. In addition, the Commission has power, after notice

and opportunity for hearing, to issue an order suspending the effectiveness of a registration statement. In certain cases, such as where

a registration statement is so deficient as to indicate a willful or negligent failure to make adequate disclosure, no letter of comment is sent

and the Commission either institutes an investigation to determine

whether stop-order proceedings should be instituted or immediately institutes stop-order proceedings. Information about the use of this

"stop order" power during 1961 appears below under "Stop Order

Proceedings. "

Time Required to Complete Registration

Because prompt examination of a registration statement is important to industry, the Commission endeavors to complete its analysis

in as short a time as possible. The act provides that a registration
26 SECURITIES AND EXCHANGE COMMISSION

statement shall become effective on the 20th day after it is filed. However, the filing of any amendment thereto establishes a new filing

date for the purpose of the 20-day period. This waiting period is designed to provide investors with an opportunity to become familiar

with the proposed offering. Information disclosed in the registration

statement is disseminated during the waiting period by means of the

preliminary form of prospectus. The Commission is empowered to

accelerate the effective date so as to shorten the 20-day waiting period

where the facts justify such action. In exercising this power, the

Commission is required to take into account the adequacy of the information respecting the issuer theretofore available to the public, the

facility with which investors can understand the nature of and the

rights conferred by the securities to be registered, and their relationship to the capital structure of the issuer, and the public interest and

the protection of investors. The note to rule 460 under the act indicates, for the information of interested persons, some of the more

common situations in which the Commission feels that the statute

generally requires it to deny acceleration of the effective date of

a registration statement.

The number of calendar days which elapsed from the date of the

original filing to the effective date of registration for the median (average) registration statement with respect to the 1,3891 registration

statements that became effective during the 1961 fiscal year was 55

compared with 43 days for 1,275 registration statements in fiscal year

1960 and 28 days for 925 registration statements in fiscal year 1959.

The increase in the elapsed time has been due primarily to the cumulative effect of the unprecedented volume of registration statements filed,

particularly those filed by issuers that had never before filed under

the Act, and the lack of sufficient number of examining personnel to

process such a volume. The number of registration statements filed

during fiscal year 1961 was 1,830, as compared with 1,628 and 1,226in

fiscal years 1960 and 1959, respectively."

The following table shows by months during the 1961 fiscal year the

number of calendar days for the median registration statement during

each of the three principal stages of the registration process, the total

elapsed time and the number of registration statements effective:

Excludes the 163 registration statements of mutual fund companies that became

effective during fiscal year 1961 that were filed pursuant to the provtstons of sec. 24(e)

of the Investment Company Act of 1940. The total elapsed time on these 163 registration

statements was 15 calendar days for the average registration statement.

"These figures Include 163. 159, and 153 for fiscal years 1961. 1960. and 1959. respectively, registration statements filed by mutual fund companies pursuant to the provisions

of sec. 24(e) of the Investment Company Act of 1940.

~
TWENTY-SEVENTH ANNUAL REPORT 27

Time in registra.twn under the Securities Act of 1933 by months during the

fiscal year ended June 30, 1961

NUMBER OF CALENDAR DAYS

From date of From date of From amendoriginal filing letter of ment after Total number Number of

Months to date of comment to letter to effec- of days In registration staff's letter date of filing nve date of registration statements of comment amendment registration effective 1

thereafter

July 196(L_______________________ August 44 11 7 62 104 __________________________ 40 10 7 57 100 September _______________________ October 40 11 7 58 105 _________________________ 36 11 7 54 115 November _______________________ December 37 10 7 54 119 _______________________ 39 12 7 58 87

~~~i~l_~= 39 11 7 57 92

March 45 14 7 66 85 __. ________________________ 40 11 7 58 111

M>::: .:

33 9 5 47 133 34 9 6 49 178 June _____________________________ 40 10 6 56 160

Fiscal 1961for median effective registration statement _________ 39 10 6 55 1,389

1 See footnote I, supra.

VOLUME OF SECURITIES REGISTERED

During the fiscal year 1961, 1,507 statements in the amount of $19.1

billion became fully effective under the Securities Act of 1933, a record both in number and dollar amount. The number of statements

increased 8 percent over the preceding year while dollar amount increased 33 percent or $4.7 billion. Not only was there a continuation

of the large volume of small issues but also an increase in the registrations covering large issues. The chart on page 2, part I, shows the

number and dollar amount of fully effective registrations from 1935

to 1961.

These figures cover all registrations which became fully effective

including new issues sold for cash by the issuer, secondary distributions and securities registered for other than cash sale, such as

exchange transactions, issues reserved for conversion and issues reserved for options. Of the dollar amount of securities registered in

1961, 74 percent was for the account of issuers for cash sale, 18.7

percent for account of issuers for other than cash sale and 7.3 percent was for the account of others, as shown below.

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

the fiscal year 1981 compared with the fiscal years 1960 and 1959

1961in Percent 1960in Percent 1959m Percent

millions oftotal millions of total millions of total

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

Registered for account of Issuers for cash sale_____________________________________ $14,115 74.0 $10,908 75.9 $12,095 17.3

Registered account of Issuers for other than cash sale___________________________3,563 187 2,407 16.8 2,746 17.5

Registered for account of others than issuers __________________________________ 1.392 7.3 1,051 7.3 815 5.2

Total _______________________________ --- --- --- --- --- --- 19,070 100.0 14,367 100.0 16,657 100 0

•

==== ==============

= = = = = = = = = = = = = = = : = = = = = = = =
28 SECURITIES A...l'.I"DEXCHANGE COMM:ISSION

Securities to be sold for cash sale for account of issuer amounted

to $14.1 billion, an increase of $3.2 billion over the previous year.

This reflects increases of $1.9 billion in debt securities and $1.3billion

in common stock. Debt securities made up $6.1 billion of the 1961

volume, preferred stock $250 million, and common stock $7.7 billion.

More than half of the common stock was registered by investment

companies. The number of statements, total amounts registered and

classification by type of security for issues to be sold for cash for

account of the issuing company is shown for each of the fiscal years

1935 through 1961 in appendix table 1. More detailed information

for 1961is given in appendix table 2.

Two industries, communications and manufacturing, showed

marked increases over fiscal year 1960in the dollar amounts registered

for cash sale. Communication companies registered $2.4 billion of

securities in fiscal 1961 compared with $1 billion in fiscal 1960 while

manufacturing companies registered $2.3 billion in fiscal 1961against

$900 million in fiscal 1960. Electric and gas companies registered

$2.4 billion of securities in fiscal 1961 and investment companies $4.5

billion, almost the same as in the previous year. Registration of

securities by other financial companies (including employee stock

pension plans) and real estate companies increased from $1.4 billion

in fiscal 1960 to $1.7 billion in fiscal 1961. A classification by major

industry is shown below for securities registered for cash sale for

account of issuer ineach of the last 3 fiscal years.

1961 m Percent 1960 In Percent 1959m Percent

millions of total ml1llons of total millions of total

Manufacturmg $2,278 16 1 $932 8.5 $1,974 16.3 Extractrve 105 .7 127 1 2 128 1 1 Electrrc, gas and water .... 2,385 169 2,313 21. 2 2.726 22.5 'I'ransportation, other than railroads 221 1 6 99 .9 41 .3 Commumcation 2,389 169 1,000 92 591 4.9 In vestment companies, 4,482 31 8 4,437 407 4,329 358 Other flnancial and real estate 1,703 12 1 1,354 12.4 880 7.3 Trade. . 274 1.9 169 1.5 543 4.5 Service 92 .7 101 .9 76 .6 Construction ._. 31 .2 8 .1 75 .6

Total corporate 13,960 989 10,539 96.6 11,363 93.9

Foreign governments. 155 1.1 369 34 732 6.1

TotaL 14,115 100 0 10,908 100 0 12,095 100. 0

Investment company issues were classified as follows:

1961 In 1960 In 1959 In

mllhons milhons ml1llons

--- --- Open-end companies 1 $3,973 $4,138 $3,760 Closed-end eompantes. 254 52 140 Face amount certltlcate compames ________________________________________ 254 246 429

--- TotaL ______________________________________________________________ 4,482 4,437 4,329

I Including periodic payment plans or their underlying securities.

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

___________________________

________________________________

________________

______ __________________________

___________• __•____

____________ __ _________________________________

___________________________________

__ • ___________ _________•__

--- --- --- --- --- --- _____________________

_______• ____________

--- --- --- --- --- --- ______________________________

_____ • _______ • ________ •• _______ • ________________ • ___

________________________• __________________________
TWENTY-SEVENTH ANNUAL REPORT 29

Of the net proceeds of the corporate securities registered for cash

sale for account of issuers in fiscal 1961, 58 percent was designated

for new money purposes, including plant, equipment, and working

capital, 5 percent for retirement of securities, 35 percent for purchase

of securities (principally by investment companies), and 2 percent

for all other purposes.

REGISTRATION STATEMENTS FILED

During the 1961 fiscal year, 1,830 registration statements were filed

for offerings of securities aggregating $20.6 billion, as compared with

1,628 registration statements filed during the 1960 fiscal year for

offerings amounting to $15.8 billion. This represents an increase of

12 percent in the number of statements filed and 31 percent in the

dollar amount involved.

Of the 1,830 registration statements filed in the 1961 fiscal year,

958, or 52 percent, were filed by companies that had not previously

filed registration statements under the Securities Act of 1933. Comparable figures for the 1960 and 1959 fiscal years were 774, or 47

percent, and 472, or 39percent, respectively .

.A. cumulative total of 19,388 registration statements has been filed

under the act by 9,129 different issuers covering proposed offerings

of securities aggregating over $203 billion from the effective date of

the Securities Act of 1933to June 30, 1961.

Particulars regarding the disposition of all registration statements

filed under the Act to June 30, 1961, are summarized in the following

table:

Number and disposition of registration statements filed

Pnor to July I, 1960, Total, June

July 1, 1960 to June 30, 30,1961

1961

Registration statements: FIled 17,558 11,830 19,388

Dlspositlon: Effective (net) -_ 15,280 21,538 2J6,807 Under stop or refusal order 207 '5 212 W rthdrawn 1,736 118 1,854 Pending at June 30,1960 335 Pending at June 30,1961- 515

TotaL 17,558 19,388

Aggregate dollar amount.

Asftled (Ill billions) $183.1 $20.7 $203.8 As effective (Ill billions) $177.3 $19 1 $196.4

I Includes 156 registration statements covering proposed offenngs totaling $4,191,497,737 filed by investment companies under sec. 24(e) of the Investment Company Act of 1940 Which permits registration by

amendment to a previously effective registratron statement

2 Excludes 15 registration statements that became effective during the year but were subsequently WIthdrawn; these 15 statements are counted III the 118 statements WIthdrawn during the year. The 1,538 figure

does include 1 statement that became effective during the year by hftmg of stop order.

2 Excludes 10 regtstration statements effeetrve pnor to July 1, 1960, that were withdrawn during the 1961

fiscal year; these 10 statements are counted under WIthdrawn. 'A total of 6 reglstration statements was placed under stop orders during the 1961 fiscal year; 1 of these stop orders was lifted during the year upon appropriate amendment of the registration statement.

_____________________________________________________

____________________- ___- - - -

____________________________________- __- _--

- - -- - -- - -- ___________________________

______________________________

_____________________________ --------------

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

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

___________________________ -- -- - --- - -- --- -- - -- --------------

_______- ______________--- ----- --- ------ ___________________________________
30 SECURITIES AND EXCHANGE COMMISSION

The reasons given by registrants for requesting withdrawal of the

118 registration statements that were withdrawn during the 1961

fiscal year are shown in the following table:

Number of Percent

Reason for registrant's WIthdrawal request statements of total

withdrawn withdrawn

1. Withdrawal requested after receipt of the staff's letter of comment; ___________ 23 20

2. Registrant was advised that statement should be WIthdrawn or stop order proceedings would be necessary _____________________________________________ 9 8

3. Change in financing plans ____________________________________________________ 45 38

4 Change in market conditions _________________________________________________ 6 5

5. Financing 0btamed elsewhcre _________________________________________________ 22 19

6. Regulation A could be used ___________________________________________________ I 1

7. Registrant was unable to negotiate acceptable agreement with underwriter ____ 10 8

8. 'Will refile on different form___________________________________________________ 2 1

TotaL _____________________________________________________________________118 100

STOP ORDER PROCEEDINGS

Section 8(d) provides that, if it appears to the Commission at any

time that a registration statement contains an untrue statement of a

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

therein or necessary to make the statements therein not misleading,

the Commission may institute proceedings looking to the issuance of a

stop order suspending the effectiveness of the registration statement.

Where such an order is issued, the offering cannot lawfully be made,

or continued if it has already begun, until the registration statement

has been amended to cure the deficiencies and the Commission has

lifted the stop order.

The following table indicates the number of proceedings under

section 8(d) of the act pending at the beginning of the 1961 fiscal

year, the number initiated during the year, the number terminated

and the number pending at the end of the year.

Proceedings pending at beginning of fiscal year__________________ 9

Proceedings initiated during fiscal year 3

12

Proceedings terminated during fiscal year by issuance of stop ordersc.,., 6

Proceedings pending at the end of the 1961 fiscal year__________________ 6

The six proceedings in which stop orders were issued during the

fiscal year are described below.

Consolidated Development Corp.-The registration statement

filed by this corporation involved a proposed offering of 448,000

shares of its 20 cent par value common stock, of which 100,000shares

were to be offered at $1 a share to the underwriter to which registrant

owed. $100,000 and 198,000 shares were to be offered to holders of

registrant's convertible debentures at 75 cents a share. In the course

of the proceeding the registrant stipulated to certain facts and consented to the entry of a stop order. The Commission found the regis-
TWENTY-SEVENTH ANNUAL REPORT 31

tration statement to be materially deficient in numerous respects.

Some of the more important deficiencies are described below,"

The registrant is a Delaware corporation organized in 1956 under

the name of Consolidated Cuban Petroleum Corp. to engage in exploration, development, and production of oil and gas in Cuba. It

adopted its present name in 1959 after its petroleum ventures had

sustained severe financial losses. It was then decided to engage in

the 'acquisition and development of real estate in the State of Florida,

and registrant entered into an agreement to acquire certain land for

$150,000in cash, 800,000shares of its stock, and subject to a $2 million

mortgage.

The Commission found the registration statement to be materially

deficient in failing to set forth clearly that registrant had been financially unsuccessful in its petroleum operations and was in serious

financial condition; that, as a result of recent Cuban governmental

acts and its lack of success in the oil business, the registrant had

suspended its oil exploration activities in Cuba and was faced with

the possibility of having to write off all of its Cuban properties and

equipment, leaving it with practically none of the assets shown on

the balance sheet filed with the registration statement.

The information in the registration statement regarding registrant's proposed real estate operations was also materially inadequate

and misleading in many respects. Among other things, the registration statement failed to disclose the funds necessary for drainage of

the Florida land proposed to be acquired, the competitive real estate

developments in the area, that no funds were available for acquiring

or developing Florida real estate, and registrant had no specific plans

for raising such funds.

The registration statement failed to disclose that if the proceeds

from the offering did not exceed $100,000 the entire amount thereof

might go to the underwriter in payment of advances to the registrant,

so that the financing might be solely for the benefit of the underwriter

and failed to set forth material facts regarding the issuance and distribution of registrant's outstanding securities, particularly 2 million

shares of its common stock.

Hazel Bishop, Inc.-The registrant, aNew York corporation organized in 1949 and engaged in the cosmetics business, filed a registration statement in June 1960 relating to 1,157,200shares of common

stock all of which were then outstanding. It was stated that these

shares, which represented approximately 61 percent of registrant's

outstanding common stock, were held by 70 named persons referred

to as the selling stockholders. An amendment to the registration

8 Securities Act Release No. 4287 (Oct. 27, 1960).

620373-62-4
32 SECURITIES AND EXCHANGE COMMISSION

statement was filed in October 1960, which, among other things, increased the number of shares to be offered to 1,274,823and the number of selling stockholders to 112. The Commission instituted

proceedings to determine whether a stop order should issue, and

registrant entered into a stipulation of facts admitting that a large

part of the stock to be offered had initially been sold in violation of

the registration requirements of the Securities Act and that the registration statement was deficient, but urged the Commission to take

into consideration amendments filed after the institution of the proceedings and to permit the statement as thus amended to become

effective, preferably without issuance of a stop order. However, the

Commission rejected this request because of "the widespread distribution of unregistered shares" and "the serious deficiencies found"

and issued a stop order.'

Among other things, the Commission found that the summary of

earnings, which showed a profit of $102,258for the fiscal year ended

October 31, 1V59, was deceptive and misleading in several respects,

particularly in that, under proper accounting practice, it should have

shown a loss of $707,996for that period.

The registration statement, while stating that television had been

registrant's principal advertising medium and that registrant had

expended about $30 million for network television advertising during

the past 10 years, failed to disclose adequately that there had been a

decided downward trend in advertising expenditures and that planned

advertising expenses were at a further reduced level.

The registration statement contained the statement that during

the period from January 1, 1959,through October 10, 1960,the price

of registrant's common stock on the American Stock Exchange

ranged from a high of $10 per share to a low of $3.50. The Commission found that the reference to the high of $10 per share was

misleading without disclosure that this price was reached on only

one day in .June 1960 following (1) the publication of a statement

by a newspaper columnist that registrant was about to introduce a

new product which would increase its sales and earnings; (2) registrant's release of unaudited results of its operations for the 6-month

period ended April 30. 1960, showing a profit of $202,776 as compared with a loss of $551,173 for the same period of the preceding

year, and (3) registrant's announcements to the cosmetics trade that

it would sponsor a number of well-known radio and television

personalities.

The registration statement stated that in registrant's opinion sales

of 562.500 shares of its stock in 1959 and 1960 constituted private

offerings exempt from registration under section 4(1) of the Securi-

• Securities Act Release No. 4371 (June 7, 1961).
TWENTY-SEVENTH ANNUAL REPORT 33

ties Act. The Commission found, however, that a widespread public

distribution was effected with respect to such shares, that the sales

were accordingly made in violation of section 5 of the act, and that

the representation to the contrary in the registration statement was

therefore false. The registration statement was also found deficient

in failing to disclose that sales of 293,000shares by Raymond Spector,

registrant's board chairman until March 1960, also constituted a public offering in violation of section 5, and that by virtue of the violations of that section, registrant became contingently liable to the

purchasers of the shares.

The Commission stated that the prospectus conveyed the impression that at least some of the shares would be offered through brokers

on the American Stock Exchange and that it would be prejudicial to

the protection of investors and the public interest if the massive distribution here proposed by a large group including registrant's controlling persons should be initiated through the facilities of the

exchange unless prior thereto the facts of the case were given a wider

distribution than was likely to result from mere delivery of copies

of the prospectus to the exchange, pursuant to Securities Act requirements regarding delivery of prospectuses. Accordingly, the Commission stated that prior to the final effective date of the

registration statement, the public interest required the transmittal

by registrant of the Commission's opinion together with an adequate

prospectus to all selling stockholders and the members of the exchange

community.

The Commission further pointed out that in view of the representation that the offering would be "at the market," the large number of selling stockholders, the apparent lack of procedures for coordinating their activities or guarding against unlawful practices, the

fact that the shares to be offered amounted to approximately 60 percent of the outstanding stock, almost twice the number of shares

previously available for trading in the open market, and other factors, there were grave potentialities for violations of the securities

laws by registrant and the selling stockholders. The Commission

called specific attention to rule 10b---6under the Exchange Act, prohibiting bids or purchases by any person participating in a distribution; rule 10b---7which prohibits stabilizing in connection with

an offering "at the market"; rule 10b-2, which prohibits persons participating in a distribution from paying or offering to pay any person for soliciting another to purchase any such security on the

exchange; and restrictions, under section 5(b) (1) of the Securities

Act, on written communications which constitute an offer of securities. The Commission also pointed out that since an offering "at the

market" implied a free and open market, any activity designed to
34 SECURITIES AND EXCHANGE COMMISSION

stabilize, stimulate, or condition the market would render such

implication false and misleading.

Following issuance of the stop order, registrant filed a material

amendment to conform with the order and to furnish up-to-date

information, and the registration statement as amended was declared

effective on June 26,1961.

J. Fred Markwell and Alexander Markwell, voting trustees for

shareholders of West Star Mining Co.-A registration statement

covering voting trust certificates representing 2,500,000shares of West

Star Mining Co. common nonassessable capital stock was filed in 1957

and became effective. West Star is an Idaho corporation organized in

1939to engage in the exploration and development of mineral deposits.

After appropriate notice a hearing was held at which the voting

trustees did not appear. However, they later submitted an answer

and petition in which they admitted that the registration statement

was deficient in certain respects and stated that no securities subject

to the registration statement had been sold and that they intended to

file an amendment. No such amendment was filed.

The prospectus failed to disclose required pertinent financial information regarding the company's operations and material information regarding the exploration of the company's properties, the nature

and dates of the work done, the results of such work, and the physical

condition of the workings. Certain excerpts taken from old engineering reports bearing various dates from 1923 to 1952 concerning

the geology and mining prospects of the company's property were

contained in the prospectus. The Commission found that the information contained in the excerpts was materially misleading without

disclosure reflecting the results of subsequent exploration and development on the properties, information which was not available to

the engineers preparing the reports. The prospectus also contained

statements indicating that the company's mine was favorably located

with reference to commercial ore bodies found on two adjoining mines.

It was found that these statements were materially misleading in view

of the failure to set forth information with respect to distances between the location of the ore mined at one of the adjoining mines and

the boundary of the company's property. Moreover, the prospectus

omitted information as to the nature of the results obtained from

exploration and development work as it continued toward the company's mine from the adjoining oil producing area,"

National Lithium Corp.-Registrant, a Delaware corporation, was

organized in November 1956 for the principal purpose of acquiring

and developing certain mining claims containing lithium deposits in

the Yellow-knife area of the Northwest Territories of Canada. The

6 Securities Act Release No. 4317 (Jan. 13, 1961).
TWENTY-SEVENTH ANNUAL REPORT 35

registration statement filed in February 1957 related to a public offering of 3,120,000shares of common stock at $1.25 per share.

A geological report regarding registrant's lithium claims, which was

filed as an exhibit to the registration statement and portions of which

were quoted or summarized in the prospectus, was found misleading

in that the word "ore" was not used in accordance with its generally

accepted meaning, and the geologist who prepared the report failed to

follow accepted engineering procedures in arriving at his reserve

estimates. The Commission further found that the report and the

prospectus insofar as it quoted from the report contained a number of

other materially misleading statements.

The prospectus also contained misleading statements concerning

the market for registrant's product, the prospects for profitable operation, the use of the proceeds from the proposed offering, the possible need for additional funds, and the absence of any reasonable

prospects of obtaining such additional funds. In addition, the introductory section of the prospectus did not adequately disclose the

speculative features of the enterprise so that they would be plainly

evident to the ordinary investor.

The impression conveyed by the figures set forth in the prospectus

as acquisition and development costs of the three Canadian corporations from whom registrant obtained its mining claims was that those

costs consisted entirely of cash expended when, in fact, some of the

claims were acquired for stock and no payment had been made for

certain other claims.

The registration statement was found to be deficient for failure to

name as promoters certain persons who were instrumental in obtaining

the mining claims in question for the Canadian corporations and in

organizing two of these corporations, and the prospectus was also

deficient in failing to identify the two individuals principally responsible for determining the total consideration to be paid for the claims

acquired by the registrant.

The Commission also found that the prospectus presented an inaccurate picture regarding the beneficial ownership of registrant's stock

issued to the Canadian corporations as consideration for the mining

claims. In addition, the Commission found that registrant's claim

that the issuance and sale of a total of 6,880,000 shares to such corporations and to persons designated by the underwriter were exempt

under section 4(1) of the act as transactions by an issuer not involving any public offering was false and that disclosure should have

been made in the financial statements of the contingent liability under

section 12(1) of the act resulting from the sale of the unregistered

securities.s

6 Securities A.ct Release No. 4378 (July 6. 1961).
36 SECURITIES AND EXCHANGE COMMISSION

Oil, Gas & Minerals, Ine., and American Investors Syndicate,

Inc.-These were consolidated proceedings relating to registration

statements filed by Oil, Gas & Minerals, Inc. ("OGM") and American Investors Syndicate, Inc. ("American"), both Louisiana corporations. The facts were stipulated and the registrants consented to the

issuance of stop orders,"

OG~rs principal assets consisted of a one twenty-fourth working

interest in a Louisiana oil field and a plot of land located in New

Orleans, La. American was organized to build and operate an apartment hotel, and its chief asset was approximately $32,000 in cash.

OGM leased the New Orleans property to American as the site for

the planned apartment hotel. James A. and Joseph D. Lindsay were

directors, officers and shareholders of both companies and together

owned the Lindsay Securities Corp., the underwriter for both proposed

issues. American proposed to issue 600,000shares of 10 cent par value

common stock and 200,000 shares of $9 stated value convertible preferred stock for a total offering price of $2,400,000,to be offered in

units of 3 shares of common stock and 1 share of preferred stock at

a price of $12 per unit. The registration statement of OGM covered

260,000 shares of 35 cent par common stock at an offering price of

$2 per share or a total of $520,000.

The description of properties of both corporations was found to be

deficient in various respects. For example, there was a failure to

disclose that the St. Charles Avenue property which American described as an excellent site for an apartment hotel located in an exclusive and highly restricted neighborhood, was in a neighborhood

whose residential quality is deteriorating. The prospectus also failed

to disclose that American was formed by OGM's promoters, that the

$2 million estimated cost of construction and 1 year estimated construction period were not based on any detailed plans or construction

arrangements and that American's management had had no experience in the construction or operation of an apartment hotel. OGM's

prospectus failed to describe the proposed apartment hotel and to

disclose that American lacked the resources to construct it.

There was a failure to disclose the fact that the underwriter was

organized by the promoters of the two registrants for the purpose of

distributing the shares of OGM and American, and the cover page of

both prospectuses failed to state that the underwriting arrangements

were on a "best efforts" basis and that there was, therefore, no assurance that all or any of the proceeds mentioned would be received.

The financial statements contained in the registration statements

were certified by an accounting firm which participated in the keeping

of the corporate books and, therefore, was not independent. The

7 Securities Act Release No. 4301 (Nov. 29. 1960).
TWENTY-SEVENTH ANNUAL REPORT 37

financial statements of OGM also did not comply with regulation

S-X under the act in that they did not present information in the

manner required nor include specified schedules with respect to, among

other things, intangible assets, capital, profit and loss, depreciation

and amortization.

American's prospectus failed to include a clear summarization of

the speculative features of its business, including the facts that

the Company was relying upon the receipts from the issue to

provide the funds for the construction of the proposed apartment

hotel; that the company would need net earnings after taxes of

$108,000to meet the annual 6-percent cumulative requirements of the

200,000 shares of preferred stock proposed to be issued and that the

company presently had no assets or operations which could provide

such earnings; that although the offering price of the common stock

was $1 per share, the book value of the company's common stock

was 20 cents per share, stock was sold to the organizers at 10 cents

per share and shares were recently offered to the public at 50 cents

per share; and that OGM, the lessor of the site on which the apartment building was to be constructed, was depending on the receipts

from its proposed offering to retire a $125,000mortgage on the leased

property.

The prospectus of OGM failed to include a clear summarization

of the speculative features of OGM's business and securities, and failed

to disclose, among other things, that the company had operated at a

loss since its inception, that it had an operating deficit of $24,297 and

that past dividends represented a return of capital; that the proposed

offering price for the OGM stock of $2 per share was arbitrarily determined, that the company's stock had a book value of 67 cents per

share and that shares of the company's common stock had recently

been offered to the public at $1 per share; that before the shares could

be resold by the purchasers to anyone else they had to be offered to the

company and other shareholders at their book value, which would

amount to $1.30 per share if all of the offered shares were sold at $2

per share, and that such restriction could result in substantial loss to

an investor desiring to sell his shares; and that the company had a

contingent liability of $166,800 to purchasers of 68,000 shares which

were sold without having been registered under the act and to purchasers of 101,800 shares which were sold by means of an inaccurate

and inadequate offering circular under regulation A.

Skiatron Electronics and Television Corp.-This registration

statement covered a proposed secondary distribution of 172,242shares

of registrant's 10 cent par value common stock, of which 75,000 shares

had been issued to Matthew M. Fox, registrant's licensee; 50,000

shares were covered by warrants owned by Fox; 30,000 shares were
38 SECURITIES AND EXCHANGE COMMISSION

owned by Arthur Levey, registrant's president, and 17,242shares had

been issued to employees, directors or persons who had performed

services for the company. In the course of the hearing, certain facts

were stipulated and the registrant consented to the issuance of a stop

order."

The registrant, a New York corporation, was organized in 1948

by Levey, to engage in research and development in the field of

electronics. In 1950 registrant began efforts to develop a subscription or pay television system. Lacking the resources for the development and operation of such a system, registrant entered into

agreement with Fox whereby Fox or his assignee, Skiatron of

America Inc., a corporation controlled by him, became the exclusive

licensee of the registrant's system. Fox assumed responsibility for

the commercial development and exploitation of the system including

the necessary development and industrial engineering, the determination of the acceptability and feasibility of the system, and arrangements for programing.

The prospectus stated that the registrant's licensee was planning

for the immediate use of its subscription television system by means

of wire or close-circuit operations and that if existing negotiations

with owners of outstanding entertainment and with municipalities and

public utilities whose facilities might be required for such operation

progressed favorably, the licensee anticipated that it would commence

commercial operations during the early part of 1960. The Commission found that there was no basis for this representation. Contracts

for the manufacture of equipment and other arrangements remained

to be secured. The prospectus was materially misleading in failing

adequately to disclose the financial and other difficulties to be met before the registrant's system could be placed in operation. Among

other things, the registration statement failed to show the large

amounts of capital needed to establish the proposed subscription

television system and defray programing costs ami to point out

that neither the registrant nor its licensee possessed the resources required and neither had access to sources able and \filling to supply

the amounts necessary. Registrant's principal asset was the right to

receive royalties under the licensing agreement with Fox. Fox and

his company were deeply in debt; debts of at least $1 million had

been reduced to judgments and Fox had further debts of approximately $3 million, a substantial portion of which was in default.

The prospectus stated that the registrant owned a number of United

States and foreign patents and patent applications and that its patent

coverage included the Skiatron "Subscriber-Vision" television systems. This representation was materially misleading since the out-

• Securities Act Release No. 4282 (Oct. 3, 1960).
TWENTY-SEVENTH ANNUAL REPORT 39

standing patents of the registrant were not essential to the operation

of either its over-the-air or wire system.

The prospectus was materially misleading in view of the failure to

disclose that Fox pledged 70,000of the 75,000shares purchased by him

and that many of such shares had been sold to the public before the

registration statement was filed. Fox had previously disposed of

195,000 warrants which he had received from registrant in 1954

in connection with the licensee agreements. By December 1958 all

195,000 warrants had been exercised and all of the shares sold to the

public. In addition, Fox disposed of 206,000 shares of registrant's

stock which were loaned to him by Levey for the specific purpose of

collateralizing loans negotiated by Fox. The Commission found that

at least a part of the shares referred to above were sold in violation

of section 5 of the act. Such sales created a contingent liability under

section 12(1) of the act which should have been disclosed in the

registration statement.

The registration statement was materially deficient in purporting to

cover shares which had already been sold to the public. Besides the

shares issued to Fox, which had been sold, a substantial portion of the

shares issued to officers,directors and creditors, had also been sold by

them prior to the filing of the registration statement. None of these

shares should have been included in view of the provisions of section

6(a) of the act limiting the effectiveness of a registration statement to

securities "proposed to be offered."

Levey, the promoter and organizer of the registrant, also disposed

of large blocks of stock to the public without registering such stock

under the act. Although he claimed exemptions from registration

under section 4(1) of the act and rule ]54, the Commission found that

neither of these exemptions was available. The registration statement

should have disclosed that Levey had been distributing shares of the

company without registration as required by the act and the contingent liability under section 12(1) of the act resulting therefrom.

EXAMINATIONS AND INVESTIGATIONS

The Commission is authorized by section 8(e) of the act to make

an examination in order to determine whether a stop order proceeding

should be instituted under section 8(d). For this purpose the Commission is empowered to subpoena witnesses and require the production

of pertinent documents. The Commission is also authorized by section 20(a) of the act to make an investigation to determine whether

any provision of the act or of any rule or regulation prescribed thereunder has been or is about to be violated. Investigations are instituted

under this section as an expeditious means of determining whether a

registration statement is false or misleading or omits to state any
40 SECURITIES AND EXCHANGE COMMISSION

material fact. The following table indicates the number of such examinations and investigations with which the Commission was concerned during the fiscal year.

Cases pending at the beginning of the fiscal year________________ 20

Cases initiated during the fiscal year____________________________ 16

36

Cases in which stop order proceedings were authorized during

the fiscal year_______________________________________________ 1

Other cases closed during the fiscal year_________________________ 18

19

Cases pending at the end of the fiscal year_______________________ 17

EXEMPTION FROM REGISTRATION OF SMALL ISSUES

Under section 3 (b) of the Securities Act, the Commission is empowered to exempt, by its rules and regulations and subject to such

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

from registration under the act, if it finds that the enforcement of the

registration provisions of the act with respect to such securities is not

necessary in the public interest and for the protection of investors by

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

public offering. The statute imposes a maximum limitation of $300,000

upon the size of the issues which may be exempted by the Commission

in the exercise of this power.

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

Rule 234: Exemption of first lien notes.

Rule 235: Exemption of securities of cooperative housing corporations.

Regulation A: General exemption for United States and Canadian issues

up to $300,000.

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

rights up to $100,000.

Regulation F: Exemption for assessments on assessable stock and for

assessable stock offered or sold to realize the amount of the assessment

thereon.

Under section 3(c) of the Securities Act, which was added by section 307(a) of the Small Business Investment Act of 1958, the Commission is authorized to adopt rules and regulations exempting securities issued by a company which is operating or proposes to operate as

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

adopted a regulation E which exempts upon certain terms and conditions limited amounts of securities issued by any small business

investment company which is registered under the Investment COIDpany Act of 1940. This regulation is substantially similar to the one

provided by regulation A adopted under section 3 (b) of the act.
TWENTY -SEVENTH ANNUAL REPORT 41

Exemption from registration under section 3(b) or 3(c) of the act

does not carry any exemption from the civil liabilities for false and

misleading statements imposed upon any person by section 12(2) or

from the criminal liabilities for fraud imposed upon any person by

section 17of the act.

Exempt Offerings Under Regulation A

The Commission's regulation A implements section 3(b) of the

Securities Act of 1933and permits a company to obtain needed capital

not in excessof $300,000 (including underwriting commissions) in any

one year from a public offering of its securities without registration,

if the company complies with the regulation. Upon complying with

the regulation a company is exempt from the registration provisions

of the act. A regulation A filing consists of a notification supplying

basic information about the company, certain exhibits, and an offering

circular which is required to be used in offering the securities. However, in the case of a company with an earnings history which is making an offering not in excess of $50,000 an offering circular need not

be used. A notification is filed with the regional officeof the Commission in the region in which the company has its principal place of

business.

During the 1961 fiscal year, 1,057 notifications were filed under

regulation A, covering proposed offerings of $239,920,549,compared

with 1,049 notifications covering proposed offerings of $224:,913,982

in the 1960 fiscal year. Included in the 1961total were 28 notifications

covering stock offerings of $5,956,350with respect to companies engaged in the exploratory oil and gas business and 28 notifications

covering offerings of $5,555,084by mining companies.

The following table sets forth various features of the regulation A

offerings during the past 3 fiscal years :

Offerings under regulation A

FIscal year

1961 1960 1959

--- ---

Size:$100,000 or less 165 220 222 Over $100,000 but not over $200,000 ____________________________________ 201 216 162 Over $200,000 but not over $300,000 ____________________________________ 691 613 470

--- --- --- 1,057 1,049 854 --- --- --- Underwriters: U sed __________________________________________________________________ 511 450 318 Not used _____________________________________________________ -------- 546 599 536

--- --- --- 1,057 1,049 854

Offerors:

~~~o~a~J~~~ .: .. .: .: .: .: .: .:

1,006 1,021 797 28 27 31 Issuers and stockholders jointly 23 1 26

--- --- --- 1,057 1,049 854

____________________________________________ ----- - -- - ---

~~= = : = = = : = = = = = === ==== = = = = = = = = = = = = = ________________________---------------
42 SECURITIES AND EXCHANGE COMMISSION

Most of the offerings which were underwritten were made by commercial underwriters, who participated in 511 offerings in 1961, 398

offerings in 1960, and 251 offerings in 1959. The remaining cases

where commissions were paid were handled by officers, directors, or

other persons not regularly engaged in the securities business.

Suspension of Exemption

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

which the regulation provides no exemption or where the offering is

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

the issuance of a temporary suspension order by the Commission, the

respondents may request a hearing to determine whether the temporary suspension should be vacated or made permanent. If no

hearing is requested within 30 days after the entry of the temporary

suspension order and none is ordered by the Commission on its own

motion, the temporary suspension order becomes permanent.

During the 1961 fiscal year, temporary suspension orders under regulation A were issued in 54 cases. These cases together with 29 cases

pending at the beginning of the fiscal year resulted in a total of 83

cases for disposition. Of these 83 cases, 55 became permanent: 35 by

lapse of time, 15 by withdrawal of the request for hearing, and 5 after

hearing, leaving 28 cases pending at the end of the fiscal year.

Several of the above cases are summarized below to illustrate the

type of misrepresentations and other noncompliance with the regulation which led to the issuance of suspension orders.

American Television and Radio Co.-The issuer's offering circular

was materially misleading in stating that the company believed it

was recognized as one of the world's leaders in the manufacture of

vibrators, which transform direct electrical current to alternating

current, and that its market position in this field was equal to that

of its competitors, and in failing to disclose the drastic inroads in the

vibrator market made by transistor auto radios, and that the market

for vibrators has substantially declined in recent years. The offering circular was also misleading in describing the vibrator as essentially a transistor device when in fact there is no similarity between

vibrators and transistors. A method employed by the company of

merchandising from factory directly to TV technician to consumer,

described in the offering circular as "unique," was in fact not unique

and had been unsuccessful.

A statement in the offering circular that approximately $120,000

of the net proceeds of the $300,000 offering would be used to reduce

the company's short-term indebtedness and that the balance would
T~ENTY-SEVENTH ~AL REPORT 43

be added to working capital was found to be misleading in failing

to disclose the more specific uses which the company intended to

make of the proceeds, including increase of vibrator production facilities and inventory, hiring trained personnel, and entering the stereophonic high fidelity field. The offering circular was also found deficient in failing to disclose clearly the dilution of the equity of public

security holders resulting from offering the securities at a price considerably in excess of book value.

The Commission further found that the company had used certain

types of publicity not permitted by regulation A and not filed with

the Commission, had failed to use the offering circular in the offer

and sale of its securities, and had not set forth in the notification the

names of all of the States in which the securities were to be offered or

the name of the underwriter,"

Committee Oil Co.-According to the Commission's order in this

case, the issuer's offering circular failed to disclose the source of funds

with which the company intended to pay interest and principal on the

debentures and the alternative use of proceeds should the company

fail to acquire oil and gas properties as proposed and failed to describe adequately the risks involved in the oil and gas business and

the extent to which the properties of the company were to be explored

and developed. The order also challenged the company's forecast of

profits based on conjecture, the statement that the company would pay

all direct sales costs and certain other expenses when in fact no funds

were available therefor, and the use of oil and gas reserve figures based

upon secondary methods although such methods had not as yet proved

successful on the properties involved."

Custer Channel Wing Corp.-The Commission's order alleged that

the offering circular in this case contained misrepresentations in regard to the development, manufacture and marketing of aircraft

embodying a "new" wing design. Although the design had been proposed and under development since 1940, the company failed to disclose the history of such development in reasonable detail, to indicate

that during the 15-year period the proposed aircraft has been under

development by Custer, its predecessors and subsidiaries, sums aggregating several hundred thousand dollars were raised through the sale

of securities, or to disclose how such sums were expended and the reasons why a salable aircraft has not been fully developed. There was

a similar failure to disclose Custer's previous unsuccessful efforts to

market the aircraft and the fact that the aircraft was demonstrated

to the military and that no interest was shown or orders taken. The

patents pertaining to the wing were not described nor was it disclosed

that applications filed in 1953 and 1954 with the predecessor of the

,. Securities Act Release No. 4355 (Apr. 18. 1961).

2Jl Securities Act Releases Nos. 4338 and 4348 (Mar. 9 and Apr. 7, 1961).
44 SECURITIES AND EXCHANGE COMMISSION

Federal Aviation Agency were not completed and have since been

abandoned. No estimate of the amount required to secure FAA certification of the aircraft proposed to be manufactured was furnished.

Misrepresentation was also alleged with respect to statements that

the break-even point would be reached at approximately the 15th aircraft produced, that the company had "firm" orders for 20 aircraft,

and that $208,850would be enough to commence actual manufacture

of aircraft to fill outstanding orders. There was a failure to disclose

that the market price of the class B stock was substantially lower than

the public offering price. Financial statements prepared in accordance with generally accepted accounting principles were not included

as required."

Hermon Hanson Oil Syndicate, Inc.-The Commission's order

stated that the offering circular did not contain accurate or adequate

disclosure with respect to the geological aspects of the issuer's properties; the fact that no oil or gas in commercial quantities had been

found within 150miles thereof, that many dry holes have been drilled

between the syndicate's properties and the nearest commercially producing area; the speculative features of the offering, including the

fact that the $1 per share offering price was essentially an arbitrary

price having no direct relation to underlying asset values, and that

public investors would be asked to furnish the total funds required to

drill a "wildcatwell for only a 7-percent interest in the company.P

Exempt Offerings Under Regulation B

During the fiscal year ended Jnne 30, 1961, 261 offering sheets were

filed pursuant to regulation B and were examined by the Oil and Gas

Section of the Commission's Division of Corporation Finance. During the 1960 fiscal year, 328 offering sheets were filed and during the

1959 fiscal year, 160 were filed. The following table indicates the

nature and number of Commission orders issued in connection with

such filings during the fiscal years 1959-61. The balance of the offering sheets filed became effective without order.

Action taken on offering sheets filed. under regul<ltion B

I FIscal years

1961 1960 1959

Temporary suspensmn orders _____________________________________________ 16 7 4 Orders tennlnatmz proceeding after amendment. _________________________ 6 6 1 Orders thin!: effective date of amendment (no proceeding pending), ______ 158 138 87

Orders consenting to WIthdrawal of offerinz sheet (no proceeding pendingL_ 7 11 2

Orders consenting to WIthdrawal of offering sheet and terminating pro- ceeding _________________________________________________________________I 2 2

Total numher of orders _____________________________________________188 164 96

n Securities Act Releases Nos_ 4311 (Dec. 30, 1960) and 4374 (June 12, 1961).

U Securities Act Releases Nos. 4344 (Mar. 17, 1961) and 4348 (Apr. 7, 1961).
~ENTY-SEVENTH ~AL REPORT 45

Reports of sales.-The Commission requires persons who make offerings under regulation B to file reports of the actual sales made

pursuant to that regulation. The purpose of these reports is to aid

the Commission in determining whether violations of law have occurred in the marketing of such securities. The following table

shows the number of sales reports filed under regulation B during

the past 3 fiscal years and the aggregate dollar amount of sales during

each of the fiscal years 1959-61.

Reports ot sales under reoulation. B

FIScal years

1961 1960 1959

Number of sales reports filed ________________________________________ 2,091 4,425 1,689 Aggregate dollar amount of sales reported ___________________________ $1,894,018 $2,833,457 $1,204,751

Exempt Offerings Under Regulation E

Regulation E provides a conditional exemption from registration

under the Securities Act of 1933 for securities of small business

investment companies which are licensed under the Small Business

Investment Act of 1958 or which have received the preliminary

approval of the Small Business Administration and have been notified

by the Administration that they may submit an application for such

a license.

The new regulation, which is similar in many respects to the general exemption provided by regulation A, requires the filing of a

notification with the Commission and, except in the case of offerings

in excessof $50,000, the filing and use of an offering circular containing

certain specified information.

Regulation E provides for the suspension of exemption in particular cases if the Commission finds that any of the terms and conditions

of the regulation have not been met or complied with.

Two notifications were filed under regulation E during the 1961

fiscal year for offerings of securities aggregating $184:,350. Of these

two notifications, one became effective for a proposed offering of

$168,750. The other notification was pending at the end of the

fiscal year.

Exempt Offerings Under Regulation F

Regulation F provides an exemption from registration under the

Securities Act for assessments levied upon assessable stock and for

delinquent assessment sales in amounts not exceeding $300,000 in any

one year. It requires the filing of a simple notification giving brief

information with respect to the issuer, its management, principal

security holders, recent and proposed assessments and other security
46 SECURITIES AND EXCHANGE COMMISSION

issues. The regulation requires a company to send to its stockholders, or otherwise publish, a statement of the purposes for which the

proceeds from the assessment are proposed to be used. If the issuer

should employ any other sales literature in connection with the assessment, copies of such literature must be filed with the Commission.

During the 1961 fiscal year, 41 notifications were filed under regulation F, covering assessments of $1,007,864. Regulation F notifications were filed in three of the nine regional offices of the

Commission; i.e., the Denver, San Francisco, and Seattle regional

offices. Underwriters were not employed in any of the regulation F

assessments and in no case did the assessment exceed $61,000.

Regulation F provides for the suspension of an exemption thereunder, as in regulation A, where the regulation provides no exemption or where the offering is not made in accordance with the terms

and conditions of the regulation, or in accordance with prescribed

disclosure standards.

Two regulation F filings were temporarily suspended in fiscal 1961

for alleged false and misleading statements in the sales material used.

Requests for hearings were made with respect to both of these suspensions but both issuers subsequently consented to the issuance of

permanent suspension orders.

LITIGATION UNDER THE SECURITIES Acr OF 1933

The Commission is authorized by the Securities Act to seek injunctions in cases where continued or threatened violations of the act are

indicated, including violations of the registration and antifraud provisions of the act. During the fiscal year, 28 such injunctions were obtained and 9 cases were pending at the end of the year. Certain of

these cases are described herein. Other actions in which violations of

the Securities Act are present and which also involve violations of

other statutes are described under the other statutes.

In S.E.O. v, FedeTal Shopping Way, Inc., et al.,13 the S.E.C. filed

a complaint against Federal Shopping Way, Inc., and 18 other defendants seeking an injunction against continued violations of the antifraud provisions of the Securities Act of 1933 in the offer and sale of

securities of defendant Federal Shopping, issued in connection with

the financing of a shopping center enterprise located at Federal Way,

Wash. It was alleged that defendants formed approximately 30

affiliated or cooperating corporations, including Federal Shopping,

and sought to create the appearance that various transactions including

property sales and rental agreements, between Federal Shopping and

others of these corporations, were arm's-length transactions when in

'" W.D. Wash., No. 2671.
TWENTY-SEVENTH ANNUAL REPORT 47

fact the various corporations were at all times under the domination

and control of defendant John R. Cessna and other defendants and

were formed and operated for the purpose of diverting moneys from

Federal Shopping, concealing such diversion from that company's

present and potential security holders, and deceiving such security

holders as to the original acquisition costs of property acquired by

Federal Shopping and the true income and profits being realized by

Federal Shopping from the rental and operation of such property.

The complaint further alleged that defendants were obtaining

money by means of untrue and misleading statements concerning the

asserted success of Federal Shopping and its shopping center enterprise, its net earnings, dividends, and bond interest paid and to be

paid and the source of such payments, the amount of rental income

and its source, its financial condition, and other matters.

In S.E.O. v. L- Wood Oompany, Inc.,14 the defendants had been selling investment contracts and participations in profit-sharing agreements without registration and had made material misrepresentations

concerning increases in the company's assets and the safety of an investment with the company. The defendants consented to entry of a

final judgment enjoining further violations of the act.

The Commission secured a permanent injunction by default against

all but one of the four defendants in S.E.O. v. American Equities Oorporation 15 prohibiting them from violating the registration and antifraud provisions of the Securities Act of 1933 in the offer and sale of

shares of that corporation. For the purpose of inducing the purchase of these securities by investors the defendants provided various

broker-dealers with false financial statements of the company and

caused various broker-dealers to enter quotations in the over-thecounter market, thus creating the appearance of an active market.

The case against Martin Benjamin, the remaining defendant, was still

pending at the close of the fiscal year.

In S.E.O. v, Insured Mortgage and Title Corporation; et al.,I6 the

Commission instituted an action against one of the so-called "8 percenters" which had been selling interests in Florida mortgages to investors throughout the United States. Under Insured's "Corrigan

Plan," investors were to receive 8 percent interest to be derived from

payments made by mortgagors on first mortgage deeds and notes on

Florida real estate which were purchased by Insured or its subsidiaries. The company issued its notes to investors, collateralized by the

assignment of the mortgages. Insured was to have the authority and

responsibility for processing the mortgages, selecting the particular

~.N.D. Tex. Civil Action No. 8828.

:Ill SoD.N.Y. No. 61-1068.

O. S.D. Fla., No. 4003.

620873-62-5
48 SECURITIES AND EXCHANGE COMMISSION

mortgage to be assigned to an investor, collecting payments from

mortgagors, remitting monthly payments of principal and interest to

investors, replacing the defaulted mortgages with others, or, in the

alternative, redeeming corporate notes collateralized by defaulted

mortgages, and handling all administrative details pertaining to the

mortgages.

The Commission charged that the defendants were selling various

types of securities, including evidences of indebtedness and investment

contracts, in violation of the registration provisions of the Securities Act. In addition, it was charged that false representations were

being made to investors and that Insured was insolvent. The parties

stipulated to the entry of a preliminary injunction which restricted

the company's operations to the State of Florida pending a trial on

the merits. Shortly thereafter, the president of Insured disappeared

and the court appointed a receiver to liquidate the corporation's

assets.

In S.E.O. v, Glass Manne Induetries, lne./7 the Commission

charged the company with violations of sections 17(a) (1), 17(a) (3),

and 24 of the Securities Act of 1933 and section 10(b) of the Securities Exchange Act of 1934 and rule 10b-5 thereunder. The complaint

charged that the company had made material misrepresentations

and had omitted material facts in a registration statement which became effective on July 6, 1960,covering a public offering which netted

the company approximately $458,000. The Commission alleged,

among other things, that whereas the registration statement had

stated that the proceeds of the offering would be used to promote and

expand the company's sales, in fact such proceeds had been used to

make loans to other companies. In addition, the complaint alleged

that the company had failed to disclose its plans for a possible merger,

and the fact that its production had been materially reduced by the

time the registration statement became effective. A preliminary injunction has been obtained freezing the assets of the company and

the matter is pending.

In S.E.O. v, American Sales Training Iiesearoh. Assn., lno./8 the

Commission charged the company and certain of its officers,directors

and employees with violating the registration provisions of the act.

The complaint alleged that the defendants were engaged in selling

education programs designed to educate a person while he sleeps, and

had sold "inactive distributorships" to certain investors for a stipulated sum in return for which the investor was to receive a percentage

of the profits realized by the defendants' sale of its programs. The

Commission contended that the defendants' "inactive distributor17 D. Del. No. 2276.

IBN.D. Ill. No. 1795.
TWENTY-SEVENTH ANNUAL REPORT 49

ships" were investment contracts. A permanent injunction was

entered by consent.

In S.E.O. v, Beverly Hills Security Investments, et ril./9 the defendants consented to the entry of permanent decrees enjoining them

from further violations of the registration and antifraud provisions

of the securities acts in the sale of securities issued in connection with

a so-called 10-percent investment program. The program was based

on the sale to the public of discounted trust deeds, mortgages, and

contracts related to real estate situated in California, Arizona, and

New Mexico.

The plan in this case was similar to that in Los Angeles TTU8t Deed

eX Mortgage Exchange, the earlier history of which is discussed in

previous annual reports. 20 Since those reports, the Court of Appeals

for the Ninth Circuit 21 affirmed the decree of the District Court 22

which had enjoined the corporate defendants and certain of their

managing officers from violating the registration and antifraud provisions of the Securities Act and the Securities Exchange Act in the

sale of securities issued under an investment plan, based on the sale

to investors of individual discounted trust deeds and mortgages. This

decision constitutes a significant judicial interpretation of the term

"investment contract." It also holds that, despite the absence of

specific statutory authority, the Commission may obtain the appointment of an equity receiver for an offender against the Federal

securities acts.

The merchandising of individual trust deeds and mortgages under

high-yield investment plans, without registration with the Commission, and often through grossly untruthful and deceitful public solicitations, had constituted a serious and growing regulatory problem.

Los Angeles Trust Deed & Mortgage Exchange alone had attracted

some $40 million from the investing public. It is now being liquidated in bankruptcy, and its promoters are under indictment. The

Commission's litigation opened up and exposed the highly speculative

nature of the investment programs offered by "10 percenters" who

lured many thousands of small investors to commit their savings and

earnings on the representation that the investment was sound, stable,

and comparatively riskless. Although California was the center for

these operations, the same basic scheme has been employed elsewhere

throughout the United States.

The collapse of the "10 percenters" created a major financial scandal

in California, and led to a sweeping investigation by a special com-

,e S.D. cane, No. 127-61-TC.

120 24th annual report, pp. 51-52; 25th annual report, p. 51; 26th annual report, pp.

57-58.

21 285 F. 2d 162, certiorari denied 6 L. ed, (2d) 241.

., 186 F. Supp. 830.
50 SECURITIES AND EXCHANGE COMMISSION

mittee of the State assembly, and the enactment of certain remedial

legislation. The serious nature of the problem created by the "10 percenters" and the ruinous consequences to many thousands of investors

are mirrored in the fact that six such enterprises are now in bankruptcy," one is in State court receivership," two are in the course of

reorganization under chapter X of the Bankruptcy Act,25and two are

subject to arrangement proceedings under chapter XI of the Bankruptcy Act.26 The criminal indictments returned with respect to "10

percenters" are discussed at p. 17'0 below.

Participation as Amicus Curiae

Honigman v, Green Giant Oompany 21and Sawyer v, Pioneer Mills

00., Ltd.,28 are two cases involving the construction of the Commission's so-called "no-sale" rule.29 In the Green Giant case, the company solicited the consent of its stockholders to a plan of reorganization which would result in one class of shareholders giving up part

of their equity in return for greater voting rights, while the other

class would give up some voting rights in exchange for a larger

equity. In a stockholders' derivative action, it was alleged that

acceptance of this reorganization plan was induced by misleading

statements and omissions in the literature sent to stockholders by the

management. Management denied the misleading nature of the statements made and further asserted that no action for fraud could be

maintained under the Federal securities laws because rule 133 provides

that a reorganization is not a "sale." The Commission is participating

in this case as amicus curiae, and has filed a brief which points out that

although the transaction in question may not have been a sale within

the registration provisions of the Securities Act, rule 133 has no

application to the anti-fraud provisions of the Federal securities laws.

The Commission took no position on the merits of the case.

In the Sawyer case, the Commission, as amicus curiae, took the same

view as in H onigman, with respect to allegedly false and misleading

solicitations of stockholder approval for a proposed merger. In addition, the Commission urged that a Federal court has jurisdiction to

rescind a consummated corporate transaction effected by means of

... Best Trust Deed Corporation, U.S.D.C. S D. Calif. ; Beverly Hills Security Investments,

U S.D.C. S.D. Calif.; Franklin Trust Deed Corporation, U.S.D.C. S.D. Calif.; Los Angeles

Trust Deed and Mortgage Exchange, U.S.D.C. S D. Calif.; Porter Trust Deed Investment.

Corporation, U.S.D.C. N.D. Calif.; Western Trust Deed Corporation, U.S.D.C. S.D. Calif.

1M Pacifto Trust Deed Oorporation.

f,J5 Mason Mortgage <£ Investment Oorporation, U.S.D.C. District of Columbia; Pickman

Trust Deed Oorporation, U.S.D.C. N.D. Calif .

.. Trustora' Oorporation, U.S D.C. S.D. Calif.; Guardian Trust Deed Oorporation,

U.S.D.C. N.D. Callf.

rn D. Minn. No.4 60 Clv. 176

.. C.A. 9, No. 17223.

.. 17 CFR 230.133.
TWENTY-SEVENTH AlrnUAL REPORT 51

violations of the anti-fraud provisions of the Federal securities laws.

Decisions in these cases have not yet been rendered.

In Moses and New v, Michael (consolidated}" the sellers of unregistered undivided working interests in oil and gas leases appealed

from summary judgments entered against them under section 12(1)

of the Securities Act. Among other things, the sellers argued that

they did not violate the Federal securities laws because only photostatic copies of the oil and gas assignments, rather than the assignments themselves, were sent through the mails. The Commission filed

a brief amicus (J'IJ/JiM, urging rejection of this contention. On Ju1y

20, 1961, the Court of Appeals sustained the Commission's contention,

affirmed the judgment of the District Court, and stated that "the

mailing of photostatic copies of the lease agreements * * * constituted

a violation of the Act * * *."

30 292 F. 2d 614 (C.A. 5, 1961).
Pacific Coast Stock Exchange

Philadelphia-Baltimore Stock Exchange

Pittsburgh Stock Exchange

Salt Lake Stock Exchange

San Francisco Mining Exchange

Spokane Stock Exchange

PART V

ADMINISTRATION OF THE SECURITIES EXCHANGE ACT

OF 1934

The Securities Exchange Act of 1934 provides for the registration

and regulation of securities exchanges, and the registration of securities listed on such exchanges and it establishes, for issuers of securities

so registered, financial and other reporting requirements, regulation

of proxy solicitations and requirements with respect to trading by

directors, officersand principal security holders. The act also provides

for the registration and regulation of brokers and dealers doing business in the over-the-counter market, contains provisions designed to

prevent fraudulent, deceptive and manipulative acts and practices on

the exchanges and in the over-the-counter markets and authorizes the

Federal Reserve Board to regulate the use of credit in securities transactions. The purpose of these statutory requirements is to ensure the

maintenance of fair and honest markets in securities.

REGULATION OF EXCHANGES AND EXCHANGE TRADING

Registration and Exemption of Exchanges

As of June 30, 1961, 14 stock exchanges were registered under the

Exchange Act as national securities exchanges :

American Stock Exchange

Boston Stock Exchange

Chicago Board of Trade

Cincinnati Stock Exchange

Detroit Stock Exchange

Midwest Stock Exchange

.National Stock Exchange

New York Stock Exchange

There have been no sales of securities on the Chicago Board of

Trade since 1953. The National Stock Exchange was granted registration as a national securities exchange on August 16, 1960, but

had not commenced to operate as of June 30, 1961.

Four exchanges were exempted from registration by the Commission pursuant to section 5 of the act:

Colorado Springs Stock Exchange

Honolulu Stock Exchange

52

Richmond Stock Exchange

Wheeling Stock Exchange
TWENTY-SEVENTH ANNUAL REPORT 53 

Disciplinary Action 

Each national securities exchange reports to the Commission disciplinary actions taken against its members andmember firms for violations of the Securities Exchange Act of 1934or of exchange rules. 

During the year 7 exchanges reported 51 cases of such disciplinary 

actions, including imposition of fines aggregating $30,137 in 25 cases; 

the suspension of 9 individuals and the expulsion of another individual from membership; the revocation of 5 specialists' registrations 

and the censure of a number of individuals and finne. 

REGISTRATION OF SECURITIES ON EXCHANGES 

It is unlarvful for a member of a national securities exchange or a 

broker or dealer to effect any transaction in a security on such exchange 

unless the security is registered on that exchange under the Securities Exchange Act or is exempt from such registration. In general, 

the act exempts from registration obligat,ions issued or guaranteed 

by a State or the Federal Government or by certain subdivisions or 

agencies thereof and authorizes the Commission to adopt rules and 

regulations exempting such other securities as the Commission may 

find necessary or appropriate to exempt in the public interest or for 

the protection of investors. Under this authority the Conmission 

has exempted securities of certain banks, certain securities secured by 

property or leasehold interests, certain warrants and, on a tempgrary 

basis, certain securities issued in substitution for or in addition to 

listed securities. 

Section 12 of the Exchange Act provides thi~t an issuer rnay register 

a class of securities on an exchange by filing with the Commission and 

the exchange an application mhich discloses pertinent information 

concerning the issuer and its affairs. An application requires the 

furnishing of information in regard to the issuer's business, capital 

structure, the terms of its securities, the persons who manage or control its affairs, t,he remuneration paid to its officers and directors, the 

allotnlent of options, bonuses and profit-sharing plans, and financial 

statements certified by independent accountants. 

Form 10 is the form used for re.gistration by most commercial and 

industrial companies. There are specialized forms for certain types 

of securities, such as voting trust certificates, certificates of deposit, 

and securities of foreign governments. 

Section 13 requires issuers having securities registered on an exchange to file periodic reports keeping current the information furnished in the application for registration. These periodic reports 

include annual reports, semiannual reports, and current reports. The 

principal annual report form is form 10-K which is designed to keep 

up-to-date the information furnished in form 10. Semiannual re-
54 SECURITIES AND EXCHANGE COMMISSION

ports required to be furnished on form 9-K are devoted chiefly to

furnishing midyear financial data. Current reports on form 8-K

are required to be filed for each month in which any of certain specified events have occurred. A report on this form deals with matters

such as changes in control of the registrant, important acquisitions

or dispositions of assets, the institution or termination of important

legal proceedings and important changes in the issuer's capital securities or in the amount thereof outstanding.

Statistics Relating to Registration of Securities on Exchanges

As of June 30, 1961, a total of 2,341 issuers had 3,931 issues of

securities listed and registered on national securities exchanges, of

which 2,748 were classified as stocks and 1,183 as bonds. Of these

totals, 1,332 issuers had 1,544 stock issues and 1,124 bond issues listed

and registered on the New York Stock Exchange. Thus, 57 percent

of the issuers, 56 percent of the stock issues and 95 percent of the bond

issues were on the New York Stock Exchange.

During the 1961fiscal year, 130 issuers listed and registered securities on a national securities exchange for the first time, while the

registration of all securities of 96 issuers was terminated. The total

number of applications for registration of classes of securities on exchanges filed during the 1961fiscal year was 271.

The following table shows the number of annual, semiannual, and

current reports filed during the fiscal year by issuers having securities

listed and registered on national securities exchanges. The table also

shows the number of such reports filed under section 15(d) of the

Securities Exchange Act of 1934 by issuers obligated to file reports

by reason of having publicly offered securities effectively registered

under the Securities Act of 1933. The securities of such issuers are

traded generally in the over-the-counter markets. As of June 30,

1961, there were 2,135 such issuers, including 350 that were also

registered as investment companies under the Investment Company

Act of 1940.

Number ot annuat and other periodic reports filed by issuers under the Securities Exchange .Act ot 1934 during the fiscal year ended June 80, 1961

Number of reports filed by

Listed Over-the- Total

Type of reports issuers counter reports

filing Issuers filed

reports filing

under reports sec 13 under

sec. 15(d)

Annual reports on form 1(}-K,ctc ___________________________________ 2,243 1,890 4, 133 Semiannual reports on form 9-K ____________________________________ 1,744 1,221 2, 965 Current reports on form 8-K, etc ___________________________________ 3,636 2,255 5,891

Total reports Iiled ___________________________._. 7,623 5,366 12,989

-

_____• • • ____••
TWENTY-SEVENTH ANNUAL REPORT 55

MARKET VALUE OF SECURITIES TRADED ON EXCHANGES

The market value on December 31, 1960, of all stocks and bonds

admitted to trading on one or more stock exchanges in the United

States was approximately $444,738,418,000.

Number of Market value

Issues Dec. 31, 1960

Stocks: New York Stock Exchange ____________________________________________ 1,528 $306,967,079,000 American Stock Exchange ____________________________________________. 942 24, 170,933.000 Exelusrvely on other exchanges 510 4, 145, 800, 000

Total stocks . . -_ -_. 2,980 335, 283, 812, 000

Bonds: New York Stock Exchange ,___________________ . ______ . ______________ 1,191 108, 256, 818, 000 American Stock Exchange _. .• . . . 63 1, 064, 503, 000 Exclusively on other exchanges . 27 133, 285. 000 -- Total bonds . 1,281 109, 454, 606, 000

Totul stocks and bonds ._. .... . 4,261 444,738,418,000

, Bonds on the New York Stock Exchange included 52 U S. Government and New York State and CIty

Issues with $79,537,243,000 aggregate market value.

The New York Stock Exchange and American Stock Exchange

figures were reported by those exchanges. There was no duplication

of issues between them. The figures for all other exchanges were for

the net number of issues appearing only on such exchanges, excluding the many issues on them which were also traded on one or the other

of the New York exchanges. The number and market value of issues

as shown excluded those suspended from trading and a few others

for which quotations were not available. The number and market

value as of December 31, 1960, of preferred and common stocks separately was as follows:

Preferred stocks Common stocks

Number Market value Number Market value

Listed on registered exchanges __________________ 570 $8, 180, 521, 000 2,125 $313,485,988,000 All other stocks ,_______________________________ 53 457, 160, 000 232 13, 160, 143, 000

623 8,637,681,000 2,357 326, 646, 131, 000

, Stocks admitted to unlisted trading privileges only or listed on exempted exchanges.

The New York Stock Exchange has reported aggregate market

values of all stocks thereon monthly since December 31, 1924, when

the figure was $27.1 billion. The aggregate market value rose to

$89.7 billion in September 1929, and declined to $15.6 billion in

July 1932. The number of stocks on this exchange has increased from

1,253 issues of 831 companies on July 1, 1932, to 1,528 issues of 1,143

companies on December 31, 1960. Their aggregate market value at

the close of 1960 was nearly 20 times the total at the low point in July

___________• _______________ ------------ _____ ______________• ______________• _______ - _____--

_____ ________ _____• __________ _________

__________________• ________________ ____

______________ _______________ ---- ------ ----------------

______________________ _______ ______ --
56 SECURITIES AND EXCHANGE COMMISSION

1932. The American Stock Exchange has reported December 31 totals

annually since 1936. Aggregates for stocks exclusively on the remaining exchanges have been compiled as of December 31 annually by the

Commission since 1948.

Share values on eechanoes, in billions of dollars

New York American Exclusively

December 31 each year Stock Ex- Stock Ex- on other Total 1

change change exchanges

1936____________________________________________________ $59.9 $14.8 -------.---- $74.7 1937____________________________________________________ 38 9 10.2 -----------. 49.1 1938____________________________________________________ 47 5 10 8 ------------ 58.3 1939____________________________________________________ 46 5 10 1 -----.------ 56 6 1940____________________________________________________ 41 9 8 6 ------------ 50 5 1941. ___________________________________________________ 35 8 7.4 ------------ 43 2 1942____________________________________________________ 38 8 7.8 46 6 1943 47.6 9 9 ------------ 57 5 1944____________________________________________________ 55 5 11 2 ------------ 66.7 1945____________________________________________________ 73 8 14 4 ------------ 88. 2 1946____________________________________________________ 68.6 13 2 --------- ..-- 81.8 1947____________________________________________________ 68 3 12 1 -------$3-ii- 80 4 1948____________________________________________________ 67 0 11.9 81. 9 1949____________________________________________________ 76 3 12.2 3. 1 91 6 1950 _________________________________________ 93.8 13 9 3 3 111.0 1951. 109.5 16 5 3 2 129.2 1952_ 120 5 16 9 3.1 140 5 1958____________________________________________________ 117 3 15 3 2.8 135 4 1954____________________________________________________ 169 1 22 1 3 6 194 R 1955____________________________________________________ 207 7 27.1 4.0 238 8 1956____________________________________________________ 219 2 31 0 3.8 254 0 1957____________________________________________________ 195 6 25 5 3. 1 224 2 1958____________________________________________________ 276 7 31 7 4 3 312 7 1959____________________________________________________ 307 7 26 4 4 2 338. 4 1960____________________________________________________ 307.0 24 2 4 1 335.3

1Total values 1936-47 mclusrve are for the New York Stock Exchange and the American Stock Exchange

only.

Fiscal Year Share Values and Volumes

The aggregate market values of all stocks on the exchanges as of

June 30 annually, and the volumes of shares traded on the exchanges

in years to June 30, have been as follows:

Volumes in years to June 30 June 30 values (billlons)

Share VOlume Dollar volume

1955_______________________________________________________ $222 8 1, 324, 383, 000 $36, 878, 540, 000 1956_______________________________________________________ 250 0 1,217,935,000 36, 226, 682, 000 1957_______________________________________________________ 2620 1, 210, 807, 000 32, 929, 671, 000 1958_______________________________________________________ 257 9 1, 209, 274, 000 30, 862, 129, 000 1959 __________________________________________ 3376 1,806,810,000 51,577, 195, 000 1960

1961. ______________________________________________________ 327.8 1,456,919,000 47,795,837,000 381.0 1, 971, 508, 000 57,029,271,000

The June 30 values were as reported by the New York Stock

Exchange and as estimated for all other exchanges. Volumes include shares, warrants, and rights. Comprehensive statistics of volumes on exchanges are included among the appendix tables in this

annual report.

The market value of all stocks on the stock exchanges rose from

$335.3 billion on December 31, 1960, to nearly $400 billion in May

1961, subsiding to about $381 billion by June 30, 1961. The rise

_______________________- ___- _- ______________________ ------------

__________0

_____________________________0 ______ 0 ______________

0 __________________________________________________

____________0

_________________-- -- - -- _______________________________
TWENTY-SEVENTH ANNUAL REPORT 57

of $45.7 billion for the 6 months included approximately $2 billion

on account of new listings. The 6 months' trading volume of

1,264,314,000shares, warrants, and rights, with a dollar volume of

$35,712,309,000,brought the :fiscal year showings above to a new

high total.

Foreign Stock on Exchanges

The market value on December 31, 1960, of all shares and certificates representing foreign stocks on the stock exchanges was reported

at about $11.1 billion, of which $10.1 billion represented Canadian

and $1 billion represented other foreign stocks. The market values

of the entire Canadian stock issues were included in these aggregates.

Most of the other foreign stocks were represented by American

Depositary Receipts or American shares, only the outstanding

amounts of which were used in determining market values.

Foreign stocks on exchanges

Canadian Other foreign Total

Dec 31,1960

Issues Value Issues Value Issues Value

Exchanges' New York ____________ 12 $4, 115,823,000 13 $727,864,000 25 $4,843,687,000 Amencan _____________ 104 5,950,437,000 41 258,397,000 145 6, 208, 834, 000 Others ________________ 1 12,014,000 2 3, 9i5, 000 3 15,989,000

TotaL ______________ 111 10,078,214,000 56 990,236,000 113 11,068, 510,000

The number of foreign stocks on the exchanges has declined

slightly in recent years, owing principally to a reduction on the

American Stock Exchange from 152 in 1956 to 145 in 1960. Trading

in foreign stocks was 42.4 percent of the reported share volume on

this exchange in 1956 and 17.9 percent in 1960.

Trading in foreign stocks on the New York Stock Exchange was

3.4 percent of the reported share volume thereon in 1956 and 2.7

percent in 1960.

Comparative Exchange Statistics

Stocks on the New York Stock Exchange and on the American

Stock Exchange continued to increase in number, and stocks exclusively on the regional exchanges continued to decline in number,

during the past fiscal year.

Net number of stocks on exchanges'

New York American Exelusively Total stocks

June 30 Stock Stock on other on exchanges

Exchange Exchange exchanges

1959 1,514 871 576 2,961 1960____________________________________________ 1,532 931 555 3,018 1961. ___________________________________________ 1,546 977 519 3,042

1Annual data from 1938 through 1960 are shown 10 a tahle on p. 10 of the 26th annual report (1960).

______• _____________________________________
58 SECURITIES AND EXCHANGE COMMISSION

The ratio of share volume on the regional exchanges to the total

volume on the exchanges has continued to decline, as indicated below

and in the table on page 71 of our 26th annual report (1960). Dollar

volumes on the New York Stock Exchange and the regional exchanges declined proportionately during the first 6 months of 1961

in view of the unusually high showing made by the American Stock

Exchange.

Annual sales of stock on eectumoee 1

Percent of share volume Percent of dollar volume

Calendar year

New York American All other New York American All other

1959___________________________ 65.59 24.50 9.91 83.86 9.53 6.81 1960___________________________ 68.48 22 27 9.25 83 81 9.35 684 1st 6 months, 196L____________ 64 46 26.92 8.62 81.46 12.05 6.49

I Shares, warrants, and rights are Included Annual data since 1935are shown ill an appendix table In

this annual report.

Comparative Over-the-Counter Statistics

So far as can be ascertained from the standard securities manuals

and from reports to the Commission, there are about 4,000 stocks with

300 holders or more, of about 3,500 domestic companies, quoted only

in the over-the-counter market. The aggregate market value of these

stocks on December 31, 1960,was about $69 billion, or about 20 percent

of the $335.3 billion on the stock exchanges, continuing the ratio existing over recent years as mentioned in previous annual reports. Registered investment companies are excluded from this compilation, and

are referred to elsewhere in this annual report.

The $69 billion market value included $17.6 billion for bank stocks,

$12.4 billion for insurance stocks, and $39 billion for industrial, utility,

and other miscellaneous stocks.

The largest number of stockholders reported for an over-the-counter

stock was "over 200,000" for the Bank of America NT & SA. Over

25,000 stockholders each were reported for 20 stocks of companies including 7 banks, 8 utilities, 2 insurance, and 3 others. The following

table groups issues according to number of reported stockholders.

Issues by number of stockholders

Number or holders Approximate Approximate number of Number or holders number or stocks stocks

-

25,000upward _______________________ 20 500 to 999____________________________ 1,100 10,000to 24,999______________________ 80 300 to 499____________________________ 1,000 5,000to 9,999________________________ 200 1,000to 4,999________________________ 1,600 TotaL ________________________ 4,000
TWENTY-SEVENTH ANNUAL REPORT 59

The most usual number of stockholders for an actively quoted overthe-counter stock appears to be in a range from 1,000 to 3,000.

In addition to the stocks mentioned above, there is a large and

rapidly growing number of actively quoted stocks of companies so

small as not to require continuous reporting to the Commission, and

whose coverage by the standard securities manuals is generally limited

to brief announcements of the circumstances of the offerings. At the

close of 1959, there were at least 500 actively quoted stocks of companies not reporting to this Commission nor presented in substantial

detail by the standard securities manuals. The number has since increased substantially. While the aggregate dollar value of these

stocks will add comparatively little to the figures in billions of dollars

shown in our $69 billion compilation, the stocks have been of intense

interest to many thousands of stockholders. Fragmentary figures indicate that even a small new offering may come to have at least 500

stockholders, running, in numerous instances, into 1,000 or 2,000, and

sometimes more.

A comprehensive view of the number of securities quoted over the

counter and at anyone time is afforded by data supplied by the National Quotation Bureau, which is the principal purveyor of overthe-counter quotations in the United States. The following table

shows the number of stocks quoted in recent years and the corresponding number of dealer listings in the aggregate.

Number 01 tseue« and dealer listings in the Nati01Wl Quotation Bureau sheets

at appro{JJimately Jan. 15, yearly

Year Stoek ISsues 1

1959___ __ __ 6, 121

1960 .______ __ ______ 6. 551

196L .________ __ __ __ 6, 918

Dealer listings

23. g64

25,950

28,2iO

1 The number of stoek ISSues over the years smee 1925 IS shown ou p, i2 of our 26th annual report (1960).

The dealer listings average about four per issue, but tend to cluster

in stocks of greatest current interest. About 3,500 of the stocks show

substantial concentrations of dealer listings, including both bids and

offers. Many of the remainder are quoted only on the bid side, generally indicating attempts either to create and expand markets for

closely held stocks or to reduce and extinguish residues from offers

in exchange following upon mergers, sales of assets, etc.

Much of the increase in number of stocks and dealer listings shown

in the table above is accounted for by hundreds of new offerings so

small in size that the financial affairs of the companies involved are

shown neither in the standard securities manuals nor in continuing

reports to this Commission.

The following table separates the components of the $69 billion

market value of domestic over-the-counter stocks mentioned above into
60 SECURITIES AND EXCHANGE COMMISSION

categories according to whether the issuers are or are not reporting

to this Commission.

Domestic companies reporting 300 or more holders for their over-the-counter

stocks as of Dec. 31, 1960

Stocks Issuers Market values

Reporting pnrsuant to sec. 15(d). Miseellaneous.c

Insurance .. . ... _.

Reporting for other reasons: I Miscellaneous ._. . __.. _

Not reporting to the Commissron: Miscellaneous . . __. . .. _... .. Insurance ... _.. . ._ ._ .. ... _

Banks .. _._._. .. ... ..

TotaL __.. __. __. _ _

1,530 1,195 $22, 941, 150,000

104 98 3, 248, 400, 000

2'0 1'0 4,951,070,000

1,861 1,420 31,140,620,000

1,300 1,196 11, 109, 363, 000

163 159 9, 159, 900, 000

719 719 17,651,250,000

2,182 2,074 37,920,513,000

4,043 3,494 69, 061, 133, 000

I These companies have other Issues hsted on stock exchanges

Reporting Under Section 15(d)

Issuers reporting pursuant to section 15(d) of the Securities Exchange Act continue to increase in number, as shown in appendix table

19 of our 25th annual report. Commencing with 80 as of June 30,

1937,they reached 1,014in number 16 years later, in 1953. They then

more than doubled to 2,135 in the 6 years to June 30, 1961. The 2,017

such reporting issuers as of December 31, 1960,included 1,353having

$31.3 billion aggregate market value of outstanding stocks. The

remaining 664 issuers included partnerships, voting trusts duplicative

of listed shares, stock purchase and employees' savings plans, companies with only bonds in public hands, registered investment companies, and numerous issuers for whose shares no quotation was

available, including a considerable number registering in 1960 but

not offering their shares until 1961.

Issuers reporting under sec. 15(d) as of Dec. 31, 1960

Stocks Issuers Market values

Over the counter: Miscellaneous ___________. _______________________________________1,530 1,195 $22,941, 150,000 Insurance. . .. 104 98 3,248,400,000 Foreign. ________. ___. ______________________________. ____________ 29 26 I, 550, 400,000

---1,663 1,319 27, 739,950,000

--- On stock exchanges:' Miscellaneous . . .. 30 29 I, 462, 200, 000 Insurance . . 3 3 915,600,000 Foreign .. . 2 2 1,179,400,000

--- 35 34 3,557,200,000

Total. . _. ---1,698 1,353 31,297,150,000

I Includes only issuers WIth stocks for which quotations are available

, These Issuers have stocks with only unhsted trading prrvileges on exchanges. They also have 31 stocks

aggregating $625,520,000 winch are only over the counter, and which are included ill the over-the-counter

showing of stocks and market values above.

L. •• __ • ••• ••• __ • • ._

_

' __ _

'

_______' __•____________• _________________________ __

___•___ ____ _____' ____________________ __________

___________ ___________________________• ______________

___________ _______________________• ___________________

_______• ______________ ________________________•______
TWENTY -SEVEN'T'H A.."'rn"UAL REPORT

DELISTING OF SECURITIES FROM EXCH..4.NGES

61

Applications may be made to the Commission by exchanges to

strike any securities or by issuers to withdraw their securities from

listing and registration on exchanges pursuant to rule 12d2-1(b)

under section 12(d) of the Securities Exchange Act.

During the fiscal year ended June 30,1961, the Commission granted

applications by exchanges and issuers to remove 51 stock issues and

13 bond issues from listing and registration pursuant to rule 12d2-

1(b). There were 53 stock removals, since 2 stocks delisted by the New

York Stock Exchange were also delisted by the Midwest Stock Exchange. The number of issuers involved was 50. The removals were

as follows:

Applications filed by:

Ne~York Stock Exchange

American Stock Exchange

Chicago Board of Trade

Cincinnati Stock Exchange

Detroit Stock Exchange

:M:id~est Stock Exchange

Pacific Coast Stock Exchange

Philadelphia-Baltimore Stock Exchange

Pittsburgh Stock Exchange

San Francisco Mining Exchange

Issuers

Total

Stock Bond

issues issues

22 13

4 0

1 0

1 0

3 0

7 0

7 0

2 0

2 0

2 0

2 0

53 13

In accordance with the practice developed in recent years, nearly

all of the delisting applications were filed by exchanges, only two

of the applications having been filed by issuers. Many of the applications were filed by the New York Stock Exchange pursuant to its

program of delisting securities which no longer meet its standards

for continued listing.

During the fiscal year, the Detroit, Pittsburgh, and Pacific Coast

stock exchanges adopted rules providing that an issuer intending to

delist may be required to obtain a vote of its stockholders before

filing an application with the Commission. This brings the number

of exchanges protected by their own delisting rules to 10, being all

except one of the principal registered exchanges.

Delisting Proceedings Under Section 19(a)

Section 19(a) (2) authorizes the Commission to suspend for a period

not exceeding 12 months, or to withdraw, the registration of a security

on a national securities exchange if, in its opinion, such action is necessary or appropriate for the protection of investors and, after notice

and opportunity for hearing, the Commission finds that the issuer

_

_

_

_

_

_

_

_

_

_

_

_
62 SECURITIES AND EXCHANGE COMMISSION

of the security has failed to comply with any provision of the act

or the rules and regulations thereunder. The following table indicates

the number of such proceedings with which the Commission was concerned during the 1961fiscal year.

Proceedings pending at the beginning of the fiscal year_______ 3

Proceedings initiated during the fiscal year__________________ 1

4

Proceedings terminated during the fiscal year:

By order withdrawing security from registration________ 1

By order suspending registration of security 0

1

Proceedings pending at the end of the fiscal year_____________________ 3

Section 19(a) (4) authorizes the Commission summarily to suspend

trading in any registered security on a national securities exchange for

a period not exceeding 10 days if, in its opinion, such action is necessary or appropriate for the protection of investors and the public

interest so requires. The Commission has used this power infrequently

in the past. However, during the 1961 fiscal year the Commission

found it necessary and appropriate in four instances to use its authority summarily to suspend trading in securities registered on a national

securities exchange. Three of these suspensions remained in effect

at the end of the fiscal year.

The only case in which an order was issued under section 19(a) (2)

during the fiscal year withdrawing securities from registration on a

national securities exchange is described below.

Cornucopia Gold Mines.-Registrant, a corporation organized in

the State of 1Vashington in 1930, registered its common stock on the

American Stock Exchange in 1939. It ceased mining operations in

1941 and remained inactive until May 1957. At that time, control of

the company passed to a group of individuals, including Earl Belle.

The Commission instituted proceedings under section 19(a) (2) of

the act to determine whether it was necessary or appropriate for the

protection of investors to suspend or withdraw the common stock

from registration on the exchange for failure to comply with section

13 of the Securities Exchange Act of 1934, and the rules thereunder

governing the filing of reports with the Commission and for filing

with the Commission proxy material which was false and misleading

and failed to comply with the requirements of the Commission's

proxy rules.

The Commission found the registrant's 1957 annual report to be

false and misleading in a number of respects. The financial statements which purported to be certified by independent certified public

accountants were, in fact, prepared and certified by an individual

accountant who had made no audit of, nor had he even seen, the
TWENTY-SEVENTH ANNUAL REPORT 63

registrant's books and records. The statements he certified were

copied, with some figure and wording changes, from statements prepared by another accountant. The financial statements furnished

were false and misleading in a number of respects including, among

other things, inclusion as cash at December 31, 1957, of the proceeds

of a loan of $125,000 made on January 20, 1958, the failure to reveal

certain contingent liabilities, and to set forth the basis for determining

the amounts at which buildings and equipment were listed as assets.

The annual report was 'also deficient in failing to indicate important changes in the business of the registrant and in stating that

certain individuals had been directors of the registrant when, in fact,

they had never consented to act as such and were not aware that they

had been "elected" to that office.

The Commission also found that the registrant had failed to file

current reports pursuant to section 13 of the act to report the acquisition of certain subsidiaries, to describe certain legal proceedings

with respect to one of its subsidiaries and to reflect a change in control

of the registrant from the group referred to above to Earl Belle.

The Commission further found that the preliminary proxy material

filed by the registrant with respect to a proposed meeting of stockholders in July 1958 contained false and misleading statements and

omitted necessary information. For example, it gave the misleading

impression that the registrant's program for the acquisition of subsidiaries was completed and that only stockholder ratification was

being sought whereas, in fact, stockholder approval of certain capital

changes was essential in order to enable the registrant to be in a position to meet its commitments to issue large blocks of stock necessary

to complete the acquisitions. The proxy material was also false and

misleading in failing to disclose adequately and accurately certain

transactions by the registrant and its affiliates. Information with

respect to remuneration paid by the registrant was also found to be

materially misleading.

On the basis of these and numerous other deficiencies the Commission issued an order withdrawing the registrant's common stock from

registration on the American Stock Exchange, which had suspended

trading in the stock prior to the commencement of the Commission

proceedings.'

UNLISTED TRADING PRIVILEGES ON EXCHANGES

Stocks with only unlisted trading privileges on the exchanges continued to decline in number, falling from 232 on June 30, 1960, to 212

on June 30,1961. For comparison, it may be recalled that such stocks

1Securities Exchange Act Release No. 6339 (Aug. 11, 1960).

620373--.62-----6
64 SECURITIES AND EXCHANGE COMMISSION

numbered about 1,800 on the American Stock Exchange alone, at their

peak in1931.

The aggregate market value of these stocks on December 31, 1960,

was $13 billion, or less than 4 percent of the $335.3 billion total of

all stocks on the exchanges. Nearly 98 percent of the $13 billion was

on the American Stock Exchange.

Stocks with only unlisted trading privileges on the exchanges as of

Dec. 81, 1960

Preferred stocks Common stocks Total stocks

Exchange

Issues Value Issues Value Issues Value

American _____________ 36 $425, 046, 000 143 $12, 305, 978, 000 179 $12,731,024, 000 All other , ____________ 5 12,800,000 31 286, 122, 000 36 298, 922, 000

TotaL __________ 41 437, 846, 000 174 12,592, 100, 000 215 13, 029, 946, 000

1 Excluding a few stocks for which quotations were not available. , ExcIudmg duplications with respect to 5 common stocks also traded unlisted on the American Stock

Exchange.

About $5 billion of the $13 billion aggregate was of 55 stocks of

companies reporting as fully as though they were listed, by reason of

registrations under the Securities Act, or the Public Utility Holding

Company Act, or the Investment Company Act, or because the companies in some cases had other securities listed on registered exchanges.

About $4 billion of the $13 billion aggregate was of 63 Canadian

and other foreign stocks and American Depositary Receipts for foreign shares, of companies not reporting to the Commission.

About $4 billion of the $13 billion aggregate was of 97 stocks of

domestic companies not reporting to the Commission. More than half

of this $4 billion was held by Standard Oil Co. (New Jersey) in shares

of Creole Petroleum Corp.

The $13 billion unlisted aggregate presents a sharp reduction from

a peak of $22.4 billion on December 31, 1956. About two-thirds of

the $9.4 billion reduction was occasioned by removal from the American Stock Exchange to listing on the New York Stock Exchange of

Great Atlantic & Pacific Tea Co., Inc., and Singer Manufacturing Co.

stocks and by absorption of Humble Oil & Refining Co., International

Petroleum Co., Ltd., and United States Foil Co. into companies whose

stocks are listed on the New York Stock Exchange. At the close of

the fiscal year, listings on the New York Stock Exchange of Duke

Power Co. and Electric Bond & Share Co. stocks, involving a further

$0.7 billion loss to the American Stock Exchange unlisted section,

were in process.

The reported volume of trading on the exchanges in stocks with

only unlisted trading privileges thereon, for the calendar year 1960,

was about 30,900,000 shares or about 2.2 percent of the total share

'
TWENTY-SEVENTH ANNUAL REPORT 65

volume on all the exchanges. About 82.6 percent of this volume was

on the American Stock Exchange, 16.4 percent was on the Pacific

Coast Stock Exchange, and four other regional exchanges contributed

the remaining 1 percent. The share volume in stocks with only unlisted trading privileges was about 8.5 percent of the total share volume on the American Stock Exchange and about 11.7 percent of that

on the Pacific Coast Stock Exchange in the calendar year 1960.

Unlisted trading privileges on some exchanges in stocks listed on

other exchanges remained at 1,538, there being 55 additions and

55 removals during the year. The reported volume of unlisted trading

on the exchanges in these stocks, for the calendar year 1960, was

close to 45 million shares. About one-fifth of this volume was on

the American Stock Exchange in stocks listed on regional exchanges,

and about four-fifths was on regional exchanges in stocks listed on

the New York or American Stock Exchange. The number of unlisted trading privileges is greater than the number of stocks involved,

since leading New York listings are traded unlisted on as many

as seven regional exchanges. While the 45 million shares amounted

to only about 3.2 percent of the total share volume on all the

exchanges, it constituted substantial portions of the share volumes on

the leading regional exchanges, reaching about 77 percent on Boston,

72 percent on Philadelphia-Baltimore, 64 percent on Cincinnati,

55 percent on Pittsburgh, 47 percent on Detroit, 32 percent on

Midwest, and 21 percent on Pacific Coast Stock Exchange.

Appendix tables 7 and 8 of this annual report show the dispersion

of stocks and share volumes among the exchanges.

Applications for Unlisted Trading Privileges

Applications by exchanges for unlisted trading privileges in stocks

listed on other exchanges, made pursuant to rule 12f-1 under section 12(f) of the Securities Exchange Act, were granted by the

Commission during the fiscal year ended June 30, 1961, as follows:

Stock exchange: Number of stocks Boston 7

Cincinnati ___ ___ ___ 10

])etroit 3

]did~est 3

Pacific Coast_____________________________________________________ 12

Philadelphia-Baltimore ____ __ 19

Pitisburgh 1

55

During the fiscal year, the Commission granted an application by

the American Stock Exchange pursuant to rule 12f-2 of section 12(f)

of the Securities Exchange Act for continuance of unlisted trading,

on the ground of substantial equivalence, in the Lackawanna Rail-
66 SECURITIES AND EXCHANGE COMMISSION

road Co. First Mortgage Bonds, Series A and B, after their assumption by the Erie-Lackawanna Railroad Co. upon merger in October

1960.

BWCK. DISTRIBUTIONS REPORTED BY EXCHANGES

The usual method of distributing blocks of listed securities considered too large :for the auction market on the floor of an exchange

is to resort to "secondary distributions" over the counter after the

close of exchange trading.

In an effort to keep as much as possible of this business on their

floors, special offering plans were adopted by leading exchanges commencing in 1942, and the somewhat more flexible exchange distribution plans commencing in 1953. The plans, declared effective by this

Commission, include an exemption from the antimanipulative rule

10b-2, as set forth in paragraph (d) thereof, with respect to payment

of compensation in connection with the distribution of securities.

The largest number of special offerings was 87 in 1944, with $32,-

454,000aggregate value. The number has declined through the years,

there being only three in 1960, aggregating $5,439,000.

Similarly, the largest number of exchange distributions was 57 in

1954, with $24,664,000 aggregate value, compared with 20 in 1960,

aggregating $11,108,000.

Secondary distributions, as reported, averaged 89 in number and

about $139,000,000in amount during the 12 years 1942-53 inclusive,

rising to 115 in number and about $433,200,000 in amount as the

average over the 7 years 1954-60 inclusive.

During the 6 months ending June 30, 1961, there were no special

offerings, 18 exchange distributions aggregating $38,743,000,and 58

secondary distributions aggregating $559,921,000. This last amount

was larger than the $424,688,000secondary distributions during the

entire year 1960, and was also larger than the $455,764,000in the first

half and the $366,572,000in the second half of 1959.

Block distributions reported by ea;changes

Number I Stgjj;;. iu I Shares sold I

12months ended Dec. 31,1960I

Value

Special offerings

Exchange drstrfbutions

Secondary distrfbutrons .

Special offenngs -. Exchange distrtbutlons

Secondary distributions

31 72,4731 63,6631 $5,439,000 20 450,574 441,664 11,108,000

92 11,206,438 11,439,065 424,688,000

6 months ended June 30, 1961

1801 703,6240 I 619,27901 $38, 743,0000 58 11,219,282 11,348,392 559,924,000

I Details of these dlstrtbunons appear ill the Oommission's monthly StatIstical Bulletins. Data for

prior years are shown In an appendix table in this annual report.

_ • _ • _

-__ - • --- ---- --- --

_

--------- ----__- -----
TWENTY-SEVENTH ANNUAL REPORT 67

STUDY OF PUT AND CALL OPTIONS

During the fiscal year, the Division of Trading and Exchanges

completed a study of put and call options and reported the results

to the Commission. The study was undertaken at the direction of

the Commission in May 1959 to enable the Commission to carry out

its statutory responsibilities under the Securities Exchange Act of

1934, sections 9 (b) and (c) of which empower the Commission to

impose rules and regulations on dealings in puts and calls if it deems

necessary.

The study was one of several reviews of option trading made from

time to time but was more comprehensive in scope than previous

studies. It was based chiefly on replies to questionnaires, covering

options outstanding or sold during June 1959,by put and call brokers

and dealers and by New York Stock Exchange member firms which

endorse or guarantee puts and calls.

A report of the study, which has been published under the title

"Report on Put and Call Options," provides for the first time detailed

statistical information on the size and nature of the put and call

market. It includes data on the proportion of options which were

exercised and on the net return to option holders.

MANIPULATION AND STABIUZATION

Manipulation

The Exchange Act describes and prohibits certain forms of manipulative activity in any security registered on a national securities

exchange. The prohibited activities include wash sales and matched

orders effected for the purpose of creating a false or misleading appearance of trading activity in, or with respect to the market for,

any such security; a series of transactions in which the price of such

security is raised or depressed, or in which actual or apparent active

trading is created for the purpose of inducing purchases or sales of

such security by others; circulation by a broker, dealer, seller, or

buyer, or by a person who receives consideration from a broker,

dealer, seller, or buyer, of information concerning market operations

conducted for a rise or a decline in the price of such security; and

the making of any false and misleading statement of material information by a broker, dealer, seller, or buyer regarding such security

for the purpose of inducing purchases or sales. The act also empowers the Commission to adopt rules and regulations to define and

prohibit the use of these and other forms of manipulative activity in

any security registered on an exchange or traded over the counter.

The Commission's market surveillance staff in its Division of Trading and Exchanges in Washington and in its New York regional

office and other field offices observes the tickertape quotations of

securities listed on the New York Stock Exchange and on the Amer-
68 SECURITIES AND EXCHANGE CO:MMISSION

ican Stock Exchange, the sales and quotation sheets of the various

regional exchanges, and the bid and asked prices published by the National Daily Quotation Service for about 6,000 unlisted securities to

observe any unusual or unexplained price variations or market activity. The financial news ticker, leading newspapers, and various

financial publications and statistical services are also closely followed.

VVhenunusual or unexplained market activity in a security is observed, all known information regarding the security is examined and

a decision made as to the necessity for an investigation. Most investigations are not made public so that no unfair reflection will be

cast on any persons or securities and the trading markets will not be

upset. These investigations, which are conducted by the Commission's

regional offices, take two forms. A preliminary investigation or

"quiz" is designed to rapidly discover evidence of unlawful activity.

If no violations are found, the preliminary investigation is closed.

If it appears that more intensive investigation is necessary, a formal

order of investigation, which carries with it the right to issue subpoenas and to take testimony under oath, is issued by the Commission.

If violations by a broker-dealer are discovered, the Commission may

institute administrative proceedings to determine whether or not to

revoke his registration or to suspend or expel him from membership

in the National Association of Securities Dealers, Inc., or from a national securities exchange. The Commission may also seek an injunction against any person violating the act and it may refer information obtained in its investigation to the Department of Justice

recommending that persons violating the act be criminally prosecuted.

In some cases, where State action seems likely to bring quick results

in preventing fraud or where Federal jurisdiction may be doubtful,

the information obtained may be referred to State agencies for State

injunction or criminal prosecution.

The following table shows the number of quizzes and formal investigations pending at the beginning of fiscal 1961,the number initiated in fiscal 1961, the number closed or completed during the same

period, and the number pending at the end of the fiscal year:

Trading investigations

Quizzes Formalin.

vestigations

PendmgJune 30, 1960 86 14 Inrtiated, •• ._. •••• 116 3

TotaL. .,. _._ 202 17

Olosed or completed during fiscal year ._. •• _._ 108 1 Changed to formal dunng fiscal year ., 3 --------------

TotaL _. ._. _. ._. III 1

Pending at end of fiscal year , 91 16

__• ______________________• ______• ___• ___________• _____•

••• ______________________________ _____••_____ __________ ___

________ ___• •_______________________________ ••• _•••• ___•__

___ _________•_••••• ____________ __••_______•__•____________••••• _______

________ ____•••••• _____•• __•_••••• ___••__•••• ______ ___

••• ______•••• _•••••• ______••• ________•____••••• _
TWENTY-SEVENTH ANNUAL REPORT 69

When securities are to be offered to the public, their markets are

watched very closely to make sure that the price is not unlawfully

raised prior to or during the distribution. Registered offerings numbering 1,507, having a value of over $19 billion, and 1,057 offerings

exempt under section 3 (b) of the Securities Act, having a value of

about $239 million, were so observed during the fiscal year. Other

offerings numbering 223,such as secondary distributions and distributions of securities under special plans filed by the exchanges, having

a total value of $485 million, were also kept under surveillance.

Stabilization

Stabilization involves open-market purchases of securities to prevent or retard a decline in the market price in order to facilitate a

distribution. It is permitted by the Exchange Act subject to the

restrictions provided by the Commission's rules 10b--6, 7, and 8.

These rules are designed to confine stabilizing activity to that necessary for the above purpose, to require proper disclosure and to

prevent unlawful manipulation.

During 1961 stabilizing was effected in connection with stock offerings totalling 45,024,882 shares having an aggregate public offering

price of $1,271,512,178and bond offerings having a total offering price

of $255,587,250. In these offerings, stabilizing transactions resulted

in the purchase of 1,052,186 shares of stock at a cost of $25,015,006

and bonds at a cost of $2,389,262. In connection with the stabilizing

transactions, 7,743 stabilizing reports showing purchases and sales

of securities effected by persons conducting the distribution were

received and examined during the fiscal year.

INSIDERS' SECURITY HOLDINGS AND TRANSACTIONS

Section 16 of the act is designed to prevent the unfair use of information by directors, officers and principal stockholders by giving

publicity to their security holdings and transactions and by removing

the profit incentive in short-term trading by them in securities of

their company. Such persons by virtue of their position may have

knowledge of the company's condition and prospects which is unavailable to the general public and may be able to use such information

to their personal advantage in transactions in the company's securities. Provisions similar to those contained in section 16 of the act

are also contained in section 17 of the Public Utility Holding Company Act of 1935 and section 30 of the Investment Company Act of

1940.

Ownership Reports

Section 16(a) of the Securities Exchange Act requires every person who is a direct or indirect beneficial owner of more than 10 per-
70 SECURITIES AND EXCHANGE COMMISSION

cent of any class of equity securities (other than exempted securities)

which is registered on a national securities exchange, or who is a

director or officer of the issuer of such securities, to file reports with

the Commission and the exchange disclosing his ownership of the

issuer's equity securities. This information must be kept current by

filing subsequent reports for any month in which a change in his

ownership occurs. Similar reports are required by section 17(a) of

the Public Utility Holding Company Act of officers and directors of

public utility holding companies and by section 30(f) of the Investment Company Act of officers, directors, principal security

holders, members of advisory boards and investment advisers or

affiliated persons of investment advisers of registered closed-end

investment companies.

All ownership reports are available for public inspection as soon as

they are filed at the Commission's office in Washington and reports

filed pursuant to section 16(a) of the Securities Exchange Act may

also be inspected at the exchanges where copies of such reports are

filed. In addition, for the purpose of making the reported information available to interested persons who may not be able to inspect the

reports in person, the Commission summarizes and publishes such

information in a monthly "Official Summary of Security Transactions

and Holdings", which is distributed by the Government Printing

Officeon a subscription basis. Such subscriptions to this publication

exceeded 16,000 as of .Iune 30, 1961.

During the fiscal year, 40,869 ownership reports were filed, as compared with 38,821 reports filed during the 1960 fiscal year. The following table shows the number of reports filed under each of the three

acts under which such reports are required.

Number of reports filed during fiscal year 1961

Section 16(a) of the Securities Exchange Act of 1934

Section 17(a) of the Public Utility Holding Company Act of 1935

Section 30(f) of the Investment Company Act of 1940

39, 127

286

1,456

TotaL ____________________________________________________ 40, 869

Recovery of Short-Swing Trading Profits by Issuer

In order to prevent insiders from making unfair use of information

which may have been obtained by reason of their relationship with a

company, section 16(b) of the Securities Exchange Act, section 17(b)

of the Public Utility Holding Company Act, and section 30(f) of the

Investment Company Act provide for the recovery by or on behalf of

the issuer of any profit realized by insiders from certain purchases and

sales, or sales and purchases, of securities of the company within any

period of less than 6 months. The Commission has certain exemptive

powers with respect to transactions not comprehended within the pur-

_

_

_
TWENTY -SEVENTH ANNUAL REPORT 71

pose of these provisions, but is not charged with the enforcement of

the civil remedies created thereby.

REGULATION OF PROXIES

Scope of Proxy Regulation

Under sections 14(a) of the Securities Exchange Act, 12(e) of the

Public Utility Holding Company Act of 1935, and 20(a) of the Investment Company Act of 1940, the Commission has adopted regulation 14 requiring the disclosure in a proxy statement of pertinent

information in connection with the solicitation of proxies, consents,

and authorizations in respect of securities of companies subject to

those statutes. The regulation includes provisions that when the

management is soliciting proxies, any security holder desiring to

communicate with other security holders for a proper purpose may

require the management to furnish him with a list of all security

holders or to mail his communication to security holders for him. A

security holder may also, subject to reasonable prescribed limitations,

require the management to include in its proxy material any appropriate proposal which such security holder desires to submit to a vote

of security holders. Any security holder or group of security holders

may at any time make an independent proxy solicitation upon compliance with the proxy rules, whether or not the management is making a solicitation.

Copies of proposed proxy material must be filed with the Commission in preliminary form prior to the date of the proposed solicitation.

Where preliminary material fails to meet the prescribed disclosure

standards, the management or other groups responsible for its preparation is notified informally and given an opportunity to avoid such

defects in the preparation of the proxy material in the definitive form

inwhich it is furnished to stockholders.

Statistics Relating to Proxy Statements

During the 1961fiscal year, 2,197 proxy statements in definitive form

were filed under the Commission's regulation 14 for the solicitation of

proxies of security holders; 2,169 of these were filed by management

and 28 by nonmanagement groups or individual stockholders. These

2,197 solicitations related to 1,974 companies, some 200 of which had

more than 1 solicitation during the year, generally for a special meeting not involving the election of directors.

There were 1,966 solicitations of proxies for the election of directors,

217 for special meetings not involving the election of directors, and

14 for assents and authorizations for action not involving a meeting

of security holders or the election of directors.

In addition to the election of directors, the decisions of security

holders were sought through the solicitation in the 1961 fiscal year
72 SECURITIES AND EXCHANGE COMMISSION

of their proxies, consents and authorizations with respect to the

following types of matters :

Mergers, consolidations, acquisitions of businesses, purchases and sales of

property, and dissolutions of companies______________________________ 197

Authorizations of new or additional securities, modifications of existing

securities, and recapitalization plans (other than mergers, consolidations, etc.)_________________________________________________________ 304

Employee pension and retirement plans (including amendments to existing plans)_________________________________________________________ 36

Bonus, profit-sharing plans and deferred compensation arrangements (including amendments to existing plans and arrangements) 21

Stock option plans (including amendments to existing plans) 212

Stockholder approval of the selection by management of independent auditors 736

Miscellaneous amendments to charter and bylaws, and miscellaneous other

matters (excluding those involved in the preceding matters)_________ 511

Stockholders' Proposals

During the 1961 fiscal year, 48 stockholders submitted a total of 198

proposals which were included in the 127 proxy statements of 127

companies under rule 14a-8 of regulation 14.

Typical of such stockholder proposals submitted to a vote of security

holders were resolutions relating to amendments to charters or bylaws

to provide for cumulative voting for the election of directors, limitations on granting stock options and their exercise by key employees

and management groups, sending a postmeeting report to all stockholders, changing the place of the annual meeting of stockholders, and

the approval by stockholders of management's selection of independent

auditors.

The managements of 27 companies omitted from their proxy statements under the Commission's rule 14a-8 a total of 55 additional proposals submitted by 31 individual stockholders. The principal reasons for such omissions and the numbers of times each such reason

was involved (counting only one reason for omission for each proposal even though it may have been omitted under more than one

provision of rule 14a-8) were as follows:

(a) 20 proposals were not a proper subject matter under State

law;

(b) 9 proposals concerned a personal grievance against the

company;

(c) 8 proposals related to the ordinary conduct of the company's business;

(d) 6 proposals were not timely submitted;

(e) 2 proposals and reasons therefor were deemed misleading

or impugned character;

(f) 1 proposal involved the election of directors; and

(g) 9 proposals were withdrawn by the stockholders.
TWENTY -SEVENTH ANNUAL REPORT 73

Ratio of Soliciting to Nonsolicitin,. C mpanies

Of the 2,341 issuers th ..t had sec .rrities listed and registered on

national securities exchanges as of June 30, 1961, 2,097 had voting

securities so listed and registered. Of these 2,097 issuers, 30 listed and

registered voting securities for the first time after their annual stockholders' meeting in fiscal 1961; thus, of the remaining 2,067 issuers

with voting securities, 1,680, or 81 percent, solicited proxies under the

Commission's proxy rules during the 1961 fiscal year for the election

of directors.

Proxy Contests

During the 1961 fiscal year, 32 companies were involved in proxy

contests for the election of directors. A total of 463 persons, both

management and nonmanagement, filed detailed statements as participants under the requirements of rule 14a-11. Proxy statements in 20

cases involved contests for control of the board of directors and those

in 12 cases involved contests for representation on the board.

Management retained control in 9 of the 20 contests for control of

the board of directors, 3 were settled by negotiation, nonmanagement

persons won 2, and 6 were pending as of June 30, 1961. Of the 12

cases where representation on the board of directors was involved,

management retained all places on the board in 10 cases and there were

2 cases pending as of June 30, 1961.

INVESTIGATIONS

Section 21 (a) of the act authorizes the Commission to make such

investigations as it deems necessary to determine whether any person

has violated or is about to violate any provision of the act or any

rule or regulation thereunder. The Commission is authorized, for

this purpose, to administer oaths, subpoena witnesses, compel their attendance, take evidence and require the production of records. In addition to the investigations undertaken in enforcing the anti-fraud,

broker-dealer registration, and other regulatory provisions of the act,

which are discussed in part XI of this report under "Complaints and

Investigations", the following investigations were undertaken in enforcing the reporting provisions of sections 12, 13, 14, and 15 (d) of the

act and the rules thereunder, particularly those provisions relating to

the filing of annual and other periodic reports and proxy material:

Investigations pending at beginning of the fiscal year

Investigations initiated during the fiscal year

Investigations closed during the fiscal year

Investigations pending at the close of the fiscal year

26

14

40

13

27

_

_

_

_
74 SECURITIES AND EXCHANGE COMMISSION

REGULATION OF BROKER-DEALERS AND OVER-THE-COUNTER

MARKETS

Registration

Section 15(a) of the Securities Exchange Act of 1934 requires the

registration of all brokers and dealers who use the mails or instrumentalities of interstate commerce to effect transactions in, or to induce the purchase or sale of, securities in the over-the-counter markets.

The act affords exemption from registration for those brokers and

dealers whose business is exclusively intrastate or exclusively in exempted securities, commercial paper, bankers' acceptances, or commercial bills.

The following table sets forth statistics with respect to broker and

dealer registrations and applications for fisca11961.

E1fective registrations at close of preceding :fiscal year 5,288

Applications pending at close of preceding :fiscal year__________________ 61

Applications :filed during :fiscal year 1,065

TotaL .. 6, 414

Applications denied____ 5

Applications withdra wn________ 16

Applications cancelled________________________________________________ 0

Registrations withdra wn__ ____ 673

Registrations cancelled_______________________________________________ 35

Registrations revoked________________________________________________ 53

Registrations suspended______________________________________________ 7

Registrations effective at end of year 5,500

Applications pending at end of year___________________________________ 126

Total 6,415

Less suspended registrations revoked during year_____________________ ] 1

Total 6,414

] 31 registrations were in suspension at close of the fiscal year.

Administrative Proceedings

Section 15(b) of the Securities Exchange Act provides that the

Commission shall, after appropriate notice and opportunity for hearing, deny or revoke registration if it finds such a sanction in the public

interest and that the applicant or registrant or any partner, officer,

director, or other person directly or indirectly controlling or controlled

by such applicant or registrant is subject to one or more of the disqualifications set forth in the act. These disqualifications, in general,

are:

(1) willful false or misleading statements in an application or

document supplemental thereto;

_

_
TWENTY-SEVENTH ANNUAL REPORT 75

(2) conviction within 10 years of a felony or misdemeanor involving the purchase or sale of securities or any conduct arising out of business as a broker-dealer;

(3) injunction by a court of competent jurisdiction against engaging in any practices in connection with the purchase or

sale of securities; and

(4) willful violation of the Securities Act of 1933 or the Securities Exchange Act of 1934 or any of the Commission's

rules or regulations thereunder.

The Commission is empowered by section 15A of the Securities

Exchange Act to suspend or expel a broker-dealer from membership

in the National Association of Securities Dealers, Inc., the only securities association registered with the Commission, upon a finding of

violation of the Federal securities laws or regulations thereunder.

Section 19(a) (3) of the act grants similar powers with respect to

membership in national securities exchanges.

The Commission may not deny or revoke registration without

finding a disqualification of the types set forth in the act. Therefore,

bad reputation or character, or lack of experience in the securities business, or even conviction of a felony unrelated to transactions in securities cannot in itself be a basis for ordering denial or

revocation of registration as a broker-dealer.

Under section 15A(b) (4) of the Securities Exchange Act, in the

absence of the Commission's approval or direction, no broker or

dealer may be admitted to or continued in membership in the Nationa} Association of Securities Dealers, Inc., if the broker or dealer

or any partner, officer, director, or controlling or controlled person

of such broker or dealer was a cause of any order of denial or revocation of registration or suspension or expulsion from membership

which is in effect. An individual named as such a cause often is subject to one or more statutory disqualifications under section 15(b)

and his employment by any other broker-dealer thus could also become a basis for broker-dealer revocation proceedings against the

new employer.

The following statistics deal with administrative proceedings instituted during fiscal 1961 to deny and revoke registration and to suspend

and expel from membership in an exchange or the National Association of Securities Dealers, Inc.

Proceedings pending at start of fiscal year to:

Etevoke registration________________________________________________ 54

Etevoke registration and suspend or expel from NASD or exchangesc.., 53

Deny registration to applicants_____________________________________ 8

Total proceedings pending________________________________________ 115
76 SECURITIES AND EXCHANGE COMMISSION

Proceedings instituted during fiscal year to:

Revoke registration_________________________________________________ 29

Revoke registration and suspend or expel from NASD or exchanges.L; 37

Deny registration__________________________________________________ 11

Total proceedings instituted______________________________________ 77

Total proceedings current during fiscal year 192

Disposition of Proceedings:

Proceedings to revoke registration:

Dismissed on withdrawal of registration____________________________ 1

Registration revoked_______________________________________________ 31

Total 32

Proceedings to revoke registration and suspend or expel from NASD or

exchanges:

Registration revoked_______________________________________________ 11

Registration revoked and firm expelled from NASD_________________ 10

Registration revoked and firm expelled from a securities exchange____ 1

Dismissed on withdrawal of registration____________________________ 3

Dismissed-registration and membership permitted to continue in

effect 2

Suspended for a period of time from NASD_________________________ 1

Firm suspended for a period of time from NASD and 2 partners in

firm suspended for a period of time from 2 securities exehanges.Li..,., 1

Total 29

Proceedings to deny registration to applicant:

Registration denied_________________________________________________ 5

Dismissed on withdrawal of application____________________________ 1

Dismissed-application permitted to become effective________________ 1

Total 7

Total proceedings disposed of____________________________________ 68

Proceedings pending at end of fiscal year to:

Revoke registra tion_________________________________________________ 51

Revoke registration and suspend or expel from NASD or securities

exchanges ---------------________________________________________ 61

Deny registration to applicants_____________________________________ 12

Total proceedings pending at end of fiscal year 124

Total proceedings accounted for 192

Revocation and Denial Proceedings

Action taken this past year in administrative proceedings under

section 15(b) of the Securities Exchange Act included the following

cases in which the Commission revoked broker-dealer registrations:
TWENTY -SEVENTH ANNUAL REPORT 77

He, He & Sagarese.-The Commission found that Gerald A. Re and

Gerald F. Re, members of the American Stock Exchange, had willfully violated section 5 of the Securities Act of 1933 in the unlawful

distribution on that exchange of the stocks of nine companies in which

they acted as specialists on the exchange. It also found that the

Res willfully violated the antifraud and antimanipulative provisions

of the Securities Exchange Act of 1934, its short-selling provisions and

its restrictions applicable to specialists as well as its bookkeeping requirements. Accordingly, the Commission, in advance of the issuance

of formal findings and opinion, ordered the immediate expulsion of

the two Res from membership on the American Stock Exchange and

revoked the broker-dealer registration of Re, Re & Sagarese."

Barnett & Co., Inc.-This registrant was found to have employed

well-known "boilerroom" techniques in connection with the offer and

sale of stock of Steuben Electronics Corporation, Inc., including the

use of numerous salesmen to sell a large block of such stock exclusively

by long-distance telephone calls through the means of inaccurate,

highly exaggerated, and misleading representations concerning the

issuer's financial condition, its income and capital, and the prospective

market price of its stock, without any reasonable basis therefor and

without any efforts having been made to obtain information concerning such matters." The Commission found Stanley Barnett, Maurice

Lieber, and Murray Libman to be causes of the order of revocation.

Midland Securities, Inc.-The Commission found that registrant,

Ben Degaetano, president, a director and principal shareholder of

registrant, and registrant's salesmen, in the sale of securities of Inland

Resources Corp., made false and misleading statements that, among

other things, Inland had just brought in a "gusher" and had many

producing wells, the stock was to be listed on a national securities

exchange, only a limited amount of stock was available, registrant's

price for the stock was lower than the prevailing market price, registrant could give a special price for the stock because it had obtained

a block from an estate, the price of the stock would increase sharply

in a short time, and that Inland had or was about to receive government contracts." The Commission found Degaetano and Joseph P.

Emanuel, Samuel Golden, Herbert Geist, Marvin Berkrot, and Irving

R. vVinkler, salesmen, each a cause of the order of revocation.

Cullen-Stanford Corp.-The Commission determined that the registrant and its president, Stanford R. Gabaeff, whom it found to be

a cause of the revocation order, had sold unregistered shares of Union

Gulf Petroleum Corp. and had made false and misleading representations in the sale of shares of Union and of Pacific Central Co.

Securities Exchange Act Release No. 6551 (May 4, 1961).

Securities Exchange Act Release No. 6466 (Feb. 8, 1961).

4 Securities Exchange Act Release No. 6524 (Apr. 10, 1961).

•

•
78 SECURITIES AND EXCHANGE COMMISSION

Among other things, it was represented that the Union stock had been

approved by the Commission, that it would have a rapid growth

and rise within a short period from its current price of $4~ per share

to $7 or $8, that dividends would be paid on the stock, and that a

New York syndicate was buying up the stock and such activity would

cause the price to increase markedly; and that the Pacific stock would

double or triple in price within 60 or 90 days, that such stock would

be listed on an exchange, that dividend payments would be increased;

that Pacific would announce startling new discoveries, that Pacific

and Shell Oil Co. expected to merge and had entered into a contract

whereby Shell agreed to take Pacific's entire output of oil, and that

registrant was the fifth largest brokerage firm on Wall Street."

N. Pinsker & Co., Inc.-Registrant sold shares of unregistered

Class B stock of Tyrex Drug & Chemical Corp. in violation of section 5

of the Securities Act, participating in a distribution being made for

the issuer and purchasing Tyrex stock with a view to distribution

from an individual who was under common control with the issuer.

In addition, registrant, employing the technique of using numerous

salesmen and wholesale and persistent telephone solicitation, violated

the anti-fraud provisions of the securities acts by making false and

misleading representations that Tyrex had developed a drug which

would cure ulcers, and concerning the future market price of Tyrex

stock and the merger or affiliation of Tyrex with another company."

Earl J. Knudson & Co.-The Commission found that registrant

Earl J. Knudson, Jr., vice president, illegally offered and sold unregistered shares of International Petroleum Holding Corp. In

August 1959, at the request of one Max Gilford, Knudson acquired

substantially all the stock of a predecessor of International, which

was a corporate shell, for $5,000 and delivered such shares to Gilford.

Following a 100-for-1 split of its shares, a total of 2,190,000 shares,

all but 100 of the shares outstanding after the split, were transferred

to Knudson. Thereafter a wide distribution of the shares was effected

in several States through various individuals and broker-dealers

without prior registration with the Commission. The Commission

found that Knudson participated in significant steps essential to the

distribution and aided and abetted in it, and that, in the light of the

extensive distribution, no private offering exemption under section

4(1) as claimed by Knudson was available.'

Lawrence Rappee, doing business as Lawrence Rappee & Co.-At

the same time that registrant was conducting an intensive campaign

to effect retail distribution of the common stock of Star Chemical

Laboratories, Inc., it purchased shares and entered quotations for

Securities Exchange Act Release No. 6427 (Dec. 2, 1960).

oSecurities Exchange Act Release No. 6401 (Oct. 21, 1960).

7 Securities Exchange Act Release No. 6503 (Mar. 21, 1961).

•
TWENTY -SEVENTH ANNUAL REPORT 79

the stock in the daily sheets of the National Daily Quotation Service

at progressively increasing prices which averaged 20 percent and

were as much as 30 percent higher than the closely contemporaneous

cost prices of the shares purchased. Registrant also arranged with

a broker-dealer in another city to also submit quotations for Star

Chemical stock and periodically furnished this broker-dealer with the

prices to quote, which in general were the same as and followed registrant's quotations. No other broker-dealer quoted Star Chemical

stock during the period.

The Commission concluded that registrant created the market for

Star Chemical stock and through the quotations of the other brokerdealer created the illusion that an independent market existed to

facilitate registrant's sales of the block of stock he acquired. These

activities of registrant were not revealed to his customers. In addition, registrant used sales brochures which contained false and misleading statements regarding the assets and facilities of Star Chemical

and represented that several other companies were its wholly-owned

subsidiaries, whereas the company had only nominal assets and had no

interest in or control over any of the alleged subsidiaries,"

Security Enterprises, Inc.-Registrant, Truman K. Pennell, president and owner of substantially all of the registrant's shares, and

Carl L. Linn, a former employee of registrant, sold shares of

American Trust Life Insurance Co. and American Trust Underwriters without disclosing to customers as required by rule 15cl-5

of the Exchange Act that Pennell was president and a large stockholder of Life and Underwriters and occupied a position of control

in those companies, or the fact that registrant and Linn were also

under the common control of Pennell. The Life and Underwriters

shares were sold to customers at excessive prices not reasonably

related to current market prices, some sales by registrant being at

prices representing markups of as much as 283 percent over its contemporaneous costs on purchases from other customers, and sales by

Linn representing markups as much as 102 percent over his contemporaneous costs on securities he purchased from Pennell and as

much as 185 percent over his contemporaneous costs on purchases

from other customers. Customers were not informed of the markups

or that shares they purchased had been acquired from Pennell.

During the period in which these transactions were being effected

registrant and Linn also failed to give or send to customers written

confirmations disclosing the information required by rule 15cl-4 of

the Exchange Act, including information as to the capacities in which

they were acting,"

Securities Exchange Act Release No. 6504 (Mar. 22, 1961).

Securities Exchange Act Release No. 6314 (JUly 11, 1960).

620373-62-7

•

•
80 SECURITIES AND EXCHANGE COMMISSION

Manthos, Moss & Co., Inc.-This case involved transactions by

registrant with customers at prices not reasonably related to prevailing market prices. The Commission held that the best evidence of

current market prices is a dealer's own contemporaneous costs, in the

absence of countervailing evidence, Certain securities purchased from

other customers were sold on the same day at markups ranging from

12.8 percent to 60 percent of such cost and from $62.50to $5,000. In

other transactions where registrant sold to customers securities purchased from other broker-dealers on 1 or 2 days prior to the date

of sale, registrant's markups over such cost ranged from 9.7 percent

to 300 percent. Registrant also purchased securities from customers

which he resold to other broker-dealers at prices ranging from 12.5

percent to 100 percent greater than the prices registrant had paid its

customers, registrant's profit on an individual transaction ranging

as high as $2,062.10

Willful violation of the antifraud provisions of the securities acts

resulting from the sale of securities through false and misleading

representation were also the basis for revocation in Berry & 00.,11

Associated Securities 00rp.,12 N. Sims Organ ill 00., Inc.,13 L. H.

Feigin,14 and for denial of registration in R. B. ~Jfi(Jhaels& 00.15 and

Irving Grubman & 00.16 Such fraud, together with willful violations

of the securities registration provisions, were the grounds for revocation in L. 1V. Page & 00., Inc./7 H. G. Stolle & 00.,18 Ira Armand &

00., Inc./9 Alan Associates Securities Oorp./o Mao Bobbin» ill 00.,

Inc./1 Stanley Brown 22 and llfakris Inuestment Broke1'8.23Violation

of the securities registration provisions was the principal or contributing basis for revocation in Rudolph V. Klein, doing business as R. V.

Klein 00.,24 Angelus & Daly, Inc.,25 and Read, Evans & 00.26

'0 Securities Exchange Act Release No. 6471 (Feb. 15, 1961). Markups ranging from

12 percent to 66 percent over the contemporaneous high asked prices In the daily quotation sheets were found exeesslve in William Evnn Davis, doing business as United Securities

Co.. Securities Exchange Act Release No. 6499 (Apr. 28, 1961).

11 Securrttes Exchange Act Release No. 6349 (Aug 17,1960).

:L2 Securities Exchunge Act Release No. 6315 (Jul~' 12, 1960). Subsequent to the end

of the fiscul year, the U S Court of Appeals for the Tenth Circuit, on petition for review,

affirmed the Commission's order Assocrated securtues Corporct um. v. S.E.C., 293 F. 2d

738 (C A 10, 1961).

13 Sepuritie_ Exchange .\pt Relea'e No 6495 (Mar. 14. 1961) aff'd 293 F. 2d 78 (C A

2, 1961), cert. denied, 30 U.S L. Week 3227 (Jan 15, 1962).

H Securities Exchange Act Release No. 6505 (Mar. 21,1961).

]5 Securities Exchange Act Release No. 6461 (Feb. 6, 1961).

16 Seeurf tles Exchange Act Release No 6546 (May 5,1961).

>7 Securities Exchangc Act Reiea"e No. 6375 (Oct. 3, 1960).

18 Securrtres Exchange Act Relens,e No 6389 (Oct. 14, 1960).

16 Securities Exchange Act Release No. 6416 (Nov. 18, 1960).

eoSecuritIcs Exchange Act Release No. 6434 (Dec. 16, 1960).

Securities Exchange Act Release No. 6462 (Feb. 6, 1961).

22 Securities Exchange Act Release No. 6474 (Feb. 15, 1961).

eaSecurities Exchange Act Release No. 6509 (Mar. 24, 1961).

Securities Exchange Act Release No. 6415 (Nov. 17, 1960).

:!5 Securities Exchange Act Release No. 6453 (Jan. 18, 1961) .

.. Securities Exchange Act Release No. 6467 (Feb. 9, 1961).

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TVVENTY-SEVENTH ~AL REPORT 81

The use of customers' funds for the registrant's own purposes, a

form of misconduct accompanied in most cases by doing business while

insolvent and in violation of the net capital requirements, by failure

to file financial reports, sending false confirmations, and keeping false

records, was found and resulted in revocation in Wiles & 00./1 Thom/pson & Sloan, Iw.,2s First Idaho 00rp.29 and in First Securities 00.30

In the last named case, Frank L. 'Vasserman, a partner, commingled

securities carried for the accounts of customers with registrant's own

securities subject to a lien for loans made to it, and sold for his own

account stock belonging to a customer without the latter's knowledge

or authorization, signing the customer's name on the stock certificate

to effect its transfer.

An injunction against violation of the securities registration provisions, conviction for mail fraud in the sale of securities and the failure to amend registrant's broker-dealer application to disclose such

conviction were the grounds for revocation in Mortgage Clubs of

America, I W.81

Suspension Proceedings

Section 15(b) authorizes the Commission to suspend effectiveness

of a broker-dealer's registration pending :final determination as to

whether registration should be revoked. To suspend, the Commission

must make a finding, after notice and opportunity for a hearing, that

suspension is necessary or appropriate in the public interest or for

the protection of investors. During the past :fiscalyear the Commission suspended the registrations of five broker-dealers after hearings

at which the evidence adduced revealed that serious misconduct was

currently being engaged in by the respondents." To prevent further

harm to investors the Commission determined that it was in the public

interest to suspend those registrations pending determination of the

question of revocation. The entry of an order of suspension is not

determinative of the ultimate questions of whether willful violations

have been committed and an order of revocation should be issued.

Other Sanctions

The Commission is empowered to suspend for a period not exceeding

12 months or to expel any member of a national securities exchange

for violations of the Securities Exchange Act and to take such action

Securities Exchange Act Release No. 6354 (Aug. 24, 1960).

2B Securities Exchange Act Release No. 6443 (Jan. 3,1961).

1'9 Securities Exchange Act Release No. 6543 (Apr. 28, 1961).

.. Securities Exchange Act Release No. 6446 (Jan. 9, 1961).

B1 Securities Exchange Act Release No. 6508 (Mar. 24, 1961).

•• Heft, Kahn &; Infante, Inc., Securities Exchange Act Release No. 6362 (July 26, 1960) ;

Biltmore Securities Oorp., Securities Exchange Act Release No. 6394 (Oct. 17, 1960);

Batten &; 00., te«, Securities Exchange Act Release No. 6436 (Dec. 14, 1960); Allstate Securities, Inc., Securities Exchange Act Release No. 6496 (Mar. 13, 1961); and

D. H. Victor &; 00., Inc., Securities Exchange Aft Release No. 6562 (May 17,1961).

'"
82 SECURITIES AND EXCHANGE COMMISSION

with respect to a member of a registered securities association for

such violations or for willful violations of the Securities Act.

In G. J.Mitchell, Jr. 00.,33 the Commission suspended the registrant

from membership in the National Association of Securities Dealers,

Inc., for 15 days for using sales literature which constituted a prospectus not conforming to the requirements of section 10 of the Securities Act and using a selling brochure which omitted to refer to operating losses by the issuer of the securities being recommended.

In Bruns, N ordemaai <:0 00.,34 the registrant was suspended from

membership in the National Association of Securities Dealers, Inc.,

and two of its partners, Harold S. Coleman and Lawrence H. Lubin

were suspended from membership in the New York Stock Exchange

and American Stock Exchange-Coleman for a period of 90 days and

Lubin for 60 days. The Commission found that Bruns, Nordeman,

in advance of a public offering through it as underwriter of additional

shares of Gob Shops, Inc., "at the market" price at the time of the

offering, entered increasing bids for Gob stock in the daily quotation

sheets and engaged in trading activities in such stock which "were designed to stimulate buyer interest and thereby create market activity

which would induce the purchase of Gob Shops stock by others at

rising prices." Additional stimulus was provided the market by the

declaration by Gob, following the proposal by Coleman and Lubin

who were directors, that a cash dividend be paid despite an operating

loss, which was charged to capital surplus because of the unsufficiency

of earned surplus. Misleading optimistic sales literature and misrepresentations were also used as part of the manipulative scheme to

raise the price of the Gob stock. The bidding for and purchasing of

Gob stock during the distribution of the shares pursuant to the underwriting was also found to violate rule 10b-6.

The Commission found. certain mitigating circumstances, including

the previous good records of the registrant, Coleman and Lubin, that

registrant would be disqualified from acting as an underwriter for an

offering of securities under regulation A for a period of 5 years, and

that pursuant to rescission offers made to customers who had purchased Gob stock from it, registrant had repurchased many shares

and had paid losses sustained by customers of over $10,000. The

Commission concluded that, under the circumstances, the public interest did not require the revocation of registrant's registration.

Net Capital Rule

Rule 15c3-1 adopted under section 15(c) (3) of the Securities

Exchange Act, commonly known as the net capital rule, provides

sa Securities Exchange Act Release No. 6433 (Dec. 13, 1960).

'" Securities Exchange Act Releases Nos. 6540 (Apr. 26, 1961) and 6548 (May 2, 1961).
TWENTY-SEVENm ANNUAL REPORT 83

safeguards for funds and securities of customers dealing with brokerdealers. This rule imposes a 20-to-1 limit on "aggregate indebtedness" which may be incurred by a broker-dealer in relation to his "net

capital" as those terms are defined by the rules.

Prompt action is taken whenever it appears from examination of

reports filed by a registered broker-dealer, or through inspection of

his books and records, that the permitted ratio is exceeded. Unless

the broker-dealer promptly takes necessary steps to correct such

capital deficiency, injunctive action may be taken and proceedings

may be instituted to determine whether the broker-dealer registration

should be revoked. During the fiscal year, violations of the net

capital rule were charged in injunctive actions filed against 31 brokerdealers and in revocation proceedings instituted against 26 brokerdealers.

Broker-dealers participating in "firm commitment" underwritings

must have sufficient net capital to permit participation in the underwriting for the amount agreed upon without impairing the allowable

capital-debt ratio prescribed by the rule. In order to protect issuers

and customers of broker-dealers participating in such underwritings,

the staff carefully analyzes the latest information concerning the

capital position of such broker-dealers in order to determine if assumption of the new obligations involved in the underwriting is possible without violating the net capital rule. Acceleration of the

effective date of registration statements filed under the Securities Act

will be denied where it appears that underwriting commitments may

engender violations of the net capital rule by any participating

underwriter. Participants who appeared to be inadequately capitalized to take down their commitments were informed of the potential

violation and the effect it would have on the pending registration

statement. Such broker-dealers either obtained sufficient additional

capital so that full compliance with the rule could be had, reduced

their commitments in the underwriting to such an extent as to participate in the underwriting without violating the rule, withdrew as

underwriters, or participated in the underwriting on a "best efforts"

basis only.

Financial Statements

Rule 17a-5 promulgated under section 17(a) of the Securities

Exchange Act requires registered broker-dealers to file annual reports of financial condition with the Commission. Every report so

filed must be certified by a certified public accountant or a public

accountant who is in fact independent with certain specified limited

exemptions applicable to situations where certification does not appear

necessary for customer protection. The rule provides specific condi-
84 SECURITIES AND EXCHANGE COMMISSION

tions under which members of national securities exchanges are exempt

from the necessity of certification. An exemption from the certification requirement is also available to a broker-dealer who, since his

previous report, has limited his securities business to soliciting subscriptions as an agent for issuers, has transmitted funds and securities

promptly, and has not otherwise held funds or securities for or owed

monies or securities to customers. An exemption is also afforded a

broker-dealer who, from the date of his last report, has confined his

business to buying and selling evidences of indebtedness secured by

liens on real estate and has carried no margin accounts, credit balances

or securities for any customers.

With respect to the times within which financial statements must

be filed, rule 17a-5 provides that upon the initial registration of a

broker-dealer the registrant's first financial report must be as of a

date during the period between the expiration of the first and fifth

months following the effective date of the registration. In all cases,

reports must be filed within 45 days after the date as of which the

report speaks.

The reports of financial condition furnish a means whereby the

Commission and the public may evaluate the financial position and

responsibility of registered brokers and dealers. The reports are

analyzed by the staff of the Commission to determine whether the

registrant is in compliance with the net capital rule. Revocation

proceedings may be instituted against registrants who fail to make

the necessary filings. However, it is the policy of the Commission first

to advise the registrant of his obligations under rule 17a-5 and give

him an opportunity to file the report.

During the fiscal year 5,060reports of financial condition were filed.

This compares to the 1960total of 4,569.

Broker-Dealer Inspections

Section 17(a) of the Securities Exchange Act of 1934 provides

for regular and periodic inspections of registered broker-dealers.

The inspection device, which the Commission has continually emphasized, is a most useful instrument in protecting investors and preventing and detecting violations of the Federal securities laws.

Among other things, the inspections involve: (1) a determination

of the broker-dealer's financial condition; (2) a complete review of

his pricing practices; (3) an evaluation of the safeguards employed

in his handling of customers' funds and securities; and (4) a determination of whether adequate and accurate disclosures relating to

transactions are made to customers.

The inspectors also determine whether brokers and dealers keep

books and records in compliance with the Federal securities laws and

conform to the margin and other requirements of regulation T as
TWENTY-SEVENTH ANNUAL REPORT 85

prescribed by the Federal Reserve Board. In addition, they examine

individual trading accounts to determine whether excessive trading

or switching has occurred. Frequently inspectors find evidence of

the sale of unregistered securities or the use of fraudulent practices,

including the use of improper sales literature or sale techniques, The

inspection program has also assisted the Commission in its administration of many of its rules.

The number of inspections completed during the fiscal year totaled

1,627, an increase of 128 inspections or almost 9 percent over the previous year. With the steady increase in the number of registered

broker-dealers and benefits derived from the inspection program, the

Commission intends to continue its policy of increasing the number

of inspections in the future.

In determining whether to institute action against a broker-dealer

found to be in violation of the statutes or rules as a result of an

inspection, consideration is given to the type of violations and to the

effect such violations may have upon members of the public. It is

not the Commission's policy to take formal action against brokerdealers for every infraction uncovered. For example, inspections

frequently reveal various inadvertent violations which are discovered

before becoming serious and before customers' funds or securities are

endangered. Where no harm has come to the public in such situations, the matter is usually brought to the attention of the registrant

and suggestions are made to correct any improper practices. If a

violation appears to be willful and the public interest or the protection of investors is best served by formal action, the Commission

promptly institutes appropriate proceedings.

The following table shows the various types of violations disclosed

as a result of the inspection program during the fiscal year:

Type Number

Financial difficulties_______________________________ ___ _______ 236

IIypothecation rules__________________________________________________ 42

Unreasonable prices for securities purchases and sales__________________ 240

Regulation T of the Federal Reserve Board____________________________ 200

"Secret profit"_______________________________________________________ 2

Confirmations and bookkeeping rules 1. 000

Other 399

Total indicated violations 2, 119

In addition to the Commission's inspection program, the National

Association of Securities Dealers, Inc., and the principal stock exchanges also conduct inspections of their members and some of the

States also have inspection programs. Each inspecting agency conducts inspections in accordance with its own procedures and with

particular reference to its own regulations and jurisdiction. Con-
86 SECURITIES AND EXCHANGE COMMISSION

sequently, inspections by other agencies are not an adequate substitute

for Commission inspections since the inspector will not be primarily concerned with the detection and prevention of violations of the

Federal securities laws and the Commission's regulations thereunder.

However, the inspection programs of these other agencies do afford

added protection to the public. The Commission and certain other

inspecting agencies maintain a program of coordinating inspection

activities for the purpose of avoiding unnecessary duplication of

inspections and to obtain the widest possible coverage of brokers and

dealers. The program does not prevent the Commission from

inspecting any person recently inspected by another agency, and such

an inspection by the Commission is made whenever reason therefor

exists.

Agencies now participating in this coordination program include

the American Stock Exchange, the Boston Stock Exchange, the Midwest Stock Exchange, the National Association of Securities Dealers,

Inc., the New York Stock Exchange, the Pacific Coast Stock Exchange, the Philadelphia-Baltimore Stock Exchange, and the Pittsburgh Stock Exchange.

SUPERVISION OF ACTIVITIES OF NATIONAL ASSOCIATION OF

SECURITIES DEALERS, INC.

Section 15A of the Securities Exchange Act of 1934 (Maloney

Act) provides for the registration with the Commission of national

securities associations and establishes standards for such associations.

The rules of such associations must be designed to promote just and

equitable principles of trade, to prevent fraudulent and manipulative

acts and practices and to meet other statutory requirements. Such

associations are essentially disciplinary in purpose and serve as a

medium for the cooperative self-regulation of over-the-counter

brokers and dealers. They operate under the general supervision

of this Commission which is authorized to review disciplinary actions

and decisions which affect the membership of members, or of applicants for membership, and to consider all changes in the rules of

associations. The National Association of Securities Dealers, Inc.

(NASD), is the only association registered under the act.

In adopting legislation permitting the formation and registration

of such associations, Congress provided an incentive to membership

by permitting such associations to adopt rules which preclude a

member from dealing with a nonmember, except on the same terms

and conditions as the member affords the investing public. The

NASD has adopted such rules. Accordingly, membership is necessary to the profitable participation in underwritings and over-thecounter trading since members may properly grant price concessions,
TWENTY -SEVENTH ANNUAL REPORT 87

discounts, and similar allowances only to other members. Loss or

denial of membership due to expulsion or suspension or other ineligibility due to a statutory disqualification, or to failure to meet standards

of qualification established in NASD rules, thus imposes a severe

economic sanction.

Membership in the NASD reached an all time high of 4,611 at

June 30, 1961. During the year membership increased by 239, as a

result of 685 admissions to, and 446 terminations of, membership. At

the same time, there were registered with the NASD as registered

representatives 94,040 individuals, including generally all partners,

officers,traders, salesmen, and other persons employed by or affiliated

with member firms in capacities which involved their doing business

directly with the public. The number of registered representatives

increased by 3,860 during the year as a result of 20,818 initial registrations, 11,813 reregistrations, and 28,771 terminations of registrations. At February 28, 1961, there were 94,176 registered representatives, an all time high figure.

NASD Disciplinary Actions

The Commission receives from the NASD summaries of decisions

in all disciplinary actions against members. Each such complaint

must be based on allegations that a member has violated specified provisions of the NASD rules of fair practice, although registered representatives of members, and persons controlling or controlled by members, may also be cited for having been the cause of a violation.

The sanctions available where violations are found include expulsion or suspension from membership, revocation or suspension of registration as a registered representative, fine, and censure. An individual may also be found to be the cause of a violation and of the

penalty imposed on another party for such violation. Such a cause

finding can have far-reaching effects, particularly in the case of expulsion, or suspension from membership or suspension or revocation of

registration as a registered representative. A person found to be a

cause of suspension or expulsion from membership cannot be employed

by any NASD member while such suspension is in effect, except with

the approval of the Commission. Where an individual should have

been, but was not, registered as a representative, a finding that the

unregistered person was a cause of an effective expulsion, suspension,

or revocation acts as a disqualification from membership, or from

controlling or being controlled by a member, just as if such a penalty

had been imposed directly on the person found a cause. In many

cases more than a single penalty may be imposed so that expulsion,

suspension, or revocation may be accompanied by a fine or censure,

and, in cases where a fine is imposed, censure is customarily added.
88 SECURITIES AND EXCHANGE COMMISSION

All decisions by district business conduct committees of the NASD

are reviewable by the NASD board of governors on its own motion,

or on the timely application of an aggrieved party. On review

the board may affirm, modify, or reverse such decisions or remand

them for further consideration. At times two or more complaints

against a single member are consolidated and disposed of in one

decision and at other times one complaint may involve more than one

member firm. During the year the association reported to the Commission its final disposition of 304 formal complaint actions. These

304 final decisions reflected action against 273 different firms." In

67 cases, the complaints were dismissed against the named respondents

on findings that the allegations had not been sustained. Formal findings of violations were made in the remaining 237 cases and some

sanction imposed. Of this total, 178 cases were directed solely against

members while 59 cases were against members and their representatives. A total of 149 representatives had been charged with violations

in the original complaints. Such charges were dismissed as to 20

such individuals and disciplinary action was taken against 129.

The maximum penalty of expulsion from membership was applied

in 31 decisions (including 1 firm expelled in each of 2 decisions), and

17 members were suspended from membership for periods ranging

from 10 days to 3 years (including 1 firm suspended in each of 2

decisions for consecutive periods of 12 and 6 months). Fines ranging

from $10 to $2,500 were imposed on members in 138 cases (including

3 in which members were expelled and 1 in which the member was

suspended) . In 55 other cases the only penalty was censure.

The sanctions imposed on registered representatives had a similar

wide range. The registrations of 45 registered representatives were

revoked and 10 suspended for periods ranging from 60 days to 2

years; 35 were fined amounts ranging from $50 to $1,000; and 13 were

censured. Twenty-six were found to be causes of 14 expulsions, 1

suspension, and 11 fines imposed on the employing firms.

In addition to the various penalties described above, some of the

costs of the proceedings were usually assessed against the members and

the registered representatives found to have acted improperly. During the fiscal year the association collected $83,256.35in fines and costs.

This amount does not reflect the fines and costs assessed since there

is little or no incentive for an expelled member or a revoked registered

representative to pay them.

Commission Review of NASD Disciplinary Action

Section 15A(g) of the act provides that disciplinary actions by

the NASD are subject to review by the Commission on its own motion

.. A total of 26 firms were each involved in 2 or more of the reported cases: 22 firms

in 2 cases; 3 firms in 3 cases; and 1 firm in 4 cases.
TWENTY-SEVENTH ANNUAL REPORT 89

or on the timely application of any aggrieved person. This section

also provides that the effectiveness of any penalty imposed by the

NASD is automatically stayed pending determination in any matter

which comes before the Commission for review. Section 15A(h) of

the act defines the scope of the Commission's review in proceedings

to review disciplinary action of the NASD. If the Commission finds

that the disciplined person engaged in such acts or practices, or has

omitted such acts as found by the NASD, and that such acts, practices,

or omissions to act are in violation of such rules of the association

as have been designated in the determination, and that such conduct

was inconsistent with just and equitable principles of trade, the

Commission must dismiss such proceedings unless it finds that the

penalties imposed are excessive or oppressive, having due regard to

the public interest, in which case the Commission must, by order, cancel

or reduce the penalties. At the beginning of the fiscal year eight

such review cases were pending before the Commission. During the

year 13 additional such petitions were filed, 1 was withdrawn prior

to a determination, and decisions were issued on 5 cases, certain of

which are discussed below, leaving 15 petitions pending at the year

end.

The Commission sustained certain findings by the NASD that

Boren &: 00., and its president and sole stockholder, Irving N. Boren,

had violated certain association rules but found the penalties imposed

excessive." In 24 retail sales to customers of shares of Colorado Gas

Co. stock, the prices charged by Boren ranged from 33.3 to 66.7 percent over the firm's contemporaneous cost. In 23 retail sales of Texas

Toy Co. stock, the markup ranged from 11.9 to 19 percent over the

prices paid by the firm on the day of the sales, and in 4 sales of other

securities the markups ranged from 10.8 to 25 percent. The Commission affirmed the NASD's findings that the markups in these transactions were excessive and inconsistent with just and equitable principles

of trade. However, in other retail sales of Texas Toy Co. stock, and

in certain transactions for customers, the Commission was unable to

sustain NASD findings that the prices and commissions charged

customers had been unfair. The Commission also set aside the NASD

finding of violation in failing to register certain representatives as

a required finding of willfulness had not been made by the NASD.

The sanctions imposed by the NASD, expulsion of Boren & Co.

from membership and revocation of the registration of Irving H.

Boren as a registered representative, and the assessment of $8,318.25

in costs, were reduced by the Commission to 90-day suspensions of

the firm's membership and of Boren's registration and $1,000 in costs.

The Commission pointed out that although substantial sanctions were

... Securities Exchange Act Release No. 6367 (Sept. 19, 1960).
90 SECURITIES AND EXCHANGE COMMISSION

warranted, the sanctions imposed were excessive in view of its modifications of the findings of the association. The Commission further

held that a part of the costs of NASD actions is to be borne by the association from its regular budget including items such as employees'

salaries which are not directly attributable to particular proceedings;

that costs should not be so high as to discourage an adequate defense;

and that in determining the amount of the reduction consideration

must be given to the facts that certain findings of violations had been

set aside and that there had been no showing of deliberate obstruction and delay. Under all the circumstances, costs were reduced to

$1,000.

The Commission also dismissed an application for review by Midland Securities, Inc., and its president and sole stockholder, Ben

Degaetano, of a decision which expelled the firm from membership,

found Degaetano a cause of such expulsion and revoked his registration as a registered representative and assessed costs of $2,292.76

against him." The Commission's opinion affirmed findings by the

NASD that the firm had sold securities at unfair prices. The Commission rejected the firm's contention that since the securities involved

were low in price, the markups were justified under the NASD's socalled "5-percent markup policy," which indicates that a "somewhat

higher" markup than 5 percent may sometimes be appropriate in the

case of securities selling below $10 per share. The Commission declared that markups of 10.4 to 67 percent cannot be considered as

only "somewhat higher" than 5 percent. Midland's contention that

its markups were justified by its claimed costs of doing business,

including 10 percent sales commissions on gross sales and allegedly

"unusual" services to customers, was also rejected, the Commission

pointing out that merely to recoup the 10 percent sales commission

on the gross sales price would require a markup of more than 10

percent, and that the alleged services did not appear to be unusual.

However, the Commission reduced the assessment of costs to $750 on

grounds similar to those cited in the Boren case.

In considering an application for review filed by Maryland Securities 00., Lnc., and its president, Morton Sandler, the Commission

reduced a fine of $750 imposed on the firm to $500.3S The Commission sustained the NASD findings that in 17 sales of shares of stock

markups ranging from 13.3 to 34.2 percent over the firm's same-day

costs of such shares were excessive and violated the NASD's Rules of

Fair Practice. The Commission determined that in 28 other transactions for which there were no same-day purchases by the firm the

NASD had incorrectly calculated a markup of 27 percent based upon

Securities Exchange Act Release No. 6413 (Nov. 16,1960) .

.. Securities Exchange Act Release No. 6442 (Dec. 30, 1960).

'"
TWENTY-SEVENTH ANNUAL REPORT 91

the prices paid by the firm some weeks prior thereto. Under the circumstances the Commission found that the representative "asked"

prices shown in the daily sheets published by the National Daily

Quotation Bureau were a more representative basis for the computation of markups, but that even when computed on this basis the firm's

markups in 20 transactions of 11.1 percent were excessive and unfair.

The Commission reduced the costs assessed by the association from

$247.38 to $75.

Commission Review of NASD Action on Membership

Section 15A(b) of the act and the bylaws of the NASD provide

that, except where the Commission finds it appropriate in the public

interest to approve or direct to the contrary, no broker or dealer may

be admitted to or continued in membership if he, or any controlling

or controlled person, is under any of the several disabilities specified

in the statute or the bylaws. By these provisions Commission approval is a condition to admission to or continuance in association

membership of any broker-dealer who, among other things, controls

or is controlled by a person whose registraton as a broker-dealer has

been revoked or who has been and is suspended or expelled from association membership or from a national securities exchange, or whose

registration as a registered representative has been revoked by the

NASD or who was found to have been a cause of such an effective

order.

A Commission order approving or directing admission to or continuance in association membership, notwithstanding a disqualification under section 15A(b) (4) of the act, or under an effective

association rule adopted under that section or section 15A(b) (3), is

generally entered only after the matter has been submitted initially

to the association by the member or applicant for membership.

Where, after consideration, the association is favorably inclined, it

ordinarily files with the Commission an application on behalf of the

petitioner. A broker-dealer, however, may file an application directly

with the Commission either with or without association sponsorship.

The Commission reviews the record and documents filed in support of

the application and, where appropriate, obtains additional relevant

and pertinent evidence. At the beginning of the fiscal year, three such

petitions were pending before the Commission. During the year nine

petitions were filed; one was withdrawn; decisions were issued in

eight cases; and three petitions were pending at the year end.

The Commission found it appropriate in the public interest to

approve seven petitions for continuance in, and one petition for

admission to, NASD membership notwithstanding employment of

a disqualified person. In four such instances the petitions concerned
92 SECURITIES AND EXCHANGE COMMISSION

disqualified persons who had earlier received Commission approval to

be employed by specified NASD member firms. The circumstances

of the initial approval having changed, reapproval was necessary."

LITIGATION UNDER THE SECURITIES EXCHANGEACT OF 1934

For the protection of the public, the Commission is authorized to

institute actions for injunctions when violations of the Securities

Exchange Act are present or threatened. A large proportion of such

actions involves unlawful activities by broker-dealers. During the

past year such illegal activities consisted primarily of violations of the

anti-fraud sections and of the provisions concerning financial responsibility and the maintenance of net capital and bookkeeping requirements. Frequently the firms involved have violated two or more of

the protective provisions of the act. Generally, also, violations of the

anti-fraud provisions involve violations of the Securities Act of 1933.

In several of the cases, it developed that the broker-dealer was insolvent, and on motion of the Commission, receivers were appointed by

the court. Injunctions were obtained in 40 cases during the fiscal year

and at the year end 12 cases were pending.

Section 25 of the act grants to any person aggrieved by an order

issued by the Commission under the act the right to obtain review of

the order by a U.S. court of appeals.

Illustrative examples of the variety of injunctions and appellate

actions are discussed below together with actions in which the Commission participated as amicus (fIJ1)'We.

In S.E.O. v. DuPont Homsey & 00. and Anton E. H omsey,40 the

Commission obtained a permanent injunction against a registered

broker-dealer and one of its general partners, Anton E. Homsey, who

was a member of the. New York Stock Exchange, prohibiting further

violations of the antifraud and other provisions of the act and the

Commission's net capital rule. The case arose out of the misappropriation by Homsey of approximately $690,000in customers' securities

deposited with the firm. Upon motion of the Commission a receiver

was appointed for all assets of the firm. The customers of the firm

whose securities had been misappropriated were compensated from

separate funds contributed by the New York Stock Exchange.

In S.E.O. v. Fruit of the Loom, Inc., et 01.,41 the Commission alleged

that the defendants had violated section 10(b) of the Securities Exchange Act and rule 10b-5 thereunder in connection with a written

offer to Loom's stockholders by Bates Manufacturing Co. to purchase

3D Securities Exchange Act Releases Nos. 6382 (Oct. 7, 1960) ; 6395 (Oct. 17, 1960) ;

6450 (Jan. 12, 1961) ; 6468 (Feb. 9, 1961) ; 6481 (Feb. 24, 1961) ; 6513 (Mar. 24, 1961) ;

6578 (June 12,1961) ; and 6581 (June 26,1961).

40 D. Mass. No. 6{)-659-J.

41 S.D.N.Y.No. 61-640.
TWENTY-SEVENTH ~AL REPORT 93

the preferred and common stock of Loom at $50 and $20 per share,

respectively; the offer was transmitted by Loom's management with

its endorsement. At the same time, another company, Philadelphia

& Reading Corp., was publicly offering to purchase the preferred and

common stock of Loom at higher prices-$51.50 and $23 per share,

respectively. To compete with this higher offer, Bates, with the

cooperation of two members of Loom's management, entered into a

secret agreement with Carl M. Loeb, Rhoades & Co., a broker-dealer,

to acquire stock of Loom at prices equaling the P. & R. offer and,

with special written approval, at even higher prices and to repurchase

all the shares obtained by Loeb, Rhoades.

The Commission charged that Loom, through its management and

specifically through two members thereof, violated rule 10b-5 by failing to disclose the higher P. & R. offer to its stockholders while the

Bates offer at the lower prices which it had endorsed and transmitted

was still continuing. Not only did the management of Loom not

disclose the higher prices being offered by P. & R., but it aggravated

this violation by advising its stockholders that the BahlS offer, which it

was transmitting, was better than that of another company, and by its

failure to inquire as to the nature of P. & R.'s offer although P. & R.

had previously informed Loom's management that an earlier offer

would be increased. Two members of Loom's management took advantage of the secret purchasing program of Loeb, Rhoades on behalf

of Bates and sold their stock to that firm after having advised Loom's

stockholders that members of management intended to tender their

shares pursuant to the terms and conditions of the Bates offer.

The Commission charged that Bates violated rule 10b-5 by making

a public offer to purchase stock of Loom at one price and then pursuing

a secret program through Loeb, Rhoades and under the auspices of

Loom's management to pay higher and varying prices. Bates also

misrepresented that a certain large block of shares of Loom would

not be tendered pursuant to its offer because of a "conflict of interest"

when in fact, shortly after the Bates offer was transmitted to Loom's

stockholders, this block was sold to Bates at higher prices.

Loeb, Rhoades necessarily violated rule 10b-5, the Commission

charged, in its capacity as the knowing instrument through which

many of the violations of Bates and of certain members of Loom's

management were committed. The defendants consented to a permanent injunction and offers of rescission were made by Bates and

by Loeb, Rhoades.

In S.E.O. v. Oecil Rhoades, et al.,42 permanent injunctions by

consent were entered against Cecil Rhoades and Marshall Field, enjoining them from further violations of the anti-fraud and antimanip-

'" S D.N.Y. No. 61 D1v. 375.
94 SECURITIES AND EXCHANGE COM:MISSION

ulative provisions of the act. Cecil Rhoades had sold short about

600 shares of IBM stock and 1,400 shares of Polaroid Corp. stock,

both securities listed on the New York Stock Exchange, and, in order

to cover such short position at favorable prices, the defendants employed a device, scheme, and artifice to defraud by concealing their

own identities and arranging to have sell orders for 4,000 shares of

Polaroid stock and 500 shares of IBM stock placed with various

brokers in fictitious names. As a result, a false and misleading appearance of active trading in these stocks was created, and their

market prices declined, enabling defendants to cover Rhoades' short

position.

In S.E.O. v, Stanley I. Younger,43 the Commission brought suit

to prohibit Younger from perpetrating a fraudulent scheme by placing orders with various New York broker-dealers to sell securities

which he did not own and by instructing the broker-dealers to buy

on the over-the-counter market, on the basis of the credit established

through the sales of such securities, the common stock of National

Photocopy, Inc., a nonexistent corporation. In order to create a

market in National Photocopy, Inc., Younger deposited with a Salt

Lake City broker-dealer a large block of stock of this fictitious corporation and had the broker-dealer place asked quotations in the National Daily Quotation Service. A permanent injunction was entered

by consent.

In S.E.O. v, Arlee Associates, Inc., et al.,44the Commission obtained

a permanent injunction prohibiting the defendants from violating the

anti-fraud provisions of the securities acts by selling without the

consent of the owners securities pledged with the defendant First

Discount Corp. as collateral for loans, and prohibiting them from

effecting securities transactions for the accounts of others without

being registered with the Commission as broker-dealers. The Commission's complaint also alleged that the defendants placed purchase

orders with broker-dealers when they did not intend to deposit funds

or securities to cover such purchases, and the injunction prohibited

any further such conduct. As a result of their unlawful conduct,

the defendants had defrauded various broker-dealers of over

$1,400,000, and the whereabouts of securities collateralizing loans

in excess of $4,500,000 is unknown. A receiver has been appointed

to administer the assets of the defendants Arlee Associates, Inc., and

First Discount Corp.

In S.E.O. v, William O. Karal,45 Karal was permanently enjoined

from employing any device, scheme, or artifice to defraud brokers

and dealers in securities. He was charged with defrauding brokers

.. S D N.Y. No. 60-3006 .

.. S.D.N.Y. No. 61-1934.

esU.S.D.C. Mass. No. 60-661-8.
TWENTY -SEVENTH ANNUAL REPORT 95

and dealers by placing orders to purchase large blocks of listed securities with members of the New York Stock Exchange, and then

failing to pay for them, causing the firms to cancel the transactions

and sell the securities so purchased. Ifthe sellout resulted in a profit,

Karal would then tender payment for the securities purchased and

demand payment for the proceeds of the sale, including the profit.

If, however, the sellout resulted in a loss, Karal ignored demands for

payment, and refused to make good the loss.

In Peoples Securities Oompany v, S.E.0.46 the Court of Appeals

for the Fifth Circuit affirmed the Commission's denial of Peoples'

motion to cancel or withdraw its application for registration as a

broker-dealer under section 15(b) of the Securities Exchange Act,

its denial of Peoples' application, and its finding that certain controlling persons were causes of the denial. The court rejected

Peoples' contention based on the early case of Jones v, S.E.0.,47 that

it had an absolute right to withdraw its application any time before

the effective date of registration. It also held that section 15(b) did

not require that the Commission cancel the application simply because

Peoples had been dissolved as a corporation.

In Blaise d'Antoni & Associates v. S.E.0.48 the Court of Appeals

sustained an order of the Commission revoking the registration of a

broker-dealer for violation of the net capital rule, naming its president and sole stockholder a cause of the revocation, and denying the

latter's application for broker-dealer registration and his request to

withdraw such application. The Court noted the importance of the

net capital rule as "one of the most important weapons in the Commission's arsenal to protect investors." It rejected the controlling

person's contention that he had an absolute right to withdraw his

application for registration. Commission orders revoking brokerdealer registrations were also affirmed in Associated Securities 001'-

poration and Norman B. Jenson v, S.E.0.49 and N. Sims Organ & 00.

v, S.E.O.50

An important decision involving applications for stays of Commission orders involved two such applications heard together by the

Court of Appeals for the Tenth Circuit in Associated Securities Oorp.

v. S.E.O. and Greenberg v. S.E.0.51 Petitioners sought to stay orders

of the Commission revoking Associated's broker-dealer registration

and affirming the NASD's revocation of Greenberg's registration as

a registered representative. The Court noted that in passing on a

.. 289 F. 2d 268 (1961). 47298 U.s. 1 (1936)

is 289 F. 2d 276 (C.A. 5, 1961), renearmg denied 290 F. 2d 688. 49293 F. 2d 738 (C.A 10,1961).

50 293 F. 2d 78 (C A. 2, 1961), cert denied, 30 U S.L Week 3227 (Jan 15, 1962).

61283 F. 2d 773 (1960)

620373-62-8
96 SECURITIES AND EXCHANGE CO:MMISSION

request to stay an order of the Commission pending a petition for

review, it had to balance the possible injury to the petitioners against

the probable harm to the public interest. The Court held that while

the exclusion of these petitioners from the securities business may

be a serious personal injury, such injury was far outweighed by the

consideration of possible harm to the investing public. To grant a

stay, the Court felt, would be to substitute its judgment of the public

interest considerations for that of the Commission, which had the

primary responsibility for making such a determination, and

whose determination as to those considerations should not be upset

except for cogent reasons.

In Samuel B. Franklin and '00. v. S.E.O.,52 the Court of Appeals

upheld an order of the Commission dismissing a proceeding to review

disciplinary action taken by the National Association of Securities

Dealers. The Court held that the evidence amply supported the

findings of the Commission that the petitioner had sold and purchased

securities at prices which were not fair under all the relevant circumstances and which were not reasonably related to the market price,

in violation of the rules of the NASD. Noting that there is no hardand-fast "5-percent rule," the Court nevertheless held that the NASD's

5-percent policy on markups and markdowns is applicable to low

price and penny stocks, and that the Commission did not affirm the

fine imposed by the NASD merely because the markups and markdowns of petitioner exceeded 5 percent, but because they were clearly

excessive. The Court also adopted the Commission's view that the

timely filing of a petition for agency reconsideration tolls the 60-day

period within which to seek review of an order of the Commission in

a court of appeals and that a petition to review such an order which is

filed within 60 days from the termination of the application for reconsideration by the agency is timely. A petition for a writ of certiorari

is pending.

Participation as Amicus Curiae

The Supreme Court has granted certiorari in Blasi v. Lelvman,53 in

which the Commission is participating as amicus curiae. This case

involves the question whether, under section 16(b) of the Securities

Exchange Act, a corporation whose securities are registered on a

national securities exchange may recover the entire "short swing"

profits realized by an investment banking partnership from trading

in such securities where a member of the partnership is also a director

of the corporation. The Court of Appeals had held 54 that a waiver

by the partner-director of his share of profits realized in such trans-

.. 290 F. 2d 719 (C.A. 9, 1961).

53 U.S. Sup. Ct. No. 66

.. 286 F. 2d 786 (C.A. 2, 1960).

•
TWENTY-SEVENTH ANNUAL REPORT 97

actions did not relieve him from liability under section 16(b), but

that such liability was limited to his proportionate share in the firm's

profits, and it dismissed the complaint against the other partners.

A motion by the Commission for leave to participate as amicus curiae

and file a petition for rehearing in the Court of Appeals was denied.

In addition to supporting plaintiff's petition for certiorari, the Commission filed a brief on the merits, urging that the partnership be held

liable for the entire "short swing" profits realized by the firm.

Bellanca (Iorporatioti v. Sidney L. Albert, et al.,55 involved a suit

for damages, based on the antifraud and reporting provisions of the

act, against a former controlling shareholder and director of the

plaintiff corporation and other former directors. The complaint

charged that Albert fraudulently induced the corporation to issue

and sell its stock and prevented the corporation from filing required

reports with the Commission. The other directors were charged with

aiding and abetting violations of the act by authorizing, ratifying

and acquiescing in Albert's actions. The Commission in a memorandum filed as (JImWU8 curiae urged that the complaint stated causes of

action against the defendants and was timely filed within the applicable statute of limitations.

In M atheson. v, A1'mb1'U8t,56 the Court of Appeals upheld a private

right of action by a defrauded purchaser of securities based upon

violation of section 10(b) or the Securities Exhange Act and rule

10b-5 thereunder. The Court concluded that Congress did not

intend to draw a distinction under section 10(b) between defrauded

sellers and buyers of securities. Accordingly, it rejected the contention that specific remedies available to the defrauded purchaser

under the Securities Act were exclusive and barred an action based

upon violation of rule lOb-5.

The Court also held that an interstate telephone call made to induce

the negotiations which led to the fraudulent sale was sufficient to

create Federal jurisdiction over the transaction, that actions under

rule lOb-5 are additional to State and any other Federal actions and

a plaintiff may bring suit in a Federal court even though he may also

have an adequate remedy in the State courts; and that rule 10b-5

encompasses "face-to-face" securities transactions not involving any

broker-dealer firm or a national securities exchange.

". N.D.O. No. 36535.

~ 284 F. 2d 670 (C.A. 9. 1960).
PART VI

ADMINISTRATION OF THE PUBLIC UTILITY HOLDING

COMPANY ACT OF I q35

In administering 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 in the retail

distribution of gas. The Commission's jurisdiction also extends to

natural gas pipeline companies and other nonutility companies which

are subsidiaries of registered holding companies. Although the

matters under the act dealt with by the Commission and its staff

embrace a variety of intricate and complex questions of law and fact

generally involving more than one area of regulation, briefly there are

three principal regulatory areas. The first covers those provisions of

the act, contained principally in section 11(b) (1), which require the

physical integration of public utility companies and functionally related properties of holding company systems and those provisions,

contained principally in section 11(b) (2), which require the simplification of intercorporate relationships and financial structures of

holding company systems. The second covers the financing operations of registered holding companies and their subsidiaries, the acquisition and disposition of securities and properties, and certain

accounting practices, servicing arrangements and intercompany transactions. The third includes the exemptive provisions of the act, the

provisions covering the status under the act of persons and companies,

and those regulating the right of a person affiliated with a public

utility company to acquire securities resulting in a second such affiliation. Matters embraced within this area of regulation frequently

come before the Commission and its staff. Many such matters do not

result in formal proceedings and others are reflected in such proceedings only in an indirect manner when they are related to issues

principally under one of the other areas of regulation.

The Branch of Public Utility Regulation of the Commission's Division of Corporate Regulation performs the principal functions

under the act. It observes and examines problems which arise in connection with transactions which are or may be subject to regulation

under the act and discusses such problems with interested persons and

companies and advises them as to the applicable sections of the act, the

rules thereunder and Commission policy with respect thereto. Ques98
TWENTY-SEVENTH ANNUAL REPORT 99

tions are raised with and problems are presented to the staff daily.

These include questions raised by security holders and problems presented by companies contemplating transactions requiring the filing

of an application or declaration, particularly financing operations

and the acquisition and disposition of securities and properties.

This day-to-day activity includes prefiling discussions and conferences, in person and by telephone, with company representatives

and with other persons where the matter under consideration affects

their interest. Members of the staff of this Division actively participate in hearings and often aid the Commission in the preparation of

its decision on a particular matter. The staff continually reexamines

the status of exempt companies, examines the annual reports filed with

the Commission and those sent to stockholders and, of course, the staff

must keep abreast of new technical developments in the electric and

gas industry, including the use of atomic energy as a source of power.

COMPOSITION OF REGISTERED BOWING COMPANY SYSTEMS AND

PROGRESS WITH RESPECT TO SECTION II AND OTHER SIGNIFICANT

PROBLEMS

At the beginning of the fiscal year there were 26 registered holding

company systems subject to regulation under the act. These included

five small registered holding company systems 1which were formerly

exempt pursuant to rule 9 of the general rules and regulations under

the act," On August 11, 1960, pursuant to section 5(d) of the act,

the Commission declared one of these five companies not to be a holding company and thereupon its registration ceased to be in effect,"

During the fiscal year a milestone was reached in the administration of the act. Proceedings relating to three of the largest holding

company systems subject to the act and which, in the past, had taken

up a substantial amount of time and effort by the Commission and

its staff, progressed to completion resulting for all practical purposes in the elimination of these three registered holding company

systems from regulation under the act. The three systems are those

of Cities Service Co., Electric Bond & Share Co., and Standard Gas

& Electric Co.

The 5 companies were Kinzua 011 & Gas Corp., C. E. Burlingame Corp., Colonial

Utilities Corp., British American Utilities Corp., and Keystone Pipe & Supply Co. The

consolidated assets, less valuation reserves, of these companies ranged from approxtmatetz

$213,500 (British American) to $3,548,700 (Burlingame).

Rule 9 permitted a holdIng company to claim exemption from the act for Itself and

Its subsidiaries If the holding company system was of relatively small size, measured by

the aggregate amount of Its utlIlty assets or of the annual revenues derived from public

utlllty operations. The rule was rescinded etl'ectlve Feb. 29, 1960.

s KeY8tone Pipe & Supply 00., Holding Company Act Release No. 14268.

~

~
100 SECURITIES AND EXCHANGE COMMISSION

Details with respect to Cities Service Co. are set forth on pages

134 and 135 of the Commission's 26th Annual Report. On Dec. 23,

1960, the Commission issued an order pursuant to section 5(d) of

the act declaring that Cities Service no longer was a holding company, and its registration under the act ceased to be in effect.' The

order continued in effect the reservation of jurisdiction over fees and

expenses incurred in various proceedings. In 1941,when Cities Service registered as a holding company it was the top company in a holding company system which consisted of 125 companies with extensive utility and nonutility interests and consolidated assets of over $1

billion.

As indicated on pages 136-137 of the Commission's 26th Annual

Report, at the beginning of this fiscal year Electric Bond & Share Co.

did not own as much as 5 percent of the outstanding securities of any

domestic public utility company and had pending before the Commission an application, filed pursuant to section 3(a) (5) of the act, for

an exemption as a holding company from the provisions of the act.

On December 6, 1960, the Commission granted the exemption subject

to certain conditions," These conditions are designed to eliminate

any possible affiliate relationship between Bond & Share and a former

public utility subsidiary and to prevent or modify practices which

might tend toward or lead to an absence of arm's-length dealings in

connection with services performed by Bond & Share, through a

wholly owned service company, for certain other domestic public

utility companies which had formerly been subsidiary companies of

Bond & Share. In its order the Commission reserved jurisdiction to

revoke Bond & Share's exemption if the conditions are not adhered to

or to impose additional conditions if necessary. The Commission also

reserved jurisdiction in respect of the fees and expenses incurred by

certain participants and after the close of the fiscal year the Commission released jurisdiction over certain of such fees and expenses of

some of the participants and reserved jurisdiction as to others," A

long and difficult job was thereupon brought to a conclusion. In 1938,

when Bond & Share registered as a holding company it was the

largest holding company system in the country. As at December 31,

1938, the consolidated assets of Bond & Share and its subsidiary

companies amounted to more than $3.6 billion. The system included

5 subsidiary holding companies and 131 domestic subsidiaries. At the

time the exemption order was issued Bond & Share had no subsidiary

HoldIng Company Act Release No. 14340.

HoldIng Company Act Release No. 14326.

"HoldIng Company Act Release No. 14416 (JUly 13.1961).

•

•
TWENTY-SEVENTH ANNUAL REPORT 101

company which was either a registered holding company or a public

utility company, and Bond & Share had converted itself into an investment company, registered as such on February 6, 1961.

Details with respect to Standard Gas & Electric Co. are set forth

on page 140 of the Commission's 26th Annual Report. On January

19, 1961, the Commission approved step V of Standard Gas' plan

which, briefly stated, proposed a liquidation and dissolution program

for Standard Gas and its subsidiary registered holding company,

Philadelphia Co., through distributions to Standard Gas' stockholders

of portfolio securities and cash.' On April 22, 1961, the plan was

approved and ordered enforced by the U.S. District Court for the

District of Delaware." Although there remains for Commission consideration the fees and expenses in connection with this proceeding

and the transactions governing the final distribution of Standard Gas'

remaining assets, virtual completion of the long and difficult job in

this system was achieved during the fiscal year. In 1938,when Standard Gas registered as a holding company it controlled a farflung

utility and nonutility system operating in over 20 States and in the

Republic of Mexico. As at December 31, 1939, the system consisted

of over 100 companies and its consolidated assets amounted to more

than $1 billion. At the present time, Standard Gas controls no

public utility company and it has only common stock outstanding

in the hands of the public. Philadelphia Co. has been dissolved.

The remaining 18 active registered systems 9 include 20 registered

holding companies since, as shown in the tabulation below, the

holding company systems of Allegheny Power System, Inc., and

Central & South West Corp. have 2 registered holding companies

each. Of these 20 companies, 13 function solely as holding companies and 7 function as operating as well as holding companies.

In these 18 active registered systems, there are 91 electric and/or gas

utility subsidiaries, 40 nonutility subsidiaries, and 12 inactive companies, totaling 163 system companies.

The following tabulation shows the number of holding companies,

electric and/or gas utility companies and nonutility companies in

each of the 18 active registered systems as at June 30,1961, and their

aggregate assets, less valuation reserves, as at December 31, 1960:

7 Holding Company Act Release No. 14352.

8 Standard Gas & Electric 00, etc., unreported (CIv. No 1497).

The Granite City Generating Co. (Voting Trustees) syxtem Is dtsoussed at page 110.

infra. Union ElectrIc Co., a regIstered holding company, has filed an applicatIon for

exemptIon pursuant to sec. 3(a) (2) of the act See p. 116, infra.

•
102 SECURITIES AND EXCHANGE COMMISSION

Olassification: of companies as of June 80, 1961

Solely Regis- ElectrIc Aggregate regis- tered and/or Non- Inac- system tered holding- gas utility trve Total assets, less

System holding operat- utility subsid- com- com- valuation com- mg com- subsrd- iarles pames panles reserves at panles panics Iarres Dec. 31, 1960I

(thousands)

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

I. Allegheny Power System, Inc

(formerly the West Penn Elec- trIc Co }.. ______________ . ____. __ 1 1 12 6 1 21 $587,600

2 American Electric Power Co , Inc. 1 0 12 9 1 23 1,007,189 3. AmerIcan Natural Gas Co.. ______ 1 0 2 5 0 8 872,585 4. Central & South West Corp. _____ I 1 4 0 1 7 724,436

5. Columbia Gas System, Inc, the .. I 0 10 8 2 21 1,256,365 6. Consolidated Natural Gas Co____ 1 0 4 2 0 7 782,111 7. Delaware Power & Light Co_____ 0 1 2 0 0 3 204,382 8. Eastern Utilities Associates... ____ 1 0 5 0 2 8 111,972 9. General Publie Utilities Corp ____ 1 0 6 3 0 10 930,749

10. Granite City Generating Co. (Voting Trustees) ______________ 1 0 1 0 0 2 292 11. Middle South Utilities, Inc ... ____ 1 0 5 0 4 10 793,945 12. National Fuel Gas Co____________ 1 0 3 4 0 8 215,011 13. New England Electrie System __._ 1 0 17 1 0 19 624,697 14. Ohio Edison Co__________________ 0 1 3 0 0 4 660,132

15. Philadelphia Eleetric Power Co__ 0 1 1 0 1 3 39,049 16. Southern Co., the ________________ 1 0 5 2 1 9 1,400,312 17. Uruon Electric Co________________ 0 1 3 1 0 5 642,830 18. Utah Power & Light Co... _______ 0 1 2 0 0 3 253,493 -- ------- --- --- Subtotals ______________________ 13 7 97 41 13 171 11,607,100

Less: Adjustment to eliminate dupll- cation m count resulting from 4

companIes being subsidiaries In 2

systems and 2 companIes being subsidiarIes In 3 systems s -6 -1 -1 -8

Add: Adjustment to molude the assets of these 6 jointly owned subsidiartes and to remove the parent companies' Investments therein

which are Included In the system assets above________________________ --.----- ---------- -_.----- -------- -------- ----.--- 4496,529 --- ---- --- -- --- Total companies and assets In active systems _______________ 13 7 91 40 12 163 12,103,679

I Represents the consohdated assets, less valuation reserves, of each system as reported to the Cornmlssion on form U5S for the year 1960,except as otherwise noted. , Represents the corporate assets of Granite City Generating Co. at Mar. 31, 1961 Assets of the Voting Trustees of Granite City Generating Co., the holding company parent ofthe Generating Co., have not been

reported.

, These 6 companies are Beech Bottom Power Co., Inc , and Windsor Power House Coal Oo., whIch are mdirect subsldlarles of American Electric Power Co., Inc, and Allegheny Power System, Inc.; Ohio

Valley ElectrIc Corp. and its subsidlary, Indiana-Kentucky Electric Corp. which are owned 37.8percent by American Electne Power Co , Inc., 165 percent by OhIOEdison Oo., 12.5percent by Allegheny Power

System, Inc., and 33.2 percent by other companies; Mlsslssrppt Valley Generating Oo., which Is owned

79 percent by Middle South Uttlities, Inc., and 21 percent by the Southern Co., and Arklahoma Corp, whIch Is owned 32percent by Central & South West Corp. system, 34percent by MIddle South Utilities,

Inc., system and 34percent by a third company. 4In addltlon to the adjustment to Include the assets of the 6 jomtly owned subsldlaries rather than their

Investments therein, the total adjustment Includes the assets ofElectric Energy, Ine., since Union Electric CO:J which owns 40percent ofthe common stock ofElectric Energy, Inc., Is a holding company with respect to that company.

During the fiscal year, certain changes occurred in the total number

of companies in 6 of the 18 active registered systems, resulting in a net

reduction of 9 companies to a total of 163 as compared with a total of

172companies as at the end of the previous fiscal year. American Electric Power Co., Inc., disposed of a nonutility subsidiary, reducing the

total companies in its system from 24 to 23. Central & South West

Corp. disposed of its interest in Compania Electrica de Matamoras,

S.A., a Mexican public utility subsidiary, reducing the number of

system companies from eight to seven. The Columbia Gas System,

•

__________----~--- ---------- --------------
TWENTY-SEVENTH ANNUAL REPORT 103

Inc., increased the system companies from 20 to 21 as a result of the

creation of a new subsidiary, Columbia Gas of Maryland, Inc., which

acquired all of the gas distribution utility assets of an associate located

in the State of Maryland. Middle South Utilities, Inc., disposed of

its interest in Louisiana Gas Service Co., a public utility, reducing

the total system companies from 11 to 10. Iroquois Gas Corp., a public utility subsidiary of National Fuel Gas Co., acquired the assets of

an associate, Penn- York Natural Gas Corp., a nonutility subsidiary

which later dissolved, resulting in a reduction of total system companies from nine to eight. Six of the electric subsidiaries of New

England Electric System were merged into a seventh electric subsidiary, resulting in a reduction of total system companies from 25

to 19.

On the basis of total assets, less valuation reserves, of the entire

privately owned electric and gas utility and natural gas pipeline

companies in the United States, a comparison of such data with similar data for the 18 holding company systems registered under the act

indicates that one-fifth of the total privately owned electric and gas

utility industry is subject to the Commission's jurisdiction under the

act. Since no other regulatory agency supervises the financial practices of as great a segment of the industry, persons interested in financial problems look to this Commission for leadership and guidance

with respect to such matters. The Commission took the initiative

in requiring competitive bidding regarding securities sold for cash,

enunciating standards regarding appropriate capitalization ratios,

specifying the protective provisions required to be included in first

mortgage bonds and preferred stock, and requiring full refundability

of senior securities at all times and at reasonable redemption prices.

The largest number of companies subject to the act as components

of registered holding company systems at anyone time was 1,620 in

1938. Altogether 2,413 companies have been subject to the act as

registered holding companies or subsidiaries thereof at one time or

another during the period from June 15, 1938, to June 30,1961. Included in this total were 224 holding companies (holding companies

and operating-holding companies), 1,037 electric and/or gas utility

companies, and 1,152 nonutility enterprises. From June 15, 1938, to

June 30, 1961, 2,226 of these companies have been released from the

regulatory jurisdiction of the act or have ceased to exist as separate

corporate entities. Of the remaining 187 companies, 163 are members of the 18 active systems listed in the table above and 24 are members of the 5 additional small systems referred to above.

Of the above-mentioned 2,226 companies, 926 with assets aggregating approximately $13 billion at their respective dates of divestment

have been divested by their respective parents and are no longer sub-
104 SECURITIES AND EXCHANGE COMMISSION

ject to the act as components of registered systems. The balance of

1,300companies includes 791 which were released from the regulatory

jurisdiction of the act as a result of dissolutions, mergers and consolidations and 509 companies ceased to be subject to the act as components of registered systems as a result of exemptions granted under

sections 2 and 3 of the act or the grant of orders pursuant to section

5(d) of the act finding such companies had ceased to be holding

companies.

While, as the above indicates, the Commission has succeeded for

the most part in accomplishing the aims and purposes of the Congress

reflected in section 11 there still remain a number of problems to be

resolved under that section. Some of them are the subject matter of

proceedings now before the Commission and are discussed under the

developments in individual registered systems.

Unresolved issues under section l1(b) (1) concern the retainability of nonutility pipeline companies by Consolidated Natural Gas

Co.; the retain ability by Delaware Power & Light Co. of both its gas

and electric facilities; the retainability of gas and transportation

properties of one of the public utility subsidiary companies in the

Middle South Utilities, Inc., system; the retainability by the National

Fuel Gas Co. system of oil and gas transmission businesses; and the

retainability by Utah Power & Light Co. of its subsidiary, the Western Colorado Power Co. Under section l1(b) (2), unresolved issues

relate to the existence of publicly held minority interests in subsidiary

companies of Allegheny Power System, Inc., the Columbia Gas System, Inc., Eastern Utilities Associates, New England Electric System,

and Union Electric Co.

DEVELOPMENTS IN INDIVIDUAL REGISTERED SYSTEMS

There is discussed below each of the active registered holding company systems and other systems in which there occurred during the

fiscal year 1961 significant developments other than financing transactions discussed under another heading.

Allegheny Power System, Inc. (Formerly The West Penn Electric Co.)

This system had consolidated assets, less valuation reserves, of

approximately $587,600,000 at December 31, 1960, and for the year

ended that date, the system's consolidated operating revenues

amounted to about $158,579,000.

During the fiscal year this holding company changed its name from

the West Penn Electric Co. to Allegheny Power System, Inc. The

change in name was approved by a vote of the stockholders at a special

meeting held in November 1960. While the change of name as such

was not subject to approval by the Commission under the Holding
TWENTY-SEVENTH ANNUAL REPORT 105

Company Act, a declaration was filed pursuant to section 12(e) of

the act regarding the solicitation of proxies to amend its charter

to effect the change and was permitted such declaration to become

effective."

Allegheny Power owns 12.5 percent of the voting securities of Ohio

Valley Electric Corp., which, with its wholly-owned subsidiary,

Indiana-Kentucky Electric Corp., furnishes electric power to an installation of the Atomic Energy Commission near Portsmouth, Ohio.

There was still pending before the Commission at the close of the fiscal

year the issue of whether the acquisition of such stock by Allegheny

Power and other sponsoring companies (among which are American

Electric Power Co., Inc., and Ohio Edison Co., registered holding

companies) meets the standards of section 10 of the act. This issue

and the organization and financing of Ohio Valley Electric Corp. and

Indiana-Kentucky Electric Corp. are discussed on pages 126-129 of

the Commission's 23d Annual Report.

American Electric Power Co., Inc.

As at December 31, 1960, the American Electric System had consolidated assets, less valuation reserves, of some $1,507,189,000, and

for the year ended that date, consolidated operating revenues totaled

about $338,078,000.

The Commission approved a declaration filed by American Electric

permitting it to issue sufficient shares of its common stock to pay a

21!z-percent stock dividend." The Commission also approved a plan

filed by American Electric pursuant to section 11 (e) of the act proposing the sale to a non affiliate of certain quarrying properties owned

and operated by a non utility subsidiary. In 1945 the Commission had

determined that, under the standards of section 11(b) (1), the operation by the system of these properties constituted a business incidental

to the operations of the system's integrated electric utility system on

the ground that blasting and quarrying operations by a nonaffiliate

might have seriously endangered the foundations of a nearby hydroelectric dam which was part of the system's integrated system."

Since 1945 more efficient, accurate, and safer quarrying methods have

been developed so that it is now possible to obtain assurance that the

quarrying operations by a nonaffiliate owner would not jeopardize the

dam. In the light of the foregoing the Commission approved the

section 11 (e) plan on the ground that the conditions upon which the

1945 order was predicated do not now exist and it could no longer be

said the quarrying operations were incidental to the operations of the

integrated system.

'0 Holding Company Act Release No. 14296 (Oct. 13, 1960).

11 Holding Company Act Release No. 14319 (Nov. 29, 1960).

,. 21 S.E.C. 575.
106 SECURITIES AND EXCHANGE COMMISSION

On April 17, 1961, the Commission approved a proposal by 'Wheeling Electric Co. to sell to Ohio Power Co. all of Wheeling Electric's

utility facilities located in the State of Ohio. These companies are

both subsidiaries of American Electric."

In addition to the above matters there was an important development relating to capitalization ratios and accounting for deferred taxes

which arose from the filing by Kentucky Power Co., a subsidiary of

American Electric, of a proposal to issue and sell $40,000,000 face

amount of long-term notes to banks. This is discussed as a separate

matter at pages 121-123.

American Electric Power owns 37.8 percent of the stock of Ohio

Valley Electric Corp. The status of this matter is discussed under

Allegheny Power System, Inc., above.

American Natural Gas Co.

As at December 31, 1960, the American Natural system had consolidated assets, less valuation reserves, of approximately $872,585,000,

and, for the year then ended, its consolidated operating revenues

amounted to about $240,250,000.

On November 13, 1959, the Commission issued its findings and

opinion regarding the plan of American Natural filed pursuant to

section 11(e) of the act providing for the elimination of American

Natural's then outstanding shares of $25 par value nonredeemable

preferred stock by the payment of $32.50 per share to the holders

thereof.> The order approving the plan was not entered until, as

required by the Commission, it was modified to provide that the

amount of cash payment, exclusive of dividends, in excess of the par

value of the preferred stock would be charged by American Natural to

its earned surplus and that American Natural would pay only such

fees, expenses, and other remuneration in connection with the proceeding as the Commission might determine, award, or allow."

During the fiscal year, claims for such fees and expenses were filed,

and, after the submission of additional information and the filing

of briefs, the Commission approved the amounts requested."

Also during the fiscal year, the Commission permitted an amendment of American Natural's charter to increase its authorized shares

of common stock and to split such stock on the basis of 2% shares

for IP

Central & South West Corp.

As at December 31, 1960, the Central & South West system had

consolidated assets, less valuation reserves, of approximately $724,-

13 Holdmg Company Act Release No 14.ll0.

H Holding Company Act Release No 14089.

15 Holding Company Act Release No. 14102 (Nov 27, 1959).

re Holdmg Company Act Release No 14255 (July 6, 1960).

17 Holding Company Act Release No 14386 (Mar. 9, 1961).
TWENTY-SEVENTH ANNUAL REPORT 107

436,000, and, for the year then ended, its consolidated operating revenues totaled about $173,152,000.

In June 1961, Southwestern Electric Power Co., a subsidiary company of Central, registered as a holding company as to the Arklahoma

Corp., an electric transmission company. Central, Southwestern, and

Arklahoma had previously filed a joint application requesting that

Central and Southwestern each be declared not to be a holding company as to Arklahoma, and that Arklahoma be declared not to be a

subsidiary company to Southwestern. Southwestern owns 32 percent

of the capital stock of Arklahoma; and Arkansas Power & Light Co.

and Oklahoma Gas & Electric Co., neither of which is affiliated with

Southwestern or with each other, each owns 34 percent of Arklahoma's

capital stock. A hearing was ordered on the joint application," but

before the hearing took place, Southwestern registered as a holding

company and the Commission, upon request, permitted the joint

application to be withdrawn."

Cities Service Co.

The details of the status of Cities and its subsidiaries up to September 2, 1960, are set forth at pages 134-135 of the 26th annual report.

The section 11(d) plan there referred to was consummated December 2, 1960; and Cities, by order issued December 23, 1960, under

section 5(d) was found to have ceased to be a holding company and

its registration as a holding company ceased to be in effect.20 The

order of the Commission approving the section 11(d) plan reserved

jurisdiction in respect of the allowance and allocation of fees and

expenses in connection with the consolidated proceeding. At the end

of the fiscal year a proceeding was pending with respect to such fees

and expenses.

The Columbia Gas System, Inc.

This registered holding company and its subsidiary companies had

consolidated assets, less valuation reserves, of $1,256,365,000 at December 31, 1960, and consolidated operating revenues for the year

then ended of $517,050,000.

Columbia continued its corporate realignment program, initiated

in 1955, to segregate retail and wholesale operations and carry on the

retail business by a single company in each State with one additional

company to transport gas in interstate commerce and render wholesale service to affiliated and nonaffiliated companies. Effective J anuary 1, 1961, Columbia Gas of Maryland, Inc., acquired the retail

gas distribution facilities, in Maryland, of Cumberland & Allegheny

Gas Co., another subsidiary company of Columbia, which was en18 Holding Company Act Release No. 14374 (Feb. Hi, 1961).

19 Holding Company Act Release No. 14468 (June 19, 1961).

eoHolding Company Act Release No 14340.
108 SECURITIES AND EXCHANGE COMMISSION

gaged in retail service in West Virginia and Maryland;" The latter

company will sell gas at wholesale to the Maryland company and

continue retail service in West Virginia. To date the program has

been completed with respect to the retail operations in the States of

Kentucky, New York, and Maryland.

After lengthy court proceedings discussed on pages 155-156 of the

Commission's 26th annual report, a plan of reorganization of American Fuel & Power Co. and its two principal subsidiary companies,

Inland Gas Corp. and Kentucky Fuel Gas Corp., was consummated.

A new company, the Inland Gas Corp., Inc., acquired the properties

and businesses of the above corporations and the common stock of

the new company was placed in escrow for delivery to Columbia

if it should, upon application under the act, obtain approval to

acquire the stock.

At the close of the fiscal year there was pending before the Commission an integration proceeding regarding the retainability of the

properties of six subsidiary companies of Columbia having net property equal to approximately 12.5percent of the aggregate net property

of the Columbia system. Many difficulties have interfered with any

substantial progress toward resolution of the proceedings. During

the fiscal year the Commission's staff reexamined the problems involved and conferences with company representatives took place.

The basic problems were further complicated by the question of

whether the facts and circumstances had changed since the hearing

was closed. As a result of conferences between the staff of the

Division of Corporate Regulation and Columbia officials an agreement was reached as to the appropriate procedure to be followed to

bring the record up to date so as to permit the matter to go forward.

Consolidated Natural Gas Co.

This registered holding company and its subsidiary companies had

consolidated assets, less valuation reserves, of approximately

$782,111,000at December 31, 1960, and for the year then ended, the

system's consolidated revenues amounted to about $363,372,000.

Pursuant to an order of the Commission dated December 29, 1960,22

Consolidated Natural Gas Co. issued 23,000shares of its capital stock,

par value $10 per share, to the Union Heat & Light Co. of Grove

City, Pa., a nonaffiliate. The stock, valued at $45 per share, or an

aggregate of $1,035,000,was issued in connection with the acquisition

by the Peoples Natural Gas Co., a subsidiary of Consolidated, of

all of the assets of Union. Peoples assumed all of Union's liabilities

and issued to Consolidated 10,350 shares of Peoples' capital stock,

par value $100 per share, or an aggregate par value of $1,035,000.

21 Holding Company Act Release No. 14299 (Oct. 25, 1960 )"

.. Holding Company Act Release No. 14345.
TWENTY-SEVENTH ANNUAL REPORT 109

The properties acquired became part of Peoples Natural Gas Co.

which now serves the 1,000 former customers of Union. Union

proposes to distribute the shares of Consolidated to its two stockholders and then dissolve.

Delaware Power & Light Co.

As at December 3'1, 1960, this system had consolidated assets, less

valuation reserves, of about $204,382,000,and, for the year then ended,

its consolidated operating revenues amounted to approximately

$54,940,000.

Delaware continues to participate in the Enrico Fermi atomic power

project which in connection with Power Reactor Development Co.

is discussed on pages 129-130 of the 23d annual report. In addition,

Delaware is a member of High Temperature Reactor Development

Associates, Inc., which is developing and constructing a reactor project

that will embody an electric generating station using steam produced

by an advanced type atomic reactor.

Eastern Utilities Associates

This registered holding company and its subsidiaries had consolidated assets, less valuation reserves, of approximately $111,972,000

at December 31, 1960, and, for the year then ended, its consolidated

operating revenues amounted to about $38,042,000.

During the fiscal year, a significant step was made with respect

to compliance by Eastern Utilities Associates with the April 4, 1950,

order directing the company to divest itself of its direct or indirect

interest in the gas utility properties of its subsidiary, Blackstone

Valley Gas & Electric CO.23 Step 1 of the section 11(e) plan discussed at pages 135-136 of the Commission's 26th Annual Report was

approved on August 10, 1960.24 Step 1 provided for the transfer of

Blackstone's gas properties and related facilities to Valley Gas Co.-

a new company organized for that purpose in 1956-in exchange for

the common stock, first mortgage bonds and a long-term unsecured

promissory note of Valley, and for the contemporaneous negotiated

sale of such bonds and notes. On October 21, 1960, this phase of

the plan was approved and ordered enforced by the U.S. District

Court for the District of Rhode Island; 25and, on appeal by a public

common stockholder of Blackstone, the District Court's order was

affirmed by the U.S. Court of Appeals for the First Circuit;" Subsequent to the close of the fiscal year, the Commission issued its

memorandum opinion and order approving the terms and conditions

relating to the sale of Valley's bonds and notes." At the close of the

es 31' S.E.C. 329

.. Holding Company Act Release No. 14266 .

.. Valley Gas 00. et al., 193 F. Supp. 808.

""Kelaghan v. S.E.O., 288 F. 2d 67 (Mar. 24, 1961).

Holding Company Act Release No. 14485 (July 24, 1961).

•

~
110 SECURITIES AND EXCHANGE COMMISSION

fiscal year, no steps had been taken with respect to step 2 of the plan

which contemplates the sale of the common stock of Valley to the

public common stockholders of Blackstone and the shareholders of

Eastern Utilities.

EUA, through its subsidiary, Montaup Electric Co., has an investment of $900,000,representing a 4.5 percent equity interest, in Yankee

Atomic Electric Co., discussed infra at pages 114--115.

General Public Utilities Corp.

As at December 31, 1960,this system, excluding Manila Electric Co.,

a foreign public utility subsidiary, had consolidated assets, less valuation reserves, of approximately $930,749,000, and, for the year then

ended, its consolidated operating revenues totaled about $204,813,000.

Construction work began in February 1960 on a small (5,000 kw.)

pressurized water-type nuclear reactor at the Saxton generating station of Pennsylvania Electric Co., a system subsidiary. The facility

is expected to be completed by the end of 1961, after which it will be

operated as a research and development project over a 5-year period.

At the end of the fiscal year the Atomic Energy Commission had

scheduled a public hearing to consider issuance of a provisional

operating license for the Saxton unit.

Granite City Generating Co. (Voting Trustees)

As at March 31, 1961, the end of its fiscal year, this system had

total assets, less valuation reserves, of about $292,000 and Granite

City Generating Co., an electric utility company, had total operating

revenues of about $125,000 for the 12 months ended that date. The

Voting Trustees, by virtue of their voting control of all of the voting

securities of the electric utility company, are a holding company and

registered as such in 1937. The electric utility company owned a

power plant which was leased to Union Electric Co. and the entire

annual rentals for the leased plant, less expenses and taxes, were

devoted to the retirement of the outstanding first mortgage bonds

of the electric utility company. During the fiscal year the Voting

Trustees and the electric utility company sold all of that company's

assets to a nonaffiliated steel company and, to the extent necessary,

the proceeds from the sale were used to retire all of the electric utility

company's first mortgage bonds then outstanding." During the coming fiscal year, it is expected that the Voting Trustees will file a plan

under section 11(e) of the act to distribute the cash balance, after

the payment of fees of the Voting Trustees and all liquidating and

other expenses, to the holders of the voting trust certificates of the

electric utility company.

esHolding Company Act Release No. 14449 (May 24, 1961).
TWENTY -SEVENTH ANNUAL REPORT 111

Middle South Utilities, Inc.

This registered holding company had consolidated assets, less valuation reserves, of about $793,945,000at December 31, 1960, and, for the

year then ended, its consolidated revenues amounted to approximately

$214,574,000.

As discussed at page 138 of the 26th annual report, Middle South

proposed to adopt a restricted stock option plan and issue thereunder

restricted common stock options to key officers and employees of the

company and its subsidiary companies. During the fiscal year, the

Commission approved the proposal subject to certain conditions. As

filed, the plan provided that during a period of 5 years from the date

of approval of the plan by the stockholders of Middle South, nontransferable options were to be granted, as determined by a special

option committee, to key executive employees of the system for the

purchase of up to 120,000 of the authorized and unissued shares of

common stock of Middle South." No options were to be issued to any

one employee which would permit him to acquire more than 10,000

shares of stock, no option could be exercised in whole or in part during

the first 12 months after its grant but each option could be exercised

as to one-fourth of the shares optioned thereunder for each 12-month

period subsequent to the date of grant, and no option could be exercised after 7 years from the date of grant. The exercise price per

share of the common stock covered by each option was to be not less

than 95 percent of the market value of such stock at the time of the

grant of the option, subject to modifications and adjustments under

certain conditions; and the exercise price could subsequently be reduced to 95 percent of the market value of the stock on the day of

reduction if the average market value thereof for the 12 consecutive

calendar months preceding the month in which the reduction occurred

was less than 80 percent of the fair market value of the stock on the

date of the grant of the original option.

In approving the proposal, the Commission required the plan be

amended so that (a) the aggregate exercise price of common stock

optioned to anyone optionee may not exceed 150percent of the regular

annual cash compensation then being paid to him, (b) the exercise

price may not be less than 100 percent of the market price of the

stock on the date of the grant of the option, and (c) not more than

25 percent of the shares reserved under the plan may be optioned to

employees who, at the time of adoption of the plan, are officersin the

Middle South system." Middle South accepted the conditions and

•• ThIs amounts to 0.72 percent or Its Issued and outstandIng common stock •

.. Holding Company Act Release No. 14367 (Feb. 7,1961).

620373-62-.9

•
112 SECURITIES AND EXCHANGE COMMISSION

in addition, eliminated the provision permitting the reduction in the

exercise price if the market price of the stock declined."

During the fiscal year Middle South filed a plan pursuant to section

11(e) of the act providing for the exchange of shares of its common

stock for the 3.18-percent publicly held shares of common stock of

New Orleans Public Service, Inc., a public utility subsidiary company

of Middle South, on the basis of 2% shares of common stock of Middle

South for each share of common stock of New Orleans. The Commission consolidated the plan proceeding with a proceeding instituted by

the Commission to determine what action, if any, should be taken by

Middle South and New Orleans pursuant to section 11 (b) (2) of the

act to insure that the corporate structure of New Orleans does not

unfairly or inequitably distribute voting power among its security

holders. A notice of filing was issued 32 and a hearing held, and, at

the end of the fiscal year, the matter was under advisement.

Following the announcement by the Government on July 11, 1955

(p. 85 of the 21st annual report) that the power contract between the

Atomic Energy Commission and Mississippi Valley Generating Co.,

a subsidiary of Middle South;" would be canceled, the Government

advised Mississippi Valley that no payments would be made under the

contract. Subsequently, on November 4, 1955, Mississippi Valley

sued the Government in the Court of Claims and recovered a judgment

on behalf of itself and certain use plaintiffs." Upon appeal by the

Government, the U.S. Supreme Court reversed the judgment on the

ground that the conflict of interest on the part of one of the Government's participants in the negotiations leading up to the power arrangements vitiated the contract. 35 Mississippi Valley's assets 36

aggregate about $524,000 and its liabilities, including expenses incurred in connection with the litigation in the Court of Claims and

Supreme Court, approximate $1,824,000, leaving an excess of liabilities over assets of about $1,300,000. Middle South, in a proceeding

pending at the close of the fiscal year, proposed to make available

about $1,027,000 31 to pay the claims against Mississippi Valley, which

is to be dissolved."

81 HoldIng Company Act Release No. 14401 (Mar. 31, 1961),

soHnldlng Cnrnpany Act Release No. 14425 (May I, 1961) .

.. Middle South holds 79 percent of the common stock of MissIssIppi Valley. The Southern Co., also a registered holding company, and a nona1llliate of MIddle South, holds 21

percent of such stock.

.. M£8sisBippi Vallell Generating 00. et al. v, U.S., 17,5F. Supp. 505 (1959)

.. U.S. v, Mississippi Vallev Generating 00. et al., 364 U.S. 52Q (1961), rehearing denIed,

365 U.S. 855 (1961,).

.. Consisting of cash, short-term Government obligations, and land at cost. .7 This represents 79 percent of the $1,300,000 deficit .

.. The other $273,000, or 21 percent, Is to be made available by the Southern Co. See

Mississippi Valley Generating 00. et aI., HoldIng Company Act Release No. 14501 (Aug. 22,

1961).

•
TWENTY -SEVENTH ANNUAL REPORT 113

National Fuel Gas Co.

As at December 31, 1960,the National Fuel system had consolidated

assets, less valuation reserves, of approximately $215,011,000,and the

system had consolidated operating revenues of $113,118,000for the

year 1960.

In July 1960, a plan was filed by National Fuel pursuant to section

11(e) of the act for the elimination of the 5.95-percent minority

interest in the common stock of one of its gas utility subsidiary companies, Pennsylvania Gas Co. The plan provides for the exchange

of shares of the common stock of National for the publicly held shares

of common stock of Penn Gas. The Commission consolidated the

plan proceeding with a proceeding instituted by the Commission to

determine what action, if any, should be taken by National and Penn

Gas, pursuant to section 11(b) (2) of the act, to ensure that the corporate structure of Penn Gas does not unfairly or inequitably distribute

voting power among its security holders. Hearings were held and

briefs were filed and, at the end of the fiscal year, the matter was

pending before the Commission for determination.

During the fiscal year, a gas utility subsidiary, Penn-York Natural

Gas Corp., sold its physical assets to an affiliated company and thereafter dissolved."

New England Electric System

As at December 31, 1960, this registered holding company and its

subsidiaries had consolidated assets, less valuation reserves, of $624,-

697,000; and, for the year ended on that date, the system's consolidated operating revenues amounted to $179,939,000.

In its findings and opinion and order issued February 20, 1958,the

Commission held that the electric properties of New England Electric

System (NEES) and its subsidiaries constituted an integrated electric utility system retainable under common control under the integration standards of section 11(b) (1) of the act.40 The order of

February 20, 1958, reserved for later determination the question of

whether any or all of the gas properties owned and operated by the

NEES system are retainable under the integration standards of the

actY The hearing has been concluded with respect to the retainability of the system's gas properties and, at the close of fiscal year,

requested findings and briefs were in preparation by the participants.

On January 9,1961, the Commission approved a proposal by NEES

""Iroquois Gas Corp. et al., Rohling Company Act Release No. 14409 (Apr. 13, 1961).

.. 38 S.E.C. 193. At Dec. 31, 1960, the NEES system's gross electric plant account (1neluding work in progress) aggregated $638,109,000, and revenues from electric sales In

1960 amounted to $152,159,000.

, At Dec. 31, 1960, the NEES system's gross gas plant (Including work In progrosa)

amounted to $62.518,000, and revenues from gas sales In 1960 amounted to $26,769,000.

•
114 SECURITIES AND EXCHANGE COMMISSION

and six of its electric utility subsidiary companies to merge into a

seventh electric utility subsidiary." Under the proposal, Worcester

County Electric Co. (the name of which was subsequently changed to

Massachusetts Electric Co.) acquired all the assets of Attleboro Electric Co., Northampton Electric Lighting Co., Northern Berkshire

Electric Co., Quincy Electric Co., Southern Berkshire Power & Electric Co., and Weymouth Light & Power Co. The merged company constitutes the largest retail electric utility subsidiary of the NEES system. As at December 31, 1960, its assets, after deducting valuation

reserves amounted to $116,730,000and its revenues in 1960 amounted to

$63,051,000, both figures giving pro forma effect to the merger.

During the fiscal year a hearing was held to determine whether

(a) the Commission should approve a plan filed under section l1(e)

of the act by NEES providing for the issuance by NEES of additional shares of its common stock in exchange for the 2.82-percent

publicly held shares of the common stock of its electric subsidiary,

Lynn Electric Co., and (b) whether an order should be entered under

section 11(b) (2) of the act directing the elimination of the publicly

held interest in Lynn. Subsequent to the close of the fiscal year the

Commission issued its findings and opinion and order approving the

plan and, in addition, directing the elimination of the minority

interest."

On December 30, 1959, the Commission issued an order under section 13 of the act conditionally approving a proposal by NEES and

its subsidiary service company, New England Power Service Co.,

providing for the transfer to the Service Co.'s, payroll of the salaries

of all officers and employees of NEES who are also officers and employees of the Service CO.H The order of December 30, 1959, provided that the authority granted thereunder would expire on June

30, 1961, unless the Commission continued the authorization. Subsequent to the close of the fiscal year, the Commission issued an order,

subject to certain conditions, authorizing the indefinite continuance

of the arrangement. 4~

NEES, through a subsidiary company, owns 30 percent of the

common stock of Yankee Atomic Electric Co., which, as set forth at

page 128 of the Commission's 25th annual report, was authorized

to construct and operate a nuclear power generating station."

During the fiscal year, the plant, located at Rowe, Mass., was com-

.. Holding Company Act Release No. 14350.

.. Holding Company Act Release No. 14490 (Aug. 3, 1961) .

.. Holding Company Act Release No. 14128. The proposal Is set forth In greater detaU In

the 26th annual report, at n, 139.

.. Holding Company Act Release No. 14491 (Aug. 3, 1961).

The Eastern Utilities Associates holding company system holds 4.11percent of the

stock, the balance being held by 9 other companies.

~
TWENTY-SEVENTH ANNUAL REPORT 115

pleted and commenced the generation of electric power. The com.

pletion was ahead of schedule and the construction costs were less than

the estimated amounts. Following operation at gradually increasing

power levels, the Atomic Energy Commission, on June 23, 1961,

amended the experimental license of Yankee Atomic to permit

operation at approximately 136,000 kw., the full rated capacity of

the plant.

Ohio Edison Co.

This company is a registered holding company and an operating

electric utility company. Ohio Edison and its electric utility subsidiary, Pennsylvania Power Co., had consolidated assets, less valuation reserves, of approximately $660,132,000 at December 31, 1960,

and system consolidated operating revenues for the year then ended

amounted to about $159,947,000.

Ohio Edison has a 16.5 percent interest in the common stock of

Ohio Valley Electric Corp. The status of such holding is discussed

under Allegheny Power System, Inc., above.

During the fiscal year, the Commission approved 41 a proposal of

Ohio Edison concerning adoption of a restricted stock option plan

which is substantially similar to the one proposed by Middle South and

discussed above.

The Southern Co.

As at December 31, 1960, this system had consolidated assets, less

valuation reserves, of approximately $1,400,312,000, and, for the year

then ended, it had consolidated operating revenues of about $319,-

162,000.

On August 1, 1947, the Commission entered an order, pursuant to

section 11(b) (1) of the act, requiring, among other things, the divestment from the Southern system of the bus properties and business

operated in Rome, Ga., by Georgia Power CO.48 No plan having been

proposed to the Commission by the system to effectuate compliance

with this order, the Division of Corporate Regulation during the

1961 .fiscalyear filed a plan, under section 11(d) of the act, proposing

a public sale of the transportation properties and business through

a court-appointed trustee, and the Commission ordered that a hearing

be held thereon." The order also stated that the Commission would

consider, among other things, whether the proposed plan should be

modified or whether another type of plan should be required. Upon

., Holding Company Act Release No. 14391 (Mar. 16, 1961).

48 The Oommonwealth cE Southern Oorp. et al., 26 S.E.C. 464, 491-492, Holding Compnny

Act Release No. 76111

•• Holding Company Act Release No. 14364 (Feb. 6, 1961).

•
116 SECURITIES AND EXCHANGE COMMISSION

request of Georgia Power, postponement of the hearing was granted

to give it an opportunity to submit an alternative solution. Subsequently, Georgia Power and the city of Rome, Ga., entered into

negotiations and, after the close of the fiscal year, the city adopted

a resolution, accepted by Georgia Power, which provided among other

things for the transfer of the transportation properties and business

to the city. After the close of the fiscal year, the Commission found

that this solution satisfied the applicable standards of the act and

permitted the transfer to the city to be carried out."

Union Electric Co.

Union Electric is a registered holding company and a public-utility

company. As at December 31, 1960, the consolidated assets, less valuation reserves, of Union Electric and its subsidiaries amounted to

approximately $642,830,000, and system consolidated operating

revenues for the calendar year 1960 totaled about $159,189,000.

.As indicated at pages 141-142 of the Commission's 26th annual

report, Union Electric has filed with the Commission an application

for exemption as a holding company from the provisions of the

Holding Company Act pursuant to section 3(a) (2) thereof, and briefs

were filed by Union Electric, by J. Raymond Dyer, a stockholder of

the company, and by the staff of the Division of Corporate Regulation.

Oral argument was held and the matter was pending at the close of the

fiscal year.

The three cases arising out of the objections of Dyer to the solicitation of proxies by the company's management which were pending

before the courts at the close of the last fiscal year have been decided.51

The Commission's order, permitting Union Electric's proxy material

to become effective and thus authorizing the solicitation with respect

to the 1957 annual stockholders meeting, was affirmed by the Court

of Appeals for the Eighth Circuit, 52 as was the Commission's order

with respect to the 1959 proxy material. 53 That court also affirmed

the Commission's order denying Dyer's request that the Commission

process Union Electric's proxy material for its 1960 annual meeting

pursuant to the provision of the Holding Company Act rather than

under the Securities Exchange Act.54 In addition, the same court

dismissed as frivolous a petition filed by Dyer for review of the

Commission's action denying his request that the Commission process

GO Holding Company Act Release No. 1351,1 (Sept. 1,3.1961,).

'1For the background of these cases, see pp. 141-142 of the 26th annual report.

""Dyer v. S.E.O.• 287 F. 2d 773 (C.A. 8,1961).

"Dyer v. S.E.O., 289 F. 2d 242 (C.A. 8, 1961).

"Dyer v. S.E.O., 290 F. 2d 541 (C.A. 8, 1961).
TWENTY-SEVENTH ANNUAL REPORT 117

Union Electric's proxy material for the 1961annual meeting pursuant

to the Holding Company Act and to review the Commission's alleged

authorization of Union Electric's proxy solicitation. 55 The same

court also affirmed the district court's finding that Dyer's mailing

of a postcard violated the Commission's order prohibiting anyone

from soliciting proxies until a declaration had been filed and the

Commission had permitted it to become effective, However, the Court

vacated the injunctive decree as being too broad, since it prohibited

Dyer from soliciting proxies in connection with any future annual

mooting of Union Electric's stockholders and not merely the 1957

meeting to which the Commission's order related. 56 The same court

also affirmed the Commission's order permitting a declaration filed

by Union Electric under section 7 of the act to become effective,

thereby authorizing Union Electric to offer common stock to stockholders and to offer the unsubscribed shares to its employees.51

FINANCING OF ACTIVE REGISTERED PUBLIC UTILITY HOLDING

COMPANIES AND THEIR SUBSIDIARIES

During the fiscal year, registered holding companies and their subsidiaries issued and sold to the public and to financial institutions,

pursuant to authorizations granted by the Commission under sections

6 and 7 of the act, 28 issues of their stock and long-term debt securities

aggregating $555 million." Of this amount, $15 million was used

for the purpose of refunding outstanding debt securities carrying

higher rates of interest. The balance of $540 million represented

securities sold for the purpose of raising new capital. Of the 18

active registered holding company systems, 13 of them sold longterm debt or stocks to the public and to financial institutions in

varying amounts and of various types."

The following table presents the financing by those 13 registered

holding companies and their subsidiaries classified by amounts and

types of securities.

.. Dyer v. S.E.O., 291, F. 2d 750 (C.A. 8, 1961).

fifJ Dyer v. S.E.O., 291 F. 2d 774 (C.A. 8, 1.ll61).

Il7 Dyer v, S.E.O., 290 F. 2d l)iK (C.A. 8, Ul61). 8. Dollar amounts of all securities are computed at gross proceeds (the amounts paid for

the securities by investors) .

.. The systems which did not sell stock or long-term debt securities to the public are

Allegheny Power System, Inc; Delaware Power & Light Co. ; Eastern Utilities Associates,

Granite City Generating Co. ; and Philadelphia Electric Power Co.
118 SECURITIES AND EXCHANGE COMMISSION

Becurities issuea ana sola tor cash to the public ana financial institutions "bfl

active registered holding companies ana their su"bsiaiaries, fiscal year 1961.

[In millions]

Holding company system Bonds Debentures Preferred Common

stock stock

American Electric Power Oo., Ine.: Indiana &: Mich. Igan Electric Co .__________________________ $20

American Natural Gas Co.:

~l~l:lg::~~~~~~tep1p~~~~.-~::::::::::::::::: ~t :::::::::::::::::::::::::::::::::::::: Central &: South West Corp.: West Texas UtilIties Coc., 8

g~~~~ld~~d8SJ~::af(l~cc~~~.~::::::::::::::::::::: :::::::::: :~~::::::::::::::::::::::::

General Public Utilities Corp.: New Jersey Power &: LIght Co ._____ 5 _. Pennsylvania Electnc Co. ._ 10 12

Middle South Uttlities, Inc.: Arkansas Power &: Light Co .___ 12

New Orleans Public Service, Inc. .______ 15 ._. . National Fuel Gas Co ._. .______ 28 . ..

New England Electric System: Massachusetts Eleetrio Co ._. .__ 18 _. •.

Merrimack-Essex Electnc Co_. .____ ---___________ $8

~~~~~~:~li~i;J~~::~:~~::::::::::::~:::::::::::: :::::::::::::::: :::::::i

g~~~\~~rwC~_~~-::::::::::::::::::::::::::::::::: 1~ :::::::::::::: ----------5- :::::::::::: Southern Electric Generating Co_ 20 .. . Union Electric Co ._____ 51 . . . ... MISSOUriEdison Co 2

Utah Power &: lJght Co ._ ._______ 16 10

Total. ._ _. _. 280 206 31 38

I Each ofthese companies sold two Issuesof debentures during the fiscal year 1961.

The table does not include securities issued and sold by subsidiaries

to their respective parent holding companies, issuance of short-term

notes to banks, portfolio sales by any of the system companies, nor

securities issued for stock or assets of nonaffiliated companies. These

issuances and sales also required authorization by the Commission

except in the case of the issuance of notes having a maturity of less

than 9 months where the aggregate amount did not exceed 5 percent

of the total capitalization of the company. The issuance of such latter

securities is exempted by the provisions of section 6(b) of the act.

Competitive Bidding

All of the 28 issues of securities sold for cash in fiscal 1961, as

shown in the preceding table, were offered at competitive bidding

pursuant to the requirements of rule 50 promulgated under the act.

Three other issues of securities, not included in the table, were sold

during the fiscal year 1961 pursuant to orders of the Commission

granting exception from the competitive bidding requirements of the

rule, because of the unusual circumstances which were present in each

case.

One issue not sold at competitive bidding consisted of 'i'10,000

shares of common stock of Louisiana Gas Service Co., a subsidiary of

Louisiana Power & Light Co., which in turn is a subsidiary of Middle

South Utilities, Inc. As described at pages 137-138 of the 26th annual

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TWENTY -SEVENTH ANNUAL REPORT 119

report, Louisiana Gas was organized for the purpose of acquiring and

operating the gas properties formerly owned by Louisiana Power and

on August 11,1960,60 the Commission approved the sale by Louisiana

Power through a non underwritten subscription offering of its holdings

of 670,000 shares of common stock of Louisiana Gas to the stockholders of Middle South. The plan, as amended, also provided for

the sale in like manner by Louisiana Gas of up to 40,000 additional

shares of its stock to the shareholders of Middle South. In its order

the Commission granted an exception from the competitive bidding

requirements of rule 50 with respect to the proposed sale of both blocks

of Louisiana Gas stock, totaling 710,000 shares. All of the 670,000

shares held by Louisiana Power were sold during the fiscal year, but

no part of the 40,000 shares to be offered by Louisiana Gas was sold.

In its order of October 6, 1960,61which permitted Electric Bond &

Share Co. to acquire 73,115 shares of its outstanding common stock

by purchase in the open market and to offer such shares to the stockholders of Walter Kidde Constructors, Inc., in exchange for the stock

of the latter company, the Commission excepted the proposed offer

from the competitive bidding requirements of rule 50.

In its order of December 29, 1960,62the Commission granted Consolidated Natural Gas Co. an exception from the competitive bidding

requirements of rule 50 with respect to the proposal of that company

to issue and sell to Union Heat & Light Co., a non affiliate, 23,000

shares of Consolidated's capital stock in connection with the proposed

acquisition by Peoples Natural Gas Co., a subsidiary of Consolidated,

of all of the assets of Union.

During the period from May 7, 1941, the effective date of rule 50,

to June 30,1961, a total of 823 issues of securities with aggregate sales

value of $12,023 million were sold at competitive bidding under the

rule, These totals compare with 229 issues of securities with an aggregate sales value of $2,365 million which have been sold pursuant

to orders of the Commission granting exception from the competitive

bidding requirements of the rule under paragraph (a) (5) thereof."

Of the total amount of securities sold pursuant to orders of exceptions

granted under this paragraph, 126 issues with sales value of $1,888

million were sold by the issuer and the balance of 103 issues with a

dollar value of $477 million were portfolio sales. Of the 126 issues

sold by issuers, 70 were in amounts of from $1 million to $5 million

and 2 bond issues were in excess of $100 million each. 64

.. Holding Company Act Release No. 14267.

e:t Holding Company Act Release No. 14294.

.. The PeOplesNatural Gas Co. et al., Holding Company Act Release No. 143411

.. Paragraph (a) (5) of rule 50 provides for exception from the competitive bidding

requirements ot the rule where the Commission finds such bidding Is not necessary or

appropriate under the partteular circumstances of the Individual case.

I"Ohio Valley Electric Corp.. a $300 mUlion Issue ot bonds; and United Gas Corp., a

$116 mJll10n Issue.

•
120 SECURITIES AND EXCHANGE COMMISSION

ISSUANCE OF LONG.TERM DEBENTURES BY SUBSIDIARY PUBLIC

UTILITY COMPANIES

During the fiscal year, applications were filed under the act by two

nonaffiliated public utility subsidiary companies of registered holding

companies, seeking, in each case, authority to issue and sell unsecured

long-term debentures. The applications were filed by Pennsylvania

Electric Co. ("Penelec"), a public utility subsidiary company of General Public Utilities Corp. ("GPU"), for an issue of $12 million

principal amount of 25-year debentures, and by Indiana & Michigan

Electric Co. ("Indiana & Michigan"), a public utility subsidiary

company of American Electric Power Co., Inc., for an issue of $20

million principal amount of 25-year debentures. After thorough

consideration, the Commission approved both transactions on May

25, 1961.65

In passing upon the Penelec proposal, the Commission noted in its

findings and opinion 66 that it departed from the pattern of financing

theretofore followed by Penelec and the GPU holding-company system of having outstanding in the hands of the public, except for

short-term notes issued to commercial banks, only two layers of securities of subsidiary public utility companies, i.e., first mortgage bonds

and cumulative preferred stock. The debenture issue, by reason of its

approval by the Pennsylvania Public Utility Commission, the State

commission of the State in which Penelec is organized and doing

business, was exempt, under the provisions of section 6(b) of the

act, from the financing standards prescribed by section 7 of the act,

subject to the imposition of such terms and conditions as the Commission might deem appropriate in the public interest or the interest

of investors or consumers. The Commission observed that it was

required to give weight to the decision of the State regulatory agency

and that it may impose conditions only to the extent that the security

issue offends the basic standards and policies of the act and thereby

creates the likelihood of those abuses which led to passage of the act;

and that, in effect, a greater degree of latitude is permitted in applymg the standards and policies of the act to a security approved by a

State commission than to an issue subject to all provisions of section

7; but that, where there is a material variance from those standards

and policies, it is the responsibility of the Commission, despite State

approval, to impose appropriate terms and conditions. The Commission noted that the issuance of the proposed debentures would create

an additional layer of long-term securities of Penelec in the hands

esPennsylvania Electric Oo., Holding Company Act Release No. 14451, and Indiana <$

Michigan Electric Co., Holding Company Act Release No. 1441>3.

.. Although the Commission did not Issue a findings and opinion In respect of the

Indiana & Michigan financing, the Commission's contemporaneous approval of that company's proposal was bottomed on the same general considerations as those set forth in the

Penelec findings and opinion.
TWENTY-SEVENTH ANNUAL REPORT 121

of the public, thus having a tendency to create a complexity in the

corporate structure of Penelec, and of the GPU holding-company

system.

The Commission considered Penelec's contentions that (a) after

issuance of the debentures, its common stock equity "cushion" would

still be adequate to preserve its stability to issue additional senior

securities even when economic conditions are unfavorable to the issuance of additional common stock; and (b) it had considered the

advisability of issuing additional preferred stock but had rejected this

as an uneconomical method of raising capital under present tax rates."

Penelec represented to the Commission that, unless conditions not

110W contemplated change radically, it will abandon any future issuances of preferred stock; and GPU and its subsidiary companies expect to give early consideration to the feasibility of retiring the

system's outstanding preferred stock." In view of these representations, and in light of the pro forma capitalization ratios and earnings

coverage of both Penelec and the GPU system, the Commission deemed

it unnecessary to consider what terms and conditions might appropriately be imposed if it had concluded that the proposed creation

of an additional layer of permanent securities was a material variance from the policies and standards of the act. In addition, the

Commission noted that the indenture under which the proposed

debentures were to be issued and which had been the subject of extended conferences between the company and the Commission's staff,

contained various protective provisions, including annual cash sinking fund payments designed to retire 48 percent of the issue before

maturity thereof; limitations on the payment of common stock dividends; a limitation on short-term indebtedness; and certain conditions, in terms of capitalization ratios and interest coverage, in respect

of additional issuance of long-term debt.

CAPITAUZATION RATIOS AND ACCOUNTING FOR DEFERRED TAXES

An important development during the past fiscal year related to

capitalization ratios and accounting for deferred taxes arising from

the taking of liberalized depreciation and accelerated amortization

for tax purposes (pursuant to sees. 167and 168of the Internal Revenue

Code) while taking straight-line depreciation for financial accounting purposes. The questions involved arose in connection with an

application filed pursuant to section 6(b) of the act by Kentucky

<l7 In this connection, however, the Commission again took the opportunity of reiterating

Its longstanding view that the deductibility for tax purposes of interest on debt capital

should not be employed as a basis for an excessive debt ratio in a company's capital

structure

.. The elimination of Penelec's outstanding preferred stock would, of course, restore Its

flnancing pattern to only two layers of publicly held long-term securities.
122 SECURITIES AND EXCHANGE COMMISSION

Power Co., a public utility subsidiary company of American Electric

Power Co., Inc., a registered holding company, proposing the issuance

of $40 million long-term notes to banks.

The balance sheet of Kentucky filed as an exhibit to the application

contained an amount of $831,825 designated "Earned Surplus Restricted for Future Federal Income Taxes" and the consolidated balance sheet of American and its subsidiaries contained an amount of

$94,698,293 which was similarly designated. The Commission's Division of Corporate Regulation contended that this treatment was not

consistent with the Commission's statement of policy regarding balance

sheet treatment of credit equivalent to reduction in income taxes."

Under the statement of policy, such accumulated tax reduction, if

material in amount, may not be designated as "earned surplus" (or its

equivalent) or in any manner as a part of equity capital (even though

accompanied by words of limitation such as "restricted" or "appropriated") .

After several weeks of hearings counsel for Kentucky and American, and counsel for the Commission's Division of Corporate Regulation, entered into discussions looking to the possible settlement of

the issues which had been raised. An agreement was reached which

was submitted to and approved by the Commission."

Under the settlement proposal, as approved, supplemental financial

statements were filed by both companies which the Commission found

not in contravention of its statement of policy. In the new financial

statements, the accumulated reductions are carried under a designation

reading: "Accumulated Amount Invested in the Business Equivalent

to Reduction in Federal Income Taxes Resulting From Accelerated

Amortization and Liberalized Depreciation, Which Is Recorded as

Earned Surplus Restricted for Future Federal Income Taxes in Accounts Maintained Pursuant to State Regulatory Requirements."

As part of the settlement, the Commission also approved certain

ratio tests concerning the future capital structure of the various companies in the American holding-company system. The opinion in the

matter stated that in future financings by companies in the system,

the Commission will give due weight to the existence of the accumulated tax reduction and its size in determining appropriate capitalization ratios; and, so long as the consolidated balance sheet of American and its subsidiary companies, or the corporate balance sheet of any

of its subsidiary companies, includes a substantial amount of accumulated tax reduction, the Commission will not take any adverse action

in respect of capitalization ratios where, upon completion of the

financing: (a) common stock equity is not less than 30 percent of total

.. Holding Company .Act Release No. 14173 (Feb. 29, 1960). For the backgronnd reading

up to tbe adoption ot the statement of policy see the 26th annual report at pp. 212-214.

'10 Holding Company .Act Release No. 14353 (Jan. 13, 1961).
TWENTY -SEVENTH ANNUAL REPORT 123

capitalization, including surplus; (b) mortgage debt is not in excess

of 60 percent of total capitalization, including surplus; and (c) total

long-term debt is not in excess of 65 percent of total capitalization,

including surplus. For purposes of these tests, any accumulated

tax reduction resulting from charges against income as an operating

revenue reduction in respect of accelerated amortization or liberalized

depreciation for Federal income tax purposes will not be included as

a part of either common stock equity or total capitalization, including

surplus.

PROTECTIVE PROVISIONS OF FIRST MORTGAGE BONDS AND PRE.

FERRED STOCKS OF PUBLIC UTILITY COMPANIES

The Commission, in passing upon issuances of first mortgage bonds

and preferred stocks of public-utility companies subject to the act,

examines the applicable mortgage indentures and charter provisions

to insure that there is substantial conformity with the standards set

forth in the statements of policy adopted by the Commission in 1956.71

These statements of policy represent a codification of the principles

and policies which the Commission had theretofore been administering on a case-by-case basis, and which the Commission had found

necessary and desirable for the protection of investors in first mortgage

bonds and preferred stocks of public utility companies. Except where,

in particular circumstances, deviations from the statements of policy

are clearly warranted, the Commission has uniformly required conformity with the statements."

During the fiscal year, applications or declarations were filed by

public utility companies under the act with respect to 14 first mortgage bond issues involving an aggregate principal amount of $265,-

500,000,73 and four preferred stock issues with a total par value of

$29,500,000.

Among other things, the statement of policy with respect to first

mortgage bonds requires that, under certain circumstances, the distribution of earned surplus to common stockholders be restricted, In

respect of 4 of the 14 bond issues filed by public utility companies

under the act during the fiscal year, this requirement of the statement

of policy was adequately provided for in the existing indentures. In

the other 10 bond issues, additional restrictions were required, and

were provided for either on the initiative of the issuer or as a result

n Holding Company Act Releases Nos. 13105 (Feb. 16, 1956), and 13106 (Feb. 16, 1956),

as to first mortgage bonds and preferred stocks, respectively.

~.The appllcatlon of the statements of polley to fillngs prior to June 30, 1960. Is discussed

in the 23d, 24th, 25th, and 26th annual reports at pp. 141-143, 128--131, 137-141, and

148--151, respectively.

'IS Omitted from this total is a bond Issue of $30 mUllon principal amount by a natural

gas plpellne company which, although a subsidiary of a registered holding company. is

not a publlc utUlty company within the meaning of the act.
124 SECURITIES AND EXCHANGE COMMISSION

of informal discussions between the Commission's staff and representatives of the issuer.

In recoznition of the fact that the mortgaged utility property b

constitutes the bulk of the bondholders' security, the statement of

policy for bonds also requires the periodic renewal and replacement

of the depreciable mortgaged utility property. In substance, this

requirement obligates the issuer to construct property additions (or,

alternatively, to deposit cash or outstanding bonds with the trustee)

in an amount which, over the estimated useful life of the mortgaged

depreciable property, will provide for the replacement in kind or in

cash of the book cost of the mortgaged property. The statement of

policy requires that the mortgage indenture express the periodic

renewal and replacement provision as a percent of the book cost of

depreciable property, but alternatively permits existing indenture

provisions expressed on some other basis-as, for example, a percent

of operating revenues-to remain unchanged if the issuer can satisfactorily demonstrate to the Commission that the existing provision

affords substantially the same protection as that based on a percent-ofproperty basis.

The indentures of 11 of the 14bond issues sold during the fiscal year

expressed the renewal and replacement provision as a percent of

depreciable property deemed adequate by the Commission. The indentures pertaining to the other three bond issues expressed the

requirement as a percent of revenues which the Commission found

afforded protection to the bondholders at least equal to that which

would be afforded under an appropriate percent-of-property basis.

In the case of the four issues of preferred stock with an aggregate

par value of $29,500,000,in respect of which applications or declarations were filed during the fiscal year. three issues had charter provisions which substantially conformed with the statement of policy

for preferred stock. In the case of the fourth issue, certain charter

provisions (or omissions) were found to be inconsistent with the statement of policy in respect of (a) the issuance of additional preferred

stock or other capital stock ranking prior thereto, (b) amendment of

the charter in a manner adverse to the preferred stockholders, (c) redemption or reacquisition of outstanding preferred stock during

periods when dividends thereon are in arrears, (d) mergers or consolidations and (e) the issuance or assumption of unsecured indebtedness.

The Commission, therefore, in approving the proposed issue of preferred stock, conditioned its order so as to extend to the holders of the

preferred stock the protective features prescribed by the statement

of policy."

74 A.labama Power co., Holding Company Act Release No. 14389 (Mar. 15. 1961).
TVVENTY-SEVENTH ~AL REPORT 125

During the fiscal year, the Commission has continued to require

adherence to the provision contained in both the bond and the preferred stock statements of policy that the securities be freely refundable at the option of the issuer upon reasonable notice and payment of

a reasonable redemption premium, if any." Continuing studies made

by the Commission's staff for fiscal year 1961 with respect to electric

and gas utility bond issues sold at competitive bidding, whether or not

subject to the act, indicate that the presence or absence of a restriction on free refundability has not affected the number of bids received

by an issuer at competitive bidding or the ability of the winning

bidder to market the bonds. This finding coincides with that described in the 26th annual report, at pages 149-150, containing a

summary of the 'results of an examination of all electric and gas

utility bond issues (including debentures) sold at competitive bidding

between }\fay 14, 1957, and June 30, 1960, by companies subject to

the act as well as those not so subject. This study has been extended

to include fiscal year 1961.

During the period from May 14, 1957,to June 30, 1961, a total of

310 electric and gas utility bond issues, aggregating $6,563.1 million

principal amount, was offered at competitive bidding. The refundable issues numbered 240 and accounted for a total of $4,434.1million,

while the nonrefundable issues-all except one being nonrefundable

for a period of 5 years, and that one being nonrefundable for a period

of 7 years-numbered 70 and totaled $2,129million principal amount.

The number of refundable issues thus represented 77.4 percent of the

total number of issues, while, in terms of principal amount, the

refundable issues accounted for 67.6 percent."

The weighted average number of bids received on the refundable

issues for the period was 4.57, while on the nonrefundable issues it was

4.23. The median number of bids was five on the refundable and four

on the nonrefundable issues." 1Vith respect to the success of the

marketing of the bond issues, an issue was considered to have been

successfully marketed if at least 95 percent of the issue was sold at

the syndicate price up to the date of termination of the syndicate. On

this basis, 13.8 percent of the refundable issues were successful, "while

.. The significance of the refunding privilege, both as a matter of conformity with the

standards of the act and as a matter of practical finance, was discussed at some length

In the 24th annual report, at pp. 130-13l.

7. During fiscal year 1961, a total of 70 bond Issues was oll'ered, aggregating $1,517.5

million principal amount, consisting of 53 refundable Issues totaling $990.5 million and

17 nonrefundable Issues totaling $527 million. IThe number of refundable Issues represented 75.7 percent of all the issues, While, In terms of principal amount, the refundable

Issues accounted for 65.3 percent.

'17 During the fiscal year 1961, the weighted average number of bids was 4.60 on the

refundables and 4.12 on the nonrefundables, while the median number of bids was 4 on

both the refundables and the nonrefundables.
126 SECURITIES AND EXCHANGE COMMISSION

'70 percent of the nonrefundable ones were successful." In terms of

principal amount, '70.8 percent of the refundable issues were successful, while 66.6 percent of the nonrefundable ones were successful."

Extension of the comparison to include the aggregate principal

amounts all issues which were sold at the applicable syndicate prices

up to the termination of the respective syndicates, regardless of

whether a particular issue met the definition of a successful marketing, indicates that 87.6 percent of the combined principal amount of

all the refundable issues were so sold, as compared with 83.8 percent

for the nonrefundable issues." These statistics developed in respect

of the two groups of bond issues support the Commission's policy of

requiring free refundability of utility bond issues subject to the act.

In connection with this policy of the Commission, it may be noted

that, during the fiscal year, National Fuel Gas Co., a registered holding company, sold at competitive bidding $2'7 million principal

amount of 4%-percent sinking fund debentures due 1986 and used a

portion of the proceeds from the sale to redeem, at 106.01 percent of

principal amount, $15 million principal amount of its outstanding

5lh-percent sinking fund debentures which were issued in 1957 with

maturity in 1982. Such redemption will effectuate a savings in capital

costs over the remainder of the original life of the redeemed issue.

If these 5lh-percent debentures due 1982 had been nonrefundable for

a 5-year period the company would have been unable to effectuate the

redemption.

In the 25th annual report, at page 141, and in the 26th annual report,

at pages 150-51, reference was made to a comprehensive study of

redemption provisions of corporate bonds being conducted at the

Wharton School of Finance and Commerce of the University of

Pennsylvania. The final results of this study were not available as

of the close of the fiscal year 1961.

EXCHANGE OF SECURITIES PURSUANT TO SEcnON 11

REORGANIZATIONS

In connection with the numerous plans of reorganization of holding

company systems which have been approved by the Commission over

the years pursuant to the provisions of section 11 of the act, the holders

of securities of reorganized companies are required to surrender their

"old" securities in order to receive the securities of the reorganized

companies. While securities amounting to hundreds of millions of

dollars have been exchanged by the holders thereof for cash and new

,'18 During fiscal year 1961, 75.7 percent of the refundable Issues were successful, as against 70.6 percent for the nonrefundables .

.,. During fiscal year 1961, In terms of principal amount, 75.1 percent of the refundables

were successful, as against 57.3 percent for the nonrefundables .

...During fiscal year 1961, the applicable percents were 88 II percent for the refundablea

and 79 percent for the nonrefundables.
TWENTY-SEVENTH ANNUAL REPORT 127

securities, some security holders have failed to surrender their "old"

securities. The Commission has made continuing efforts to insure that

all reasonable steps are taken to locate and to give notice to the security holders entitled to effect an exchange. Establishing contact is

often difficult due to the death of registered holders, the lack of recent

addresses, and the like, and is frequently complicated by the fact that

many of the securities had been considered by their owners to be

virtually worthless. In many instances, the further exchange of

securities has been barred by the lapsing of the period fixed for exchange in the plan of reorganization or in the order of the appropriate

Federal district court enforcing the plan. However, there are many

cases in which the "bar date" on exchanges has not passed or in which

no time limit has been fixed.

The staff of the Division of Corporate Regulation checks upon

efforts made by the various companies to contact and locate holders

of unexchanged securities and, in order to explain the situation and

clear up misunderstandings, frequently communicates with such security holders by letter and, occasionally, by telephone. In most

instances, the companies are urged to employ the services of a professional tracing agency to locate missing shareholders or their heirs.

Where an extension of the period for exchanging shares appears

necessary, either the company involved or the Commission will petition the appropriate court for additional time.

During the past fiscal year renewed and more intensive efforts

were made by the Commission to locate "lost security holders." .A

further review was made of all reorganization plans under section 11

to determine instances where there was no "bar date" or the time for

exchange of securities had not yet expired, and more than 100 questionnaires were sent by the Commission's Division of Corporate Regulation to companies, banks, and exchange agents inquiring as to the

status of any unexchanged securities and what efforts had been made

or were contemplated to locate the rightful owners of the securities .

.As a result, renewed efforts were made by the exchange agents, with

the aid of professional tracing agencies in some instances. While

there can be no exact measurement of the benefits of this inquiry,

thousands of dollars worth of securities have found their way to their

beneficial owners, who, often are in financial need.

620313-.62---10
PART VII

PARTICIPATION OF THE COMMISSION IN CORPORATE

REORGANIZATIONS UNDER CHAPTER X OF THE BANK.

RUPTCY ACT

The Commission's role under chapter X of the Bankruptcy Act,

which provides a procedure for reorganizing corporations in the

United States district courts, differs from that under the various

other statutes which it administers in that the Commission does not

initiate chapter X proceedings or hold its own hearings. It has no

authority to determine any of the issues in these proceedings. However, at the request of the judge or on the Commission's own

motion, if approved by the judge, the Commission may participate

in such proceedings in order to provide independent, expert assistance to the court, the participants, and investors on matters arising

in such proceedings and, where the Commission considers such action

appropriate, it may file advisory reports on reorganization plans.

Thus, the facilities of the Commission's technical staff and its disinterested recommendations are placed at the service of the judge and

the parties, affording them the views of impartial experts in a highly

complex area of corporate law and finance. The Commission pays

special attention to the interests of public security holders, who may

not otherwise be effectively represented.

Where the scheduled indebtedness of a debtor corporation exceeds

$3 million, the judge under section 172 of chapter X must, before

approving any plan of reorganization, submit it to the Commission

for its examination and report. If the indebtedness does not exceed

$3 million, the judge may, if he deems advisable, submit the plan to

the Commission before deciding whether to approve it. Where the

Commission files a report, copies of it, or a summary thereof, must

be sent to all security holders and creditors when they are asked to

vote on the plan. The Commission has no authority to veto or require

the adoption of a plan of reorganization and is not obligated to file

a formal advisory report on a plan.

The Commission's advisory reports on plans of reorganization are

usually widely distributed and serve an important function. However, they represent only one aspect of the Commission's activities

in cases in which it participates. The Commission, as a party to a

128
T~ENTY-SEVENTII ~AL REPORT 129

chapter X proceeding, is actively interested in the solution of every

major issue arising therein, and the adequate performance of its

duties requires that it undertake in most cases intensive legal and

financial studies. Even in cases where the plans are not submitted

to the Commission and no report is filed, the Commission must consider various reorganization proposals of interested parties while

plans are being formulated, and be prepared to comment fully upon

all plans that are the subject of hearings for approval or confirmation.

In the exercise of its functions under chapter X, the Commission

has endeavored to assist the courts in achieving equitable, financially

sound, expeditious, and economical readjustments of the affairs of

corporations in financial distress. To aid in attaining these objectives the Commission has lawyers, accountants, and financial analysts

in its New York, Chicago, and San Francisco regional offices who

keep in close touch with all chapter X hearings and issues. Supervision and review of the regional offices'chapter X work is the responsibility of the Division of Corporate Regulation of the Commission,

which also handles the actual trial work in cases arising in the Atlanta

and Washington, D.C., regional areas.

SUMMARY OF ACTIVITIES

The Commission actively participated in 56 reorganization proceedings involving 85 companies (56 principal debtor corporations and

29 subsidiaries of those debtors) during the past fiscal year.' The

stated assets of these 85 companies totaled approximately $599,477,000

and their indebtedness totaled approximately $559,735,215. The

proceedings were scattered among district courts in 23 States and the

District of Columbia as follows: 10 proceedings in New York ; 5 each

in Illinois and Kentucky; 4 in Texas; 3 each in Oklahoma and

Maryland; 2 each in Iowa, Pennsylvania, California, Colorado,

Michigan, North Carolina, Nevada, and Utah; and 1 each in 1Vashington, Virginia, New Jersey, North Dakota, Kansas, Georgia, Louisiana,

Wyoming, Florida, and the District of Columbia.

During the year, the Commission entered its appearance in 11 new

proceedings under chapter X involving companies with aggregate

stated assets of approximately $32,383,000and aggregate indebtedness

of approximately $27,615,215. They involved the rehabilitation of

corporations engaged in the operation of such varied businesses as

a deluxe resort motel, an automobile parts fabricator, an aluminum

product fabricator, TV tube rehabilitation, amusement park, oil and

gas exploration, mutual investment fund, apartment and transient

hotel, an insured 10-percent second mortgage broker, meat packing,

1The appendix table contains a complete list of reorganization proceedings In which the

Commission participated as a party during the fiscal year ended .Tune30, 1961.
130 SECURITIES AND EXCHANGE COMMISSION

manufacture of cosmetics, a machine shop, and real estate development.

Proceedings involving eight principal debtor corporations were

closed during the year. At the end of the year, the Commission was

actively participating in 48 reorganization proceedings involving 75

companies.

THE COMMISSION AS A PARTY TO PROCEEDINGS

The Commission has not considered it necessary or appropriate that

it participate in every chapter X case. Apart from consideration

of the excessive administrative burden of participating in everyone

of the 111 cases initiated during the fiscal year, many of the cases

involve only trade or bank creditors and few stockholders. The

Commission has sought to participate principally in those proceedings

in which a substantial public-investor interest is involved. This

is not the only criterion, however, and in some cases involving only

limited public-investor interest, the Commission has participated

because an unfair plan had been or was about to be proposed, the

public security holders were not adequately represented, the reorganization proceedings were being conducted in violation of important

provisions of the act, the facts indicated that the Commission could

perform a useful service, or the judge requested the Commission

to participate."

MATTERS RELATED TO THE PROCEEDINGS

When a party in chapter X proceedings, the Commission has urged

upon the court the procedural safeguards to which all parties are

entitled. The Commission also has attempted in its interpretations

of the statutory requirements to encourage uniformity in the construction of chapter X and the procedures thereunder.

In its efforts to protect the public security holder the Commission,

in the case of M agio M owntain, Ina.,s filed objections to the referee's

report which had recommended that the debtor's voluntary petition

for reorganization be dismissed. The debtor owned an amusement

park which was only partially completed. The Commission in its

2 In In the Matter oJ Southern Enterprise Oorporation (S.D. Texas, Houston Div.• No.

2048), the judge stated his reasons for requesting the Commission to participate as follows:

... • • (1) the complexity of the corporate structure of Southern Enterprise Corp.

and Its several subsidiaries and the complexity of this reorganization proceeding, (2) the

necessity for protection of the public-Investor Interest of more than 885 stockholders,

holding more than 211,300 shares at a cost of more than $833,900 of the common capital

stock of the debtor, (3) the necessity for the Interests of creditors holding asserted claims

against the debtor In excess of $295.700, (4) and the desire of this court and of the

trustee in this proceeding for the expert assistance in technical matters o1fered by the

Securities and Exchange Commission."

-In the Matter oJMagic Mountain, Ino. (D. Colo., No. 26858).
TWENTY-SEVENTH ANNUAL REPORT 131

objections pointed out to the court that there were 12,000 holders of

the common stock of the debtor and stated that "nothing is more

demonstrative of the need for reorganization" than the possibility

that these stockholders might be wiped out by the many pending

:foreclosure actions. The Commission urged that a disinterested

trustee be appointed to determine whether the corporation could be

reorganized, and to investigate the conduct of the debtor's former

management. The district court judge entered an order in accordance with the Commission's views.

In Kirohofer and Arnold, Inc.,4 and in connection therewith, in

Morehead Oity Shipbuilding, Inc.,ll a subsidiary, although it was

clear that the debtors would have to be liquidated because hopelessly

insolvent, the Commission recommended that the debtors not be

adjudicated bankrupts since this would involve a precipitous liquidation with great loss to the security holders. Rather, the Commission recommended that the chapter X court retain its jurisdiction

and conduct an orderly liquidation pursuant to a plan in an attempt

to obtain a better price for the debtors' assets.

Similarly, in Dieie Aluminum Oorporation,6 after the trustee's

report that no plan of reorganization could be effected without substantial additional operating capital, and that no one could be found

who was interested in making such an investment, the court adjudicated the debtor a bankrupt. However, after advice by Commission

counsel that liquidation pursuant to a plan under chapter X would be

more appropriate for the protection of the public security holders, the

district judge vacated his order and retained jurisdiction under

chapter X.

In the H. H. Mundy Oorporation case 1 the Commission objected

to the retention of the trustee's attorney on the grounds that he was

not "disinterested" as defined in section 158 of the Bankruptcy Act

since he was an attorney for a director of the debtor and assisted the

debtor's counsel in the preparation of the chapter X petition.

Following the staff's objection, the trustee's attorney resigned.

In the Food Town, Inc. case 8 the Commission objected to a proposed

order for general employment of an accounting firm to assist the

trustee in his section 167 investigation since this firm had audited

the debtor's books at the time a purported fraud was committed. The

court approved the employment of the firm, but limited its employment to matters unrelated to its adverse interest in order to meet the

objections of the Commission.

In the Matter of Kirchofer and Arno~, tno. (E.D.N.C., No. 2876).

In the Matter Of Morehead Oitll Shipbuilding Oorporation (E.D.N.C., No. 288~).

"In the Matter of Dizie Aluminum Oorporation (N.D. Ga., No. 9765).

In the Matter of Reorganization of H. H. Mundv Oorporation (N.D. Okla., No. 10387).

'In the Matter of Food Town, Ino., ef al. (D. Md., No. 11070).

•

•

•
132 SECURITIES AND EXCHANGE COMMISSION

In the Muntz TV, Inc. case," following consummation of the plan,

one of the debtor's trustees was designated as the chief executive

officerof the reorganized company at a salary of $10,000a year. It

has been the Commission's consistent policy to oppose the employment of a trustee or his counsel by the reorganized debtor. This

policy is based on the theory that the eff'ecti veness of the trustee's

position, so far as the public security holders are concerned, depends

on his disinterested attitude. The Commission recommended to the

court that the trustee, who was still occupying that position, should

not be permitted to serve also in an important salaried position with

the reorganized company. The court, however, did not follow the

Commission's recommendation. Instead it allowed the trustee a

substantial fee for his servicesin addition to the salary being paid him

as chief executive officer.

In the TJIT Trailer Ferry, Inc. case 10 the Commission objected to

the claims of Merrill-Stevens Drydock and Repair Co., one of the

largest TMT creditors, on various grounds. The court allowed the

Commission time to investigate and file specifications in support of

its objections. This matter is still pending.

In the Swan-Finch Oil Corporation. proceeding 11 the court of appeals upheld the Commission's viewpoint, set forth in the Commission's

26th annual report," that a petition for the reorganization of a

subsidiary under chapter X could be filed in the court in which the

chapter X reorganization of the parent was pending notwithstanding

the pendency of a chapter XI proceeding for the subsidiary in another

district.

PROBLEMS IN CONNECTION WITH THE ADMINISTRATION OF ESTATES

In Piclcmam.Trust Deed Oorporation,13 the debtor operated a second

trust deed business in the San Francisco area under a program wherein

notes secured by trust deeds were purchased by Pickman to be placed

into customers' accounts on the basis of a 10 percent annual return.

Pickman, which obtained $5 million from investors, is 1 of 12

companies which have operated in this manner in California and are

currently in financial difficulties, representing total investments of

over $70 million.

After the Commission successfully caused the debtor to amend its

chap~er XI petition to conform to the provisions of chapter X, a

question arose as to the nature of the legal rights of investors who

had been allocated notes. The trustee adopted a position that all notes

In the Matter of Muntz TV, Inc. (N.D. Ill .• No. 54B491).

10 In the Matter of TMT Trailer Ferry, Inc. (8 D. Fla., No. 3659-M. Bk).

U In the Matter of Swan-Finch 0,1 Oorporation (S.D.N.Y., No. 93046).

:12 Twenty-sixth annual report ot the Securities and Exchange Commission, page 156.

]I In the Matter of Pickman Trust Deed Oorporation (N.D. Callt. N. Dlv. No. 57469).

•
TWENTY-SEVENTH ANNUAL REPORT 133

were to be pooled for the benefit of all investors. The Commission,

however, advocated that each investor should be allowed to trace hie

specific note and reclaim it on an individual basis, on the ground that

otherwise contractual rights would be disregarded. The trustee, after

6 days of litigating the matter before the district court, proposed a

compromise whereby claimants to approximately $2,300,000 of notes

which were recorded in their names could elect to reclaim their notes

or remain in a pool. The Commission argued that the compromise

proposal was premature since a section 167 report had not been prepared by the trustee, in the absence of which customers would not have

the necessary information as to the status of the debtor to make an

intelligent choice whether to withdraw their notes or remain in a

pool. The court, however, approved the compromise and classified

investors as "secured creditors" rather than "owners," but with the

right to withdraw their underlying securities if their deeds were

recorded.

In DePaul Educational Aid Society,I4 the debtor was organized in

1927 as a nonprofit corporation to build and operate a building which

would house DePaul University while at the same time insulating

the university from any liability. The debtor issued 6-percent mortgage bonds to the public. "When the debtor went into a chapter X

reorganization in 1959 the Commission made an extensive investigation of its financial condition. The investigation showed that the

debtor was extremely undercapitalized. Difficulties ensued from the

debtor's inception but the university kept the debtor alive with

financial aid during its first few years. However, when business

conditions worsened in the 1930's,the university withdrew its aid and

the debtor became insolvent. After the debtor passed through a

section 77B reorganization proceeding, the university secretly purchased about one-third of all the debtor's outstanding bonds at large

discounts while continuing to occupy the bulk of the debtor's rentable

space at a rental which barely covered minimum operating costs. It

was the Commission's contention, as well as that of the trustee, that,

DePaul University's claims should be subordinated to those of the

public bondholders. This matter is still pending.

In the case of Hudeon. and lJfanhattan Railroad Oompany 15 the

Commission took the position that the court should not approve the

action of the directors of the reorganized company in appointing the

trustee as the chief executive of the company and his counsel as

general counsel. The appointment of these persons to remunerative

positions was inconsistent with the policy of chapter X to maintain

the independence and disinterestedness of a trustee and of his counsel

.. In the Matter of DePaul Educational Aid Society (N.D. nL, No. 59B41)

.. In the Matter Of Hud80n & Manhattan Railroad OompafIJI (S.D.N.Y., No. 90460).

•
134 SECURITIES AND EXCHANGE COMMISSION

until the termination of the proceeding. The Commission pointed out

that just as a chapter X trustee may retain special counsel for certain

limited purposes during a proceeding, where such counsel need not

be disinterested, it would not be inappropriate for the reorganized

company to employ either the trustee or his counsel for special

purposes. In this case, the possible sale of the company's assets to

a public authority would represent such a special purpose. The court

approved the directors' action because of the unique situation arising

out of the apparent imminence of sale negotiations.

TRUSTEE'S INVESTIGATIONS

A complete accounting for the stewardship of corporate affairs by

the old management is a requisite under the Bankruptcy Act and

chapter X. One of the primary duties of the trustee is to make a

thorough study of the debtor to assure the discovery and collection

of all assets of the estate, including claims against officers, directors,

or controlling persons who may have mismanaged the company's

affairs, diverted its funds to their own use or benefit, or been guilty

of other misconduct. The staff of the Commission participates in

the trustee's investigation so that it may be fully informed as to all

details of the financial history and business practice of the debtor.

The Commission views its duty under chapter X as requiring it to

call the attention of the trustee or the court, if necessary, to any

matters which should be acted upon.

In TMT Trailer Ferry, lno.,16 after the district court confirmed a

plan of reorganization which the Commission felt was inequitable

because, among other things, it returned control of the debtor to those

responsible for its downfall, the Commission prevailed upon the trustee to complete his section 167 report. Thereafter a hearing was held

which resulted in the district court vacating its previous order and

ordering the trustee to submit a new plan. An appeal was taken by

those who benefited under the original plan. Following the close of

the fiscal year, the Court of Appeals for the Fifth Circuit affirmed the

district court order and denied a petition for rehearing."

In Equitable Plan Oompany 18 the trustee, holding a substantial

amount of shares of Doeskin Products, Ino., instituted a derivative

action in the Federal court on behalf of Doeskin to set aside the fraudulent issue of 1 million shares of Doeskin stock and to recover assets

misappropriated by officers and directors in the control of Lowell M.

Birrell. Doeskin moved to stay the action because of a prior stockholder's suit pending in the State court. The Commission appeared,

10 Supra, Note 10.

17 Sha!1er v, Anderson, 292 F. 2d 455 (C..A.. 5, 1961).

1ll In the Matter 01 EqUitable Plan Oompanll (S.D. Callt. No. 86. 096--BH).
TWENTY-SEVENTH ANNUAL REPORT 135

amicus curiae, and urged that the chapter X trustee was in a different

position from any other stockholder in that it was his duty to protect

a substantial asset of Equitable Plan and that he should not be prevented from undertaking any action which he deemed necessary to that

end. The district court, in a decision based in part upon the Commission's position, denied the motion for a stay. The Court of Appeals

for the Second Circuit affirmed."

In Automatic Washer 00., Ino.,20 the trustee obtained a judgment

for more than $500,000 for fraud in the alleged sale of rubber machinery to the debtor. While an appeal from this judgment was pending,

the defendant offered to compromise the judgment for $105,000 cash.

The Commission, along with a creditors' committee, objected to the

settlement on the ground, among others, that the trustee had not made

a real effort to determine whether the judgment could be satisfied.

The district court approved the settlement offer, and an appeal was

taken by the creditors' committee and a stockholders' committee in

which the Commission participated. The Court of Appeals for the

Eighth Circuit reversed the district court's action and remanded the

case, stating that there had not been a sufficient investigation to enable

the district court to exercise an informed judgment," Shortly after

the close of the fiscal year, the same compromise, reduced to writing

and with a provision added that the judgment debtor should not be

interrogated as to his assets, was resubmitted to the district court.

After a full hearing, the trustee was directed to reject the offer.

The trustee also obtained a judgment of over $1 million against

Banker's Life and Casualty Co. as a result of an investigation in

which he was assisted by the Commission.

INTERVENTION IN CHAPTER XI PROCEEDINGS

Chapter XI of the Bankruptcy Act provides a procedure by which

debtors can effect arrangements with respect to their unsecured debts

under court supervision. Where proceedings are brought under that

chapter which should have been brought under chapter X, section

328 of the Bankruptcy Act authorizes the Commission to make application to the court to dismiss the chapter XI proceeding unless the

petition that initiated the proceeding is amended to comply with the

protective requirements of chapter X.

In Life and Industrial Oompanies, Ino.,22 a parent and three affiliated companies which controlled manufacturing plants producing

concrete and plating, filed chapter XI petitions on July 8, 1960. The

debtors' public investors included 225 holders of 6-percent subordi10 Fergu80n v. Tabah, 288 F. 2d 665 (C.A. 2, 1961).

eoIn the Matter of Automatio WaBher Oompany (S.D. Iowa, No. ~26).

21 A8hbaon v. Kirtley, 289 F. 2d 159 (8th Clr. 1961).

II In the Matter Of Life and Indu8trial Oompanie8, InD. (E.D. Ark., No. LR 110&-177).
136 SECURITIES AND EXCHANGE COMMISSION

nated debenture bonds, 51 holders of preferred stock, and 1,324 holders of common stock, or a total of 1,600. An arrangement was

proposed on July 28, 1960, whereby the debtors would merge into a

new corporation. Stock of such corporation would be issued to the

unsecured creditors and stockholders. On October 7, 1960,the Commission, feeling that the proceedings under chapter XI were not

sufficient to protect the public security holders and that chapter XI

was being misused, filed a motion under section 328of the Bankruptcy

Act to intervene and to dismiss the proceeding. In its motion the

Commission pointed out that what in effect was taking place was

a complete reorganization which was not authorized under chapter

XI. The Commission noted that reorganization of companies with

complex capital structures should be conducted under chapter X,

where appropriate substantive and procedural safeguards are supplied. The District Court for the Eastern District of Arkansas denied

the Commission's motion but immediately adjudicated the debtors

bankrupt.

In Herold Radio and Electronics Corporation." the debtor had

been engaged in the business of manufacturing and distributing radios,

phonographs and other electronic equipment since 1950. The debtor

had outstanding $1,472,000principal amount of 6-percent convertible

subordinated debentures, 4,816 shares of $5 par value cumulative convertible preferred stock and 582,199shares of $0.25 par value common

stock. Except for 38 percent of the common stock which was held

by persons associated with management, these securities were all held

by members of the investing public. There were approximately 400

holders of debentures, 52 holders of preferred stock, and 1,600holders

of the common stock which was listed on the American Stock

Exchange.

On August 15, 1960,the debtor filed a petition in the District Court

for the Southern District of New York under section 322 of chapter

XI alleging inability to meet its debts as they matured and an intention to propose an arrangement. The Commission moved to intervene and to dismiss the debtor's petition unless it was amended to

comply with the requirements of chapter X.

The district court granted the Commission's motion and dismissed

the debtor's chapter XI petition as improperly filed on the grounds

that chapter XI is not available to a debtor when there are publicly

held securities and the corporation has need of a thoroughgoing reorganization and recasting of its capital structure. Subsequent to the

dismissal of the chapter XI proceeding, the debtor consented that it

be adjudicated a bankrupt.

ZI In the Matter of Herold Radio and Electronics Oorporation (S.D.N.Y. No. 60B--4!68).
TWENTY -SEVENTH ANNUAL REPORT 137

In Trustors' Oorporation,24 the debtor filed a chapter XI petition

on April 3, 1961. The debtor dealt in second trust deed notes which it

sold to investors who were assured an annual return of 10 percent

on their investment. The company's operation was similar to that

in the Pickman Trust Deed case, supra. At the time the petition was

filed, there were outstanding $8,900,000face amount of notes held for

1,800 customers. Trusters' is itself an obligor on $1,500,000of these

trust deed notes. The debtor has outstanding 42,834 shares of 6 percent cumulative preferred stock held by 492 stockholders. The common stock is held by two of its officers.

'The Commission moved for dismissal of the petition on June 20,

19tH, stating that a proposal filed by the debtor in connection with

its plan of arrangement might modify its secured debts. Since only

chapter X can affect the rights of secured creditors the need for transferring the proceedings was evident. Subsequent to the close of the

fiscal year, the debtor abandoned the objectionable proposal and,

accordingly, the Commission withdrew its objections to the chapter

XI proceeding.

ACTIVITIES WITH REGARD TO ALLOWANCES

Every reorganization case ultimately presents the difficult problem

of determining the allowance of compensation to be paid out of the

debtor's estate 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

from the estate for the services it renders, has sought to assist the

courts in protecting debtors' estates from excessive charges and at the

same time in equitably allocating compensation on the basis of the

claimants' contributions to the administration of estates and the

formulation of plans.

The role of the Commission with regard to fees was questioned in

the Liberty Baking Oorporation. case." Applications for allowances

from nine applicants requested a total of $341,693.53. The Commission's recommendations totaled $173,184.13. The court offered the

applicants an opportunity, if they desired, to cross-examine persons

responsible for the Commission's recommendations. The Commission

expressly declined a written request by several applicants to subject

the Commission or any of its members to cross-examination explaining

that the recommendations stated to the court by counsel were the

Commission's and that such inquiry would be analogous to examining

a judge concerning the bases of his decision. The Commission further

""In the Matter 0/ Trustor's Corporation (S.D. Calif., No. 123,776-Y).

25 In the Matter of Liberty Baking Corporation (S.D.N.Y .• No. 91173).
138 SECURITIES AND EXCHANGE COMMISSION

stated that the careful consideration accorded its views by some courts

derives from the Commission's unique position as a disinterested

party to the proceeding and its broad range of experience in cases of

this nature. The court thereafter awarded fees in the amount of

$229,090.

As reported in the Commission's 25th annual report," the Commission took the position that the attorney first appointed for the

trustees in the F. L. Jacobs Oompany case 21 was not "disinterested"

and he resigned while a decision was pending on the application for

his removal. He subsequently sought an allowance for services rendered prior to his resignation. The Commission opposed any award

to him since, as an experienced bankruptcy lawyer, he was well aware

of the significance of his acts. The court, however, granted him

compensation equal to 25 percent of the amount requested.

In the Stardust, Ino., case 28 applications for allowances totaling

$637,100were requested. The Commission recommended total overall

allowances of $326,925. At the end of the fiscal year the court had not

acted on the applications.

In El-Tronics, Inc.,29 applications for allowances were filed totaling

$462,500. The Commission recommended allowances totaling $180,-

000; no allowances were recommended for one of the counsel for a

trade creditors' committee and for its secretary. Counsel had traded

in the stock of the debtor during the proceeding and was disqualified

from an allowance under section 249 and withdrew his application.

The secretary of the creditors' committee, it appeared, had participated with third persons in the purchase of claims against the debtor

from creditors of the class represented by the committee. The claims,

after being voted in favor of the trustees' plan, were converted into

stock pursuant to the plan and thereafter sold at a substantial profit.

The Commission obtained an order from the court authorizing an

investigation of the activities of the secretary and others involved

in these transactions. The secretary moved to vacate the order of

investigation and for leave to withdraw his allowance application.

The Commission took the position that the order constituted an

appropriate exercise of the power of the court to look into the activities of a fiduciary during the proceeding and that permission should

not be granted to the secretary to withdraw his application pending

the outcome of the investigation. At the close of the fiscal year, the

decision on this matter and on the allowances had not been rendered .

.. Twenty-fifth annual report, pp. 144-5.

27 In the Matter of F. L. Jacobs Oompanv (E D. Mich., No. 42235)

.. In the Matter 0/ Stardust, Inc. (D. Nev., No. 955).

In the Matter 0/ El-Tronics, Inc. (E.D. Pa, No. 256(7).

•

•
~NTY-SEVENTH ~AL REPORT 139

In Inland Gas Uorporaiion. 30 the Commission, at the request of

the district judge, submitted a report of its recommendations on applications for compensation, exclusive of expenses, totaling $1,422,072.39.

The Commission recommended fees totaling $1,070,383. At the hear

ing the judge stated that he gave great weight to the Commission'

report and that he relied heavily upon it. In his order grantin

allowances, the judge adopted the Commission's recommendations on

all but three of the 27 applications. One of the applicants has been

granted leave to appeal and the matter is still pending.

10 In the Matter Of Inland Gas Oorporation et al., (D. Ky., No. 9SP-B).
PART VHI

ADMINISTRATION OF THE TRUST INDENTURE ACT

OF 1939

The Trust Indenture Act of 1939 requires that bonds, notes, debentures and similar securities publicly offered for sale, except as specifically exempted by the act, be. issued under an indenture which

meets the requirements of the act and has been duly qualified with the

Commission. These indentures must provide means by which the

rights of holders of securities issued under such indentures may be

protected and enforced by including provisions which relate to designated standards of eligibility and qualification of the corporate trustee

to provide reasonable financial responsibility and to minimize conflicting interests. The act outlaws exculpatory provisions formerly

used to eliminate all liability of the indenture trustee and imposes on

the trustee, after default, the duty to use the same degree of care

and skill "in the exercise of the rights and powers invested in it by

the indenture" as a prudent man would use in the conduct of his own

affairs.

The provisions of the Trust Indenture Act are closely integrated

with the requirements of the Securities Act. Registration pursuant

to the Securities 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,

and necessary information as to the trustee and the indenture must be

contained in the registration statement. In the case of securities issued

in exchange for other securities of the same issuer and securities issued

under a plan approved by a court or other proper authority which,

although exempted from the registration requirements of the Securities Act, are not exempted from the requirements of the Trust Indenture Act, the obligor must file an application for the qualification of

the indenture, including a statement of the required information

concerning the eligibility and qualification of the trustee.

140
TWENTY -SEVENTH ANNUAL REPORT 141

Indentures filed under the Trust Indenture Act of 1939 dUring tuo fiscal year

ended June 30, 1961

Number Aggregate filed amount

Indentures pending June 30,1960 ________________________________________________ 31 $456,275, 060 Indentures filed dunng fiscal year 280 6, 138, 425, 705

TotaL 311 6, 594, 700, 765

Disposition during fiscal year" Indentures quallfled _________________________________________________________ 251 5, 780, 064, 515 Indentures deleted by amendment or withdrawn, ___________________________ 12 67,479,600 Indentures pending June 30,1961 48 747,156,650

TotaL . 311 6, 594, 700, 765

LITIGATION UNDER THE TRUST INDENTURE ACT

The Commission filed a brief as amicus curiae during the course of

a reorganization, pursuant to section 122(a) of the Real Property law

of the State of New York, of the Hotel St. George Corp. which had

offered securities pursuant to an indenture qualified under the provisions of the Trust Indenture Act of 1939. The Commission took the

position that in accordance with section 312(b) of the Trust Indenture

Act, the court should vacate its order directing the indenture trustee

not to send to all bondholders of the corporation proposed communications which had been submitted to the trustee by a protective committee comprised of certain of the bondholders. The Commission

suggested that if the trustee should be of the opinion that a mailing of

any such material would be contrary to the best interests of the

bondholders or would be in violation of applicable law, the trustee

should be directed to file a written statement to that effect with the

Commission, in accordance with the procedure specified in section

312(b) of the act. The matter was settled without a ruling by the

court on the Commission's motion to participate as amicus C11/1iae.

_____________________________• _________________

________• _____________• ___•• __• ___• ______________• __• _______________

__• _________________________________________

____• _________•___________________________________ __________________
PART IX

ADMINISTRATION OF THE Th'VESTMENT COMPANY ACT

OF 1940

Companies primarily engaged in the business of investing, reinvesting, holding, and trading in securities are subject to registration and

regulation under the Investment Company Act of 1940. This act,

among other things, prohibits such companies £rom changing the

nature of their business or their investment policies without the

approval of their stockholders, requires disclosure of their finances

and investment policies, regulates the means of custody of the companies' assets, requires management contracts to be submitted to

security holders for their approval, prohibits underwriters, investment bankers, and brokers from constituting more than a minority of

the directors of such companies, and prohibits transactions between

such companies and their officers, directors, and affiliates except with

the approval of the Commission. The act also regulates the issuance

of senior securities and requires face-amount certificate companies

to maintain reserves adequate to meet maturity payments upon their

certificates.

The securities of investment companies which are offered to the

public are also required to be registered under the Securities Act of

1933 and the companies must file periodic reports. Such companies

are also subject to the Commission's proxy rules and closed-end companies are subject to "insider" trading rules. The Division of Corporation Finance and the Division of Corporate Regulation both assist

the Commission in the administration of the statute, the former being

concerned with the disclosure provisions and the latter with regulatory

provisions.

COMPANIES REGISTERED UNDER THE ACT

As of June 30, 1961,there were 663 investment companies registered

under the act, including 44 small business investment companies, and

the estimated aggregate market value of their assets on that date was

approximately $29 billion. These figures represent an overall increase

of 93 registered companies and an increase of roughly $5.5 billion

142
TWENTY-SEVENTH ANNUAL REPORT 143

in the market value of assets over the corresponding totals at June 30,

1960. The total registered companies by classification are as follows:

!fanagernent open~nd__________________________________________________ 330

!fanagernent closed~nd_________________________________________________ 185

Unit investment trust__________________________________________________ 137

Face-amount certificate_________________________________________________ 11

Total____________________________________________________________ 663

During the fiscal year ending June 30, 1961, 118 new companies

registered under the act while the registrations of 25 companies were

terminated, including one of the new registered companies which

was deregistered and one which withdrew its registration.

Registered Registration dunng the termmated

fiscal year dunng the

fiscal year

Management open-end _____________________________________________________ M 46 7 anagemen t closed-end __________________________________ Unit 52 15 illvestmen t trust. ______________________________________________________ 19 0 Face-amount certlftcate ______________________________________________________ 1 3

TotaL ________________________________ 118 25

In the 1961 fiscal year 29 small business investment companies

registered under the Investment Company Act, representing 25 percent of the total registrations under the act during the fiscal year. In

addition, pursuant to an arrangement with the Small Business Administration, the staff of the Commission examines a copy of each Proposal to Operate as a Small Business Investment Company, filed

with the SBA, to determine the status of the Proposed Operator

under the Investment Company Act and the other statutes administered by the Commission. Both the proposed operator and the SBA

are notified as to the staff's conclusion in each case. A total of 356

such proposals were reviewed by the staff of the Commission during

the fiscal year.

GROWTH OF INVESTMENT COMPANY ASSETS

The following table illustrates the striking growth of investment

company assets during the past 21 years, particularly in the most

recent years.

620378-62--,1J.

• •__________________

•________________________________
144 SECURITIES AND EXCHANGE COMMISSION

Number oj investment companies registered under the Investment Oo-mpanll Act

and th e estimated aggregate aesets ot the end oj each fiscal year, 1941 through

1961

Number of companies Estimated

aggregate

market value

FIscal year ended June 30 Regrstered Regrstratlon of assets at at beginnmg Registered terminated Registered end of year of year dunng year during year at end ot year (In milhons) I

1941 0 450 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 I g50_____________________________ 358 26 18 366 4,700 1951_____________________________ 366 12 10 368 5,6C0 1952_____________________________ 368 13 14 367 6,8CO 1958 367 17 15 369 7,OCO 1954_____________________________ 369 20 5 384 8,7(0 1955_____________________________ 384 37 34 387 12, OCO 1956_____________________________ 387 46 34 399 14,OCO 1957_____________________________ 399 49 16 432 15,000 1958_____________________________ 432 42 21 453 17, OCO 1959_____________________________ 453 70 11 512 2O,OCO 1960_____________________________ 512 67 9 570 23,5<'0 1961. ____________________________ 570 118 25 663 29,000

TotaL ____________________ -------------- 1,075 412 -------------- --------------

I The increase In aggregate assets reflects the sale of new seeuntles as well as capital appreciation. By

way of Illustration, the National ASSOCIatIOnof Investment Compames reported that dunng the calendar

year 1960 Its open-end mvestment company members, numbering 161 and representmg the hulk of the

I ndustry, had net sales of their seeunties amounting to $1.3 billion,

INSPECTION PROGRAM

The Commission initiated in 1957 a program for the periodic

inspection of investment companies pursuant to the statutory authority conferred under section 31(b) of the Investment Company Act.

Prior to the fiscal year 1961,57 companies had been inspected pursuant

to this program. An additional 56 companies were inspected in fiscal

year 1961. As in prior years, a number of inspections were undertaken by staff teams consisting of attorneys or analysts from the

Division of Corporate Regulation and securities investigators from

the appropriate field office. However, several of the regional offices

now have personnel experienced in the inspection of investment

companies and approximately 23 inspections were conducted exclusively with regional office personnel. This is consonant with the

Commission's program, which contemplates placing the principal

responsibility for making inspections in the regional offices as personnel in such officesbecome sufficiently experienced in the regulatory

provisions applicable to investment companies.

The inspections made indicated, in a number of instances, failure

to comply with various regulatory provisions of the Investment

Company Act or with the other statutes administered by the Commission. The 26th annual report discusses, at page 170, the irregu-

________________________• ____

________• ____________________
TWENTY-SEVENTH ANNUAL REPORT 145

larities discovered in inspections made in previous years. Inspections

in the 1961 fiscal year disclosed a number of instances in which fund

prospectuses did not accurately or adequately describe the actual

practice of the funds, and as a result, the prospectuses were revised.

This involved such matters as the policy on control of portfolio

companies, interrelationships of several investment companies with

common management, and methods used in pricing shares for sale

and redemption. This year's inspection program also disclosed

several instances of failure to keep accurate and up-to-date minutes

of meetings of boards of directors, failure to obtain the requisite

shareholders' vote needed to approve an advisory contract, infrequent

attendance at meetings of certain directors, instances of portfolio

securities being held which were not in accordance with stated investment policies, expenses paid by funds which should have been paid by

the investment advisor, possible affiliations in violation of the act and

insufficiency of accounting records. Instances were noted where an

increase in the amount of fidelity bond was indicated. In one case

where sales of portfolio securities to affiliated persons were made

under circumstances which raised questions as to possible violations

of the prohibitions of the act, the transactions were reversed or the

fund was compensated for the difference between the sales price and

current market price on the date of the sale. Normally where

deficiencies are noted, unless other action is indicated, they are brought

to the attention of the investment companies involved so that corrective steps may be taken.

STUDY OF SIZE OF INVESTMENT COMPANIES

On behalf of the Commission, the Securities Research Unit of the

'Vharton School of Finance and Commerce of the University of

Pennsylvania has been conducting a factfinding survey in connection

with a study of the problems created by the growth in size of investment companies. This inquiry has been undertaken pursuant to

section 14(b) of the Investment Company Act. Information has

been obtained through questionnaires sent to registered investment

companies.

The first questionnaire was distributed in fiscal 1959 to all registered open-end investment companies and the information furnished

in response thereto is the basis for a report covering the following

subjects: Origin and Scope of the Study and Summary of Principal

Findings; The Organization and Control of Open-end Investment

Companies; Growth of Funds of the Investment Company Industry,

1952-1958; Open-end Investment Companies and Portfolio Company

Control ; Investment Policy; Investment Company Performance;

and Impact of Investment Funds on the Stock Market.
146 SECURITIES AND EXCHANGE COMMISSION

A second questionnaire, distributed in December 1960, will form

the basis of an additional report dealing with the relationships

between open-end companies and their investment advisers and principal underwriters.

Itis expected that the complete report will be available to the Commission prior to the end of the calendar year 1961. With information

gained therefrom, the Commission will be in a position to determine

what further action by it is required and whether specific remedial

legislative recommendations should be made by the Commission to

the Congress.

CURRENT INFORMATION

The Commission's rules promulgated under the act require that the

basic information contained in notifications of registration and in

registration statements of investment companies be kept up to date,

through periodic and other reports, except in cases of certain inactive

unit trusts and face-amount companies. The following current reports and documents were filed during the 1961 fiscal year:

llnnuaI reports_______________________________________________________ 412

Quarter Iy reports_____________________________________________________ 242

Periodic reports to stockholders (containing financial statements) 1,199 Copies of sales literature 2,256

The foregoing statistics do not reflect the numerous filings of revised prospectuses by open-end mutual funds and unit investment

trusts making a continuous offering of their securities. These prospectuses, which must be checked for compliance with the act, are

required to show material changes which have occurred in the operations of the companies since the effective date of the prospectuses on

file. In this respect the registration of the securities of such companies is essentially different from the registration of the usual

corporate securities.

APPUCATIONS AND PROCEEDINGS

The Investment Company Act prohibits certain types of transactions in the absence of an exemptive order by the Commission issued

upon a determination that specified statutory standards have been

met. Accordingly, one of the principal activities of the Commission

in its regulation of investment companies is the consideration of

applications for such exemptive orders. Under Section 6 (c) the Commission, by rules and regulations, upon its own motion or by order

upon application, may exempt any person, security, or transaction

from any provision of the act if and to the extent that such exemption is necessary or appropriate in the public interest and consistent

with the protection of investors and the purposes fairly intended

by the policy and provisions of the act. Other sections, such as 6(d),
TWENTY-SEVENTH ANNUAL REPORT 147

9(b), 10(f), 17(b), and 23(c) contain specific provisions and standards pursuant to which the Commission may grant exemptions from

particular sections of the act or may approve certain types of transactions. Also, under certain provisions of sections 2, 3, and 8 the

Commission may determine the status of persons and companies under

the act.

There were 216 applications under various sections of the Investment Company Act before the Commission during the fiscal year

1961. The various sections of the act with which these applications

were concerned and their disposition during the fiscal year are shown

in the following table:

Applications filed with, and acted upon by the Commission under the Inuestment Company Act of 1940 during the fiscat year ended June 30, 1961

Pcnd- PendSections Subject involved mg Filed Closed mg July I, June 30,

1960 1961

-- -- -- 3 and 6__________Status and exemption, ______________________________ 12 13 9 16 7(d)_____________Registranon of foreign investment companies _______ 1 2 1 2 8(f)-_____________Termination of registratlon __________________________ 29 23 27 25 9, 10, 16__________Regulation of affllranons of directors, officers, em- 5 9 11 3

ployees, Investment advisers, underwriters, and

others

12,13,14(a), 15___ Regulation offunctlons and activities of investment 5 11 10 6

companies. 11_______________ Regutanon of secnrity exchange offers and reorganl- 0 1 0 1

zatlon matters. 17_______________Regulation of transactions with afflhated persons ___ 15 43 36 22

18, 19,21, 22, 23__ Requirements as to capital structures, loans, distrr- 15 26 35 6

bunons and redemptions, and related matters. 1 1 20,30____________Proxies, reports, lind other documents reviewed for 2 0

compliance. 1 2 28 _______________ Regulation of face-amount certIficate companies ____ 1 2 32 .AccountIng supervision ____________________ ._ 1 0 1 0

TotaL -- -- -- -- 86 130 132 84

Usually the applications for exemptions under the act are processed

without holding formal hearings; however, hearings are held when

the impact of the proposal upon investor or the public interest are

substantial or matters of fact or of law are in dispute.

In the past fiscal year, the following matters upon which hearings

had been held were determined :

As reported in more detail in the 26th annual report, page 178, The

Equity Oorp. consented to a judgment enjoining it from violation of

the anti pyramiding provisions of the act arising out of its continued

holdings of the common stock of Eq1tity General Corp, and Development Oorp. of America, both investment companies. Pursuant to the

method of compliance specified in such injunction, Equity General

was merged into Equity Corp.; the preferred stock of Development

Corp., which was publicly owned, was redeemed at its contract price;

and Development Corp. was merged into Equity Corp. The Commission exempted the Equity Corp.-Development Corp. merger from

_______________ •______

____•___•_______________________________
148 SECURITIES AND EXCHANGE COMMISSION

section 17(a) of the act.' In connection with the merger, the common

stockholders of Development Corp., other than Equity, were paid

in cash $7.91 as the value of each share they held, unless they exercised their right to demand an appraisal under Delaware law.

The Commission also granted an exemption from section 17(a) of

the act to Madison Fund, Imc., and International Mining Corp. for the

sale of the assets of Canton Co. of Baltimore, 79 percent of whose

outstanding stock was owned by Madison, to Northside Warehouse

Corp., a subsidiary of International." The ownership by Madison

of an 8.3 percent interest in International created an affiliation which,

under the act, resulted in a bar to the transaction unless exempted.

It was proposed that Northside would be merged with Canton and

the surviving corporation would acquire the Canton stock for $25

per share payable in cash and notes of International, which price

and other terms of the transactions the Commission considered to be

fair and reasonable and not to involve any overreaching. In exempting the transactions, the Commission found that the record did not

support the objections of a stockholder of International and a stockholder of both Madison and International, both of whom contended

that the transactions were unfair.

The Commission also granted an application pursuant to section

17(b) of the act filed by Oentu,ry Inoestors, Ino., and Web8ter Inmestors, Imc., investment companies, and American lIIanufrwtul'ing 00.,

Ino., an affiliate of Century and Webster, for an exemption with

respect to transactions incident to a merger of Century and Webster

into American," Under the proposal, each publicly held share of

common stock of Century and each publicly held share of common

stock of 'Webster were to be exchanged for 1.27 shares and 1.25shares

of common stock of American, respectively. The Commission found

the exchange ratios reasonable and fair, that there was no overreaching involved, and that the terms of the proposed merger were consistent with the general purposes of the act. At American's request

the Commission deferred action on the application of American for

an order declaring that it would not be an investment company upon

consummation of the merger, conditioning such action on compliance

by American with its commitment that it would not engage in any

transactions which would be prohibited to a registered investment

company pending the Commission's determination of the company's

status.

An exemption was granted to Atlas Corp, and its controlled company, Mel'tronic8 Oorp., with respect to an offering of Summers Gyro1 Investment Company Act Release No. 3077, July 14, 1960.

Investment Company Act Release No. 3080, July 22, 1960.

3 Investment Company Act Release No. 3139, Nov. 14, 1960.

"
TWENTY-SEVENTH ANNUAL REPORT 149

scope Co. shares to their shareholders. 4 The purpose of the offering

was to effect a divestiture by Atlas and Mertronics of all their interests

in Summers in order to dispose of proceedings before the Civil Aeronautics Board arising out of interlocking relationships existing

between Atlas, which controls an air carrier, and Summers, which is

deemed to be engaged in a phase of aeronautics. The offering was

proposed to be made at '75cents per share through primary and secondary subscription rights. In order to assure complete divestiture of

their entire interest in Summers, Atlas and Mertronics entered into

agreements with a former officer and director of Atlas whereby he

undertook to purchase, at 75 cents per share, all shares of Summers

stock owned by them, subject to their prior right to offer such shares

to their shareholders. The Commission noted that it did not appear

necessary to decide the question of control of Atlas by the former

officer since the consideration to the former officer in return for his

obligation to purchase all unsubscribed Summers shares was reasonable and fair and no overreaching was involved. Accordingly, it was

appropriate to exempt the transactions from section I7(a) of the act

even if such affiliation existed.

Proceedings were instituted to determine whether an exemptive

order previously granted to the Securities Corporation General should

be revoked. The order exempted the sale by Securities of 51.25 percent of the outstanding stock of Anemostat Corp. of America to

Dynamics Corp. of America which held about 33 percent of such

stock. The proceedings were instituted when the Commission was

informed that the purported directors of Securities at the time the

sale was negotiated and the exemption application filed had not been

elected in accordance with the provision of the act which requires

directors of registered companies to be elected by the stockholders at

annual or special stockholder meetings. The Commission determined

not to revoke the exemptive order, rejecting a contention by a stockholder that because of noncompliance the exemptive order was automatically void and finding that the failure to comply with the requirements of the act relating to election of directors was inadvertent;

that the persons who caused the change inthe board of directors owned

a majority of the outstanding stock and could have elected, and at

the next regular stockholder meeting did elect, their representatives

as directors in compliance with the act and that there was no evidence

of fraud or overreaching in the transaction and the terms of the

transaction were reasonable and fair. 5

The Commission issued an exemption order under the act permitting Vornado,Ino., to purchase 160,000shares of its common stock

Investment Company Act Release No. 3131, Nov. 4, 1960.

Investment Company Act Release No. 3165, Dec. 23, 1960.

•

•
150 SECURITIES AND EXCHANGE COMMISSION

from Investors Diversified Seroioes, Lno., in exchange for $2,340,000

principal amount of Vornado's 3.10-percent junior subordinated

notes, due May 1,1976, and a warrant expiring April 27, 1967,to purchase 42,000 shares of Varnado common stock at $16 per share." The

terms of the contract of sale of the 160,000shares of Vornado stock

were found to be fair and reasonable and not rendered unfair or unreasonable by subsequent market price increases in Vornado's stock.

The Commission granted an application of the Great American

Life Underwriters, Ino., for an exemption from the Investment Company Act of 1940,retroactive to January 1, 1941, the effective date of

the act," The company had discontinued the issuance and sale of

face-amount certificates prior to the effective date of the act but continued to receive payments on and to service outstanding securities

and accordingly was within the definition of an investment company.

In view of the discontinuance of the sale of such securities and the

Commission's conclusion that the company was primarily engaged

in the insurance business through controlled subsidiaries, the Commission concluded that the company should be granted an exemption

from the Investment Company Act on the ground that it is not the

type of company intended to be regulated thereunder. Among the

other considerations leading to this conclusion were the facts that the

company has a very substantial part of its investments in, and derives

a very substantial part of its income from, its holdings of stock in its

insurance subsidiary and that the company's officers and directors

have been active in the management and operation of the insurance

subsidiary. In determining that the exemption might be made retroactive, the Commission pointed out that the company would have been

entitled to the exemption at any time, that it failed earlier to file an

application for exemption because of good faith through mistaken

belief that it was not subject to the act, that it clearly is not now an

investment company and was at all times primarily engaged in the

insurance business, and its outstanding face-amount certificates were

at all times protected by reserves on deposit with a State agency and

have been reduced to the point where they are insignificant in comparison to applicant's assets.

An Arizona corporation called International Bank applied to the

Commission for an order declaring it not to be an investment company under the Investment Company Act, and the Commission

ordered hearings thereon." The company also seeks a temporary

exemption from the registration requirements of the act pending

final determination of its status under the act. It asserts that it is

not engaged in business as an investment company but is engaged,

Investment Company Act Release No. 3238, Apr. 26, 1961.

Investment Company Act Release No. 3070, July 15. 1960.

8 Investment Company Act Release No. 3285, June 30, 1961.

•

~
TWENTY -SEVENTH ANNUAL REPORT 151

through wholly owned subsidiaries and through working control of

Financial General Corp. and Iowa Interests Corp., in the small loan

business; international trade financing; registration of ships, servicing of corporations, and commercial banking in Liberia; life, fire,

and casualty insurance; banking; real estate development; manufacture of plywood and textiles, and other activities.

A hearing was held in the case of Mid-America Mutual Fund, Inc.,G

on an application to allow it to sell its shares to certain insurance

policy holders at less than the public offering price. A decision is

pending.

The following significant decisions were issued by the Commission

in matters in which no formal hearing was held:

The Commission granted an application of Israel Development

Oorp. for an exemption from section 18(c) of the act with respect to

its issuance and sale of $3 million of debentures due 1976 while it has

outstanding $1,625,000of bank loans secured by the pledge of various

securities." The Commission's decision construed section 18(c) as

intended to make clear that a company might have outstanding both

publicly distributed and privately arranged debt securities only if

there were no differences in the preferences as to assets and interest of

any outstanding indebtedness. The exemption order is subject to the

condition that the bank loans be eliminated not later than August 22,

1962, and that thereafter, while the proposed debentures are outstanding, the company does not issue or sell any senior security representing

indebtedness containing a preference or priority over such debentures

in the distribution of its assets or in respect of the payment of interest.

The Commission also issued a decision granting an application of

Reinsurance Investment Oorp. for exemption from all provisions of

the act for a period of 1 year.!' As of September 30, 1960, the company had total assets valued at $5,596,722and consisting of 1,152,000

shares of Loyal American Life Insurance Co., Inc., valued at

$3,312,000and 189,495shares of American Income Life Insurance Co.

valued at $1,184,950 with the balance of its assets consisting mainly

of government securities and cash. According to the decision, the

company has majority voting control, although not majority ownership of American; Loyal American until recently was a majorityowned subsidiary and the company intends to acquire sufficient additional shares of Loyal American within 1 year to make it a majorityowned subsidiary; and, in such event, the company may no longer fall

within the definition of an investment company or may qualify for

exemption.

"Investment Company Act Release No. 3226 (Apr. 10, 1961).

,. Investment Company Act Release No. 3214 (Mar. 16. 1961).

11 Investment Company Act Release No. 3209 (Mar. 6. 1961).
152 SECURITIES AND EXCHANGE COMMISSION

The Commission issued a decision and order exempting the merger

of Delaware Realty ill Investment Co. into Christiana Securities Co.

from the provisions of section 17(a) of the act." Delaware owned

32.7 percent of the outstanding common (voting) stock of Christiana.

The value of the total net assets of Christiana as of September 30,

1960,was approximately $2,418million of which 98.6percent was represented by its holdings of common stock of E. I. du Pont de Nemours

& Co. On the same date, the value of the total net assets of Delaware

Realty was approximately $1,052 million, of which 74.5 percent was

represented by its holdings of Christiana common stock and 22.6

percent by its holdings of Du Pont common stock. Under the agree.

ment of merger, the common stock of Delaware was converted into

common stock of Christiana.

Variable Annuity Contracts

As described in detail in the 26th annual report," the Commission

on February 25, 1960, issued decisions granting certain exemptions

under the 1940 act to Variable Annuity Life Insurance Co. and

Equity Annuity Life Insuranoe 00., engaged in the business of

offering variable annuity contracts. Subsequent to an enabling

amendment to the District of Columbia Life Insurance Code, the

assets of each of these companies applicable to variable annuity contracts have been segregated into a separate fund which is available

only for satisfaction of the claims of variable annuity contract holders.

As a result, during the fiscal year, the Commission granted additional

exemptions from prohibitions of the 1940 act with respect to loans

and advances to agents, managers and sales employees 14 and to permit

in certain circumstances borrowings from nonaffiliates in addition to

bank borrowings."

The Prudential Lneurance 00. of America has filed an application

for exemption from the 1940 act or, in the alternative, for exemption

from certain provisions thereof, in connection with its proposed plan

for the sale of variable annuity contracts." Hearings on this application were commencedon June 12, 1961,and were still in progress at the

close of the fiscal year. The application seeks a determination that

Prudential will be the issuer of such contracts and is not required to

register as an investment company. Under New Jersey law, pursuant

to which Prudential was organized, the proceeds from the sale of

variable annuity contracts must be placed in a fund segregated from

the company's other assets. Prudential proposes to invest such proceeds primarily in equity securities and if the Commission determines

12 Investment Company Act Release No 3177 (Jan. 15, 1961).

as Twenty-sixth annual report, pp. 175-178 .

.. Investment Company Act Releases Nos. 3227 (Apr. 13, 1961), and 3%41 (May 3, 1961).

;IS Investment Company Act Release No. 5264 (June 2,1961).

10 Investment Company Act Release No. 3259 (May 23, 1961).
TWENTY-SEVENTH A..l\ffiUAL REPORT 153

that this segregated fund, rathe,: dl::n Prudential, is the issuer of the

contracts and an investment company, Prudential requests an order

exempting the fund from certain provisions of the act. The provisions of the act from which exemption is sought for the fund deal

mainly with the voting rights of holders of investment company

securities, the manner in which directors are selected and the terms

under which a redeemable security may be issued and sold. New

Jersey law provides that holders of variable annuity contracts are

entitled only to vote for directors, charter amendments, and mergers

whereas the act provides for shareholder approval of other matters,

including changes in investment policies which would govern the

fund. Similarly the ad prohibits any person from serving as a

director of an investment company unless elected by the security

holders and Prudential seeks to continue its present arrangement

whereby 7 of its 23-member board of directors are appointed rather

than elected. Additional exemptions are sought concerning the

redemption features of the contracts and the sales load to be deducted

from payments.

LITIGATION UNDER THE INVESTMENT COMPANY ACT OF 1940

The Commission filed a complaint against Townsend Corporation

of America, et al.,n charging that Townsend Corp. of America

(TCA) and Townsend Management Co. (TMC) had been under the

control and domination of Morris M. Townsend, Clinton Davidson,

and Raymond E. Hartz; that these individuals had knowingly operated the two companies and their subsidiaries for their personal

benefit and in derogation of the interests of TCA and TMC shareholders; that both companies had engaged in business as investment

companies since 1957 without being registered, in violation of the

registration requirements of the Investment Company Act; that from

that time until January 1960, when they registered at the insistence

of the staff of the Commission, they had engaged in numerous transactions which were in violation of the act; that upon registration

in January 1960 the companies acknowledged that they had acquired

investments which they could not lawfully continue to hold, and

represented to the Commission that within 1 year they would either

divest themselves of such investments or would cease to be investment

companies; and that they had failed to perform either undertaking

and had made no diligent attempt to do so but, on the contrary, had

engaged in further illegal transactions.

The complaint further alleged, among other things, that the named

individuals caused TCA and TMC to acquire securities which they

would have been prohibited from acquiring had they been registered;

17 D.N.J. No. 336-61.
154 SECURITIES AND EXCHANGE COMMISSION

to obtain loans in excess of the debt limit prescribed by the act; to

enter into situations involving cross-ownership of securities prohibited

by the act; and to issue non-voting common stock prohibited by the

act; and caused TCA to make loans to TMC and the latter's subsidiary

which would have been prohibited had the companies been registered

as required by the act.

The complaint also alleged that in September 1960, TCA mailed

to its stockholders a report with was false and misleading in the

following material respects: It reflected fictitious and inflated assets;

it failed to disclose the adverse operating results of TCA and its

subsidiaries for the 6 months ended June 30, 1960, and the facts that

TCA's chief source of income had been dividends paid by its subsidiary, Resort Airlines, Inc., which had held a contract with the U.S.

Air Force, that at June 30,1960, such contract was not renewed, and

that Resort Airlines had a net loss for the :first 6 months of 1960; and

it stated that TCA's profit for 1959 was about $700,000 when in fact

the profit reported was a capital gain of a subsidiary which was insolvent, with the result that such profit was not available for distribution to TCA stockholders.

The complaint also alleged that the individual defendants caused

TCA and TMC to borrow from Resort Airlines from time to time

sums aggregating over $1,200,000, which loans were repaid in newly

issued shares of common stock of TCA and TMC to the detriment

of the stockholders of Resort Airlines. In addition, the complaint

alleged, among other things, borrowings at excessive rates of interest,

failure to call stockholders' meetings and to mail reports to stockholders, the granting of options to the individual defendants in violation of the act, and waste of assets.

Injunctions were entered by consent against the two corporations

and the three individuals. The court took possession of TCA and

TMC for the purpose of enforcing compliance with the act and

appointed an interim board of directors to carry out the terms of

its decree.

In connection with the above it may be noted that a voluntary petition for reorganization under chapter X of the Bankruptcy Act was

filed on May 10, 1961, by Townsend Growth Fund, Inc., a registered

open-end investment company, of which TMC and a subsidiary thereof

were the investment advisers and of which another subsidiary of

TMC was the principal underwriter. Davidson was chairman and

Townsend and Hartz were members of the board of directors of the

Growth Fund. This represents the first chapter X reorganization

of a registered investment company since World War II. A trustee,

appointed by the U.S. District Court for the Southern District of

New York, is now in control of the company's assets. The company

was unable to meet its obligations as they matured, including requests
TWENTY-SEVENTH ANNUAL REPORT 155

for redemptions, since a large part. of its portfolio consisted of securities not readily marketable. There were 302,900 shares of stock

outstanding on May 5, 1961,held in approximately 1,900 stockholders

accounts.

The case of Hennesey v. S.E.O.18 was an appeal from an order

of the Commission granting the application of the Great American

Life Underwriters, Inc. (Underwriters), for a retroactive exemption

under section 6(c) of the Investment Company Act from the provisions of the act from and after January 1, 1941, the effective date

of the act.

Hennesey, a stockholder of Underwriters, whose participation in

the proceedings was limited to an appearance on the first day of the

hearings, filed an application with the Commission for reargument

and rehearing. The Commission denied the application on the

grounds that it was not timely filed and raised no issues not previously presented to or considered by the Commission. Following

the denial of the application for rehearing Hennesey filed a petition

for review in the Court of Appeals.

Underwriters was granted leave to intervene and subsequently

moved to dismiss the appeal on the ground that Hennesey had no standing to appeal because she had not participated in the hearings and

had not raised any issues before the Commission. The Commission

opposed the motion to dismiss, taking the position that the petitioner

could raise on appeal any issue that had been raised before the Commission by a participant in the hearing whose interests were not

adverse to those of the petitioner. The Court of Appeals subsequently

denied the motion to dismiss."

Following the end of the fiscal year, the Court of Appeals affirmed

the Commission's order, holding (1) that the record contained substantial evidence to support the Commission's findings of fact; (2)

that in view of the exceptional circumstances of the case the Commission was justified in entering a retroactive order, and that the Commission should not be deprived of the flexibility that the retroactive

procedure permits; and (3) that in view of the Commission's determination that Underwriters was not the type of company intended to

be covered by the act, it was not necessary for the Commission to

scrutinize Underwriters' transactions. 20 A petition for rehearing was

denied.

In Oivil &: Military Investor's Mutual Fund, Inc. v. S.E.O.,21 a

mutual fund appealed from a Commission order declaring that the

name of the Fund was deceptive and misleading within the meaning

of section 35(d) of the Investment Company Act of 1940. The Com18 293 F. 2d 48 (C.A.3, 1961).

111285F. 2d 511 (C.A. 3, 1961)

.. The Commission's findings are described above at p. 150.

m 288 F. 2d 156 (C.A.D..c.• 1961).

•
156 SECURITIES AND EXCHANGE COMMISSION

mission found an implication inherent in the name "that registrant

is particularly suited to meet the investment needs of [government]

personnel", and concluded that such implication was deceptive and

misleading. The Court of Appeals affirmed the Commission order

and stated that the determination made by the Commission was not

unreasonable and was supported by substantial evidence. In addition, the Court held that the Commission's finding of a "harmful tendency [to deceive] inherent in the name itself" was sufficient to support the Commission's action and that there was no need to find "an

actual intent to deceive."

The case of Nadler v, 8.E.0. 22 is an appeal from an order of the

Commission refusing to revoke a previous Commission order, issued

pursuant to sections 17(b) and 23(c) of the Investment Company

Act, which exempted from the provisions of section 17(a) of the act

certain transactions between affiliates, and permitted one of the parties,

an investment company, to receive as part of the consideration certain

of its own preferred shares.

A stockholder of the companies involved urged before the Commission that the directors of the investment company were not elected

in accordance with the requirements of section 16(a) of the act, and

that accordingly all of their subsequent acts, including the application

to the Commission for an exemption, as well as the Commission's order

granting the exemption, were void. As described above at p. 149,

the Commission held that the acts of the directors were voidable only

and that under all the circumstances the prior order should not be

revoked. The case was pending at the close of the fiscal year.

Participation as Amicus Curiae

Three important cases in which the Commission is appearing as

amicus curiae involve private rights of action under the Investment

Company Act. In Brouk v. Managed Funds, Managed Funds filed

a complaint in the U.S. District Court for the Eastern District of

Missouri, seeking an accounting, injunctive relief, and money damages

from its former directors, its investment advisers, its brokers and

others, for alleged violations of the Investment Company Act of 1940.

It was alleged (1) that the investment advisers received fees for which

no services were performed; (2) that the person to whom the investment advisory function was delegated channelled the Fund's brokerage

business to a brokerage partnership of which he was a member; (3)

that the Fund did not follow the investment policy announced in its

prospectuses in that it engaged in excessive portfolio transactions;

(4) that false statements were contained in the Fund's registration

statements; (5) that the investment advisers and brokers occupied

a fiduciary relationship to Managed Funds which was breached

""C.A. 2, No. 26810.
TWENTY-SEVENm ANNUAL REPORT 157

through mismanagement and waste of the Fund's assets; and (6) that

the director-defendants had knowledge both of the fiduciary relationship and of the mismanagement and waste, but failed to take any

action to prevent it. The District Court denied defendants' motion to

dismiss, but the Court of Appeals reversed on the ground that the

Investment Company Act provides for no civil remedies." The Court

denied plaintiff's motion for rehearing as well as the Commission's

motion requesting leave to appear as amicus on the rehearing. The

Supreme Court has granted certiorari."

In its brief supporting the petition for certiorari the Commission

contended that the decision of the Court of Appeals is in conflict with

numerous courts of appeals decisions under other Federal securities

laws and with several holdings of the district courts that the Investment Company Act gives rise to an implied private right of action,

and that a proper construction of the legislative history and the

statutory language provides for a private right of action.

The Commission participated as amicus curiae in Brown v, Bullock,

an action instituted by shareholders of Dividend Shares, Inc., a

registered investment company. The complaint alleged that the defendants, who are directors of the fund and also of the fund's investment adviser and underwriter, engaged in a course of conduct

constituting "gross misconduct" and "gross abuse of trust" under the

standards imposed by section 36 of the Investment Company Act,

and in an unlawful and willful conversion in violation of section 37

of the act. The complaint also alleged that certain proxy material

caused to be distributed by defendants on behalf of the fund was to

their knowledge false and misleading in violation of section 20(a)

of the act and the Commission's rules thereunder and that the fund's

directors failed to perform their duties under section 15 in connection

with the annual renewals of the fund's investment advisory contract.

The action was brought by plaintiffs both as a derivative action on

behalf of the fund and as a representative action on their own behalf

and that of other stockholders of the fund similarly situated.

Defendants moved to dismiss the complaint on the ground that

it failed to state a Federal claim, arguing, inter- alia, that neither

section 36 nor section 20(a) nor the rules thereunder give rise to a

private right of action. The Commission, as amicus curiae, took the

position that a private right of action under the act may flow from

violations of the duties imposed by the act, and specifically from

violations of the proxy requirements under the act and from "gross

misconduct" or "gross abuse of trust."

After extensive briefs had been filed by the parties and by the

Commission, the district court denied defendants' motion to dismiss

"'286 F. 2d 901 (C.A. 8. 1960).

.. June 19, 1961.
158 SECURITIES AND EXCHANGE COM:MISSION

and in a carefully considered and detailed opinion held that defendants' position was unsound and that the complaint stated claims under

the Federal statute upon which relief could be granted. 25

An appeal was taken from the district court's denial of the motion

to dismiss and the Commission filed a brief and presented oral argument as amicus curiae on the appeal. On September 5, 1961, the

court of appeals en bamo affirmed the decision of the district court

holding that a private right of action would flow from violation of

the duties contained in the act, specifically holding that violation of

section 37 (larceny and embezzlement) and the duties imposed by

section 15 (relating to renewal of the advisory contracts) would give

rise to such private rights of action. The court did not pass on the

section 20(a) or 36 issues since it held the section 15 and 37 violations

were sufficient to sustain the complaint."

The actions of Ohabot v, Empire Trust 00. and Schwartz v. National Securities Series were brought by shareholders of a mutual

fund, organized as a common law trust, against the trustee and others

for restoration to the fund of fees paid to the trustee. The trustee

moved to stay the proceedings until the plaintiffs had delivered a

bond to indemnify it against the costs and expenses of defending the

action. The District Court for the Southern District of New York 21

held applicable the provision of the trust agreement to the effect that

no shareholder of the fund should have the right to an accounting

except upon furnishing indemnity to the trustee against costs and

expenses, with such indemnity to be payable unless it should be

established that the trustee had been guilty of fraud, misfeasance, or

gross negligence. The district court therefore stayed the action

pending the posting of security.

On appeal from that decision, the court of appeals expressed doubt

whether the complaint in fact asserted a claim within the jurisdiction

of a Federal court but noted that this point was soon to be decided by

it in Brown v, Bullock (described above). It upheld, however, the

right of appeal from the order of the district court." Subsequent to

the close of the fiscal year, the Commission filed a brief as amicus curiae

expressing the view that the provision of the trust agreement requiring the posting of security before .the shareholders can commence

their action is void under section 17(h) of the act which prohibits an

investment company from operating under any instrument which

contains "any provision which protects or purports to protect any

director . . ." Such a provision would also violate section 47(a), the

Commission contended, in that the security requirement constitutes

a waiver of compliance with provisions of the act.

""194 F. Supp. 207 (S.D.N.Y., 1061).

.. 294 F. 2d 415 (C.A. 2, 1961).

189 F. Supp. 666

.. 290 F. 2d 657 (C.A. 2, I061).

~ •
PART X

ADMINISTRATION OF THE INVESTMENT ADVISERS ACf

OF 1940

The Investment Advisers Act of 1940 requires the registration of

persons who are engaged for compensation in the business of advising

others with respect to securities. There are, however, certain limited

exemptions from the requirement of registration. One who advises

only investment or insurance companies need not register. An exemption is also afforded the adviser who in the last 12 months had fewer

than 15 clients and does not hold himself out generally to the public

as an investment adviser. Furthermore, the registration requirement

does not apply to one whose investment advice is given only to persons

resident in the State in which he maintains his principal place of

business as long as the advice does not concern securities listed on a

national securities exchange or admitted to unlisted trading privileges

on such an exchange.

Prior to amendments to the Investment Advisers Act, effective September 13, 1960, it was unlawful for registered investment advisers

to engage in practices which constitute fraud or deceit upon clients

or prospective clients. Section 206 of the act, as amended, now prohibits any investment adviser from engaging in fraudulent, deceptive,

or manipulative acts or practices and gives the Commission authority,

by rules and regulations, to define and to prescribe means reasonably

designed to prevent such acts and practices.

Prior to said amendments the Commission was not empowered to

inspect the books and records of an investment adviser. Section 204

of the act, as amended, now requires every investment adviser, if not

exempt from registration, to make, keep and preserve such books and

records as may be prescribed by the Commission and empowers the

Commission to inspect such books and records.

The act as amended has added additional grounds under section

203(d) of the act for denying, suspending or revoking the registration of an investment adviser. These include conviction of a felony

or misdemeanor involving mail fraud; fraud by wire, telephone, radio

or television; or embezzlement, fraudulent conversion or misappropriation of funds or securities; also willful violation of any provision

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

the Investment Advisers Act of 1940, or any rule or regulation under

620373--62----12 159
160 SECURITIES AND EXCHANGE COMMISSION

any of such acts, as well as aiding or abetting any other person's

violation of such acts, rules or regulations.

These and other amendments to the acts and rules promulgated or

proposed thereto are more fully discussed in part II of this report.

Investment advisers who violate any of the provisions of the act

are subject to appropriate administrative, civil or criminal remedies.

Investment advisers who also effect transactions as brokers and

dealers, must disclose any interest they may have in transactions effected for clients if acting as an investment adviser with regard to

such transactions. The act prohibits any investment adviser not exempt from registration from basing his compensation upon a share

of the capital gains or appreciation of his client's funds. The act

also makes it unlawful for any such investment adviser to enter into,

extend or renew any investment advisory contract or to perform

such contract if the contract provides for compensation to the investment adviser on the basis of a share of capital gains or capital appreciation of the funds or any portion of the funds of the client or fails

to provide that no assignment of such contract shall be made by the

investment adviser without the consent of the other party to the

contract.

At the close of the fiscal year, 1,855 investment advisors were

registered with the Commission. The following tabulation contains

statistics with respect to registrations and applications for registration during fiscal year 1960.

Incestment Advi8er Regi-8tratio1l8-1961 Pisco; Year

Effective registrations at close of preceding fiscal year 1,867

Applications pending at close of preceding fiscal year 26

Applications filed during fiscal year 313

Total 2,206

Registrations canceled or withdrawn during year_______________________ 321

Registrations denied or revoked during year___________________________ 3

Applications withdrawn during year__________________________________ 3

Registrations effective at end of year 1,855

Applications pending at end of year__________________________________ 24

Total 2,206

ADMINISTRATIVE PROCEEDINGS

During the past fiscal year, the Commission has instituted proceedings against three registered investment advisers.

Oambridge Research and Investment Oorp.; Arthur J. Bryant.-

Proceedings against these two registrants were consolidated. Cambridge was permanently enjoined by the U.S. District Court for the

District of Massachusetts, in an action instituted by the Commission,
TWENTY-SEVENTH ANNUAL REPORT 161 

from violating section 206 of the act by soliciting subscriptions to its 

service and accepting subscription fees by means of misstatements 

or omissions of material facts concerning its ability to publish and 

furnish the service for the en,tim period of tlie subscriptions, and 

without disclming that it had not published and furnished such copies 

to a number of subscribers since November 1959, and that it had 

applied subscription fees to its own use at a time when it was unable 

to publish and furnish such service. Bryant, who was president of 

Cambridge, mas also permanently enjoined from aiding and abetting 

such violations. In addition to the injunction, the Commission found 

that Cambridge, aided and abetted by Bryant, violated section 207 

of the Investment Advisers Act in that it willfully failed to amend 

information in its application for registration to disclose that Bryant 

ceased to be sole owner of more than 25 percent of the voting 

securities of Cambridge and that Cambridge had moved its principal 

place of business from the address shown on its registration application. In view of the injunction md the violations, the Commission 

found it in the public interest to revoke the registrations of registrants as investment advisers.' 

FTank Payson Todd, doing business as The New England Ownse2Zor.-Registrant, publisher of an investment letter called "The 

New England Counsellor", recommended that subscribers purchase 

common stock of Canadian Javelin, Ltd., a Canadian corporation 

engaged in operating a foundry and developing mining properti F The company retained Todd to make an evaluation of its financial 

program and paid him $500 for this service. Shortly thereafter, 

he purchased 17,000 shares of Javelin stock for $70,500 and gave two 

unsecured demand notes in payment After such purchase registrant 

mentioned Canadian Javelin in his newsletter about every other week 

and sent telegrams to his subscribers advising purchase of Canadian 

Javelin stock. He was reimbursed for part of his telegraph expenses 

by the secretary to the president of Canadian Javelin. The stock 

was unregistered. 

In an action brought by the Commission, a permanent injunction 

was issued by the U.S. District Court for the District of Massachusetts 

against registrant. The injunction decree recited that it appeared 

to the court that regist.rant was engaged and about to engage in acts 

violating the registration and antifraud provisions of the Securities 

Act of 1933 'and section 206 of the Investment Advisers Act, and 

enjoined him from using the mails or interstate facilities to (1) 

sell or deliver stock of Canadian Javelin or any other securities contrary to the registration provisions of the Securities Act; (2) publicize any security in return for a consideration from any issuer, 

Investment Advisers bet Release No.108 (Oct. 4.1860). 
162 SECURITIES AND EXCHANGE COMMISSION

underwriter or dealer, without disclosing such consideration and the

amount thereof; or (3) in connection with the offer or sale of Canadian

Javelin stock or any other securities, employ any fraudulent device

or course of conduct or untrue or misleading statement concerning,

among other things, recommendations to purchase such securities,

profits from such purchases, the price at which such securities should

be sold or traded, and the compensation received for recommending

such securities. The decree also permanently enjoined the registrant,

while registered with the Commission as an investment adviser, from

engaging in fraudulent activities or representations, and recommending the purchase of securities, or accepting fees from clients for such

recommendations without disclosing that he was receiving compensation from persons interested in selling such securities. Registrant

consented to the entry of the decree without admitting any of the

allegations in the complaint.

In the revocation proceeding, which followed the injunction, registrant argued that, since the injunction was entered by consent and no

factual issues were litigated, the decree could have no binding effect

on the administrative proceeding and that the injunction alone, in the

absence of proof that it had been violated, was not sufficient to warrant

a finding that revocation or suspension of registration is in the public

interest. The Commission rejected this argument holding that an

injunction against an investment adviser within the ambit of section

203(d) of the Investment Advisers Act is sufficient to support a

finding that revocation of registrant is in the public interest, that in

determining the question of public interest it was appropriate to look

to the nature of the acts enjoined and the basis on which the injunction

was entered, and that the fact that the injunction was entered by

consent did not alter the basic consideration. The Commission observed that it was not determinative that the injunction had not been

violated, since to hold otherwise would be to treat the existence of an

injunction as precluding action by the Commission with respect to

the registration although the statute expressly makes it a ground for

revocation. The Commission stated "An investment adviser is a

fiduciary and, as such, owes a duty of fair and impartial advice to

his clients. It is clear that Todd's conduct grossly violated this

standard, and we conclude that under all the circumstances it is in the

public interest to revoke his registration as an investment adviser." 2

LITIGATION UNDER THE INVESTMENT ADVISERS ACT OF 1940

In S.E.O. v. Robert Carter Allen et al.,3 Allen conducted an investment advisory service under the name of Insurance Stock Advisory

Securities Exchange Act Release No. 109 (Oct. 31. 1960).

D. Colo., No. 6890.

•

•
TWENTY-SEVENTH ANNUAL REPORT 163

Service, Inc. The complaint alleged that the defendants solicited

and received payments from insurance companies for recommending

securities issued by such companies in the defendant's semimonthly

bulletins which were then distributed to subscribers as containing

unbiased and independent recommendations. Permanent injunctions

were entered by consent.

In 8.E.0. v. Oapitoi Gains Research Bureau, Inc.,4 the Commission

charged the company, an investment service, and its president, Harry

P. Schwarzman, with violations of sections 206 (1) and (2) of the

Investment Advisers Act. The complaint alleged that the company

assumed a position opposed to that of its customers by purchasing

certain securities, then recommending to its customers that they purchase such securities without disclosing its position or its intention

to sell, and thereafter selling its securities in the higher market resulting from its customers' purchases. Conversely, the complaint

charged, the company sold securities short, then advised its clients that

such securities were overvalued, and within a few days, as a result

of a falling market, was able to buy the securities at a profit. The

Commission's request for a preliminary injunction was denied and

the matter has been appealed to the Court of Appeals. (\

S.D.N.Y., No. 60-4526.

C.A. 2, No. 26942.

•

•
PART XI

OTHER ACTIVITIES OF THE COMMISSION

COURT PROCEEDINGS

Civil Proceedings

At the beginning of the fiscal year 1961 there were pending in the

courts 84 injunctive and related enforcement proceedings instituted by

the Commission to prevent fraudulent and other illegal practices in

the sale or purchase of securities. During the year 92 additional

proceedings were instituted and 81 cases were disposed of, leaving

95 such proceedings pending at the end of the year. In addition the

Commission participated in a number of corporate reorganization

cases under chapter X of the Bankruptcy Act, in 12 proceedings in

the district courts under section 11(e) of the Public Utility Holding

Company Act; and in 9 miscellaneous actions. The Commission also

participated in 55 civil appeals in the U.S. Courts of Appeals. Of

these 27 came before the courts on petition for review of an administration order, 7 arose out of corporate reorganizations in which the

Commission had taken an active part, 8 were appeals in actions

brought by or against the Commission, 3 were appeals from orders

entered pursuant to section 11(e) of the Public Utility Holding

Company Act, and 10 were appeals in cases in which the Commission

appeared as amicus curiae. The Commission also participated in

7 appeals or petitions for certiorari before the U.S. Supreme Court

resulting from these or similar actions.

Complete lists of all cases in which the Commission appeared before

a Federal or State court, either as a party or as amicus curiae, during

the fiscal year, and the status of such cases at the close of the year, are

contained in the appendix tables.

Certain significant aspects of the Commission's litigation during

the year are discussed in the sections of this report relating to the

statutes under which the litigation arose.

Criminal Proceedings

The statutes administered by the Commission provide for the transmission of evidence of violations to the Attorney General, who may

institute criminal proceedings. The regional officesand at times the . , , mam officeof the Commission prepare detailed reports in cases where

the facts appear to warrant criminal prosecution. After careful

164
TWENTY -SEVENTH ANNUAL REPORT 165

review by the General Counsel's office, these reports are considered

by the Commission and, if it believes criminal prosecution is appropriate, the reference for criminal prosecution is forwarded to the

Attorney General. Commission employees familiar with the case

generally assist the U.S. Attorneys in the presentation to the grand

jury, the conduct of the trial, and the preparation of briefs on appeal.

The Commission also submits parole reports prepared by its investigators relating to convicted offenders.

During the past fiscal year 42 cases were referred to the Department of Justice for prosecution. As a result of these and prior referrals, 44 indictments were returned against 205 defendants during the

fiscal year. There also were 126 convictions in 45 cases, the largest

number of convictions obtained in any fiscal year since the earliest

days of the Commission's history. Convictions were affirmed in four

cases, reversed in two cases, and appeals were still pending in seven

other criminal cases at the close of the period. Of five criminal contempt cases handled during the year, three defendants were convicted

in two cases, another case was dismissed and two cases are still

pending.

From 1934, when the Commission was established, until June 30,

1961,2,982 defendants have been indicted in the U.S. District Courts

in 689 cases developed by the Commission, and 1,507 convictions have

been obtained. The record of convictions obtained and upheld in

completed cases is over 86 percent for the 27-year life of the

Commission.'

The fraud cases again, as in prior years, covered a wide variety of

fraudulent practices. They included high-pressure long-distance

telephone "boiler room" frauds, frauds by investment advisers, frauds

in the sale of securities by new as well as established businesses, and

fraudulent security sales relating to the promotion of insurance companies, oil, gas, and mining ventures, alleged inventions, and other

spurious investment schemes. In addition, there were prosecutions

for the filing of false proxy statements, as well as other false documents filed with the Commission, and the first criminal prosecution

for violation of the Investment Company Act of 1940. Because of

the large volume of cases it is impossible to report in detail all of

the criminal matters, but some of the more important and endless

variety of fraudulent devices and techniques are described in the

specific cases discussed below,"

1A condensed statistical summary of all criminal cases developed by the Commission

from the fiscal year 1934 through the fiscal year 1961 Is set forth In appendix table lW.

The status of criminal cases developed by the Commission. which were pending at the end

of the fiscal year, is set forth In appendix table 17.

2 Charges of violations of the mall fraud statute are frequently included in the Indictments which charge violations of the antifraud provisions of the securities law. The Commission Is assisted In its eft'orts In these cases by the personnel of the Post Office Department.
166 SECURITIES AND EXCHANGE COMMISSION

The first criminal prosecution under the Investment Company Act

resulted in a conviction in United States v, Francis Peter Orosby

(S.D.N.Y.) where the defendant pleaded guilty to violations of that

act, as well as the Securities Exchange Act. Crosby had acquired

control of Jefferson Research Foundation, Inc., and, through that

corporation, control of Jefferson Custodian Fund, Inc., an investment

company. Crosby then liquidated a portion of the portfolio of the

fund for some $241,000 to raise cash and attempted to sell the fund

worthless securities for $396,000. When the custodian of the fund

refused to execute the orders to purchase the worthless securities,

Crosby attempted to secure another custodian.

The first conviction for violation of the anti-touting provisions of

section 17(b) of the Securities Act was obtained in United States v,

Todd (D. Mass.) where F. Payson Todd, doing business as the New

England Counsellor, entered a plea of nolo contendere to charges that

he had recommended purchases at the market to his customers of the

stock of Canadian Javelin without disclosing that he had received

compensation from the issuer and underwriters and that his recommendations for purchase to his clients were for the purpose of facilitating a distribution of the stock by creating a demand for it and

to raise its market price.

The first convictions for violations of the proxy provisions of the

Securities Exchange Act were had in United States v, Fortune Pope

and Anthony Pope (S.D.N.Y.). The defendants were each sentenced

on pleas of guilty and nolo contendere to fines of $25,000 and additionally given a 1-year suspended prison sentence and placed on

probation for that period. The defendants were convicted of soliciting

proxies of stockholders of the Colonial Sand & Stone Co., Inc., by

means of false and misleading proxy statements and filing such false

and misleading proxy statements with the Commission and with the

American Stock Exchange.

Another conviction involving the use of false and misleading proxy

soliciting material was obtained in United States v. Maurice Olen

(S.D. Ala.) where the defendant was convicted on his nolo contendere

plea and fined $2,500.3 In United States v. Alexander L. Guterma

(S.D.N.Y.) involving the stock of United Dye & Chemical Corp.,

Guterma pleaded guilty to charges that he conspired to file a false

and misleading proxy statement with respect to that company, to

obstruct the making and filing of reports required to be filed by the

company with the New York Stock Exchange and the Commission,

and to defraud purchasers in the sale of unregistered securities of

that corporation. This case is still pending as to other codefendants,-

For further details, see 26th annual report, 189.

, For further details, see 26th annual report, 188-189.

•
TWENTY-SEVENTH ANNUAL REPORT 167

Guterma also pleaded guilty to the indictment in United States v,

Samuel S. Garfield et al. (S.D.N.Y.) which charges a conspiracy to

distribute to the public shares of the common stock of United Dye &

Chemical Corp. through the mails without complying with the registration provisions of the Securities Act. This case is pending as to

other defendants. Guterma again pleaded guilty in United States v.

Samuel S. Garfield et al. (S.D.N.Y.) to an indictment charging conspiracy to violate the registration and antifraud provisions of the

Securities Act in the distribution of stock of Shawano Development

Corp. by use of false and misleading literature and by means of an

intensive local and long-distance telephone sales campaign. This

indictment also is pending as to other defendants.

Guterma and Paul Hughes pleaded guilty in United States v. Paul

Hughes et al. (S.D.N.Y.) where the defendants are charged with

fraud in the sale of stock of the Western Financial Corp., Diversified

Financial Corp. of America, and Consolidated American Industries,

Inc., and where it is alleged an extensive telephone and mail campaign

was carried on to effect the sale of the stock at arbitrary prices from

$2.25 to $2.50 per share. Other defendants are awaiting trial.

Convictions were affirmed in United States v. Guterma, 281 F. 2d

742 (GA. 2, 1960), cert. denied, 364 U.S. 871, for conspiracy to violate

and for violation of the reporting requirements of the Securities

Exchange Act. This landmark case was the first criminal prosecution

of corporate insiders for their failure to file ownership reports and

for their obstruction of the filing of the annual report required to be

filed by companies having securities listed on a national securities

exchange."

A conviction for violations of the Securities Act and the mail fraud

statute was affirmed in J. Phil Burns et al. v. United States, 286 F. 2d

152 (C.A. 10, 1961). The defendants were found guilty of selling

over $51 million of securities of the Selected Investments Trust Fund

of which $12 million were redeemed. Dividends had been paid out of

capital while the defendants represented to investors that dividends

were paid from profits; false financial statements were distributed;

defendants redeemed certificate bonds at their face amount which

substantially exceeded their actual value; and defendants converted

and used for their own personal profit money and properties of the

trust fund without reimbursing the trust fund. In addition, the

defendants, with a total investment of $13,800 in the Selected Investments Corp., dominated and controlled the multimillion dollar trust

fund which in turn controlled approximately 37 subsidiary companies.

The defendants, J. Phil Burns and Hugh A. Carroll, were sentenced

to 5 years, William A. Rigg received a suspended sentence of 5 years

• For further details of this important case see the 26th annual report, p. 188.
168 SECURITIES AND EXCHANGE COMMISSION

and was placed on probation, and Julia Moore Carroll was placed on

probation for 5 years. The defendant corporation, Selected Investments Corp. and United Securities Agency, were each fined $1,500.

The stock of Atlas Gypsum Corp., Ltd., was sold through the

securities brokerage firm of J. C. Graye Co., in one of a series of

boiler room promotions controlled by Stanley I. Younger and his

associates in United States v, Stanley I. Younger et at. (D. Conn.) ,

The defendants acquired a large block of Atlas Gypsum stock at

approximately 20 cents per share and subsequently sold these shares

to investors in some 30 States by means of arbitrary markups at

prices as high as $3.75 per share. As the trial was to start in

October, six defendants entered pleas of guilty or nolo contendere /

after the Government called its first witness, the remaining defendants

on trial withdrew not-guilty pleas and entered pleas or nolo contendere:" Stanley Ira Younger received an 8-year sentence, James C.

Graye received a 3-year sentence and varying sentences were imposed

on the remaining defendants, including Carmine Lombardozzi who

received a suspended sentence of 3 years and 5 years' probation with

a fine of $2,500, Arthur Tortorello who received a 3-year sentence to

be suspended after service of 3 months, and Louis Michael de F'illippo

who was similarly sentenced.

In connection with the investigation of the Atlas Gypsum Corp.,

Ltd. matter, Jack Yetman pleaded guilty to committing perjury

while testifying before investigating officers of the Securities and

Exchange Commission and is awaiting sentence.

Younger was again a defendant in another boiler room promotion,

United States v, Phillip Newman Associates, Inc.; et at. (D.N.H.)

where he received a 3-year sentence, to be served concurrently with

other sentences imposed upon him, for violations of the antifraud

provisions of the Securities Act in the sale of securities of Monarch

Asbestos Co., Ltd., through the brokerage firm of Phillip Newman

Associates, Inc.

Younger also was convicted, together with Richard T. Cardall, of

violating the antifraud provisions of the Securities Exchange Act

and the Mail Fraud Statute in the case of United States v. Stanley I.

Younger, et al, (S.D.N. Y.). Here the defendants placed orders with

brokers for stock of National Photocopy, Inc., a nonexistent corporation, and then sold Photocopy stock using an alias through other

brokers. In this manner they caused the brokers to purchase the

Photocopy stock, but never accepted or paid the broker for the stock.

For his part in the manipulations of National Photocopy, Inc., stock

Younger received a sentence of 3% years. A somewhat similar

e Of the 25 defendants, 20 pleaded nolo contendere and 5 pleaded guilty. The remainIng

defendants, other than those dIsmIssed or deceased, have not been apprehended and are

princIpally resIdents of Canada.
TWENTY-SEVENTH ANNUAL REPORT 169

scheme was utilized by the defendant in United States v. William O.

l{aral (D. Mass.).

Seven codefendants of Lowell M. Birrell, a fugitive presently

residing in Brazil/ were convicted in United States v, Samuel J.

Smiley (S.D.N.Y.) of violating the antifraud provisions of the

Securities Exchange Act in defrauding Doeskin Products, Inc., by

causing Doeskin to issue over 1 million shares of its stock by

falsely pretending that $2,140,000 had been received by Doeskin.

Some of the defendants also induced Doeskin to pay a commission

of $53,500 on this fictitious sale. They then sold 70,000 shares back

to the corporation and obtained $100,000more. A number of other

codefendants in addition to Birrell are presently fugitives in this

ease,

A number of broker-dealers were convicted and a number of others

are awaiting trial on charges arising from conduct of a securities

business. Thus in United States v, Iiomsey (D. Mass.) a 2-year

sentence and a $5,000 fine was imposed on Anton E. Homsey on

his plea of guilty. Defendant, who was a partner in the Boston

securities firm of DuPont, Homsey & Co., hypothecated investors'

securities in violation of the provisions of the Securities Exchange

Act. Single investors were defrauded in amounts of $385,000,

$85,000, and $25,000; a Florida couple gave Homsey $102,000 of

securities, having been promised 5 percent interest plus the dividends

on the securities. They did not receive the dividend payments, the

interest, or the return of the securities. Joseph F. 'Whalen, Jr., a salesman for the same firm of DuPont, Homsey & Co., also hypothecated

securities for his own use, forged checks received from the proceeds

of the sale and then appropriated the same to his own use and benefit.

Whalen was sentenced to 1 year's imprisonment on his guilty plea.

Fraud and registration violations are included among the pending

charges in United States v. Greenberg, et al. (S.D.N.Y.). Jacob A.

Greenberg and Morris Mac Schwebel are charged with selling stock of

Soil Builders International Corp. to Associates Union Trust, a

Lichtenstein trust, with officesin Geneva, Switzerland, which stock

was then immediately resold to investors in the United States without

registration. Misrepresentations as to the profitable operation of the

business, its proposed listing on the American and New York Stock

Exchanges, and other similar matters also are alleged in the indictment. These defendants also are charged in another indictment with

conspiring to violate and violating the registration provisions of the

Securities Act in the sale of cornmon stock of Basic Atomics, Inc.

1 Birrell also is named as a defendant in a number of other indictments. as well as in 11

criminal contempt action arising out of Commission injunctive action.
170 SECURITIES AND EXCHANGE COMMISSION

A number of convictions were obtained for fraud involving the sale

of insurance company stock. Thus in United States v, (Iharles

1/. Newell and OhaunceyA. Allen (D. Colo.) the defendants were

convicted of falsely representing in the sale of stock of the Unity

Insurance Co. of Omaha that the investor's money would be placed

in escrow until an insurance business franchise was issued by the State

of Nebraska; that the company had the money to qualify and would

get the license, and the company was so profitable that they would

refund the issuer's money at any time with 5-percent interest. The

defendants did not disclose that the officers of Unity Insurance Co.

did not invest their own money in the company but received stock

options from the company and that the greater portion of the investor's purchase price went to a company officer.

There were also several prosecutions for alleged fraud in the sale

of notes and mortgages and related securities. An indictment was

returned in United States v, David Farrell, et al. (S.D. Cal.), where

some 9,000 investors invested in excess of $40 million in an

alleged "Secured 10% Earnings Program", for violations of the

Securities Act and the Mail Fraud Statute in the sale of securities of

the Trust Deed & Mortgage Exchange, Los Angeles Trust Deed &

Mortgage Exchange, Trust Deed & Mortgage Markets, and Colorado

Trust Deed & Mortgage Markets. The indictment alleged that the

defendants engaged in a scheme and artifice to defraud investors

throughout the United States and in foreign countries by falsely

representing that the Secured 10% Earnings Program assured

investors "full, firm 10% earnings" with a degree of liquidity comparable to insured bank deposits or insured savings and loan certificates, that the "Exchange" maintained by TD & ME and LATD &

ME was similar to a stock exchange, and that LATD & ME and

TD & MM were "safe, solid, solvent and adequately financed institutions"-the "oldest and largest in America" offering "Secured 10%

Earnings." The indictment alleges that in fact LA TD & ME and TD

& MM were insolvent and that funds entrusted to them by investors

were constantly endangered and in jeopardy."

The defendant in United States v, Wendell Ralph Lutes (S.D.

Ind.) was convicted on charges of defrauding investors by the sale

of common stock of the Brown Mortgage Co., Inc. The defendant

had organized this company for the avowed purpose of making mortgage loans in Brown County, Ind., and represented to purchasers that

the company would earn 12 percent a year on mortgage loans and that

the company could pay a 10-percent stock dividend. The company

actually did not own mortgages and did not do business of this kind;

the defendant caused a 10-percent stock dividend to be paid solely for

8 For a discussion of the Commission's prevtous succesBtuI injunction action against this

promotion, see euoro, p. 49.
TWENTY-SEVENTH ANNUAL REPORT 171

the purpose of aiding in the sale of the stock. The defendant Lutes

drew from the company funds of over $80,000 by writing company

checks to fictitious persons, forging the endorsements, and then endorsing the checks for deposit in his bank account; by taking securities belonging to the mortgage company, registering them in his

name and then selling the mortgages; by organizing a stock brokerage firm in Saint Petersburg, Fla., with funds of the mortgage company; and by inducing a purchaser to take control of the Brown

County Mortgage Co. and redeem Lutes' shareholdings for an amount

far in excess of its value.

An alleged revolutionary uranium processing machine, the "Benson

Uranium Upgrader," was one of the schemes involved in United

States v. John Milton Addison, et al. (N.D. Tex.). The defendants

obtained money from the public in 35 States, including Hawaii, in

the sum of about $2 million. After trial the judge imposed a 15-

year sentence and $36,000 fine on one defendant and sentences of

from '7 to 2 years on five others." The fraudulent promotion of a

steam generating machine, as well as a protective paint, a nonslip

nut, roll-a-way furniture, and a water retaining fertilizer, were involved in United States v. OZarkL. Fry (W.D. Wis.).

Oil and mining promotions continued to provide a fertile field for

fraudulent promoters. The defendant in United States v. Tho11UL8E.

Robertson (S.D.N.Y.) was sentenced to 3 months' imprisonment on

the first count and a sentence 1 year was suspended on all other counts

after conviction on an indictment charging violations of the antifraud

provisions and the registration requirements of the Securities Act in

the offer and sale of stock of the American-Canadian Oil & Drilling

Corp. Robertson had acquired 500,000 shares of stock of AmericanCanadian in exchange for certain oil and gas leases which was sold to

investors without registration and without disclosing that Thomas E.

Robertson, Inc., was the principal and owner of the shares. Robertson

and his company made misrepresentations as to dividend payments,

the value of the stock, approval of the Securities and Exchange Commission, listing of the stock on a national securities exchange, value

of the properties, and cost of acquisition of the properties.

In another oil promotion, United States v. Mervin J. Fischman,

et al. (D. Mass.), pleas of not guilty were changed to guilty by two

defendants who employed a scheme to defraud investors in a longdistance telephone campaign to sell shares of the Lexa Oil Corp. to

residents of Massachusetts and other States. In the telephone campaign false representations were made that Lexa Oil Corp. had struck

a well that was producing 250 barrels a day; that proceeds from the

sale of shares that were being offered by Anglo-American were to be

• Appeals are presently pending in this matter.
172 SECURITIES AND EXCHANGE COMMISSION

used by Lexa as working capital; that Anglo-American was offering

the shares of Lexa at a lower price than that being charged in the open

market; that an investment in Lexa would certainly result in a high

profit; and that the shares of Lexa were going to be listed on a stock

exchange. Fischman received a suspended sentence of 5 years and

5 years' probation and Palermo received a 2-year probationary

sentence.

A purported Canadian mining venture resulted in a 3-year sentence

for the defendant in United States v. George Alexander Kerr (D.

Wash.) upon his plea of guilty to violating the Mail Fraud Statute.

Kerr sold shares of Eagle Plains Development, Ltd., a Canadian

corporation, misrepresenting that there was a limited amount of stock

available for purchase; that a million dollars had been invested by

a syndicate in the corporation; and that the company owned producing

mining property and that the stock on the New York Stock Exchange

"Eagle P" was, in fact, the stock of Eagle Plains Development. By

this scheme the defendant and his associates obtained more than

$375,000 from some 1,000 investors in the United States by longdistance telephone calls and a mail campaign from Vancouver, British

Columbia, and "Whitehorse, Yukon Territory. Other participants

in the scheme were apprehended by Canadian authorities.

COMPLAINTS AND INVESTIGATIONS

Each of the acts administered by the Commission specifically authorizes investigations to determine whether violations of law have

occurred.

The nine regional officesof the Commission, with the assistance of

their branch offices,are primarily responsible for the conduct of investigations. In addition, the Office of Special Investigations of the

Division of Trading and Exchanges of the Commission's Washington

Office conducts investigations dealing with matters of particular interest or urgency, either independently or assisting the regional

offices. The Division of Trading and Exchanges exercises general

supervision over and coordination of the investigative activities of

the regional offices. Its staff examines and analyzes the investigative

findings and recommendations of the regional officesand recommends

appropriate action to the Commission.

There are several sources of information which eventually lead to

investigation. One of the primary sources of information is complaints submitted by members of the general public concerning the

activities of persons involved in the offer and sale of securities. The

Division of Trading and Exchanges and the regional officesgive careful consideration to such information and, if it appears that violations

of the Federal securities laws may have occurred, an investigation is
TWENTY-SEVENTH ANNUAL REPORT 173

commenced. Other sources of information which are of great assistance to the Commission in carrying out its enforcement responsibilities are the national securities exchanges, brokerage firms, State and

Canadian securities authorities, better business bureaus, the National

Association of Securities Dealers, Inc., and various law enforcement

agencies.

It is the Commission's policy to conduct its investigations on a

confidential basis. Such a policy is necessary for effective law enforcement and in the interest of fairness to persons against whom unfounded

or unconfirmed charges may be presented. Another advantage of

confidential investigations is that suspected violators may not be

warned and afforded an opportunity to frustrate or obstruct the investigation. The Commission investigates many complaints where no

violation is ultimately found to exist. To conduct such investigations

publicly would ordinarily result in hardship or embarrassment to

many innocent persons and might affect the market for the securities

in question, resulting in injury to investors with no countervailing

public benefits. Moreover, members of the public have a tendency to

be reluctant to furnish information concerning suspected violations

if they think their personal affairs would be publicized. Accordingly,

the Commission does not generally divulge the existence of or findings

of any investigation unless they are made a matter of public record

through proceedings before the Commission or in the courts.

'Vhen a preliminary investigation indicates a serious violation or

appears to require more extensive investigation, which may include

examination of books and records or interviews with numerous

persons, a case is docketed and a full investigation is conducted.

Under certain circumstances it becomes necessary for the Commission

to issue a formal order of investigation which designates members

of its staff as officersto issue subpenas and take testimony under oath.

This step is taken when the principals and others involved in the

investigation are uncooperative or it is otherwise necessary to use the

subpoena power in order to determine the exact nature of the activities

involved. During the past year, 131 formal orders were issued in

connection with investigations handled through the Division of Trading and Exchanges. In addition, there were 24 formal orders issued

at the recommendation of the Division of Corporation Finance. That

Division conducts certain investigations necessary to assist in processing filings made with that Division under the Securities Act of 1933

and the Securities Exchange Act of 1934.

Wb.en an investigation has been completed and enforcement action

appears appropriate, the Commission may proceed in one of several

ways. The evidence may be referred to the Department of Justice

with a recommendation for criminal prosecution. Should this occur,
174 SECURITIES AND EXCHANGE COMMISSION 

members of the Commission's staff, who were instrumental in developing the case, usually assist the Department of Justice and the U.S. 

attorney in presenting the case to the grand jury. If an indictment is 

returned, members of its staff usually aid in the trial of the case. 

The Commission may, when appropriate, authorize institution of 

civil action for injunctive relief to restrain further violations. In 

such event, the complaint is filed in the Commission's name with the 

appropriate U.S. district court and the case is presented by a member 

of the Commission's staff. The Commission may also institute admin. 

istrative proceedings when the investigation indicates that such action 

is appropriate, for example, that a registration statement or report 

filed with it is false or misleading or omits required information, or 

that a broker-dealer or investment adviser registered with this Commission is violating the Federal securities laws. 

,The following table reflects in summarized form the investigative 

activities handled by the Division of Trading and Exchanges of the 

Commission during fiscal 1961 : 

Inue8tigat.lon.s of poasibie ohlatiow of the aota aflmtrriatered By the Cornmisalon 

Pending June 30, Ism ......................................... 116 844 960 New cares .................................................... 131 415 646 Transferred from nrelimlnm ................................. 1 .............. 1 21 / zl 

ENFORCEMENT PROBLEMS WITH RESPEm TO CANADIAN 

SECURITIES 

Total ................................................... 

Olosed ........................................................ Transferred to docketed ....................................... Pen- at June a0,1961..... ................................. 

While the unlawful offering and sale of securities by Canadian 

issuers and broker-dealers continues to be a serious problem, considerable progress has been made within the past fiscal year, resulting 

in great improvement in this field. 

The success which has been achieved is due to continued and aggressive efforts and the increasing awareness of the seriousness of the 

problem on the part of Canadian provincial authorities and responsible members of the Canadian securities industry, resulting in an active 

interest in cooperative enforcement. We are currently receiving excellent cooperation from most Provinces and some segments of the 

Canadian securities industry. 

A principal factor in our enforcement program during the past 

year has involved the issuance of postal fraud orders which greatly 

reduced illegal offering9 from Toronto. During the past fiscal year, 

upon evidence furnished.by the Commission, 58 postal fraud orders 

247 

103 

21 

123 

1,280 

a77 .............. 1, W3 

1,527 

380 

21 1, 128 
TWENTY -SEVENTH ANNUAL REPORT 175

have been issued. Numerous "extensions" to such orders have also been

issued to cover changes of address by persons who sought by such

changes to avoid the consequences of original orders directed to them.

On March 28, 1961, the Toronto Stock Exchange and the Ontario

Broker-Dealers Association took steps to require their members to

refrain from offering securities illegally in the United States. Conferences were held between representatives of the Commission and

representatives of the securities industry in Toronto to discuss the

situation and to work out a plan whereby broker-dealers in Ontario

could operate in compliance with the laws of the United States. As

a result of these actions several broker-dealers from Toronto have

become registered with this Commission under the Securities Exchange Act of 1934, and have agreed that they will not offer or sell

securities in the United States in violation of the registration requirements of the Securities Act of 1933. The chairman of the Ontario Securities Commission has expressed his approval of these

arrangements.

Our enforcement difficulties with respect to jurisdictional problems,

including the denial of extradition by Canadian courts in a test case

under the Supplementary Extradition Convention, have been presented in detail in previous annual reports.

Details concerning actions involving Canadian securities are described elsewhere in the section relating to litigation under the Securities Act of 1933and in the section relating to criminal proceedings.

The Commission continues to maintain its Canadian restricted list.

This is a list of Canadian companies whose securities the Commission

has reason to believe currently are being, or recently have been, distributed in the United States in violation of the registration requirements of the Securities Act of 1933. Failure to comply with the

registration requirements deprives investors of material information

and facilitates false claims as to the worth of securities. Thus investors are denied the essential protections provided by the Securities

Act.

The list and supplements thereto are issued to and published by

the press and copies are mailed to all registered broker-dealers and

are available to the public. The list serves as a warning to the public

and alerts broker-dealers to the fact that transactions in the securities

of the companies named therein may be unlawful. Most United States

broker-dealers refuse to execute transactions in such securities.

During the fiscal year 1961, 26 supplements to the list were issued

in which 47 names were added and 4 deleted upon compliance with

established procedures. The number of names on the list as of June

30,1961,was 253.

The current list, as of September 30, 1961,follows:

62037~1.3
176 SECURITIES AND EXCHANGE COM:MISSION

CANADIAN RESTRICTED LIST

Adonis :JIines, Ltd.

Alaska-Canadian Mining & Exploration Co., Ltd.

Aldor Exploration and Development

Co., Ltd.

A. L, Johnson Grubstake

Alouette Mines, Ltd.

Amador Highland Yalley Coppers,

Ltd.

Ambassador :JIining Developments,

Ltd.

Americanadian Mining & Exploration

Co., Ltd.

Amican Petroleum & Natural Gas

Corp., r.eu,

Anthony Gas and Oil Explorations,

Ltd.

Apollo :Mineral Developers Inc.

Associated Livestock Growers of

Ontario

Atlantis Industrial Development Co.,

Ltd.

Atlas Gypsum Corp., Ltd.

Ava Gold l\Iining Co., Ltd.

Baranouri Minerals, Ltd.

Barite Gold :JIines, Ltd.

Basic Lead and Zinc Mines, Ltd.

Bengal Development Corp., Ltd.

Black Crow :JIines, Ltd.

Blue Springs Explorations

Bonwitha Mining Oo.,Ltd.

Burbank Minerals, Ltd.

Cable :JIines and Oils, Ltd.

Caesar Minerals, Ltd.

Cairngorm Mines, Ltd.

Cameron Copper Mines, Ltd.

Canada Radium Corp., Ltd.

Canadian Alumina Oorp., Ltd.

Canford Explorations, Ltd.

Canoll\Ietal :JIines,Ltd.

Cartier Quebec Explorations, Ltd.

Casgoran Mines, Ltd.

Central & Eastern Canada Mines

(1958), Ltd.

Centurion Mines, Ltd.

Cessland Gas and Oil Corp., Ltd.

Colville Lake Explorers Ltd

Consolidated Easter Island :JIines,

Ltd.

Consolidated Exploration & :JIining

Co., Ltd.

Consolidated St. Simeon Mines, Ltd.

Consolidated Woodgreen Mines, Ltd.

Continental Consolidated l\Iines &

Oils Corp., Ltd.

Copper Prince l\lines, Ltd.

Courageous Gold Mines, Ltd.

Cove Uranium Mines, Ltd.

Cree Mining Corp., Ltd.

Crusade Petroleum Corp., Ltd.

Davian Exploration, Ltd.

Dayjon Explorers, Ltd.

Dempster Explorations, Ltd.

Derogan Asbestos Corp., Ltd.

Devonshire Mining oo., Ltd.

Devonshire Mining Syndicate

Diadem Mines, Ltd.

Dolmac Mines, Ltd.

Dolsan Mines, Ltd.

Dominion Fluoridators, Ltd.

Dominion Granite & Marble, Ltd.

Dul\Iaurier Mines, Ltd.

Dumont Nickel Corp.

Dupont Mining Co., Ltd.

Eagle Plains Developments, Ltd.

Eagle Plains Explorations, Ltd.

East Trinity Mining Corp.

Eastern-Northern Explorations, Ltd.

Elk Lake Mines, Ltd.

Embassy Mines, Ltd.

Explorers Alliance, Ltd.

Export Nickel Corp. of Canada, Ltd.

Fairmont Prospecting Syndicate

Federal Chibougamau Mines, Ltd.

File Lake Explorations, Ltd.

Fleetwood Mining and Exploration,

Ltd.

Flint Rock Mines, Ltd.

Font Petroleums, Ltd.

Foreign Exploration Corp., Ltd.

Fort Hope Grubstake, The

Franksin Mines, Ltd.

Gasjet Oorp., Ltd.

Genex Mines, Ltd.

Georay Prospecting Syndicate

Golden Algoma Mines, Ltd.

Golden Hope Mines, Ltd.

Goldmaque Mines, Ltd.

Granwick Mines, Ltd.

Guardian Explorations, Ltd.

Haitian Copper Mining Corp., Ltd.

Hallmark Explorations, Ltd.

Halstead Prospecting Syndicate

Hoover Mining and Exploration, Ltd.

Ibsen Cobalt-Silver Mines, Ltd.

Inlet Mining Corp.. Ltd.

International Ceramic Mining, Ltd.

Irando Oil and Exploration, Ltd.

Jack Haynes Syndicate

Jacmar Explorations, Ltd.

Jaylac Mines, Ltd.

Jilbie Mining Co., Ltd.

Jomac Mines, Ltd.

Kateri Mining Co., Ltd.

Kelkirk Mines, Ltd.

Kelly-Desmond Mining Corp., Ltd.

Kennament Development Oorp., Ltd.

Key West Exploration Co.,Ltd.

Kimberly Copper Mines, Ltd.

Kipwater Mines, Ltd.

Kordol Explorations, Ltd.

Korich Mining Co., Ltd.

Kukatush Mining Corp.

Kuskokwim Grubstake

Ladysmith Explorations, Ltd.

Lake Kingston Mines, Ltd.
TWENTY-SEVENTH ANNUAL REPORT

CANADIAN RESTRICTED LIST-Continued

177

Lake Otter Uranium Mines, Ltd.

Lama Explorations and Mining Co.,

Ltd.

Lambton Copper Mines, Ltd.

Larutan Petroleum Corp., Ltd.

Lavan din Mining Co.

Lavant Mines, Ltd.

Leader Mining Corp., Ltd.

Lee Gordon Mines, Ltd.

Lindsay Explorations, Ltd.

Lucky Creek Mining Co., Ltd.

Lynwatin Nickel Copper, Ltd.

Mack Lake Mining Corp., Ltd.

Magni Mining Corp., Ltd.

Mallen Red Lake Gold Mines, Ltd.

Maple Leaf Investing Corp., Ltd.

March Minerals, Ltd.

Marian Lake ~lines, Ltd.

Marple Explorations, Ltd.

Marpoint Gas & Oil Corp., Ltd.

Mattagami Explorers Corp.

Megantic Milling Corp.

Mexicana Explorations, Ltd.

Mexuscan Development Corp.

Midas Mining co, Ltd.

liEd-Nation Developments, Ltd.

Mile 18 Mines, Ltd.

Milldale Minerals, Ltd.

lIIilmar-Island Mines, Ltd.

Mina-Nova Mines, Ltd.

Minden Land Enterprises, Ltd.

Mineral Exploration Corp., Ltd.

Missile Metals and Mining Corp., Ltd.

Monarch Asbestos Co., Ltd.

Monarch Gold Mines, Ltd.

Montor Gold Mines, Ltd.

Monpre Mining Co., Ltd.

Montclair Mining Corp., Ltd.

Mylake Mines, Ltd.

National Telepix (Canada), Ltd.

Nationwide Minerals, Ltd.

Native Minerals, Ltd.

Natto Mining Co., Ltd.

Neeland Flin Flon Mining and Explorations, Ltd.

New Campbell Island Mines, Ltd.

New Faulkenham Mines, Ltd.

New Hamil Silver-Lead Mines, Ltd.

New Mallen Red Lake Mines, Ltd.

New Metalore Mining Co., Ltd.

New Spring Coulee Oil and Minerals,

Ltd.

New Surpass Petrochemicals, Ltd.

Norbank Explorations, Ltd.

Norcopper and Metals Corp.

Normalloy Explorations, Ltd.

Norsco Mines, Ltd.

Norseman Nickel Oorp., Ltd.

North American Asbestos Co., Ltd.

North Gaspe Mines, Ltd.

North Lake Mines, Ltd.

Northport Mineral Explorers, Ltd.

North Tech Explorations, Ltd.

Nortoba Mines, Ltd.

Nu-Gord Mines, Ltd.

Nu-Reality Oils, Ltd.

Nu-World Uranium Mines, Ltd.

Olympus Mines, Ltd.

Outlook Explorations, Ltd.

Palliser Petroleums, Ltd.

Pantan Mines, Ltd.

Paramount Petroleum & Minerals

Corp., Ltd.

Peace River Petroleums, Ltd.

Pick Mines, Ltd.

Plexterre Mining Corp., Ltd.

Prestige Lake Mines, Ltd.

Primary Gold Mines, Ltd.

Prudential Petroleums, Ltd.

Purdex ::.\fineruls,Ltd.

Quebec Graphite Corp.

Queensland Explorations, Ltd.

Quinulta Petroleum, Ltd.

Rambler Exploration Co., Ltd.

Red River Mining & Exploration, Ltd.

Regal Mining & Development, Ltd.

Resolute Oil and Gas Co., Ltd.

Revere Mining Corp., Ltd.

Riobec Mines, Ltd.

Roberval Mining Corp.

Rockroft Explorations, Ltd.

Rothsay Mines, Ltd.

Roxton Mining -& Development Co.,

Ltd.

St. Anthony Mines, Ltd.

St. Lawrence Industrial De,'. Corp.

St. Stephen Nickel Mines, Ltd.

Saskalon Uranium and. Oils, Ltd.

Sastex Oil and Gas, Ltd.

Savoy Copper Mines, Ltd.

Seaboard Industries, Ltd.

Senvil Mines, Ltd.

Sheba l\lines, Ltd.

Sheraton Uranium Mines, Ltd.

Shoreland Mines, Ltd.

Sico Mining Corp., Ltd.

Siconor Mines, Ltd.

Sinclair Prospecting Syndicate

South Seas ?llining, Ltd.

Space Age Mines, Ltd.

Stackpool Mining Co., Ltd.

Strathcona :alines, Ltd.

Sturgeon Basin Mines, Ltd.

Success Mines, Ltd.

Sudbay Beryllium Mines, Ltd.

Sudbay Exploration and Mining, Ltd.

Swift Copper Mines, Ltd.

Tabor Lake Gold ::.\lines,Ltd.

Taiga Mines, Ltd.

Tamicon Iron Mines, Ltd.

Taurcanis Mines, Ltd.

Temanda Mines, Ltd.

Territory Mining Co., Ltd.

Trans Nation Minerals, Ltd.

Trans-Oceanic Hotels Corp.

Trenton Petroleum & ::.\Iinerals Corp.,

Ltd.

Tri-Cor Mining Co., Ltd.
178 SECURITIES AND EXCHANGE COMMISSION

CANADIAN RESTRICTED LIST-Continued

Triform Explorations, Ltd.

Trio Mining Explorations, Ltd.

Trojan Consolidated Mines, Ltd.

'I'umac Mining & Development Co.,

Ltd.

Turbenn llIinerals, Ltd.

Turzone Explorations, Ltd.

Tyndall Explorations, Ltd.

Upper Ungava Mining Corp., Ltd.

var Jon Exploration, Ltd.

Valray Explorations, Ltd.

Vanguard Explorations, Ltd.

Venus Chibougamau Mines, Ltd.

Ver-Million Gold Placer Mining, Ltd.

Vieo Explorations, Ltd.

Vimy Explorations, Ltd.

Viscount Oil and Gas, Ltd.

Wakefield Uranium Mines, Ltd.

Webbwood Exploration Co., Ltd.

Western Allenbee Oil and Gas Co.,

Ltd.

Westwind Explorations, Ltd.

Windy Hill Mining Corp.

Wingdam & Lightning Creek Mining

Co., Ltd.

Yukon Prospectors' Syndicate

SECTION OF SECURITIES VIOLATIONS

A section of securities violations is maintained by the Commission

as a part of its enforcement program to provide a further means of

detecting and preventing fraud in securities transactions. The section maintains files providing a clearinghouse for other enforcement

agencies for information concerning persons who have been charged

with violations of various Federal and State securities statutes. Considerable information is also available concerning violators resident

in the Provinces of Canada. The specialized information in these

files is kept current through the cooperation of the U.S. Post Office

Department, the Federal Bureau of Investigation, parole and probation officials,State securities authorities, Federal and State prosecuting attorneys, police officers, better business bureaus, chambers

of commerce and other agencies. At the end of the fiscal year these

records contained information concerning 76,399 persons against

whom Federal or State action had been taken in connection with

securities violations. In keeping these records current, there were

added during the fiscal year items of information concerning 13,281

persons, including 4,651 persons not previously identified in these

records.

The section issues and distributes quarterly a securities violations

bulletin containing information received during the period concerning violators and showing new charges and developments in pending

cases. The bulletin includes a "wanted" section listing the names and

references to bulletins containing descriptive information as to persons wanted on securities violations charges. The bulletin is distributed to a limited number of officials of cooperating law

enforcement and other agencies in the United States and Canada.

Extensive use is made of the information available in these records

by regulatory and law enforcing officials. Numerous requests are received each year for special reports on individuals in addition to the

information supplied by regular distribution of the quarterly bulletin. All available information is supplied in response to inquiries
TWENTY-SEVENTH ANNUAL REPORT 179

from law enforcement agencies. During the fiscal year the Commission received and disposed of 3,216 "securities violations" letters

or reports and dispatched 812 communications to cooperating

agencies,

APPLICATION FOR NONDISCWSURE OF CERTAIN INFORMATION

The Commission is authorized under the various acts administered

by it to grant requests for nondisclosure of certain types of information which would otherwise be disclosed to the public in applications,

reports or other documents filed pursuant to these statutes. Thus,

under paragraph (30) of schedule A of the Securities Act of 1933,

disclosure of any portion of a material contract is not required if the

Commission determines that such disclosure would impair the value

of the contract and is not necessary for the protection of investors.

Under section 24(a) of the Securities Exchange Act of 1934, trade

secrets or processes need not be disclosed in any material filed with

the Commission. Under section 24(b) of that act written objection

to public disclosure of information contained in any material filed

with the Commission may be made to the Commission which is then

authorized to make public disclosure of such information only if in

its judgment such disclosure is in the public interest. Similar provisions are contained in section 22 of the Public Utility Holding Company Act of 1935and in section 45 of the Investment Company Act of

1940. These statutory provisions have been implemented by rules

specifying the procedure to be followed by applicants seeking a determination that public disclosure is not necessary in a particular case.

The number of applications granted, denied or otherwise acted

upon during the year are set forth in the following table:

Applioations for nondisclosures auruu) 1961 fiscal year

Number Numner Number pending Number Number demed pending

July I, reoeived granted or with- June 30, 1960 drawn 1961

SeeuritIes Aet of 1933 1 3 43 33 8 5 Seeurrties Exchange Act of 1934 1 12 4 1 8 Investment Company Act ofl940' 0 9 9 0 0

TotaL 4 61 46 9 J:J

1 Frled under rule 485.

FIled under rule 24b-2 .

Filed under rule 45a-l.

ACTIVITIES OF THE COMMISSION IN ACCOUNTING AND AUDITING

The several acts administered by the Commission recognize the

importance of dependable informative financial statements which disclose the financial status and earnings history of a corporation or

--- --- --- --- --- _______________________________

' ____________________ __________________

--- --- ________________________________________ --- --- ---

•

•
180 SECURITIES AND EXCHANGE COMMISSION

other commercial entity, These statements, whether filed in compliance with the requirements under those statutes or included in other

material available to stockholders or prospective investors, are indispensable to investors as a basis for investment decisions. The Congress, cognizant of the fact that such statements lend themselves

readily to misleading inferences or even deception, whether or not

intended, included express provisions with respect to disclosure requirements. Thus, for example, the Securities Act requires the inclusion in the prospectus of balance sheets and profit and loss statements "in such form as the Commission shall prescribe" 10 and

authorizes the Commission to prescribe the "items or details to be

shown in the balance sheet and earnings statement, and the methods to

be followed in the preparation of accounts * * *." 11 Similar authority is contained in the Securities Exchange Act,12and even more comprehensive power is embodied in the Investment Company Act 13and

the Public Utility Holding Company Act.14

Pursuant to the broad rule-making power thus conferred with respect to the preparation and presentation of financial statements, the

Commission has prescribed uniform systems of accounts for companies subject to the Holding Company Act; 15has adopted rules

under the Securities Exchange Act goyerning accounting and auditing of securities brokers and dealers; 16and has promulgated rules

contained in a single. comprehensive regulation, identified as regulation S-X,17 which govern the form and content of financial statements

filed in compliance with the several acts. This regulation is implemented by the Commission's Accounting Series Releases, of which

89 haye so far been issued. These releases were inaugurated in 1937

and were designed as a program for making public, from time to time,

opinions on accounting principles for the purpose of contributing to

the development of uniform standards and practice in major accounting questions. The rules and regulations thus established, except for

the uniform systems of accounts which are regulatory reports, prescribe accounting principles to be followed only in certain limited

areas. In the large area of financial reporting not covered by such

rules. the Commission's principal means of protecting investors from

inadequate financial reporting. fraudulent practices and overreaching

10 Sections 7 and 10(a) (schedule A, pars. 25, 26).

11 Section 19(a)

re Section 13 (b).

ra Sections 30, 31.

14 Sections 14, 15.

15 Uniform System of Accounts for Mutual Service Companies and Subsidiary Service

Companies (effective August 1, 1936) ; Uniform System of Accounts for Public Utility

Holding Companies (effective Junuury 1, 1937; amended effective January 1, 1943).

,. Rule 17a-5 and Form X-17A-5 thereunder.

17 Adopted February 21, 1940 (Accounting Series Release No. 12) ; revised December 20,

1950 (Accounting Series Release No. 70).
TWENTY-SEVENTH ANNUAL REPORT 181

by management under the various acts is by requiring the report of an

independent public accountant 'which is based on auditing standards

and prepared in accordance with accounting principles and practices which are recognized as sound and which have attained general

acceptance.

The Securities Act provides that the financial statements required

to be made available to the public through filing with the Commission

shall be certified by "an independent public or certified accountant.' 18

The other three statutes permit the Commission to require that such

statements be accompanied by a certificate of an independent public

accountant," and the Commission's rules require, with minor exceptions, that they be so certified. The value of certification by qualified

accountants has been conceded for many years, but the requirement

as to independence, long recognized and adhered to by some individual accountants, was for the first time authoritatively and explicitly introduced into law in IV33. The Commission's rules are designed to accept accountants qualified to practice in their own St ate

as qualified to practice before the Commission unless they have entered into disqualifying relationships with a particular client, such

as becoming a promoter, underwriter, voting trustee, director, officer,

employee, or stockholder; 20 or, in rare cases, have demonstrated incompetence, subservience to the management, or have engaged in unethical

and improper professional conduct." The Commission has worked

along these lines to encourage and foster an independent state of mind

of the accountant with respect to his dealings with his client so that

he may better be able to perform the service to the public contemplated

by the Congress in the various acts.

The Commission is vigilant in its efforts to assure itself that. the

audits which it requires are performed by independent accountants ;

that the information contained in the financial reports represents full

and fair disclosure and that appropriate auditing and accounting

practices and standards have been followed in their preparation. In

addition it recognizes that changes and new developments in financial

and economic conditions affect the operations and financial status of

the several thousand commercial and industrial companies required

to file statements with the Commission and that accounting and auditing procedures cannot remain static and continue to serve well a dynamic economy. The Commission's accounting staff, therefore,

studies the changes and new developments for the purpose of estab18 Sections 7 and 10(a) (schedule A, pars. 25, 26).

19 Securities Exchange Act, section 13(a) (2) ; Investment Company Act, section 30(e) ;

Holding Company Act, section 14.

,., See, for example, rule 2-01 of Regulation S-X

21 See, for example, Securities Exchange Act Release No. 3073 (1941); 10 S E.C. 982

(1942) ; Accounting Series Release No 68 (1949); Accounting Series Release No. 82

(1959) ; and Accounting Series Release No. 88 (1961).
182 SECURITIES AND EXCHANGE COMMISSION

lishing and maintaining appropriate accounting and auditing policies, procedures and practices for the protection of investors. The

primary responsibility for this program rests with the Chief Accountant of the Commission, who has general supervision with respect to

accounting and auditing policies and their application.

Progress in these activities requires continuing contact and consultat ion between the staff and accountants both individually and through

such representative groups as, among others, the American Accounting Association, the American Institute of Certified Public Accountants, the American Petroleum Institute, the Controllers Institute

of America, the National Association of Railroad and Utilities Commissioners, and the National Federation of Financial Analysts

Societies, as well as other Government agencies. Recognizing the importance of cooperation in the formulation of accounting principles

and practices, adequate disclosure and auditing procedures which will

hest serve the interests of investors, the American Institute of Certified

Public Accountants, the Controllers Institute of America, and the

National Federation of Financial Analysts Societies appoint committees which maintain liaison with the Commission's staff. The

Commission on its part has authorized its Chief Accountant to continue to serve as a member of an advisory committee to the accounting

principles board of the American Institute of Certified Public

Accountants.

The many daily decisions of the Commission require the almost constant attention of some of the Chief Accountant's staff. These include questions raised by each of the operating divisions of the Commission, the regional officesand the Commission. As a result of this

day-to-day activity of the Commission and the need to keep abreast of

r-urrent accounting- problems, the Chief Accountant's staff spends

much time in the examination and reexamination of sound and generally accepted accounting and auditing principles and practices.

From time to time members of the staff are called upon to assist in

field investigations, to participate in hearings and to review opinions

insofar as they pertain to accounting matters.

Prefiling and other conferences, in person or by telephone, with

officials of corporations, practicing accountants and others occupy a

considerable amount of the available time of the staff. This procedure,

which has proven to be one of the most important functions of the

Office of the Chief Accountant and of the Chief Accountant of the

Division of Corporation Finance and his staff, saves registrants and

their representatives both time and expense.

Many specific accounting and auditing problems arise as a result

of the examination of financial statements required to be filed with

the Commission. Where examination reveals that the rules and reg-
TWENTY-SEVENTH ANNUAL REPORT 183

ulations of the Commission have not been complied with or that

applicable generally accepted accounting principles have not been

adhered to, the Examining Division usually notifies the registrant by

an informal letter of comment. These letters of comment and the

correspondence or conferences that follow continue to be a most convenient and satisfactory method of effecting corrections and improvements in financial statements, both to registrants and to the Commission's staff. Where particularly difficult or novel questions arise

which cannot be settled by the accounting staff of the divisions and

by the Chief Accountant, they are referred to the Commission for

consideration and decision. By these administrative procedures the

Commission deals with many accounting questions.

These procedures are particularly applicable to the problems which

arise in connection with initial filings made by new corporate entities

and by corporations whose securities had been closely held or traded

over the counter. Currently there are many such filings being made

oy companies whose business is closely associated with rapidly growing technological and scientific developments and with our expanding population, as in real estate and recreational activities.

Some of the problems frequently causing difficulty arise because

audits made in prior years did not measure up to generally accepted

standards, particularly in that they often omitted accepted-audit procedures with respect to inventories and receivables. These procedures

require observation of inventories and confirmation of receivables

where either of these assets represents a significant proportion of the

current assets or of the total assets of a concern. Failure to apply

them where they are practicable and reasonable generally precludes

expression of an opinion on the fairness of the financial statements

taken as a whole because the income, earned surplus, and the current

position may be materially affected. If the auditor finds himself

faced with such a situation, he must satisfy himself as to inventories

for prior years by appropriate methods. In some instances this is

very difficult and may preclude certification because the client may

not have taken an inventory at any prior yearend or because inventory records for such years are incomplete or because such records

may have been destroyed.

Other difficulties often arise in connection with the initial filings of

such companies because accountants and other advisers serving them

have not had any prior dealing with the Commission. In some cases

these persons have not familiarized themselves with the rules and

regulations of the Commission-particularly the instructions as to

financial statements required by the forms, the rules relating to independence of the certifying accountant, and those relating to the form

and content of financial statements set forth in regulation S-X.
184 SECURITIES A...1'Il"DEXCHANGE COMMISSION

During the fiscal year the Chief Accountant and his staff cooperated

with other divisions of the Commission in the preparation of proposals

to amend articles 7 and 12 of regulation S-X governing the form and

content of financial statements and schedules filed by insurance companies other than life and title insurance companies; to amend form

10-Ie and regulation S-X setting forth the disclosures and financial

statements required by employee stock purchase, savings or similar

plans; and for a new form for the registration of securities of certain

real estate companies. The revision of articles 7 and 12 of regulation

S-X was adopted July 26, 1961.22 This revision reflects changes in

requirements of the annual statement filed with State regulatory authorities and developments in insurance reporting since these articles

were originally adopted.

As a result of the reluctance on the part of independent public accountants to express an opinion in respect of the financial statements

included in the annual statement and the accounting principles and

practices reflected therein as required by rule 2-02 (c) of regulation

S-X without taking exception to certain insurance accounting practices, there has grown up the practice of reconciling the statutory

capital share equity and net income or loss with capital share equity

and net income or loss as determined in accordance with generally

accepted accounting principles and practices. Special note 2 of rule

7-05 gives recognition to this practice where such differences are

deemed to be material, the principal differences being in the accounting for nonadmitted assets and commissions and expenses incurred

in writing insurance.

'With respect to commission and expenses written off it has been

the practice to add back such expenses only to the extent of increase

in equity in unearned premiums, less Federal income tax effect, which

can be supported by reliable loss and expense ratios. Comparable

conservative practices are followed in making the other adjustments.

The Chief Accountant's officealso cooperated with other divisions

of the Commission in the preparation of a rule under the Investment

Advisers Act of 1040 which requires investment advisers subject to

registration with the Commission to maintain specified books and

records relating to their business. This rule as adopted by the

Commission became effective July 1, 1961.23

Early in 1959 the Commission issued its findings, opinion, and

order pursuant to rule II (e) of the Commission's Rules of Practice

denying to Theodore Bollt, formerly a partner in Bollt & Shapiro, a

firm of certified public accountants, now dissolved, who was found

22 Accounting Series Release No. 89.

22 Investment Advisers Act of 1940. Release No. 114. May 25. 1961.
TWENTY -SEVENTH ANNUAL REPORT 185

to have engaged in unethical and improper professional conduct, the

privilege of practicing before the Commission until he obtained the

approval of the Commission."

Late in 1960Bollt filed a petition for reinstatement of his privilege

of practicing before the Commission.

In his petition BoIlt represented, among other things, that his professional and business reputation had not been impugned prior to

the Commission's proceedings; that on the basis of the Commission's

findings against him he was suspended from membership in the

American Institute of Certified Public Accountants for a period of 6

months, which period of suspension has expired; that although he

was no longer engaged in the practice of public accounting, and had

no intention of actively practicing as an accountant before the Commission, the issuance and continuance of the Commission's suspension

order of January 28, 1959, and the widespread publicity received by

it had severely adversely affected his business and professional standing; and that the further continuance of such order was not necessary

or appropriate in the public interest.

The Commission considered the representations set forth in the

petition and, being satisfied that under all the circumstances it would

not be inconsistent with the public interest, early in 1961it terminated

its order denying Bollt the privilege of practicing before the

Commission."

During the fiscal year the Commission issued its findings, opinion,

and order in a proceeding instituted under rule 2(e) of its rules

of practice against Myron Swartz, a certified public accountant. The

Commission found that the respondent had made it possible for false

and misleading financial statements and certificates to be circulated

on his stationery over his signature and, thereafter, without disclosing

the falsity of such statements, continued to perform accounting services, including the preparation of incorrect and misleading statements

for filing with the Commission. The Commission found also that in

a subsequent Commission investigation respondent testified falsely

with respect to certain of the matters referred to above. The Commission concluded that, in view of the gravity of the misconduct in

the case before it and in view of the high standard of honesty and

professional conduct the Commission must demand of accountants and

others practicing before it if it is to fulfill its responsibility to protect

the public interest, Swartz should be denied the privilege of practicing

before the Commission in the future."

.. Accounting Series Release No. 82, January 28, 1959. See also 25th annual report.

p.197 .

.. Accounting Series Release No. 87, January 17, 1961.

26 Accounting Series Release No. 88, May 24,1961.
186 SECURITIES AND EXCHANGE COMMISSION

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

Section 15 of the Bretton Woods Agreements Act, as amended,

exempts from registration under both the Securities Act of 1933 and

the Securities Exchange Act of 1934 securities issued, or guaranteed

as to both principal and interest, by the International Bank for Reconstruction and Development. The Bank is required to file with the

Commission such annual and other reports with respect to such securities as the Commission shall determine to be appropriate in view of

the special character of the Bank and its operations and necessary in

the public interest or for the protection of investors. Pursuant to

the above authority, the Commission has adopted rules requiring the

Bank to file quarterly reports and also to file copies of each annual

report of the Bank to its Board of Governors. The Bank is also required to file reports with the Commission in advance of any distribution in the United States of its primary obligations. The Commission, acting in consultation with the National Advisory Council on

International Monetary and Financial Problems, is authorized to

suspend the exemption at any time as to any or all securities issued

or guaranteed by the Bank during the period of such suspension.

During the fiscal year ending June 30,1961, the Bank made 27 loans

totaling the equivalent of $610 million, compared with a total of $659

million last year. The loans were made in Argentina, British Guiana, Burma, Ceylon, Chile, Colombia (2 loans), Costa Rica, EI Salvador, India (2 loans), Israel, Japan (4 loans), Mexico (2 loans),

Norway, Pakistan (2 loans), Panama, Peru, Sudan, Thailand,

Uganda, and Yugoslavia. This brought the gross total of loan commitments at June 30 to $5,790.5 million. By June 30, as a result of

cancellations, repayments and sales of loans, the portions of loans

signed still retained by the bank had been reduced to $4,217.2million.

During the year the Bank sold or agreed to sell $202 million principal amount of loans, all without its guarantee. On June 30 the total

sales of loans amounted to $1,013 million, of which $69 million was

with the Bank's guarantee.

The outstanding funded debt of the Bank amounted to $2,228 million on June 30, 1961, reflecting a net increase of $155.5 million over

the past year. In this period there was a gross increase in borrowings

of $837.5million consisting of three public bond issues, two in Swiss

francs equivalent to $37.3 million and one in Netherlands guilders

equivalent to $13.8 million; the private placement of bonds and notes

equivalent to $736 million, partly to raise new funds and partly as refunding operations ($508 million in U.S. dollars, $220.2 million in

deutsche marks and $7.8 million in Swiss francs); the delivery of

$14.5million of dollar bonds and $23.8 million in deutsche mark notes

of issues sold previously subject to delayed delivery arrangements and
TWENTY-SEVENTH ANNUAL REPORT 187

$12.1million equivalent which was added to the funded debt as a resuIt of the revaluation of outstanding Netherlands guilder, Canadian

dollar, and deutsche mark bonds and notes. An amount of $182.5

m.illion of the U.S. dollar and deutsche mark borrowings in the fiscal

year had not been drawn down at .Iune 30, 1961. The funded debt was

decreased by $499.5million as a result of the maturing of $15million

of bonds and notes; sinking fund and purchase fund transactions

amounting to $18.5 million; and the refunding of privately placed

issues equivalent to $466million.

Pursuant to the increase in the authorized capital of the Bank from

$10 billion to $21 billion on September 15, 1959, 62 members have

doubled their subscriptions and 29 members have subscribed to

$1,396.9million in addition to their 100percent increases. During the

fiscal year, Cuba and the Dominican Republic withdrew from membership and Portugal and Nigeria became members of the Bank

with capital subscriptions of $80 million and $66.7 million, respectively, making total membership 68. The subscribed capital of the

Bank amounted to $20.093million on .June 30, 1961.

INTER-AMERICAN DEVELOPMENT BANK

The Inter-American Development Bank Act, which authorizes the

United States to participate in the new Inter-American Development

Bank, provides an exemption for certain securities which may be issued by the Bank similar to the exemption provided for securities of

the International Bank for Reconstruction and Development. Acting pursuant to this authority, the Commission, during the fiscal year,

adopted regulation IA which require." the Bank to file with the Commission substantially the same information, documents, and reports

as are required from the International Bank for Reconstruction and

Development. The Bank is also required to file a report with the

Commission prior to the sale of any of its primary obligations to the

public in the United States. Up to .June 30, 1961, 110 such sales had

been made.

The first meeting of the Board of Governors of the Bank took place

in February 1960, and the Bank officially commenced operations on

October 1, 1960. As of .June 30, 1961, the Bank had approved loans

from its ordinary capital totaling $4,700,000to borrowers located in

Brazil. As of that date additional applications for loans from ordinary capital were pending in the amount of $36,189,974from applicants located in Brazil, Chile, Colombia, El Salvador, Guatemala,

Honduras, Nicaragua, Peru, and Venezuela. In addition, loans from

the Bank's Fund for Special Operations had been made in Bolivia in

the total amount of $10 million. Additional loans from the fund for
188 SECURITIES AND EXCHANGE CO:Ml\ITSSION

special operations were pending in the amount of $HU50,OOO with respect to borrowers in Brazil, Haiti, Honduras, and Paraguay.

STATISTICS AND SPECIAL STUDIES

During the past fiscal year the Branch of Economic Research continued its reg-uIar 'York in connection with the statistical activities of

the Commission and the overall Government statistical program under

the direction of the Office of Statistical Standards, Bureau of the

Budget. In addition, the Branch of Exchange Regulation continued

its compilation of data on the stock market.

The statistical series described below are published in the Commission's Statistical Bulletin and in addition, except :for data on registered issues and on the stock market, current figures and analyses of

the data are published in quarterly press releases.

Issues Registered Under the Securities Act of 1933

Monthly and quarterly statistics are compiled on the number and

volume of registered securities, classified by industry of issuer, type

of security, and use of proceeds. Summary statistics :for the years

1935-61 are given in appendix table 1 and detailed statistics for the

fiscal year 19G1 appear in appendix table 2.

New Securities Offerings

This is a monthly and quarterly series covering all new corporate

and noncorporate issues offered for cash sale in the United States.

The series includes not only issues publicly offered but also issues

privately placed, as well as other issues exempt from registration

under the Securities Act, such as intrastate offerings and railroad

securities. The offerings series includes only securities actually offered

for cash sale, and only issues offered for account of issuers. Annual

statistics on new offerings for recent years as well as monthly figures

from January 1960 through June 1961 are given in appendix tables

3,4, and 5.

Estimates of the net cash flow through securities transactions are

prepared quarterly and are derived by deducting from the amount of

estimated gross proceeds received by corporations through the sale

of securities the amount of estimated gross payments by corporations

to investors for securities retired. Data on gross issues, retirements,

and net change in securities outstanding are presented for all corporations and for the principal industry groups.

Individuals' Saving

The Commission compiles quarterly estimates of the volume and

composition of individuals' saving in the United States. The series

represents net increases in individuals' financial assets less net in-
TWENTY-SEVENTH ANNUAL REPORT 189

creases in debt. The study shows the aggregate amount of saving

and the form in which the saving occurred, such as investment in

securities, expansion of bank deposits, increase in insurance and pension reserves, etc. A reconciliation of the Commission's estimates with

the personal saving estimates of the Department of Commerce, derived

in connection with its national income series, is published annually

by the Department of Commerce as 'Yell as in the Securities and

Exchange Commission Statistical Bulletin.

Corporate Pension Funds

An annual survey is made of pension plans of all United States

corporations where funds are administered by corporations themselves, or through trustees. The survey shows the flow of money into

these funds, the types of assets in which the funds are invested, and

the principal items of income and expenditures.

Financial Position of Corporations

The series on working capital position of all U.S. corporations, excluding banks, insurance companies, and savings and loan associations,

shows the principal components of current assets and liabilities, and

also contains an abbreviated analysis of the sources and uses of corporate funds.

The Commission, jointly with the Federal Trade Commission, compiles a quarterly financial report of all U.S. manufacturing concerns.

This report gives complete balance sheet data and an abbreviated

income account, data being classified by industry and size of company.

Plant and Equipment Expenditures

The Commission, together with the Department of Commerce, conducts quarterly and annual surveys of actual and anticipated plant

and equipment expenditures of all U.S. business, exclusive of agriculture. Shortly after the close of each quarter, data are released on

actual capital expenditures of that quarter and anticipated expenditures for the next two quarters. In addition, a survey is made at the

beginning of each year of the plans for business expansion during

that year.

Stock Market Data

The Branch of Exchange Regulation regularly compiles statistics

on the market value and volume of sales on registered and exempted

securities exchanges, round -lot stock transactions on the New York

exchanges for accounts of members and nonmembers, odd-lot stock

transactions on the New York exchanges, special offerings, and secondary distributions. It also computes indexes of stock market

prices each week based upon the closing market prices of common

stocks listed on the New York Stock Exchange. This stock price in-
190 SECURITIES AND EXCHANGE COMMISSION

dex and data on round-lot and odd-lot trading on the two New York

exchanges are released weekly. The other statistical data mentioned

above, as well as these weekly series, are published regularly in the

Commission's Statistical Bulletin.

During the fiscal year, the Commission revised its stock price index

to conform with the recommendation of the Officeof Statistical Standards that all Government indexes be compiled on a uniform and recent base period where feasible. There were two major changes in the

stock price index: (1) The base period was changed to the years

1957-59 from the former base year of 1939; and (2) the coverage

was expanded to include 32 industry classifications and 300 stocks, in

place of 29 groups covering 265 issues. 1Yeekly indexes were computed on the new base back to January 1939. The Commission published a pamphlet containing the revised indexes, a description of

the method of computation, and a list of stocks included in the indexes.

OPINIONS OF THE COMMISSION

The Commission issues opinions in contested and other cases arising

under the statutes administered by it and under the Commission's rules

of practice, where the nature of the matter to be decided, whether

substantive or procedural, is of sufficient importance to warrant a

formal expression of views. These opinions include detailed findings

of fact and conclusions of law based on evidentiary records taken before a hearing examiner who serves independently of the operating

divisions, or, in an occasional case, before a single Commissioner or

the entire Commission. In some cases, formal hearings are waived

by the parties and the findings and conclusions are based on stipulated

facts or admissions.

The Commission, as well as individual Commissioners to whom

particular cases may be assigned for the preparation of an opinion, is

assisted in the preparation of findings and opinions by its Office of

Opinion .Writing, a staff officecompletely independent of the operating divisions of the Commission and directly responsible to the Commission itself. The independence of the staff members reflects the

principle, embodied in the Administrative Procedure Act, of a separation between staff members performing investigatory or prosecutory

functions and those performing quasi-judicial functions. In some

cases, with the consent of all parties, the interested operating division assists in the drafting of opinions.

The opinions of the Commission are publicly released and distributed to representatives of the press and to persons on the Commission's mailing list. In addition, the opinions are printed and

published by the Government Printing Office in bound volumes entitled "Securities and Exchange Commission Decisions and Reports."
TWENTY-SEVENTH ANNUAL REPORT 191

During the fiscal year 1961,the Commission issued 167opinions and

other rulings of an adjudicatory nature.

DISSEMINATION OF INFORMATION

The objective of the laws administered by the Commission of providing public disclosure of pertinent financial and other information

concerning securities offered for public sale and those traded on

exchanges so that they may be realistically evaluated by the investing public, is furthered by various activities of the Commission which

facilitate the dissemination of such information. This is accomplished

in part, of course, through the requirements of the law and Commission rules for the distribution of the prospectus or offering circular on new offerings and the filing of annual and other periodic

reports. All registration statements and reports are available for

public inspection. Much of the data also is reprinted and receives

general circulation through published securities manuals, investment

advisory services and statistical services, which are reference material

for securities analysts and investment advisers.

To facilitate public dissemination of the financial and other proposals filed with and actions taken by it, the Commission issues a

daily News Digest containing a resume of these filings and actions.

The Digest is distributed daily to the press; and it also is distributed

on a daily, subscription basis through the Government Printing

Office (1,195 copies) and on a weekly basis by the Commission to a

mailing list comprising the names of over 11,000 individuals and

firms. Included in the Digests issued during the year were summary reports on the 1,674 registration statements filed during the

year (not including amendments pursuant to section 24(e) of the

Investment Company Act) which proposed the public offering of

$16.5 billion of securities. Also included were resumes of the 1,302

notices, orders, decisions, rules, and other announcements issued by

the Commission. Much of the information is published in the daily

press and in financial and other periodicals. The texts of the Commission's pronouncements are available to the press and given more

limited distribution to registrants, practicing lawyers, and others.

Members of the Commission and its staff frequently deliver addresses before professional, business, and other groups, and participate in "briefing" and other conferences in order to explain the

Commission's functions and activities, explain important rules and

policies, and otherwise contribute to a better understanding by individuals and firms subject to its jurisdiction as well as the investing

public of the role of the Commission.

620373--62----14
192 SECURITIES AND EXCHANGE COMMISSION

Information Available for Public Inspection

The many thousands of registration statements, applications, declarations, and annual and other periodic reports filed each year are

available for public inspection at the Commission's principal office

in 'Washington, D.C. In addition, copies of recent reports filed by

companies having securities listed on exchanges other than the New

York Stock Exchange and the American Stock Exchange, and copies

of current reports of many nonlisted companies which have registered

securities for public offering under the Securities Act, may be exambled in the Commission's New York regional office; and recent

reports filed by companies whose securities are listed on the New York

and American Stock Exchanges may be examined in the Commission's

Chicago regional office. Moreover, there are available for examination in all regional offices copies of prospectuses relating to recent

public offerings of securities registered under the Securities Act; and

all regional offices have copies of broker-dealer and investment adviser registration applications, broker-dealer annual financial reports

and regulation A letters of notification filed in their respective regions.

Reports of companies whose securities are listed on the various exchanges may be seen at their respective offices.

Photocopies of reports or portions thereof and other material in

the public files of the Commission may be obtained upon request

directed to the Commission's public reference room in Washington.

The charge per page for photocopies varies from 15 cents to 50 cents

depending upon the size of the page being copied. A minimum charge

of $1 is made for less than seven pages (legal size). The charge for

each certification of any such document by the Commission is $2.

Each year many thousands of requests for photocopies of and information from the public files of the Commission are received by the

public reference room in Washington, D.C. During the year 5,848

persons examined material on file in the ",Vashington office,and several thousand others examined files in the New York and Chicago

regional offices. About 210,251 photocopy pages were sold pursuant

to 3,444individual orders.

PUBLICAnONS

Publications currently being issued include:

Weekly: Index of Weekly Closing Prices.

Monthly:

Statistical Bulletin!

Official Summary of Security Transactions and Holdings of Officers, Directors, and Principal Stockholders.'

'Must be ordered from the SuperIntendent of Documents. Government Printing Office,

WashIngton 25, D.C.
TWENTY-SEVENTH ANNUAL REPORT 193

Quarterly:

Financial Report, U.S. Manufacturing Corporations' (jointly with the

Federal Trade Commission).

Plant and Equipment Expenditures of U.S. Corporations (jointly with the

Department of Commerce).

New Securities Offered for Cash.

Volume and Composition of Individual's Saving.

Working Capital of U.S. Corporations.

Annually:

Annual Report of the Commission.'

Securities Traded on Exchanges under the Securities Exchange Act of 1934.

Companies Registered under the Investment Company Act of 1940.

Corporate Pension Funds.

Directory of Companies FHing Annual Reports.

Other publications:

Decisions and Reports of the Commission.'

The 'work of the Securities and Exchange Commission.

ORGANIZATION

The Commission's staff consists of attorneys, security analysts, accountants, engineers, investigators, and administrative and clerical

personnel.

The following organizational changes have been made since June

30, 1960, in accordance with the Commission's policy of continuing

review of its organization and functional alignments:

In August 1960, the Commission established an additional Branch

of Investigations and an additional Branch of Enforcement in the

New York regional office. This action was designed to permit improved utilization of available personnel for the mounting workload

of cases requiring investigative and enforcement action and for the

regulation A, corporate reorganization and interpretative functions

of the New York regional office.

In November 1960, the position of Adviser to the Commission was

abolished and the functions were transferred to other staff officials.

In June 1961, the positions of Executive Director and Associate

Executive Director were abolished and certain functions thereof were

delegated to other members of the staff.

In August 1961, the Commission established three additional

Branches of Corporate Analysis and Examination in the Division of

Corporation Finance to handle the increased volume of filings on

proposed new financing under the Securities Act of 1933.

In October 1961, the Commission established a special study of

securities markets to conduct the study and investigation of the

adequacy of the rules of the national securities exchanges and na1Must be ordered from tbe Superintendent of Documents, Government Prtutmg Office,

Washington 25, D.C.
194 SECURITIES AND EXCHANGE COMMISSION

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tional securities associations provided for by Public Law 87-196, dated

September 5, 1961.

Also in October 1961,the Commission established two new branches,

the Branch of Special Investigations, Trial and Enforcement, and

the Branch of Criminal References, in the Division of Trading and

Exchanges. This action was designed to consolidate in one division

the Commission's investigation and enforcement activities in the headquarters officeand to contribute to more effective coordination of such

activities in the several regional offices.

PERSONNEL, BUDGET, AND FINANCE

In fiscal 1961, the Commission continued its efforts to recruit outstanding college and law school students with the specialized academic

training required for its fields of work. Recruitment brochures

covering specific positions were prepared and articles in the recruiting literature published by the Civil Service Commission updated.

Close contacts with placement officers and finance and law professors

of various colleges and law schools enabled the Commission to hire a

number of high-caliber recent finance and law graduates to fill

positions at the entrance levels.

Early in the fiscal year, an attorney honors program was adopted,

aimed directly at those law school graduates whose academic achievements, special training and career objectives indicated an unusual

suitability for the work involved in carrying out the objectives of the

Federal securities laws. On June 19, 1961, hiring procedures for

filling attorney positions were further revised to provide for giving

an examination to those candidates who, on initial review and evaluation of their applications, are considered to be well qualified for

employment on the Commission's staff.

The Federal service entrance examination conducted by the U.S.

Civil Service Commission continues to be an excellent source of supply for the filling of competitive positions at the GS-5 and GS-7

levels, particularly in the financial analyst category. Appointments

also are made from the lists of eligibles established under this examination to investigator (trainee) and other professional job categories

at the entrance levels.

Training activities in fiscal 1961were conducted in accordance with

the Commission's basic policies of (1) training employees to do their

work more efficiently and effectively, (2) stimulating and encouraging employee self-development and self-training to the fullest extent

and (3) affording equal opportunities for development. Supervisory

officials were enrolled in a special training course for middle and top

management officials. Professional training, though largely on the

job, was supplemented by special critique and instructional sessions
196 SECURITIES AND EXCHANGE CO:MMISSION

to meet identifiable needs. For example, in the Denver regional office,

new attorneys and investigators attended sessions conducted by the

regional administrator and senior officials on special aspects of

gathering evidence and developing securities fraud cases. In ",Vashington, a briefing conference on securities laws and regulations, which

was sponsored by the Federal Bar Association and in which members of the Commission and top officialsparticipated, served an additional purpose of training junior and intermediate staff members,

who were selected to attend at no cost to the Commission those sessions particularly pertinent to their work.

The average grade level of positions in the Commission in fiscal

ID61 was GS-8.88 compared with GS-8.D3 for 1960. Approximately

200 positions were studied and grades substantiated or adjusted.

Proper grade allocations for its top-level positions continue to be

of utmost importance to the Commission for the effective execution

of its programs. In the interest of attracting and retaining highly

qualified persons for these positions, continuous efforts are being made

to obtain favorable consideration of recommendations, heretofore

submitted to the Civil Service Commission, to place these positions

in grades GS-16, GS-17 and GS-18 as spaces become available.

A total of D55 employees were eligible to enroll in the Federal employees health benefits program which went into effect on July 10,

1960. Of this number 845, or 89 percent, elected to enroll in health

plans offered under the program. Sixty percent selected the service

(Blue Cross) plan, 32 percent the indemnity (Aetna Life Insurance

Co.) plan and 8 percent local comprehensive medical plans. Ninetythree percent of the employees enrolling in plans chose the high

option.

In its sixth annual service and merit awards ceremony held in

October 1960, the Commission for the first time gave formal recognition to those members of the staff whose term of service included time

completed in other Federal agencies. The length-of-service emblem

pin used by various Federal agencies was adopted. In addition, new

15-year and 25-year SEC service pins now make it possible to reward

length of service with the Commission at 5-year intervals commencing with the completion of 10 years. Pins covering total Federal

service were awarded to 3 employees for 40 years, 7 employees for

35 years and 16 employees for 30 years. Fifty-five employees received pins for 25 years of SEC service. Cash awards totaling $6,800

and certificates of merit were presented to 54 employees and 13 employees received a total of $395 for suggestions adopted during the

fiscal year.

During the fiscal year, the outstanding achievements of members of

the Commission's staff received further public recognition in the form
TWENTY-SEVENTH ANNUAL REPORT 197

of awards made by other organizations. On March 21, 1960,Manuel

F. Cohen, Director, Division of Corporation Finance, was 1 of 10

employees throughout the Federal service to receive a Career Service

Award presented by the National Civil Service League annually. Mr.

Cohen was selected on the basis of a "record of Federal service exemplifying outstanding qualities of technical competence and efficiency,

and personal and intellectual integrity of the highest order." On

May 20, 1961,the Federal Government Accountants Association presented its first National Award for Distinguished Leadership to Andrew Barr, Chief Accountant of the Commission, Mr. Barr received

his award "for distinguished leadership in formulating and administering financial requirements placed upon the business community

under the laws administered by the Securities and Exchange

Commission."

In February 1961, Magdalen B. Murphy, attorney-adviser, and

Helen K. Steiner, analytical statistician, both on the staff of the Division of Trading and Exchanges, were presented citations in recognition of their contributions to the public service and to the prestige

of women employeesin the Federal Government.

The trustees of the .William A. Jump :.\IemorialFoundation in :May

1961 presented Andrew N. Grass, Jr., a chief enforcement attorney

in the New York regional office,a certificate and citation in recognition of his exemplary accomplishments and special contributions to

the efficiencyand prestige of the public service.

The Commission is justifiably proud of the devoted, conscientious,

and competent service rendered by its staff. Public recognition is an

essential factor in building and maintaining the prestige of public

careers and awards of this nature serve to improve the quality of public administration and the morale and public service motivations of

Federal employees.

The following comparative table shows the personnel strength of the

Commission as of June 30, 1960and 1961:

Commlssloners . . _. . __________________. . _._1

June 30, 1961 June 30, 19GO

5 5

StaffHeadquarters offiee____________. __. ___. __.. ____.... _._.. _____._. __.. __. 6i5 nOO Regional offices, •. _. _. . . _. .. ._ 40i 375

Total statt., . . __ •.. . . . _._.. 1.082 9i5

Orand total. . . . . _._. . 1,08i 980

The table facing page 198 shows the status of the Commission's

budget estimates for the fiscal years 1952 to 1962, from the initial

submission to the Bureau of the Budget to final enactment of the

annual appropriation.

_____________________ _______ •__ __

________" _____ ______ ___ ______ ' ___ _______

_____________________' ___ ___ ____ ___________

_________________' _____________________ ____ __' __
198 SECURITIES AND EXCHANGE COMMISSION

The Commission is required by law to collect fees for registration

of securities issued, qualification of trust indentures, registration of

exchanges, and sale of copies of documents filed with the Commission."

The following table shows the Commission's appropriation, total

fees collected, percentage of fees collected to total appropriation, and

the net cost to the taxpayers of Commission operations for the :fiscal

years 1959, 1960,and 1961:

Percentage

of fees

Yeolr Appropna. Fees collected to Net cost of tlOn collected} total appro- Commission

pnauon operation

(percent)

1959____________________________________________I ~7, 705,000 $2,407,706 31 $5,297,294 1960 _. 8,100,000 2,631,498 32 5,468,502 1961. ___________________________________________ 9,517,500 2,927,407 31 6,590,093

I Includes a supplemental appropnation of $605,000 to cover statutory pay increases,

, Fees are depositsd In the general fund of the Treasury and are not available for expenditure by the

Oomrrnssron,

21 Principal rates are (1) ;ioo of 1 percent of the maximum aggregate price of securrtres

proposed to be offered but not less than $25; (2) '1600 of 1 percent of the aggregate dollar

amount of stock exchange transactions. ,Fees for other services are only nominal.

____ - -- - --- -- - -- - ------ ----~- - ----- - - -- --
8eourltieB ana E:echange Oommi8Bion

Action taken on 'budget 6BtlmateB and appropriation from fi,8caZ1958 through fi,8ca1 196!

FIsca11952 Flsca11953 Fiscal U54 Flsca11955 FlscalI956 Flsca11957 Flsca11958 Fiscal 1959 Flscall960 F1sca11961 FlscalI962

ACTION

Average Average Average Average Average Average Average Average Average Average Average employ- Money employ- Money employ. Money employ. Money employ- Money employ. Money employ- Money employ. MODeY employ- MODeY employ. Money employ- Money menb ment ment ment ment ment ment ment ment ment went

- Estimate submitted to the Bureau of the Budget ._ _. 1,127 $6,605,000 1,092 $6,360,000 1,080 $6,810,000 780 $5,124,760 734 $4,997,000 794 $5,749.000 935 $7.178,000 974 $7,500,000 995 $8.437,000 1.135 $9,760,000 1,228 $11,450,000 Action by the Bureau of the Budget -77 -&11,000 -157 -410,000 -142 -810,000 -63 -299.760 -... ..------ ------------ ---.....-_ ...- ------------ --------_. ------------ -58 -400.000 -17 -162,000 -93 -860,000 -42 -435,000

Amount B1lowedby the Bureau ofthe Budget 1,050 5,924,000 935 5,950,000 938 6,000,000 717 4,825,000 734 4,997,000 794 5,749,000 935 . 7,178.000 916 7,100,000 978 8,275,000 1,042 8,900,000 1,186 , 11,015,000

Action by the House of Representatlves -50 -225,000 -125 -704,920 -152 -754,920 -26 -125,000 -9 -122,000 -8 -49,000 -80 -478,000 -46 -300,000 -55 -475,000 -46 -375,000 ------- ...-- -15,000

--- ------------ Subtotal.. _._._._. .-. 1,000 5,699,000 810 5,245,080 786 5,245,080 691 4,700,000 725 4,875000 780 5,700,000 855 6,700,000 870 6,800,000 lI23 7,800,000 996 8,525,000 1,186 11,000.000 Action by the Senate ._ -93 -320,520 ---------- -----........ -..._- -42 -245,080 +14 +75,000 +9 +122,000 +8 +49,000 -.-...-_ ......-- ......-----.---- +46 +300,000 +55 +475,000 +92 1+775,000 ---------- ------- ...---- Bubtotal, _. 907 5,378,480 810 5,245,080 744 5,000,000 705 4,775,000 734 4,997.000 794 5,749,000 885 6, 700.000 916 7,100.000 978 8,275,000 1,088 9,300,000 1,186 11,000,000 Action by Conferees ...--...-...-..-- --_ ...-------- ....-_ ...--.-. -_ ...... -.-..---.... ---.-..---- ------_._--- -6 -25,000 -4 -42,000 ----_..._-- -----_ .._--_. --_ ..-..-.-- ..--_.---_ .... .. .._------ .._----- ...._-- -24 -175,000 -47 -387,500 --------- .._-

AnnuB! appropriation ",, ._._._. 907 5,378.480 810 5,245,080 744 5,000,000 699 4, 750,000 730 4,955,000 794 5.749,000 855 6,700,000 916 7,100.000 954 8,100,000 1,041 8,912,500 1,186 ll,OOO, 000

SupplementBI appropriation for statutory pay 1ncreBses.. ._._ ..._-- .. ...-- 435,000 93,180 323,000 235,000 605,000 J 605,000 ......._------ ....__ .._---_ ...- -------_ ..... ------------ ---_ .._ ...--- .._-_ .._--- ---------- ---_ .._------ -------_.- -_ ...------ --_ ..------ -----....---_ ... ------_ ..-- -.... . .-- ------------ Total approprlatlon ._. 907 5,813,480 810 5,245,080 - 744 5,000,000 699 4,843,180 730 5,278,000 794 5,749,000 855 6,935,000 916 7.705,000 954 8,100,000 1,041 9,517,500 1,186 '11,000,000

1 Includes a supplemental request lor $400.000. 1Includes a supplemental request lor $100,000. J Excludes a 5upplementalapproprlatl.on of $412,500for the special study of securities markets.

620373--62 (Face p. 198)

_______•_____________••• ___•_____•

___________ -

__ ____•__

____••• __•• _____• ___ •• _______ ••••••• __••••••

•• _•••• _•• __•• __••• ___•___•• __ ••• _____•• __••• __••••••••• _ _ _ _ ----------

•• _•• ___" __ __

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

__ _••• ___••• __••••
PART XII

APPENDIX

STATISTICAL TABLES

TABLE 1.- A 27-year record of reqistraiions full y eif ective under the Securities A ct of 1933

1985-1961

[Amounts III millions of dollars]

For cash sale for account of ISSuers

Numher

FJscal year ended June 30 of All regisstate- tranons Bonds, Preferred Common ments I Total debentures, stock stock and notes

1935 284 $913 $686 $490 $28 $168 1936___________________________ 689 4,835 3,936 3,153 252 531 1937___________________________ 840 4,851 3,635 2,426 406 802 1938___________________________ 412 2,101 1,349 666 209 474 1939___________________________ 344 2,579 2,020 1,593 109 318 1940___________________________ 306 1,787 1,433 1,112 110 210 1941. __________________________ 313 2,611 2,081 1,721 164 196 1942___________________________ 193 2,003 1,465 1,041 162 263 1943___________________________ 123 659 486 316 32 137 1944__________. _____. __________ 221 1,760 1,347 732 343 272 1945______________. ___________ 340 3,225 2,715 1,851 407 456 1946_________. __________. ______ 661 7,073 5,424 3,102 991 1,331 1947________________. __________ 493 6,732 4,874 2,937 787 1,150 1948___________________________, 435 6,405 5,032 2,817 537 1,678 1949___________________________ 429 5,333 4,204 2,795 326 1,083 1950___________________________ 487 5,307 4,381 2,127 468 1,786 1951___________________________ 487 6,459 5,169 2,838 427 1,904 1952___________________________ 635 9,500 7,529 3,346 851 3,332 1953___________________________ 593 7,507 6,326 3,093 424 2,808 1954___________________________ 631 9,174 7,381 4,240 531 2,610 1955___________________________ 779 10,960 8,277 3,951 462 3,864 1956___________________________ 833 13,096 9,206 4,123 539 4,544 1957___________________________ 860 14,624 12,019 5,689 472 5,858 1958___________________________ 809 16,490 13,281 6,857 427 5,998 1959___________________________ 1,055 15,657 12,095 5,265 443 6,387 1960___________________________ 1,398 14,367 10,908 4,221 252 6,435 1961________. __________________ 1,507 19,070 14,115 6,150 247 7,719

I Statements registering Amencan Depositary Reeeipts agamst outstanding foreigu secuntes as provided

by Form S-12 are not mcluded .

For 10 months ended June 30, 1935.

201

•_________________________

•
202 SECURITIES AND EXCHANGE COMMISSION

TABLE 2.-Regi8trations fully effective under the Securities Act of 1933, fiscal year

ended June 30, 1961

PART I.-DISTRIBUTION BY MONTHS

[Amounts in thousands of dollars I)

All registrattons Proposed for sale for account of issuers

Year and month Number of Number of Amount Number of Number of Amount statements issues statements Issues

1960 July _________________. ___.. ___ 117 170 $1,278,624 96 135 $999,268 August ______._. ___. ___. __. ___ 107 140 1,505,199 84 110 1,202,488 September ___. ____________. ___ 112 145 823,333 96 1I7 656,102 October __. ___. __. ________.. ___ 1I8 159 1,494,574 96 124 1,179,647 November _. _. _. ______________ 121 153 1,121,386 101 1I7 687,459 December. __. _______. ____. ___ 97 132 916,107 76 93 628,901

1961 January _______________________ 88 121 951,677 69 94 688,276 February _____________________ 103 134 2,319,499 88 109 1,808,219 March. _______________________ 124 160 1,017,059 1I2 136 840,026

Aprrl .; 159 191 2,675,457 143 163 2,233,094

May. 181 224 2,108,364 152 179 1,432,11I June __________________. ______. ISO 231 2,858,802 144 177 1,759,199

Total, fiscal year 1961 ___ '1,507 1,960 19,070,082 1,257 1,554 14,1I4,791

PART 2.-PURPOSE OF REGISTRATIO:'-l AND TYPE OF SEOURITY

[Amounts In thousands of dollars IJ

Type of security

Purpose of regtstratron All types

Bonds, de- Preferred Common

bentures, stock stock and notes 3

AlIregistratlOllS (estunated value) ___________________ $19,070,082 $6,233,503 $484,489 $12, 352, 091

For account or issuers for cash sale 14, 1I4, 791 6,149,635 246,594 7,718,561

Corporate ____________________________________ '13,959,916 6,004,760 236,594 7,718,561

Offered to General public _______. _______. _______ lI,009,667 5,598,207 235,51I 5,175,950 Security holders., ___________. ________ 2,072,750 400,468 600 1,671,681 Other special groups., ________________ 877,499 6,085 483 870,930

Foreign governments. ________________________ 154,875 144,875 10,000 0

For account of issuers for other than cash sale ____ 3,563,444 62,994 192,040 3,308,41I

For account of others than ISSuers .. ______________ 1,391,847 20,873 45,854 1,325,1I9

For cash sale ___________. ____. ________________ 1,124,682 62 35,971 1,088,649 For other purposes. ____________. ______. _____. 267,164 20,812 9,883 236,469

See footnotes at end of part 4 of table.

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TWENTY-SEVENTH ANNUAL REPORT 203

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TWENTY-SEVENTH ANNUAL REPORT 209
210 SECURITIES AND EXCHANGE COMMISSION

TABLE 4.-Proposed uses of net proceeds from the sale of new corporate securities

offered for cash in the United States

PART I.-ALL CORPORATE

[Amounts in thousands of dollars I

Proceeds New money Calendar year or Retire. Other month 2 ment of purposes Total gross Total net Total new Plant and Workmg securlties

proceeds' proceeds 3 money equipment capital

1956... ____. _______. ____._ 10,938,718 10,748,836 9,662,952 6,709,126 2,953,826 364,459 721,424 1957.. ___.. __________.. ___ 12,883,533 12,661,300 11,783,879 9,039,778 2,744,101 214,294 663,127 1958_._ .. __________. ______ 11,558,343 11,371,563 9,907,135 7,792,008 2, Il5,127 548,952 915,475 1959... ____. ___._ . ______._ 9,748,069 9,526,631 8,577,764 6,084,152 2,493,612 134,548 814,319 1960 ._ .. 10,153,980 9,923,779 8,758,240 5,661,567 3, 096, 673 270,784 894, 755

1960

January .. ___. ____________ 640,674 625,956 547,920 313,310 234,610 55,636 22,401 February ___._._ .. _______ 735,483 718,792 661,205 401, 211 259,995 4,269 53,317 March .. . 888,878 869,143 762,399 465,810 296,588 8,709 98,036 April, . •. . . 805,189 782,869 674,818 478,641 196,177 21,960 86, 091 May •.... ..... .. 607,796 589,524 513,769 331, 098 182 672 12,952 62,802 June •.. .. 1,12.3,672 1,092,403 991, 984 602,759 389,224 48,143 52,277 July .... _____._. ___. ____._ 777, 378 759,727 656,529 325,354 331,175 23,962 79,236 AugUSt .... ____. ___.. _____ 995,859 976,270 894,819 613,608 281,211 10,166 71,285 September. ___. ___.. __.. _ 746,591 731,130 671,120 541,240 129,880 5,258 54,752 October __________.. ___. __ 928,185 910,297 830,177 626,613 203,564 20,214 59,906 November _______________ 1,009,485 988,474 804,515 466, 010 338,505 32,321 151,6AA December . ________. ______ 894,790 879,192 748,9&4 495,912 253, 072 27,194 103,014

1961

January . _________________ 600,616 mO,250 551,575 359,176 192,399 10,346 28,328 February. ___.. _____•. ___ 695,413 681 810 611,885 304,253 307,632 14,327 55,598 March, ..• _. ___________._ 696,272 679,178 484, III 288,762 195,349 Il7,655 77,412 Apnl.; .. _•. _.____________2,231, 437 2,202,858 2,055,451 1,780,209 275,242 84,749 62,658 May ______.. _. ____. ______ 1,341,815 1,314,344 1,090. 014 833,809 256,205 55,279 169,051 June .. ._ . . 1,778,662 1,743,947 1,126,731 758,816 367,915 426,340 190,877

P.\RT 2 -MANUFAOTURING

9

1956... ______... ___. ___._. 3,647,243 3,578,Ii02 2,944,378 1,928,034 1,016,3 44 242,684 391,440 1957_ •. .... 4,233,708 4,153,534 3,764,423 2,644,460 I, Il9, 963 49,131 339,980 1958._ ... . . ._ 3, SIS, 407 3,459,399 2,851,033 2,027,328 823,7 05 194,629 413,738 1959.... ___._ .. ____.. ___.. 2,072,820 2, OIl, 306 1,684, 071 863,709 820,3 62 70,419 256,815 1960.• _...•.. ___•. ___. __._ 2,152,419 2,076,267 1,710,743 944,632 766,1 11 79,327 286,196

1960

January .. __. ___•.. ___.. __ 67,437 63,580 54.822 33,681 21,1 40 4, 236 4, 522 February .••.... ____. ____. 71,936 67,226 59,178 26,458 32,7 19 603 7,446 March .... _. ____... _. __._ 181,013 173,298 150,492 96,421 54,0 71 1,181 21,625 Aprtl, •.... ____.• _____. ___ 179,261 172,948 132,024 51,429 80,5 95 2,309 38,615 May •.. ___. __.. ____.. __.. 103,576 98,309 73,876 24,365 49,5 12 6,294 18,139 June ••. _. .•. . 260,806 249,121 219,720 107,834 Ill, 886 459 28,942 July .... ______.. ____. _____ 188,786 182,293 162,670 72,742 89,9 27 583 19,041 August •. _... ___•. __.... __ 233,134 225,907 206,122 156,790 49, 331 6,075 13,710 September .. _.. _________. 169,014 164,699 134,871 79,143 55,7 29 3,785 26,042 October . ____.. ___. _______ 195,739 189,151 160,572 107,427 53,1 45 4,491 24, 087 November •. _._ •. ___.. ___ 283,319 276,624 204,758 100,983 103,7 75 27,160 44,706 December _.__._. ___.. ____ 218,399 213,112 151,640 87,359 64, 280 22,151 39,321

1961

January •. _._ .. _. __.. _••.. 173,177 169,784 155,356 97,322 58,0 34 1,246 13,183

February _.. _._.... __... _ 106,322 103,654 75,114 29,653 45,4 61 4, 739 23,801 March .• _. ____.. ____.•. __ 285,626 279,351 182,692 79,230 103,4 62 31,736 64,923 ApnL •. _.. ____.... _. _•. __ 601,932 590,049 543,257 439,882 103,3 75 16,880 30,412 May •... .•.• ..• 480,831 468,993 339,003 203,516 135,4 87 22,449 107,542 June .••. ...• . 584,897 573,715 340,098 170,549 169, 549 127,677 105,93

See footnote at end of table.

___ __________' ____

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•• _ __ ____ ___

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•• _ __ ____•__
TWENTY-SEVENTH ANNUAL REPORT 211

TABLE 4.-Proposed uses of net proceeds from the sale of new corporate securities

offered for cash tn the United States-Continued

PART 3 -EXTRACTIVE

[Amounts m thousands of dollars 1]

Proceeds New money Calendar year or Retlre- Other month' ment of purposes Total gross Total net Total new Plant and Workmg secunues proceeds 3 proceeds 3 money equipment capital

1956______________________ 455,523 435,691 304,909 211,029 93,880 37,849 92,934 1957______________________ 288,574 276,809 242,826 159,783 83,042 6,838 27,145 1958______________________ 246,565 239,274 184,092 95,221 88,871 2,033 53,149 1959______________________ 161,396 154,495 119,555 39,190 80,365 12,245 22.695 1960______________________ 245,682 2&9,469 154,216 71,338 82,879 8,476 76,777

1960 J anuary __________________ 29,213 27,975 21,357 18,435 2,922 0 6,618 February ________________ 10,175 9,927 9,827 3,166 6,661 0 99 March ___________________ 78,745 77,178 21,248 12,937 8,311 0 55,930 ApnL ____________________ 7,800 7,579 3,919 1,910 2,010 0 3,659 May _____________________ 35,178 34,759 29,833 11,339 18,494 1,008 3.918 June __, __________________ 2,454 2,311 1,060 487 572 0 1,251 July ______________________ 23,669 22,793 14,942 2,594 12,348 7,068 784 Autust ___________________ 9,339 9,273 9,237 220 9,017 0 36 September _______________ 4,872 4,600 2,876 2% 2,591 0 1,724 October __________________ 8,734 8,608 8,518 2,470 6,048 0 90 November _______________ 13,614 13,109 11,594 3,140 8,454 0 1,515 December 21,888 21,358 19.806 14,356 5,450 400 1,152

1961 January __________________ 15,171 15,105 13,282 6,414 6,867 593 1, 2-~0 February. 28,283 27,682 25,071 9,024 16,047 817 1,794

March _______=========:== 16,756 16,130 15,136 6,387 8,749 249 745 Apnl, ____________________ 9,935 9,762 5,852 2,828 3,024 286 3,623 May _____________________ 34,168 33,644 32,017 24,791 7,226 514 1,113 June _____________________ 10,675 9,965 9,476 3,822 5,654 32 458

PART 4.-ELECTRIC, GAS AXD WATER

1956______________________ 2,529,175 2,487,493 2,409,885 2,394,928 14,957 I 13,794 63,814 1957______________________ 3,938,087 3,871. 899 3,659,189 3,645,919 13,271 51,280 161,430 1958______________________ 3,804,105 3,743,395 3,441,074 3,411,355 29,719 138,392 163,928 1959______________________ 3,257,790 3,204,090 3,056,634 3,036,644 19,900 15,250 132,205 1960______________________ 2,851,215 2,805,315 2,655,559 2,624,059 31,500 51,170 98,587

1960 January __________________ 158,040 155,387 154,757 153,708 1,049 0 630 February ________________ 253,227 247,631 245,007 244,738 270 2,250 374 March ___________________ 202,021 198,142 196,933 194,787 2,146 459 750 AprIL ____________________ 326,225 320,657 282,737 282,737 0 18,155 19,765 May _____________________ 146,719 143,939 137,678 137,678 0 0 6,262 June _____________________ 370,818 365,050 354,109 350,668 3,441 3,445 7,496 July ______________________ 143,116 140,869 118,446 117,319 1,126 14,450 7,973 August, __________________ 225,531 222,287 217,287 216,187 1,101 0 5,000 September _______________ 307,253 303,269 302,544 302,311 234 125 600 October __________________ 215,422 212,344 199,149 198,387 762 9,794 3,400 November _______________ 320,076 315,454 267,483 246,508 20,974 1,789 46,183 December ________________ 182,768 180,287 179,430 179,033 397 702 155

1961 January __________________ 139,643 137,235 134,198 134,160 &7 0 3,037 February ________________ 162,751 159,999 159,961 159,923 38 0 38 March ___________________ 85,067 83,693 81,912 81,546 366 0 1,782 ApnL ____________________ 278,098 274,934 247,393 247,116 277 21,442 6,149 May _____________________ 461,286 455,732 408,095 406,670 1,425 16,757 30,880 June _____________________ 408,145 401,912 387,411 385,859 1,552 13,174 1,327

See footnotes at end of table.

-

_____ ----- ----
212 SECURITIES AND EXCHANGE COMMISSION

TABLE 4.-Proposed uses of net proceedsfrom the sale of new corporate securities

offered for cash in the United States-Continued

PART 5.-RAILROAD

[Amounts in thousands of dolIars ']

Retire- Other

moot of purposes Total gross Total net Total new Plant and Working securities proceeds a proceeds a money equipment capital

Calendar year or

month 2

Proceeds New money

1956

1957

1958

1959

1960

382.012

343,647

238,352

173,913

211,244

378,159

340,244

235,542

172,244

209,146

365,447

326,409

206,381

172,244

174,485

365,447

326,409

188,784

169,314

174,485

o

o 17,597

2,930

o

12.713

13,835

29,151

o 34,661

o

o

o

o

o

1950 January

February

March

ApriL

May

June

July

August.

September

October

November

December.

1961 January

February

March

AprIL

l\1a~-

June

18,867

4,736

7,558

28,924

19,789

46,089

30,692

16,141

16,282

8,437

2,604

11,125

27,620

17,063

22,537

10,404

14,204

13,237

18,697

4,697

7,486

28,659

19,574

45,446

30,482

16,017

16,143

8,345

2,582

11,016

27,384

16,848

21,984

10,300

14,065

13,185

18,697

4,697

7,486

28,659

19,574

10,785

30,482

16,017

16,143

8,345

2,582

11,016

27,384

10,374

13,171

10,300

14.065

7,200

18,697

4, 697

7,486

28,659

19,574

10,785

30,482

16,017

16,143

8,345

2,582

11,016

27,384

10,175

13,171

10,300

14,065

7,200

o

o

o

o

o

o

o

o

o

o

o

o

o 200

o

o

o

o

o

o

o

o

o 34,661

o

o

o

o

o

o

o 6,473

8,812

o

o 5,985

o

o

o

o

o

o

o

o

o

o

o

o

o

o

o

o

o

o

PART 5.-0THER TRANSPORTATION

22

88

1956______________________ 342,000 335,772 322.855 298,537 24,318 7,147 5,770 1957______________________ 479,921 475,421 465,095 456,665 8,430 204 10,1 1958______________________ 585,539 580,031 474,438 458,345 16,093 8,505 117,0 1959______________________ 792.829 784.469 747,347 699,873 47,474 15,077 22,045 1960______________________ 507,286 501,031 451,064 423,993 27,071 3,008 46,059

19'10 January __________________ 40,473 39,649 37,940 36,020 1, ll20 855 855 February ________________ 14,580 14.014 13,588 13,045 543 426 0 March ___________________ 68,353 67,628 65,406 64,295 1,111 1,111 1, III AprIL ____________________ 24,778 24,476 24,476 24,197 279 0 0 May _____________________ 60,020 58,872 54,140 52,781 1,358 0 4, 732 June 28,055 27,779 27,320 21,6:>2 5,718 459 0 July 20,028 19,834 19,751 19,710 41 41 41 August. _________________ 76,282 75,943 53,590 51,410 2,181 0 22,353 September _______________ 34,854 34,536 27,6J9 19,525 8,084 0 6, ll27 October __________________ 27,713 27,512 27,362 27,242 120 75 75 November _______________ 43,454 42,569 39,501 36,675 2,826 0 3,0611 December ________________ 68,697 68,2111 60,381 57,400 2,891 941 6,897

1901 January __________________ 55,123 54,396 53,544 51,236 2,308 322, 829 February ________________ 44,615 44,230 44,051 43,108 943 00 00 March ___________________ 60,434 59,653 58,210 53,U84 5,125 722 722 April _____________________ 23,623 23,524 2O,8il 111,259 1,611 830 1,823 May. 54,134 53,181 52,959 49,297 3,662 111 111 June. 109,741 108,656 67,842 66,975 867 708 40,106

See footnotes at end or table.

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

________________ • ____

___ • _________________

________________•• __ ____• _______________
TWENTY -SEVENTH ANNUAL REPORT 213

TABLE 4.-Proposed uses of net proceedsfrom the sale of new corporate securities

offered for cash in the United States-Continued

PART 7.-COMMUNICATION

[Amounts in thousands of doIlars 1J

Proceeds New money

CalendarJear or Retlre- Otber mon J ment of purposes

Total gross Total net Total new Plant and Working securities proceeds 3 proceeds 3 money equipment capital

1955______________________ 1,419,457 1,405,006 1,371,471 1,369,832 1,639 20,674 12.861 1957______________________ 1,461,748 1,444,446 1,427,977 1,425,696 2,281 3,904 12,566 1958______________________ 1,423,776 1,411,831 1,265,315 1,262,382 2,933 118,112 28.404 1959______________________ 717,101 707,265 702,959 701,347 1,612 113 4,192 1000______________________ 1,049,810 1,036,460 1,031,659 1,022,870 8,790 682 4,119

1960 January __________________ 36,998 36,345 36,245 36,154 91 0 100 February ________________ March 85,561 84, 535 84, 535 84, 490 45 0 0 ___________________ ApnL 69,803 69,124 68,442 68,397 45 682 0 ____________________

May 52,518 51,733 51,123 48,182 2,940 0 611 37,250 36,462 36,462 35,452 1,010 0 0 June _____________________ 61,745 60,698 60,361 60.341 19 0 337 July ______________________ 58,361 57,432 56 432 52,855 3,577 0 1,000 August. __________________167,682 165,434 163,974 163.974 0 0 1,460 September _______________ 95,747 94, 101 93,886 93,322 564 0 215 October __________________ 255,620 253,560 253,560 253.516 45 0 0 November _______________ 27,303 26,792 26,397 25, q44 453 0 395 December 101,225 100,243 100,243 100,243 0 0 0

1961 January ____ 21,300 21,140 17,857 17,588 270 0 3,283 February ________________ 41,306 40,527 38,700 36,914 1,786 0 1,827 March ___________________ ApriL 90,200 88,994 18,885 18,709 176 69,933 176 ____________________

May 1,044, 870 1,038,794 993,779 991,649 2,130 44,973 42 _____________________ 97,929 97,193 84.881 84,723 158 12.154 158 June. ____________________ 269,544 266,613 13 948 13,778 169 250,531 2,134

PART 8,-FINANCIAL AND REAL ESTATE

1956______________________ 1,855,953 1,831,550 1,703,487 39.038 1,664, 449 16,947 111,116 1957______________________ 1,795.413 1,768,353 1,635,740 241,464 1,394, 276 67,314 65,298 1958______________________ 1,088,299 1,060,792 900,109 186,773 713,336 46,887 113,796 1959 1,852,906 1,807,390 1,568,990 300,592 1.268,398 6,116 232,285 1960 2, 524, 619 2,472,229 2,143,135 267,586 1,875,549 71,366 257,728

1960 January __________________ 254, 543 251,007 192,837 6,794 186,042 50,480 7,690 February ________________ March 203,105 200,695 185,037 9,090 175,947 0 15,659 ___________________ 225,346 222,523 213.623 9,702 203.921 3,247 5,653 A pril, ____________________143,688 137,313 115,336 30,957 84,379 987 20,990 May _____________________ 164, 492 158,427 137,884 45,954 91,930 1,142 19,401 J une _____________________ 303,463 294, 948 276,725 27,752 248,973 8,612 9,611 July ______________________ 287,150 282,108 235,327 25,246 210.081 50 46,731 August ___________________ 223,866 219,213 194, 883 4, 020 190,863 3,863 20,467 September _______________ 74,287 71,821 63,321 21,833 41,488 112 8,388 October __________________ 150,414 147,222 125,229 11,879 113,350 109 21,885 November __________ 245,212 242,433 206,972 33,022 173,950 150 35,311 December ________________ 249,055 244, 518 195,961 41,337 154,624 2,614 45,943

1961 January __________________ 148,570 146,232 132,005 18,781 113 224 8,106 6,121 February ________________ 227,664 223,842 220,843 7,215 213,628 1,022 1,977 March ___________________ 97,401 93,643 85,816 27,044 58,772 1,400 6,427 ApriL ____________________ May 190,836 186,144 168,987 59,420 109,566 410 16,748 _____________________ 117,686 113,014 90,146 27,308 62,837 1,834 21,034 J une 243,233 236,587 203,184 77,870 125,314 5,442 27,962

See footnotes at end of table.

____________________•

_______________•

_____________0

_____• ________________ ________________• _____

____ 0

_____ • _______________
214 SECURITIES AND EXCHANGE COMMISSION

TABLE 4.-Proposed uses of net proceeds from the sale of new corporate securities

offered for cash in the Umted States-Continued

PART 9.-COMMERCL<l.L AND OTHER

[Amounts III thousands of dollars II

-- I

Proceeds New money

Calendar year or Retire- Other

month' mcnt of purposes

Total grOSS Total net Total new Plant and Working securrties

proceeds a proceeds' money equipment capital

1956________. _____. _______ 307,355 296,663 240,521 102,281 138,239 12,652 43,491 1957___ 342,435 330,593 262,220 139,382 122.1<33 21,788 46,585

1958_. __:: ::: ::: ::::::: ::: 656.299 641,298 584,692 161,819 422.873 11,234 45,372 1959______________________ 719,314 685.374 525,963 273,483 252,480 15,328 144,082 1960._. ___________________ 611,705 583,860 437,378 132,604 304,774 21,194 125,288

1960

January _______________. __ 35,103 33,316 31,265 9,821 21,444 65 1,986 February _______... ____.. 92,164 90,067 59,337 15,527 43,810 990 29,740 March; ___________. _____. 56,040 53,766 38,770 11,786 26,984 2,029 12,967 Apn!... . 41,996 39,505 36,545 10,571 25,974 509 2,451 May. ___. _______._._. ___. 40,773 39,181 24,322 3,954 20,368 4,608 10,352 June, ... ____._____., ____. 50,243 47,052 41,905 23,290 18,616 507 4,640 July .. _. . _. _. 25,578 23,915 18,479 4, 405 14,074 1,770 3,666 August ____________. __. ___ 43,882 42,196 33,708 4,990 28,718 228 8,259

September. _____._. ______ 44,281 41,961 29.869 8,679 21.189 1,237 10,855 October ______. __. _. _.. ___ 66,105 63.555 47,441 17,347 30,094 5,745 10,369 November 73.904 68.910 45.229 17,156 28,073 3,222 20,459 Deeember __.. __________._ 41,634 40,437 30,507 5,076 25,431 385 9,546

1961

January __________________ 20,012 18,975 17.950 6.291 11,659 80 945 February _________. ______ 67.410 65,028 37,771 8,242 29,530 1,186 26,070 March. ___. _________. _. __ 38,251 35,730 28.289 9,590 18,699 4.803 2.638 Aprl!... __________________ 71,738 69,300 65,013 9,754 55,258 428 3,860 May . 81,577 78,521 68,848 23,439 45,409 1,460 8.213 June __. ________. _________ 139,190 133,315 97,573 32,764 64,809 22,792 12,951

I Slight discrepaneres between the sum of figures in the tables and the totals shown are due to rounding.

, For earlier data see 26th annual report. a Total estimated gross proceeds represent the amount paid for the seeunties by investors, whIle total

estimated net proceeds represent the amount received by the Issuer after payment of compensation to distnbutors and other costs of flotation,

___________•___ __

___•__ _____ __

__•_____•______

• _______ ____________
TWENTY-SEVENm ANNUAL REPORT 215

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216 SECURITIES AND EXCHANGE COMMISSION

TABLE 6.-Brokers and dealers registered under the Securities Exchange Act of

1934 I-effective registrations as of June 30, 1961, classified by type of organization and by location of principal office

Number of registrants Number of proprietors, partners,

officers, etc. , ,

Location of principal office Sole Sole pro- Part- Cor- pro- Part- Cor- Total prio- ner- pora- Total pne- ner- pora- tor- ShIPS nons tor- ships nons ships ships

--- --------------- Alabama 39 14 4 21 119 14 13 92 Alaska 4 3 0 1 8 3 0 5 ArIzona 30 7 5 18 117 7 13 97 Arkansas 33 6 3 24 122 6 6 110 Oahforma 415 152 86 177 1,568 152 532 884 Colorado 95 27 6 62 330 27 21 282 Conneencut 46 17 12 17 188 17 59 112 Delaware 20 7 4 9 79 7 22 50 DIstrict of Columbia 139 33 21 85 616 33 120 463 Flonda 136 53 10 73 387 53 25 309 Georgia 37 9 5 23 219 9 26 184 HawaIL 36 13 6 17 139 13 15 111 Idaho 15 7 1 7 40 7 3 30 Ilhnois 196 44 55 97 945 44 300 601 Indiana 57 26 4 27 180 26 9 145 Iowa 36 13 5 18 105 13 14 78 Kansas 32 10 5 17 125 10 15 100 Kentucky 22 8 6 8 66 8 22 36 Louislana M 28 11 15 126 28 43 55 Maine 28 9 2 17 79 9 7 63 Maryland 64 20 12 32 212 20 84 108 Massachusetts 216 92 33 91 932 92 240 600 Michigan 62 9 17 36 329 9 100 220 Minnesota 67 9 9 49 329 9 35 285

~:~~~~~:= .; = =::.:=:::: .:

22 8 7 7 51 8 18 25

87 23 17 47 509 23 144 342 Montana 16 9 2 5 40 9 4 27 Nebraska 27 9 0 18 127 9 0 118 Nevada 5 3 0 2 11 3 0 8 New Hampshire 11 7 1 3 25 7 2 16 New Jersey 256 131 38 87 585 131 104 350 New Mexico 11 3 3 5 37 3 10 24

New York State (excluding New York City) 446 248 44 1M 920 248 129 543 North Carolina 42 14 4 24 210 14 10 186 North Dakota 10 3 2 5 27 3 4 20 Ohio 135 27 35 73 626 27 191 408 okJahoma 39 23 5 11 80 23 11 46 Oregon 31 5 6 20 112 5 12 95 Pennsylvania 240 69 82 89 996 69 400 527 Rhode Island 21 5 9 7 49 5 24 20 South Carolma 33 10 4 19 99 10 9 80 South Dakota 8 4 0 4 19 4 0 15 Tennessee 49 11 7 31 213 11 23 179 Texas -_ 205 88 20 97 648 88 72 488 Utah 44 15 6 23 135 15 27 93 Vermont 4 2 0 2 14 2 0 12 VIrginia 51 21 12 18 170 21 63 86 WashIngton 86 43 4 39 273 43 8 222 West Virginia 14 9 2 3 31 9 5 17 WlsconsIn 48 9 5 34 229 9 28 192 Wyoming 12 8 0 4 23 8 0 15

--------------- --- Total (excluding New York CIty) 3,832 1,423 637 1,772 13,619 1,423 3,022 9,174 New York City 1,614 379 588 647 7,563 379 3,834 3,350

Total --_ --- --------- ------ 5,446 1,802 1,225 2,419 21,182 1,802 6,856 12,524

I Does not include 54 registrants whose principal offices are located in foreIgn countries or other territorial

[urtsdrcnons not listed. , Includes directors, officers, trustees, and all other persons oeeupymg sinular status or performing similar

runcnons . Allocations made on the basis of location of prineipal offices of registrants, not actualloeatlon of persons. Information taken from latest reports filed pnor to June 30, 1961.

Includes all forms of organrsatlons other than sole proprietorships and partnerships.

• •

--- ____________________________

______________________________

_____________________________

____________________________

___________________________

____________________________

_________________________ ____________________________

________________ ______________________________

______________________________

_____________________________

_______________________________

______________________________

_____________________________

________________________________

______________________________

___________________________

___________________________ _______________________________

___________________________

_______________________

____________________________

___________________________

____________________________ = = = = = = ==== ____________________________

_____________________________

_____________________ __________________________

_________________________

________________________

______________________

_______________________ ____________________________ - ___

___________________________ ______________________________

____________________- ___

________________________

______________________

_______________________ ___________________________

_________________________ ---- ________________________________ ____________________________

_____________________________

_________________________

_______________________

___________________________

___________________________

--- --- ________________________

_____________________

--- --- ____________________- __

•

•
TWENTY -SEVENTH ANNUAL REPORT 217

TABLE 7.-Number of issuers and security issues on exchanges

PART 1.-UNDUPLICATED NUMBER OF STOCK AND BOND ISSUES ADMITTED TO

TRADING ON EXCHANGES AND THE NUMBER OF ISSUERS INVOLVED, AS OF JUNE

30,1961

Total Issuers Status under the act I Stocks Bonds stocks involved and bonds

Registered pursuant to sec. 12 (b), (c), and (d) _________ 2,748 1,183 3,931 2,341 Temporarily exempted from registration by COmmIS- sion rule _____________________________________________ 12 22 34 9 Admitted to unlisted trading prlvileges on registered exchanges pursuant to sec. 12(f)- _____________________ 197 28 225 183 Listed on exempted exchanges under exemption orders of the Commission ___________________________________ 70 8 78 D6 Admitted to unlisted trading privileges on exempted

exchanges under exemption orders of the Commtssicn, 15 0 15 15

Total ____________________________________________ 3,042 1,241 4,283 2,604

I Registered Sec. 12(b) of the act provides that a security may be registered on a national seeurities

exchange by the Issuer filing an apphcanon WIth the exchange and WIth the Commission contal-ung certain

types of specified mrormanon. Sec. 12(c) authorizes the Commissron to require the submission of intormatron of a comparable character If In its Judgment Inrormauon specifled under sec. 12(b) IS mappheabla

to any specified class or classes of Issuers. Sec 12(d) provides that If the exchange authorities eertiry to the

Cornrmssion that the security has been approved by the exchange for hsting and registration, the registrauon

shall become effeetrve 30 days after the reeeipt ofsuch certrfleation by the COIDm1SSlOnor within such shorter period of time ll'> the Commission may dctermme.

Temporarily exempted: These are stocks of certain banks and other securities resulting from mergers,

consolidations, etc., which the Comrmssion has by pubhshed rules exempted from regtstration under specified eondr.ions and for stated periods.

Admitted to unlisted tradmg prrvrleges- Sec. 12(1) provides, m effect, that securities which were admitted to unhsted trading privileges on Mar 1 1934 (i.e , WIthout apphoatlons for hsting filed by the issuers), may continue such status. Additional securlties may be granted unlisted trading privileges on exchanges only if they are listed and registered on another exchange or the ISSuer IS subject to the reporting

requirements of the act under sec. 15(d).

Listed on exempted exchanges: Certain exchanges were exempted from full registration under sec. 6

of the act because of the limited volume of transactions. The Commissron's exemption order specifies that seeunttes which were lister! on the exchange at the date of such order may continue to be listed thereon, and

that thereafter no additional seeurrties may be listed except upon compliance WIth sec. 12 (b), (c), and (d).

Unlisted on exempt exchanges- The Commission's exemption order specifies that secuntres which were admit ed to unhsted trading pnvrleges thereon at the date of such order may contmue such pnvrleges, and

that no addrtional secunttes may be admitted to unhsted trading pnvileges except upon compliance WIth

sec. 12(f).

PART 2.-NUMBER OF STOCK AND BOND ISSUES ON EACH EXCHANGE .AND NUMBER

OF ISSUERS INVOLVED,.AS OF JUNE 30,1961

Stocks Bonds Exchanges Issuers

R X U XL XU Total R X U XL Total

----- -- -- -- --- --- -- -- -- -- American 919 760 4 213 977 35 1 29 ------ 65 Boston . 436 69 1 381 451 12 12 Chicago Board of 6 'Irade _______________ 10 ------ 4 ------ ------ 10 -----g- ------ ------ ------ ------ Cincinnati 147 41 1 113 ------ 155 1 -----. 10

Detroit. Colorado Sprmgs _____ 10 ------. 11 ------ 11 -------

Honolulu 232 100 5 134 239 --.---- ------ 56 ------- ------ 51 16 67 ------- ------ ------ 8 8 Mid west. 456 401 1 111 513 15 ------ ------ 15 New York Stock 1,332 1,544 2 ------ 1,546 1,124 21 ------ 1,145 Pacific Coast. 507 332 1 245 ------ ------ 578 21 ------ 21 Phlladelphla-Balti- 171 6 457 634 52 more ________________ 544 ------ ------ ------ ------ ------ 52 Pittsburgh ____________111 41 2 75 118 1 ------ 1 Rlchmond 18 ----85- 27 ------ 27 Salt Lake ------- ------ ------ ------ ------ 89 1 3 ------ 89 ------- ------ San FrancISCO Minmg, 41 42 ------ ------ ------ 42 ------- ------ ------ ------ ------ ~kane-------------- 26 23 ------ 6 29 eellng ------ 13 ------- ------ ------ 12 3 15 ------- ------ ------ ------ -.----

Symhols: R-reglswred; X-temporarIly exempted; U-admltted to unhsted trading privileges; XLlisted on an exempted exchange; XU-adlIUtted to unlisted trading prlvileges on an exempted exchange.

NOTE.-Issues exempted under sec. 3(a) (12) of the act, such as obligations of the U.S. Government,

the States and cities, are not included in this table.

_____________ ------ ------ ___ ____________ ------ ------ ------ ------ ------

' ___________ ------ ------ ______________ ------ ------ ------ ------ ------ _____________ ------ ------ ------ _____________ ------ ------ ------ ______ ------ ------ ------ ________ ------ ------

____________ ------ ------ ------ _____________ ------ ------ ------ ------

_____________ ------- ------ ------ ------
218 SECURITIES AND EXCHANGE COMMISSION

TABLE S.-Unlisted stocks on stock exchanges 1

PART l.-NUMBER OF STOCKS ON THE EXCHANGES IN THE VARIOUS UNLISTED

CATEGORIES' AS OF JUNE 30,1961

U nlisted only' LIsted and registered on another exchange Exchanges

Clause 1 Clause 3 Clause 1 Clause 2 Clause 3'

Amencan ________________________ 174 2 32 4 I Boston __________________________ I 0 145 235 0 Chicago Board of Trade _________ 2 0 2 0 0 Otnclnnatr _______________________ 0 0 0 113 0 Detroit, _________________________ 0 0 13 121 0 Honolulu ________________________

Midwest 16 0 0 0 0 , _______________________ 0 0 0 III 0 Pacific Coast. ___________________ 19 0 55 171 0 Ptuladelphra- Baltimore __________ 3 0 222 232 0 Pittsburgh ______________________ 0 0 16 59 0 Salt Lake 2 0 0 0 1 Spokane _________________________ 4 0 1 1 0 Wheelmg ________________________ 0 0 0 3 0

Total' ____________________ 221 2 486 1,050 2

PART 2.-UNLISTED SHARE VOLUYIE ON THE EXCHANGES-CALENDAR YEAR 1960

Unlrsted only 3 LIsted and registered on another exchange

Exchanges

Clause 1 Clause 3 Clause 1 Clause 2 Clause 3'

Amencan ________________________25,494,995 17,060 5,448,030 4,076,300 18,200 Boston __________________________ 10,067 0 2,159,034 2,143,638 0 Chicago Board of Trade _________ 0 0 0 0 0 CmcinnatL _____________________ 0 0 0 441,031 0 Detroit __________________________ 0 0 359,108 1,892,455 0 Honolulu ________________________ 51,556 0 0 0 0 Midwest , _______________________ 0 0 0 10,181,358 0 Pacific Ooast , ___________________ 5,078, 804 0 3,589,739 5,435,949 0 Ptnladelphia- Baltimore __________ 200 0 4,515,325 4,229,628 0 Pittsburgh ______________________ 0 0 253,438 180,432 0 Salt Lake ________________________ 0 0 0 0 190 Spokane _________________________ 250,682 0 20,041 185 0 Wheehng ________________________ 0 0 0 1,254 0

Total. _____________________ 30,886,304 17,060 16,345,615 28,582,230 18,390

I Refer to text under heading "Unhsted Trading Privileges on Exchanges." Volumes are as reported

by the stock exchanges or other reporting agencies and are exclusi ve of those in short-term rights . The categories are aecordmg to clauses I, 2, and 3 of sec. 12(f) of tbe SecurIties Exchange Act.

a None of these issues has any listed status on any domestic exchange, except that 6 of the 19 Pacific Coast

Stock Exchange issues are also lJsted on an exempted exchange.

, These Issues became listed and registered on other exchanges subsequent to their admlssron to unlisted

trading on the exchanges as shown.

, Duplicatlon of Issues among exchanges brings the figures to more than the actual number of issues Illvolved,

_______- ________________

•
TWENTY-SEVENTH ANNUAL REPORT 219

TABLE g.-Dollar volume and share volume of sales effected on securities exchanges

in the calendar year 1960 and the 6-month period ended June 30, 1961

[Amounts in thousands]

PART 1.-12 MONTHS ENDED DEC. 31, 1960

Stocks Bonds RIghts and

warrants Total

dollar

volume Dollar Share Dollar Principal Dollar Num- volume volume volume amount volume ber of

uruts

--- Registered exchanges, 46,900,318 45,218,535 1,388,610 1,606,985 1,614,233 74,797 51,316

--- American ______________ 4,262,445 4,176,296 300,601 26,760 26,359 59,390 20,305 Boston _________________ 272,156 272,156 5,606 0 0 0 0 Chicago Board of Trade 0 0 0 0 0 0 0 Omcinnatr, 34,928 34,825 690 103 162 0 0 Detroit _________________

Midwest 154, 538 154,501 4,806 0 0 37 103 _______________1,235,464 1,235,160 31,432 15 16 289 291 NationaL ______________ 0 0 0 0 0 0 0 New York _____________ 39,552,249 37,959,591 958,310 1,579,816 1,587,414 12,842 28,568 Paeifie Coast ___________ 883,358 881,155 43,415 2 1 2,201 1,438

Philadelplna- Baltimore 471,325 470,996 12,171 290 282 39 610 Prttsburgh _____________ 28,271 28,271 793 0 0 0 0 Salt Lake ______________ 2,396 2,396 16,727 0 0 0 0 San Francisco __________ 1,186 1,186 11,153 0 0 0 0 Spokane 2,316 2,316 2,906 0 0 0 0 --- Exempted exchanges, 12,991 12,712 1,086 33 36 246 35

--- --- Colorado Springs _______ 89 89 547 0 0 0 0 Honolulu _______________ 11,654 11,375 510 33 36 246 35 Rrohmond _____________ 808 808 18 0 0 0 0 Wheelmg 441 441 12 0 0 0 0

PART 2 -6l\fONTHS ENDED JUXE 30,1961

9

283

o

8

5

66

o

3

9

6

o

o

o

o

o

o

o

o

o

Registered exchanges, 36,785,968 35,514,513 1,171,205 1. 088, 454 1,027,757 183,001 92,27

American ______________ 4,339,871 4,238,175 332,340 35.833 23,129 65,864 8,04 Boston 172,119 171,695 3,376 0 0 424

Chicago Board of Trade 0 0 0 0 0 0 CmcmnatL ____________ 25,766 25,722 508 39 52 5 Detroit , _______________ 115,333 115,251 3,346 0 0 82 5 Mid" est _______________ 908,472 905,997 23,007 51 56 2,425 1,9 National _______________ 0 0 0 0 0 0 New York _____________ 30,144,543 28,982,441 735,686 1,052,434 1,004,411 109,668 79,30 Paclfie Ooast.; _________ 693,104 690,093 42,671 0 0 3,011 1,63

Philadelphia- Baltimore 363,053 361.433 8,704 97 109 1,523 97 Pittsburgh _____________ 18,662 18,662 578 0 0 0 Salt Lake ______________ 1,474 1,474 9,613 0 0 0 San Francisco Mmmg __ 1,330 1,330 8,778 0 0 0 Spokane ________________ 2,240 2,240 3,598 0 0 0

Exempted exchanges, 14,812 14,795 630 17 18 0

Colorado Springs _______ 40 40 120 0 0 0 Honolulu ______________ 14,235 14,218 499 17 18 0 Riclnnond _____________ 353 353 9 0 0 0 Wheeling ______________ 184 184 3 0 0 0

NOTE -Data on the value and volume of securities sales are reported in conneetlon With fees paid under

sec. 31 of the Secunties Exchange Act of 1934 They mclude all securities sales effected on exchanges except

sales of bonds of the U.S. Government which are not subject to the fee. The data cover odd-lot as well a

round-lot transaenons Reports of most exchanges for a given month cover transactions cleared during the

calendar month; clearances occur for the most part on the 4th day after that on whieh the trade actually was

affected.

________•___

_____• __________

______ • _______

_____•• __________
220 SECURITIES AND EXCHANGE COMMISSION

TABLE lO.-Comparative share sales and dollar volumes on exchanges

[Annual sales, mcludtne stocks, warrant, and rights, as reported by all U.S. exchanges to the Commission

Figures for merged exchanges are Included in those of the exchanges into which they were merged)

1

1

1

1

1

1

1

1

1

1

S

Year Share sales :!'."'YS AMS MSE PCS PBS BSE DSE PIT CIN Other

% % % % % % % % % %

-- ----- -- -- ----- ------ 1935 681, 970, 500 73 13 12.42 1 91 269 076 096 0.85 034 003 6. 91 1936__. ______ 962. 135. 940 7302 1643 2 18 296 .69 .72 .74 .32 .04 200 1937_________ 838, 469, 889 7319 14 75 1. 79 323 .70 83 S9 .38 .03 451 1938_.• _. ____ 543,331,878 7808 10 55 2.27 267 .79 1.03 .75 .25 .04 357 1939_________ 468, 330, 340 7823 11 39 226 23S .93 1 18 .76 .25 .05 260 1940. _______. 377,896, 572 7S 44 1320 211 278 102 1.19 .82 .31 .08 205 1941. ________ 311, 150,395 7396 12 73 272 269 1.24 1.50 .87 .36 .14 379 1942. ________ 221. 159,616 7649 11. 64 270 2.62 1 08 139 .90 .29 .12 277 1943.. ___.. _. 486. 290, 926 7458 1672 2.20 1.92 .85 .76 .64 .20 .07 206 1944_________ 465, 523, 183 7340 1687 2.07 240 .79 .81 .86 .26 .06 2.48 1945_________ 769.018, 138 6587 21. 31 1. 77 2.98 .66 .66 .79 .40 .05 551 1946_________ 803. 076, 532 6607 19.37 1. 74 3.51 .68 .84 .63 .28 .05 6.83 1947... ______ 513,274,867 6982 1698 1. 67 422 .90 1 05 .66 .19 .08 4.43 1948_________ 571,107,842 72 42 15.07 1.63 39.; .87 .76 .68 .18 .08 436 1949_________ 516, 408, 706 73 51 14.49 1. 67 372 1.21 .93 .73 .18 .09 3.47 1950_________ 893, 320, 4S8 7632 13 M 216 3.11 .79 .6S .55 .18 .09 2.61 1951. ________ 863. 918, 401 74.40 14.60 210 3M .76 .70 .58 .16 .08 3.08 1952. _._ _____ 732,400,451 71.21 1608 2.43 385 .85 .73 .55 .16 .09 4.05 1953_________ 716. 732, 406 7264 15.85 2.28 3.90 .83 .81 .55 .15 .11 2.88 19M __. ______ I, 053, 841, 443 71.04 16.87 200 3.24 .88 .50 .53 .13 .07 4. 74 1955_____,_,_ 1,321,400,711 6885 1919 2.09 308 .75 .48 .39 .10 05 S.02 1956____. ____ I, 182, 487, 085 66.31 21. 01 232 325 .72 .47 .49 .11 .05 5.Z1 1957... _. ____ 1,293,021,856 70.70 18.14 2.33 273 .98 .40 .39 .13 .06 4.14 1958.. _______ 1,400,578, 512 71.31 19.14 2 13 299 .73 .45 .35 .11 .05 2.74 1959. ________ 1,699,696.619 6559 2450 2.00 281 .90 .37 .31 .07 .04 3.41 1960_________ 1,441,047,564 68.48 22.27 220 311 .89 .39 .34 .06 .05 2.21

Six months

to June 30, 1961. __. ___ 1.264,313,919 64 46 2692 1 91 3.50 .77 .29 .Z1 .OS .04 1.79

DoUar volume

(000 omitted)

1935____. ____ $15,396, 139 8664 7.83 1.32 1.39 .68 1 34 .40 .20 .04 .16 1936.. _______ 23,640,431 8624 869 1.39 133 .62 1.05 .31 .20 .03 .14 1937_________ 21,023,865 8785 7.56 1.06 1 25 .60 1.10 .24 .20 .03 .11 1938_________ 12,345,419 89.24 5 57 1 03 1 27 .72 1. 51 .37 .18 .04 .07 1939_______._ 11,434.528 87.20 656 1 70 I 37 .82 1. 70 .34 .18 .06 .07 1940_________ 8,419,772 85.17 768 207 1 52 .92 1 91 .36 .19 .09 .09 1941. ________ 6,248,055 84.14 7.45 259 1. 67 1.10 2.Z1 .33 .21 .12 .12 1942_________ 4,314,2'l4 85 16 660 2.43 1 71 .96 233 .34 .23 .13 .11 1943__.. __. __ 9,033,907 R4 93 8.90 202 1. 43 .80 1.30 .30 .16 .07 .09 1944. ________ 9,810.149 84 14 930 2.11 1 70 .79 129 .34 .15 .07 .11 1945_________ 16,284,552 82.75 10 81 200 1.78 .82 1 16 .35 .14 .06 .13 946_________ 18,828,477 8265 10 73 200 187 .79 1.23 .33 .16 .07 .17 1947_________ 11.596,806 84.01 8.77 1. 82 226 .91 1.51 .36 .14 .11 .11 948_________ 12,911,665 84.67 8.07 1. 85 2.53 .88 1. 33 .34 .14 .10 .09 949. ________ 10. 746, 9.~5 83.85 844 1. 95 2.49 1.11 1. 43 .39 .13 .12 .09 1950. ________ 21.808.284 85.91 685 2.35 2.19 .92 1.12 .39 .11 .11 .05 951. ________ 21.306.087 85 48 7.56 230 206 .89 1 06 .36 .11 .11 .07 952_________ 17,394,395 84.86 7.39 2.67 2.20 .99 1.11 .43 .15 .12 .08 953_________ 16.715,533 85.25 679 284 220 1. 06 1.04 .46 .16 .13 .07 9M _________ 28.140,117 86.23 679 242 2.02 .94 .89 .39 .14 .10 .08 955__._. ____ 38,039.107 8631 698 2.44 1.90 .90 .78 .39 .13 .09 .08 956_________ 35.143,115 84.95 7.77 2.75 208 .96 .80 .42 .12 .08 .07 957. _. ______ 32,214,846 85.51 7.33 2. 69 202 1.00 .76 .42 .12 .08 .07 958. ________ 38,419,560 85.42 7.45 271 211 1.01 .71 .37 .09 .08 .05 959_________ 52,001.255 83 66 9.53 2.67 1.94 1 01 .66 .33 .08 .07 .05 960. _. ______ 45,306,603 83.81 9.35 2.73 1. 95 1.04 .60 .34 .06 .08 .04

ix months

to June 30, 1961. ______ 35,712,309 81. 46 12.05 2.54 194 1.02 .48 .32 .05 .07 .06

Symbols' NYS, New York Stock Exchange; AMS, American Stock Exchange; MSE, Midwest Stock

Exchange; PCS, PaCIfic Coast Stock Exchange; PBS, Philadelphia-Baltimore Stock Exchange; BSE,

Boston Stock Exchange; DSE, Detroit Stock Exchange; PIT, PIttsburgh Stock Exchange; CIN, Clnein- nan Stock Exchange.

__" __'"
TWENTY-SEVENTH ANNUAL REPORT

TABLE H.-Block distributions

[Value in thousands of dollars]

221

Special offerings Exchange distnbutions Secondary distributions

Calendar year

Num- Shares Value Num- Shares Value Num- Shares Value ber sold ber sold ber sold

19421 ___________ 79 812,390 22,694 ---.---- ----------.- 116 2,397,454 82,840 1943_____________ 80 1,097,338 31,054 --_.---- -----.---.-. 81 4,270,580 127,462 1944 87 1,053,667 32,454 ----._------ -------. 94 4,097,298 135,760 1945 79 947,231 29,878 ---.---- 115 9,457,358 191,961 1946 23 308,134 11,002 -----------. --._---- 100 6,481,291 232,398 1947 24 314,270 9,133 -----.------ -------. 73 3,961,572 124,671 1948 21 238,879 5,466 ---._------- 95 7,302,420 175,991 1949 32 500,211 10,956 --_.---- 86 3.737,249 104,062 1951L 20 150,308 4,940 --_.---- -----------. 77 4,280.681 88,743 195L 27 323.013 10,751 ------.- 88 5,193,756 146,459 1952 22 357,897 9,931 ------.- 76 4,223,258 149,117 1953 17 380,680 10,486 -------_.--- 68 6,906,017 108,229 1954 14 189,772 6,670 57 705,781 24,664 84 5,738,359 218.490 1955____________ 9 161,850 7,223 19 258,348 10,211 116 6,756,767 344,871 1956_____________ 8 131,755 4,557 17 156,481 4,645 146 11,696.174 520,966 1957_____________ 6 63,408 1,845 33 390,832 16,855 99 9,324,699 339,062 1958_____________ 6 88.152 3,286 38 619.876 29,454 122 9,508.505 361,886 1959_____________ 3 33,500 3,730 28 545,038 26,491 148 17,330.941 822,336 1960_____________ 3 63,663 5,439 20 441,664 11,108 92 11,439,065 424,688

I The first special offering plan was made effective Feb. 14, 1942; the plan of exchange distributron was

made effectrve Aug. 21, 1953, secondary distributions are not made pursuant to any plan but generally

exchanges require members to obtain approval of the exchange to participate m a secondary and a report

on such distrtbution IS filed WIth this COmmISSIon.

TABLE 12.-Reorganization proceedings under ch, X of the Bankruptcy Act in

which the Commission participated during the fiscal year 1961

Securities and Petition Exchange

Debtor DIstrict court Petition filed approved Commission

notice of appearance filed

Alaska Telephone Corp ____________________ W.D. Wash ___ Nov. 2,1955 Nov. 21,1955 Nov. 7,1955 Amencan Fuel & Power Co ________________ E.D. Ky ______ Dee 6,1935 Dec. 20, 1935 May 1,1940 Buskeye Fuel Oo .; _________________________do _________ Nov, 28,1939 Nov 28,1939 Do. Buckeye Gas service Co ____________________do ______________do ____________.do________ Do. Carbreath Gas Co_. _________________________do ______________do ____________.do________ Do. Inland Gas Distributing Co _________________do ______________do ____________.do ________ Do. Automatic Washer Co _____________________ S D. Iowa.,., __ Oct. 17,1956 Nov, 2,1956 Nov. 2,1956 Brookwood Country Club _________________ N.D TIL _____ Feb. 17,1959 Mar. 3,1959 Mar. 19, 1959 Central States Electric Corp E.D Va ______ Feb. 26,1942 Feh. 27,1942 Mar. 11,1942 Coastal Finance Corp ______________________ D. Md ________ Feb 15,1956 Feb. 18,1956 Apr. 16,1956

Coffeyville Loan & Investment Co., Inc .. __ D Kans ______ July 17,1959 July 17,1959 Aug. 10,1959

Com Belt Packing Co 1'._________________ N.D. Iowa ____ June 24,1960 June 24,1960 Sept. 8,1960 Crusader 011 & Gas Corp.' , ________________ S.D. Texas ____ June 10,1960 -----_.--- ----- July 25,1960 DePaul Educational AId SOCIety___________ N.D. IlL _____ Jan. 1,1959 Jan. 13,1959 Feb. 4,1959 Dixie Aluminum Corp.! ____________________ N.D. Georgia Dec. 12,1960 Dec. 16,1960 Dec. 21,1960

Dumont-Airplane & Marme Instruments, SD N.y ____. Oct. 27,1958 Oct. 27,1958 1'0,. 10,1958

Inc.La John Manufacturing Co ____________ _____do _________ Oct. 31,1958 Oct. 31,1958 Do. El-Tromcs Inc. ____________________________ E.D. Pa ______ Nov, 25,1958 Nov. 25,1958 Jan. 16,1959 Equitablc Plan Co _________________________ SD CaliL ___ Mar. 18, 1958 May 29,1958 Mar. 27,1958 Frank Fehr Brewme Co.' __________________ W.D. Ky .. ___ Aug. 13,1957 Aug. 14,1957 Nov. 8,1957 Fleetwood Motel Corp.L ___________________ D K.J ________Sept. 26, 1960 Sept. 27,1960 Nov, 3,1960 Food Town Inc ____________________________ D. Md ________ July 29,1959 July 29,1959 Allg 13,1959 General Stores Corp ________________________S D. N.y _____ Apr. 30,1956 May 1,1956 May 23,1956 Green River Stecl Corp. ___________________ W D. Ky _____ Sept. 13, 1956 Sept. 18, 1956 Oct. 5,1956 Horsting 011 Co , __________________________ D.N. Dak _____ Mar. 17,1952 Mar. 17,1952 Sept 30,1955 Hudson & Manhattan Railroad Co. ________ S D. N.Y _____ Aug. 11,1954 Dec. 14,1954 Jan. 7,1955 Inland Gas Corp ___________________________ ED Ky ______ Oct. 14,1935 Nov. 1,1935 Mar. 28,1939 F. L. Jacobs Co ____________________________ E.D. Mich ____ Mar. 17,1959 Mar. 18,19.19 Mar. 20, 1959 Keeshin Freight Lines, Inc _________________ N.D IlL _____ Jan. 31, 1946 Jan. 31, 1946 Apr. 25,1949 Keeshin Motor Express Co., Inc _______ _____do ______________do __._____ _____do. _______ Do. Seaboard Freight Llnes, Inc ________________.do_________ do do Do. National Freight Lines, Inc ____________ _____do ______________do ____________.do________ Do.

Sllefootnotes at end of table.

-~------ _____________ -------- _____________ -------- _____________ -------- ------------ _____________ -------- _____________ -------- _____________ -------- -------- ___________ -------- ------------ ___________ -------- _____________ -------- ------------ _____________ ------------ -------- _____________ -------- --------

___-- __________

_____ __•_____ _____ ________
222 SECURITIES AND EXCHANGE COMMISSION

TABLE 12.-Reorganization proceedings under ch, X of the Bankruptcy Act in

which the Commission participated during the fiscal year 1981-Continued

Securities and

Petition Exchange

Debtor Distnct court Petition tiled approved Comrmsslon

notice of ap- pearanee tiled

Kentucky Fuel Gas Corp __________________ E.D. Ky ______ Oct. 25,1935 Nov 1,1935 Mar. 28, 1939 Kentucky Jockey Club, Inc ________________ W.D.Ky Dec. 9,1959 Dec. 9,1959 Jan. 18,1959 Kirchofer & Arnold, Inc ____________________ E D. N.C_~==: Nov. 5,1959 Nov. 5,1959 Nov. 9,195~ Liberty Baking Corp ______________________ SD.NY _____ Apr. 22,1957 Apr. 22,1957 May 2,1957

MagIC Mountain, Inc.'. ____________________ D Colo _______ Oct. 3,1960 Dec 15,1960 Oct. 20,1960 Magnolia Park, Inc ________________________ ED. La ----- Oct. 16,1957 Feb. 26,1958 Oct, 24,1957 Mason Mortzage & Investment Co ,_______ D. D.C ________ Oct. 31,1960 Oct. 31,1960 Nov. 9,1960

Mason Mortgage Fund of Florida, Inc __ _____do ______________do _____________do ________ Do. Mason Acceptance Corp _______________ _____do ______________do ________ _____do ________ Do. Southern Mortgage Co., Inc ____________ _____do ______________do _____________do ________ Do Morehead City Shipbuilding Corp _________ E.D.N.C _____ Nov. 5,1959 Nov. 5,1959 Nov. 9,1959 Muntz TV Inc.' ____________________________ N.D IlL_____Mar 2,1954 Mar 3,1954 Mar 4,1954 Tel-A- Vogue ___________________________ _____do ______________do _____________do ________ Do. Muntz Industries, Inc ______________ _____do ______________do _____________do ________ Do. H. H. Mundy Corp.' ______________________ X.D.Okh ___ Apr. 17,1961 Apr. 17,19M May 22,1961 Rutang Corp ___________________________ _____do ______________do ________ _____do ________ Do Muskegon Motor Specrahtles i ____________ E D. Mrch ____ May 11,1961 May 11,1961 May 12,1961 Parker Petroleum Co., Inc _________________ W D Okla ____ May 6,1958 May 6,1959 June 9,1958 Pickman Trust Deed Corp _________________ N.D. Calrf ___ June 13,1960 June 13,1960 June 13,1960

Reynolds Engineering & Supply, Inc _______ D.Md ________ Feh. 1,1960 Feb. 1,1960 Feb. 17,1~60 San SOUCIHotel, Inc _______________ . _______ D.Nev_ ----- Aug. 1,1958 Aug. 1,1958 Sept. 16,1958 scranton Corp _____________________________ M.D Pa ______ Apr. 3,1959 Apr. 3,1959 Apr 15,1959 Hal Roach Studios _________. _______________do ______________do _____________do ________ Do.

Chemical & Rubber Corp of Amer ica ___ _____do _________ July 17,1959 July 17,1959 Do. Rabco TV _____________________________ _____do _________ Oct. 1,1959 Oct. 1,1959 Do.

Selected In vestmen ts Tr st Fund __________ N D. Okla Mar. 3,1958 Mar. 3,1958 Mar. 17,1958 Selected Investments Corp _____________ _____do ______________do _____________do ________ Do Shawano Development Corp _______________ D. Wyo _______ Apr. 3,1959 Apr. 13, 1959 May 20,1959 Srlesian Amencan Corp ____________________ SD.N.Y _____ July 29,1941 July 29,1941 Aug. 1,1941 Southern Enterprise Corp __________________ S D. 'I'ex ______ Oct. 31,1958 Nov. 3,1958 June 18,1960 West American Corp _____do _________ May 18,1961 May 18,1961 Do Stardust, Inc _______________________________ Ds Nev _______ July 19,1956 Sept. 10,1956 Sept. 7,1956 Sure Seal Coru-' ____________________________ D Utah ______ May 13,1958 Aug. 12,1958 Sept. 30, 1958

Swan Finch 011 Corp, S.D N.Y _____ Jan. 2,1958 Jan. 2,1958 Jan. 27,1958

Keta Gas & 011 COrP_-:::=::::::::::::: _____do _________ Oct 20,1959 Oct. 28,1959 Oct 29,1959 Texas Portland Cement Co ________________ E.D TeL ____ July 7,1958 July 7,1958 AUI!. 12,1958 Third Avenue Transit Corp ________________ S.D. N.Y. ____ Oct 25,1948 June 21, 1949 Jan. 3,1949 Surface Transportation Corp ___________ _____do _________ June 21,1949 ____.do ________July 7,1949

Westchester St. 'Transportation Co, ____.do______________do ________ _____do ________ Do.

Inc. Westchester Electric Railroad Co ______ _____do _________ ____.do _____________do ________ Do. Warontas, Press, Inc ___________________ _____do _________ Sept 8,1949 Sept. 8,1949 Sept. 8,1949 Yonkers Railroad Co ___________________ _____do _________ June 21,1949 June 21,1949 Jnly 7, 1949 TMT Trailer Ferry, Inc ___________________ S D. Fla ______ June 27,1957 Nov 15,1957 Nov, 25,1957 Trans-Caribbean Transport, Inc .. _____ _____do _________ _____do _____________do ________ Do.

Trans-Canbbean Motor Transport. ____ _____do _________ _____do _____________do ________ Do.

Trailer Marine Transportation, Inc. . __ _____do _________ _____do _____________do ________ Do.

Commonwealth Inter-Island Towmg _____do _________ _____do ________ _____do ________ Do.

Co., Inc. Townsend Growth Fund, Ine.t _____________ S.D. N.Y _____ May 10,1961 May 10,1961 May 10,1961

TrInity Buildings Corp. of New York ______ S.D. N.Y _____ Jan. 18,1945 Jan. 18,1945 Feb. 19,1945 U.S. Durox Corp. of Colorado ______________ D. Colo _______ Feb. 4,1959 Feb. 9,1959 Mar. 31,1959 Vactron Corp.I' ____________________________ N D. Tex _____ Oct. 21,1960 Oct. 21,1960 Nov. 17,1960 Verdi Development Co.' __________________ C.D. Utah ____ Feh. 25,1959 Mar. 11,1959 Apr. 3,1959 Wmdennere Hotel Co , ____________________ X.D.IlI.. _____ Sept. 13, 1960 Oct. 12,1960 Oct. 24,1960

, Comrnission filed notice of appearance in fiscal year 1961.

, Reorganization proceedmg closed dunng fiscal year 1961.

' _________________
TWENTY-SEVENTH ANNUAL REPORT 223

TABLE I3.-Summary of criminal cases developed by the Commiseion which were

pending at June 30, 1961

Number of Xurnber of such defendants as to

sucb de- whom cases are pending and rea. Number of fendantsas sons tberefor

Cases defendants to whom

msuch cases have

I cases been com- Xot yet Awartmg Awaittng

pleted appre- trial appeal

bended

Pending, referred to Department of Justice m the fiscal

year- 1938_________________________ 1 2 1 1 0 0 1939_________________________ 0 0 0 0 0 0 1940_________________________ 0 0 0 0 0 0 1941. ________________________ 0 0 n n o 0 1942_________________________ 2 18 4 13 1 0 1943_________________________ 1 5 2 2 1 0 1944_________________________ 1 7 2 5 0 0 1945_________________________ 1 1 0 1 0 0 1946_________________________ 4 16 1 15 0 0 1947_________________________ 1 5 1 4 0 0 1948_________________________ 0 0 0 0 0 0 1949_________________________ 0 0 0 0 0 0 1950_________________________ 0 0 0 0 0 0 1951.________________________ 0 0 0 0 0 0 1952_________________________ 0 0 0 0 0 0 1953_________________________ 1 11 10 1 0 0 1954_________________________ 1 16 9 7 0 0 1955_________________________ 0 0 0 0 0 0 1956_________________________ 1 1 0 0 1 0 1957_________________________ 6 45 6 0 37 2 1958_________________________ 3 16 2 0 12 2 1959_________________________ 11 137 36 26 73 2 1960 _________________________

~II 126 33 16 69 8 1961.________________________ 136 10 29 97 0

TotaL 172 542 117 120 291 H

----

SClIf:\IARY Total cases pending 100 Total defendants 791

Total defendants as to whom cases are pending , 674

I As of the close of tbe fiscal year, tndictments had not yet been returned as to 249 proposed defendants

in 28 cases referred to the Department of Justice. Tbese are reflected only in the recapitulation of totals

at the bottom of the table.

820378-62--16

____________________ '

' '
224 SECURITIES AND EXCHANGE CO:M:MISSION

TABLE! 14.-Summary of cases instituted in the courts by the Commission under

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

Holding Company Act of 1935, the Investment Company Act of 1940, and the

Investment Advisers Act of 1940

Types of cases

Total Total cases In. cases

stituted closed up to end up wend

of 1961 of 1961

fiscal fiscal

year year

ClISes

pending

at end of 19f11

fiscal

year

Cases

pending

at end of 1960

fiscal

year

Cases In.

stltuted

during

1961

fiscal

year

Total

cases

pending

during

1961

fiscal

year

Cases

closed

during

1961

fiscal

year

Actions to enjoin violations of the above acts

Actions to enforce subpenas

under tbe Secuntles Act and

the Securities Exchange Act._

ActIons to carry out voluntary

plans to comply with sec

l1(b) of the Holding Com- pany Act.

Miscellaneous actions

TotaL _.

1,076

77

139

35

1,327

981

77

133

33

1,224

95

o

6

2

103

84

o

2

5

91

90

2

10

2

104

174

2

12

7

195

79

2

6

5

92

TABLE 15.-Summary of cases instituted against the Commission, cases in which

the Commission participated as intervenor or amicus curiae, and reorganization cases on appeal under ch. X in which the Commission participated

Total Total Cases Cases Cases In. Total Cases

cases In' cases pending pending stltuted cases closed

stltuted closed at end at end during pending during

Types of cases up to end up to end of 1961 of 1960 1961 during 1961

of 1961 of 1961 fiscal fiscal fiscal 1961 fiscal

fiscal fiscal year year year fiscal year year year year

---- ---------------- Actions to enjoin enforcement

of socurtttes Act, Securities

Exchange Act and Public Utility Holding Company

Act with the exception of

subpenas Issued by tbe Com. mlsslon 64 64 0 0 0 0 0

Actions to enlom enforcemen t of or compliance with subpenas

Issued by the Commisslon 9 9 0 0 0 0 0

Petitions for re view of Commlsston's orders by courts of

appeals under the various

acts administered by tbe Commlssion 240 230 10 10 17 27 17

MISCellaneous actions against

the Commission or officers of

tbe Commtssron and cases ill

which the Comrmssion partieipated as Intervenor or amiC'UI C'1Lriae________________ 229 220 9 3 13 16 7

Appeal cases under ch. X In which the Commlsston par. ttelpated 175 173 2 3 4 7 5

--- ------------------------ Total 717 696 21 16 34 50 29

• _

_

_

•• •• _

_____________ •• _______

••• _

__•• _________• ____

••• _________• _______•

___ • ___•• ____• ___•• _
TWENTY-SEVENTH ANNUAL REPORT 225

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226 SECURITIES AND EXCHANGE COMMISSION

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TABLE 25.-Reorganization cases under ch. X of the Bankruptcy Act pending

during the fiscal year ended June 30, 1961, in which the Commission participated

when district court orders were challenged in appellate courts

Name of case and U.S. Court of

Appeals

Automatic Washer Co, debtor;

Harvey Gill, J. L Wellinger, C.

M. Cuny, R. sowmskr, H. J.

Luke, C. E DaVIS,Leonard Ashback, and Harold snenskv, ap- pellants (8th CIrCUIt).

General Stores Corp, debtor;

LewIS J. Ruskin, appellant (2d

Circuit)

Jacobs Co., F. L, debtor; Milton

S GOUld,Lazarus Joseph, appel- lants (6th Circurt).

Parker Petroleum Co , Inc , debt- or; OCCidentalPetroleum Corp., appellant (10th Circurt).

Parker Petroleum Co., Inc., debt- or; Webster Drilling Co., appel- lant (10th CIrCUIt).

Swan-Finch Oil Corp., debtor;

Barton Grubbs II, appellant (2d

Circuit),

TMT Trailer Ferry, Ine., debtor;

Protective Comrmttee for Independent Stockholders, Arthur H.

Shaffer, M. James Spitzer, ap- pellants (5th CIrCUIt).

Nature and status of case

Appeals from order of Sept. 2, 1960,approving a compromise of the

claims of debtor and authorizmg the settlement of certam claims

of the debtor against Joseph Abrams and Richland Securities, Inc.

Commission's brief Feb. I, 1961,supporting the position of appel- lants by requesting that distrrot court order be reversed although Commission is an appellee in this action. Opinion and [udgrnent

Apr. 10,1961,entered setting aside district court order and remand.

mg case forfurther proceeding Closed.

Appeal from order of Mar. 6, 1961,awarding supplemental allow- ances. Pending.

Appeal from order of Apr. 15. 1959,denying the receivers' motion to vacate the order approving the petition for reorganization or to dismiss the pennon and transfer the ch X proceedings to the

Southern Distnet of New York. Order June 23, 1959,extending time to docket record on appeal. Appeal Withdrawn. Closed.

Appeal from order of July 20, 1960,requiring appellant to invest a certain amount of money in new common stock of the debtor as per plan of reorgamzation. Oomnnssion's memorandum Nov 15.

1960,stating that the order of the distrrct court should be reversed

and proceedings remanded to the distnet court, and If this court conclude that any lunitation of the trustee's damages to the $25,000 set forth in the liquidated damages provision is contrary to law the

remand should contain mstructton that appellant should be re- quired to pay all damages caused by its failure to undertake Its

obhganon under the agreement. Bnefs and reply briefs filed.

Opinion and judgment entered Feb. 7, 1960,reversing order of the

distriet court and remanding cause for further proceeding Ap- pellees' petition forrehearing and clanflcation denied Apr. II, 1961.

Closed.

Appeal from order of Mar. 15, 1960,and modified Mar. 28, 1960,

denying certain portions ofappellant's claim against debtor. Commisslon's memorandum Nov. 15, 1960,IIIsupport of trustee's mo- tion to dismlss appeal, served. Appellant's reply bnef and re- sponse to motion to dismiss, served. Court of Appeals for the

Tenth CIrCUitJan. 4, 1961,reversed that part of district court order

insofar as it demed the claim for attorney's fees, and cause is re- manded. Closed.

Appeal from order of Nov. 13, 1959,denying motion to dismiss pro- ceedmgs and vacate order approving eh. X pennon of subsidiary Keta Gas & Oil Co. Order Apr. 22, 1960,to show cause to dlSIDlSS

appeal or fixdate for argument, Answer May 9, 1960,by appellant to rule to show cause. Appellant's brief and appendix filed. Commission's brief III support of the district court order, filed June 6,

1960. Bnef and appendix of Wm D. Pettit et al., filed. Brief of

debtor submitted in support of position of appellees, lIled. Rele- vant sections of the Bankruptcy Act submitted by the Commission, filed June 14,1960. Appellant's reply bnef, flied about June

21, 1960. Opmlon by Court of Appeals for the Second Circurt

affirmmg order of the district court, Aug 29. 1960. Closed.

Appeal from order of Mar. 6, 1959,conflrrmng trustee's plan of reor- garuzation and various other orders dated Aug. 12, 1960,Aug. 15,

1960,Sept. 30, 1960,Dec 22, 1960,Feb. 6, 1961,and Apr. 27, 1961.

Court of Appeals for the Fifth CIfCUIton Sept. 9, 1960,denied mo- non of trustee to dlsnnss appeal. Order Oct. 4, 1960,consolidating appeals. Oomnussion's telegram to the court Jan. 25, 1961,III op- position to appellants' monon to filepetition for writ of prohrbitron andjor mandamus. Court of Appeals for the FIfth CIrcuit Jan. 26,

1961,denied motion for leave to file petition. Commission's brief as appellee May 15,1961.statmg that the order of the distrlct court entered Aug. 15, 1960,vacating the order of eonnrmanon of Mar.

6, 1959,should be affirmed or the order of confirmation of the dis- tnct court entered Mar. 6, 1959.should be reversed, filed. Briefs

and reply briefsfiled. Pendmg,
TVrENTY-SEVENTH ~AL REPORT 259

TABLE 26.-A 28-year summary of criminal cases developed by the Commissionfiscal years 1934-61

[See table 27 for olassiflcauon of defendants as broker-dealers, etc I

Number Number Number Number of persons of such of these

of cases as to cases in Number defend- Number

referred whom which of de- ","umber Number ants as to of these to De- prosecu- mdict- fendents of these of these whom defend- FIScal year partment bon was ments indicted defend- defend- proceed- ants as to of Justice reeorn- were ob- m sueh ants con- ants ae- Ings were whom

in each mended tamed by cases 1 vlCted quitted dismissed cases are

year m each US on motion pendmg t

year attorneys of US

attorneys

---- 1934. 7 36 3 32 17 0 15 0 1935 29 177 14 149 84 5 60 0 1936 43 379 34 368 164 46 151l 0 1937 42 128 30 144 78 32 34 0 1938 40 113 33 134 75 13 45 1 1939 ._ 52 245 47 292 199 33 60 0 1940 59 174 51 200 96 38 66 0 1941. 54 150 47 145 94 15 36 0 1942 50 144 46 194 108 23 49 14 1943 31 91 28 108 62 10 33 3 1944 27 69 24 79 48 6 20 5 1945 19 47 18 61 36 10 14 1 1946 16 44 14 40 13 8 4 15 1947 20 50 13 34 9 5 16 4 1948_. 16 32 15 29 20 3 6 0 1949 ._._ 27 44 25 57 19 13 25 0 1950. 18 28 15 27 21 1 5 0 1951. 29 42 24 48 37 5 6 0 1952 14 26 13 24 17 4 3 0 1953 ._ 18 32 15 33 20 7 5 1 1954 19 44 19 52 29 10 6 7 1955_. 8 12 8 13 7 0 6 0 1956 17 43 16 44 28 5 10 1 1957 26 132 1& 80 30 5 6 39 1958 ._ 15 51 13 31 10 5 2 14 1959 45 217 36 229 99 19 10 101 1960 53 281 42 186 66 8 19 93 1961. 342 240 28 149 21 0 2 126

---- TotaL 836 3,071 689 2,982 1,507 329 721 425

I The number of defendants m a case is sometimes increased by the Department of Justree over the number against whom prosecutton was recommended by the Oommission, Also more than 1 Indictment may

result from a single reference . See table 13 for breakdown of pendtng cases . 14 of these references as to 117 proposed defendants were still being processed by the Department of

Jnstice as of the close of the fiscal year, and also 14 of the prior years references as to 132 proposed defendants .

621 of these cases have been completed as to 1 or more defendants Conviettons have been obtained

in 536, or 86 percent of such cases. Only ~5, or 14 percent, of such cases have resulted in acquittals or dismissals as to all defendants, this includes numerous cases in which indictments were dismissed Without

trial because of the death of defendants or for other administrative reasons. See note 5, mjm.

, Includes 69 defendants who died after indictment.

---- ---- ---- ---- ---- ---- ________________

___• _____________

_______• ________• ____• ____________ _________________

_______________

_________________

____• ___________ ___________

_________________

___• _____________

_________________

_________________

_____• ___________

______________• _____________

________________

____• ___________ _________________

_______________

_________________

_______________ _______• _________

_____ • ___________

_____________ ••

_______• _________

____• ____________

____• ___________

---- ---- ---- ---- ---- ---- ---- ' ________ •

•

•

•
260 SECURITIES ANI> EXCHANGE COMMISSION

TABLE 27.-A 28-year summary classifying all defendants in criminal cases

developed by the Commission-1934 to June 30, 1961

Number as to whom Number as Number Number Number cases were to whom

indicted convicted acquitted dismissed cases are on motion pending

of U.S.

attorneys

Registered broker-dealers 1 (including principals of such firms) _________________ 441 256 30 103 62

Employees of such registered broker- dealers ________________________________ 236 95 17 60 74

Persons in general securities business but not as registered broker-dealers (includes principals and employees). ______________ 789 389 64 262 74 All others 2________________________________ 1,516 767 218 306 225

TotaL. ___________________ 2,982 1,507 329 721 425

1Includes persons registered at or prior to time or indictment. 2 The persons reCerredto in this column, while not engaged in a general business in securities, were almost

without exception prosecuted Corviolations of law involving securities transactions.

• -

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TWENTY-SEVENTH ANNUAL REPORT 261

TABLE 28.--28-year summary of all injunction cases instituted by the Commission, 1934 to June 30, 1961, by calendar year

Number of cases Instituted Number of cases In which by the Commission and injunctions were granted the number of defend- and the number of de- Calendar Year ants Involved fendants enjoined 1

Cases Defendants Cases Defendants

1934

1935 7 24 2 4

1936____________________________________________ 36 242 17 56

1937 42 116 36 108

1938____________________________________________ 96 240 91 211

1939____________________________________________ 70 152 73 153 1940____________________________________________ 57 154 61 165

1941 _________ 40 100 42 99

1942____________________________________________ ------------- ----- ---- ------- ----- 40 112 36 90

1943 21 73 20 54

1944____________________________________________ 19 81 18 72

1945____________________________________________ 18 80 14 35

1946____________________________________________ 21 74 21 57

1947____________________________________________ 21 45 15 34 20 40 20 47 1948____________________________________________ 1949____________________________________________ 19 44 15 26

1950____________________________________________ 25 59 24 55 27 73 26 71 1951____________________________________________ 22 67 17 43 1952____________________________________________ 1953____________________________________________ 27 103 18 50 20 41 23 68 1954____________________________________________ 1955____________________________________________ 22 59 22 62 23 54 19 43 1956____________________________________________ 1957____________________________________________ 53 122 42 89

1958____________________________________________ 58 192 32 93

1959____________________________________________ 71 408 51 158

1960____________________________________________ 58 206 71 179 99 270 ls4 222 1961 (to June 30) _______________________________ 44 172 48 141

TotaL 1,076 3,403 958 2,485

SUMMARY

Cases Defendants

Actions Instituted ___________________________________________________________ 1,076 3,403

Injunctions obtalned ____________________________________________________ 932 2,485

Actions pendIng--------------------------------------------------------- 48 1336 Other dispositions' ____________________________________________________._ 96 582

TotaL 1,076 3,403

1 These columns show dlspo sition of cases by year of disposition and do not necessarily reflect the dlsposition of the cases shown as having been Instituted in the same years .

Includes 26 cases which were counted twice in this column because Injunctions against different defend- ants in the same cases were granted in different years. a Includes 68 defendants in 17 cases in which Injunctions have been obtained as to 56 codefendants. 'Includes (a) actions dismissed (as to 510 defendants); (b) actions discontlnued, abated, vacated, aban- doned, stipulated, or settled (as to 54 defendants); (c) actions in which judgment was denied (as to 12 defendants); (d) actions in which prosecution was stayed on stipulation to discontinue misconduct charged (as

to 4 defendants).

o

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_______• _________________• __________________

_____________________•• _____________________

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_______________________________________• _________________________

•