Sixteenth Annual Report

of the

Securities and Exchange

Commission

Fiscal Year Ended June 30, 1950

UNITED S'TATES GOV,ERNMENT PRINTING OFFICE, WASHINGTON: IUO

For lillIeby the Superintendent ot Documents, U. S. GuYerom.nt PrinU ... Olll.,.

Wuhlnilon 25, D. C. - Price 55cents
II

SECURITIES AND EXCHANGE COMMISSION

Headquarters Office

425 Second Street'NW.

Washington 25, D. C.

COMMISSIONERS

HARRY A. McDoNALD, Chairman.

DONALD C. COOK, Vice-Ohairman

RICHARD B. MCENTIRE

PAUL R. ROWEN

EDWARD T. MCCORMICK

ORVAL L. Dnbors, Secretary
LEITER OF TRANSMI1TAL

SECURITIES AND EXCHANGE C01\IMISSION,

Washington, D.O., January 31, 1951.

SIR: I have the honor to transmit to you the Sixteenth Annual

Report of the Securities and Exchange Commission, in accordance

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

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

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

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

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

August 22, 1940,and section 3 of the act of April 25, 1949,amending

the Bretton Woods Agreements Act.

Respectfully,

HARRY A. McDoNALD,

Ohairman.

THE PRESIDENT OF THE SEN ATE,

THE SPEAKER OF THE HOUSE OF REPRESENTATIVES,

Washington, D. O.

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TABLE OF CONTENTS

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Foreword_________________________________________________________ XI

Commissioners and staff officers___________________________________ __ XVI

Regional and branch offiees., ________________________________________ xv

PART I

ADMINISTRATION OF THE SECURITIES ACT OF 1933

The registration process

Purpose of registration

Examination procedure

Effective date of registration statement;

Time required for registration

The volume of securities registered

Volume of all securities registered

Volume of securities registered for cash sale

A. All securities

B. Stocks and bonds

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

D. Use of investment bankers as to securities registered for

cash sale for the accounts of issuers

All new securities offered for cash sale

Registered securities

Unregistered securities

Corporate

Noncorporate

Total registered and unregistered securities

Registration statements filed

Disposition of registration statements

Other documents filed under the act

Exemption from registration under the act

Exempt offerings under regulation A

Exempt offerings under regulation A-M

Exempt offerings under regulation B

Confidential written reports under regulation B

Oil and gas investigations

Formal actions under section 8

Stop-order proceedings under section 8 (d)

Deficiencies discovered in examination of registration statements

Changes in rules, regulations and forms

Regulation BW-Reports of International Bank for Reconstruction,

Regulation A-General exemption of small issues

Litigation under the act

PART II

ADMINISTRATION OF THE SECURITIES EXCHANGE ACT OF

1934

Regulation of exchanges and exchange trading; ___________________ 23

Registration of exehanges.L, , _ ________________________ 23

Disciplinary actions by exchanges against membera, ___________ 26

Registration of securities on exchanges___________________________ 26

Examination of applications and reports______________________ 26

Statistics of securities registered on exchanges_________________ 28

Temporary exemption of substituted or additional securities., ___ 28

Special offerings on exchangea.; _ ____ ______________ 29

Secondary distributions approved by exchanges; __ ____________ 30

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PART II-Continued

ADMINISTRATION OF THE SECURITIES EXCHAKGE ACT OF

1934-Continued

Termination of registration under section 19 (a) (2)

Unlisted trading privileges on exchanges

Applications for unlisted trading privileges

Delisting of securities from exchanges

Securities delisted by application

Securities delis ted by certification

Securities removed from listing on exempted exchanges Manipulation and Stabilization

Manipulation

Trading investigations Stabilization

Security transactions of corporation insiders

Reports of transactions and holdings Publication of data reported

Preventing unfair use of inside information

Statistics of ownership reports

Solicitations of proxies, consents, and authorizations

Statistics of proxy statements

Examination of proxies

Regulation of brokers and dealers

Registration

Administrative proceedings

Record of broker-dealer proceedings

Broker-dealer insI?ections

Pricing practices

Financial reports

Supervision of N ASD activity

~~e~b~rship---~---------------------------------------- __ Disciplinary actions

Changes in rules, regulations, and forms Form 10

Form 10- K

Form 8-K

Form 9-K

Form 8

Rule X-12A-4

Litigation under the act,

Inju?~tio~ actions_:

Participation as amUU8 cunae

Appellate proceedings

Kaiser-Frazier investigation and litigation with Otis & Co

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PART III

ADMINISTRATION OF THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935

The public utility industry under the acL________________________ 60

Progress under section II-over-all summary _ __ __________________ 62

Progress under section ll-survey of individual systems____________ 65

Cities Service Co_____ __ ____ ___ ____ _____ _ 65

The Commonwealth & Southern Corp____________________________ 67

Electric Bond and Share Co_____________________________________ 68

American & Foreign Power Co., Inc_________________________ 69

American Power & Light Co________________________________ 70

Electric Power & Light Corp________________________________ 71

National Power & Light Co_________________________________ 72

General Public Utilities Corp , _ _ _ __ ____ _ 73

International Hydro-Electric System______ __ ___ 74

Long Island Lighting Co_ ___ _______________ _______ _ ___ 76

The Middle"West Corp____ __ __ _____________________ ____________ 77

National Gas & Electric Corp___________________________________ 78

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TABLE OF CONTENTS VII 

PART III-Continued 

ADMINISTRATION OF THE PUBLIC UTILITY HOLDING COMPANY 

ACT 0%" 1935-Continued 

New England Public Service Co ................................. Niagara Hudson Power Cor .......h.. .............. North Continent Utilities &~~o~&~o~

Standard Power and Light Gorp.-Standard Gas and Electric Co. 
 The United Corp .......................................... 
 The United Li ht & Railways Co ............................ 
 The continuing hol8ing company systems ......................... 
 American Gas md Electric Co .............................. 


American Natural Gas Co.................................. 


Central and South West Cor ............. 
 The Columbia Gas System, ~I:::I ........................ 


Consolidated Natural Gas Ca ............................... 
 Delaware Pawer & Light Co ................................ 
 Interstate Power Co ....................................... 
 Middle South Utilities, Inc ................................. 
 National Fuel Gaa Co ...................................... 
 New England Electric System ............................... 
 Xew England Gas & Electric Association ..................... 


Northern Natural Gas Co.................................. 


Northern States Power Co .................................. 


Ohio Edison Co ........................................... 


The Southern Co .......................................... 


Utah Power and Light Co ................................... 


The West Penn Electrio Co .................................. 
 Issues of seeuntiea, assumptions of liabilities and alterations of rights. . 

Competitive bldding ............... 


Cooperation with State and Local regulatory authorities ............ 


Litigation under the act ........................................ 
 Actions to enforce voluntary plans under section 11 (e)........ 
 Petitions to review orders of the Commission under section 24 (a) . 


Enforcement proceedings under section 11 (e).. ...............; 


Petitions to review orders of the Commission .................. 
 Petitions for intervention ................................... 


PAR'l'I('11'.4TIOY OF THE CO3lhllJSION IS CORPORVI'E KE011(:.4TlZ.4TlOY.3 I'NLIER C1f.4l'TEH ?(OF T11E ........... 13AXKIt17PTC'\' 


ACT, AS AMENDED 


Commission's functions under chapter X......................... 
 The Commission ss a party to proceedings ........................ 


Summary of activitis .......................................... 
 Activities relating to the trusteeship ......................... 
 Problems in the administration of the estate .................. 


Responsibilities of fiduciaries ................................ 


Activities with respect to allowances ......................... 
 Institution of chapter X proceedings ............................. 
 Plans of reorganization under chapter 
X. 

Fairness ofplan ........................................... 
 Feasibility of plan ......................................... 
 Consummation of plan ..................................... 
 Advisory rep0 rt.. ............................................. 


ADMINISTRATION OF THE TRUST INDENTURE ACT OF.......1820 


Kature of trust indenture regulation ...................... 


lntraration rirh Seeuritie~.4ct of 1833................... 
 Stari.+trrs of inderrturclr qualified.. ..................... 

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PART VI

ADMINISTRATION OF THE INVESTMENT COMPANY ACT OF

W~ h~ Registration under the act___ ____ _ __ ____ 140

Types and investment policies of companies formed_______________ 141

Sellingliterature_______________________________________________ 141

Data on investment companiea.; ___ ___ __ __ _ 142

Applications flled; , ____________________________________________ 142

Litigation under the act, _______________________________________ 143

PART VII

ADMINISTRATION OF THE INVESTMENT ADVISERS ACT OF

1940

Registration statlsties, _________________________________ 145

Administrative proceedings _____________________________________ 145

PART VIII

OTHER ACTIVITIES OF THE COMMISSION UNDER THE

VARIOUS STATUTES

The Commission in the courts

Civilproceedings

Criminal proceedings

Complaints and Investigatlons

Investigations of securities violations

Canadian situation

Securities violations file

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

Proposed amendment of regulation S-X

.. Other de,:el!>pme~t~ in accounting and auditing Division of oplIDon wntmg

International Bank for Reconstruction and Development Advisory and interpretative assistance

Confidential treatment of applications, reports or documents

Statistics and special studies

Saving study

Financial position of corporations Capital markets

PersonneL

Fiscal affairs

Publications

Public releases

Other publications

Information for public inspection Public hearings

PART IX

APPENDIX-8TATISTICAL TABLES

Table 1. Registrations fully effective under the Securities Act of 1933_ __ 174

Part 1. Distribution by months_________________________________ 174

Part 2. Breakdown by method of distribution and type of security

of the volume proposed for cash sale for account of issuers________________________________________________ 175

Part 3. Purpose of registration and industry of registrant- _________ 176

Table 2. Claesificatlon by quality and size of new bond issues registered

under the Securities Act of 1933 for cash sale to the general

public through investment bankers during the fiscal years 1948, 1949, and 1950_ _____ ___________________________________ 177

Part 1. Number of bond issues and aggregate value_______________ 177

Part 2. Compensation to distributorB____________________________ 178

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PUT IX--Continued

APPENDIX-STATISTICAL TABLES-Continued

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Table 3. New securities offered for cash sale in the United States________ 179

Part 1. Type of offering________________________________________ 179

Part 2. Type of security_______________________________________ 180

Part 3. Type of issuer_________________________________________ 181

Part 4. Private placements of corporate securities_________________ 182

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

securities offered for cash sale in the United Btates , ___ ___ 184

Part 1. All corporate__________________________________________ 184

Part 2. Public utility _ _ _ __ _______ 185

Part 3. IndustriaL ___ __ _ _______ 187

Part 4. Railroad., __ ____ _ __ 189

Part 5. Real estate and financiaL_______________________________ 190

Table 5. A 17-year summary of corporate bonds publicly and privately

placed in each year-1934 through 195Q--by calendar yearc , , 191

Table 6. A 17-year summary of new securities offered for cash in the United Statesc. , , _ _ _ _ _____________ 192

Table 7. Brokers and dealers registered under section 15 of the Securities

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

1950, classified by type of organization and by location of

principal offiee , _ __ ___ ___ 193

Table 8. Market value and volume of sales effected on securities exchanges

for the three 6-months periods ended June 30, 1950__________ 195

Part 1. Six months ended June 30, 1949__________________________ 195

Part 2. Six months ended December 31,1949_____________________ 196

Part 3. Six months ended June 30, 1950__________________________ 197

Table 9. Special offerings effected on national securities exchanges for

fiscal year ended June 30,1950___________________________ 198

Table 10. Secondary distributions of listed stocks approved by national

securities exchanges for fiscal year ended June 30, 1950______ 198

Table 11. Classification by industry of issuers having securities registered on national securities exchanges as of June 30, 1949 and as of June 30, 1950_ ________ __________ _______________________ 199

Table 12. Number and amount of securities classified according to basis for

the admission to dealing on all exchanges as of June 30, 1950__ 199

Table 13:

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

number of registered exchanges on which issue was admitted to dealing as of June 30,1950___________________ 200

Part 2. Proportion of registered issues that are also admitted to un- listed trading privileges on other exchanges as of June 30, 1950________________________________________________ 200

Part 3. Proportion of issues admitted to unlisted trading privileges

that are also registered on other exchanges as of June 30, 1950________________________________________________ 201

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

exchanges that are admitted to dealing on more than 1

registered exchange as of June 30, 1950__________________ 201

Table 14. Number of issuers having securities admitted to dealings on exchanges as of June 30,1950, classified according to the basis

for admission of their securities to dealing_________________ 201

Table 15. Number of issuers having stocks only, bonds only, and both

stocks and bonds admitted to dealings on exchanges as of June 30, 1950_ ______________ ____________________ _______ 201

Table 16. For each exchange as of June 30, 1950, the number of issuers

and securities, basis for admission of securities to trading, and

the percentage of stocks and bonds admitted to trading on one or more other exchanges_________________________________ 202

Table 17. Number of issues admitted to unlisted trading pursuant to

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

of 1934 and volume of transactions therein________________ 203
x TABLE OF CONTENTS

PART IX--Continued

APPENDIX-STATIS'I'ICAL TABLES-Continued

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Table 18. Reorganization cases instituted under chapter X and section

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

and in which the Commission actively participated during the

fiscal year ended June 30,1950___________________________ 204

Table 19. Reorganization proceedings in which the Commission participated during the fiscal year ended June 30,1950___________ 204

Table 20. Summary of cases instituted in the courts by the Commission

under the Seeurities 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____________________________________ 206

Table 21. Summary of cases instituted against the Commission, cases in

which the Commission participated as in intervenor or amicus

curiae, and reorganization cases on appeal under chapter X in

which the Commission participated-pending during the

fiscal year ended June 30,1950___________________________ 206

Table 22. Injunctive proceedings brought by Cornmission, under the

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

Public Utility Holding Company Act of 1935 and the Investment Advisers Act of 1940, which were pending during the

fiscal year ended June 30,1950__________________________ 207

Table 23. Indictments returned for violation of the acts administered by

the Commission, the Mail Fraud statute (sec. 338, title 18,

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

case) which were pending during the 1950 fiscal year________ 210

Table 24. Petitions for review of orders of Commission under the Securities

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

Holding Company Act of 1935, and the Investment Company

Act of 1940, pending in circuit courts of appeals during the fiscal

year ended June 30,1950________________________________ 215

Table 25. Contempt proceedings pending during the fiscal year ended

June 30,1950__________________________________________ 216

Part 1. Civil contempt proceedings , ___ 216

Part 2. Criminal contempt proceedings___________________________ 216

Table 26. Cases in which the Commission participated as intervenor or as

amicus curiae, pending during the fiscal year ended June 30, 1950__________________________________________________ 217

Table 27. Proceedings by the Commission, pending during the fiscal year

ended June 30, 1950, to enforce subpenas under the Securities

Act of 1933 and the Securities Exchange Act of 1934________ 224

Table 28. Miscellaneous actions against the Commission or employees of

the Commission during the fiscal year ended June 30, 1950___ 225

Table 29. Actions to enforce voluntary plans under section 11 (e) to

comply with section 11 (b) of the Public Utility Holding Company Act of 1935___________________________________ 226

Table 30. Actions under section 11 (d) of the Public Utility Holding Company Act of 1935 to enforce compliance with Commission's

order issued under section 11 (b) of that act_______________ 228

Table 31. Reorganization cases under chapter X of the National Bankruptcy Act in which the Commission participated when

appeals were taken from district court orders __ ____________ 229

Table 32. A 17-year summary of criminal cases developed by the Commission-1934 through 1950, by fiscal year________________ 230

Table 33. Summary of criminal cases developed by the Commission which were still pending at June 30, 1950-by fiscal year__________ 231

Table 34. A 17-year summary classifying all defendants in criminal cases developed by the Commission-1934 to July 1, 1950________ 231

Table 35. A 17-year summary of all injunction cases instituted by the

Commission-1934 to July 1, 1950, by calendar year________ 232
FOREWORD

This is the Sixteenth Annual Report of the Securities and Exchange

Commission. It covers the year July 1, 1949 to June 30, 1950.

The report first outlines the activities of the Commission under the

major statutes entrusted to it and, in later sections, deals with over-all

activities that cut through statutory lines.

For the Securities and Exchange Commission the year was an extremely active one. Financing by industry, the major source of workload for the Commission, has continued at a high rate. The Commission's job in a particular financing may be the clearance of a registration statement under the Securities Act or the approval of the financing

under the Public Utility Holding Company Act, or it may be, by

formal or informal means, to issue an opinion as to whether the financing is exempted from these statutes. In any case the work must be

done thoroughly and promptly-to guard the interest of investors

and to be fair to business whose timing schedules may be closely

geared to market conditions.

This balance of interests is, in our view, essential to the effectiveness

of the laws. Thorough performance is a necessity in order to serve

the investor whom the laws seek to protect. Unwarranted delays are a

disservice to those who must live with and comply with the laws. The

basic philosophy behind these statutes is that free enterprise is facilitated by honest and decent relations between investor and management.

The Commission stresses the facilitative aspect of these laws.

Past reports of the S. E. C. have outlined its progress toward simplifying administration and compliance. Those efforts continue. They

are--in the context of our disclosure laws-e-eflorts to transform disclosure on paper into effective information of the investor. For

example, the Commission has by dint of constant pressure succeeded

in eliminating from prospectuses destined for investors a good deal of

technical and confusing detail. This process of simplification has not

yet reached the financial statements in prospectuses to the extent the

Commission would like to see that done. The accounting profession

has recently been invited to join the Commission in an effort to reduce the present formal presentation of information in balance sheets

and income statements to homely and understandable terms.

Material problems have faced the Commission in its study of methods

of revising the mechanics of prospectus distribution under t'he Securities Act. These difficulties have delayed the recommendation of statutory changes. However, the study has proved to be a fruitful one

nevertheless. It has stimulated an active interest in the usefulness

of the prospectus as a vehicle of investor information. It has

prompted active attempts-with revisions already made and more in

the offing-to change the prospectus into a piece of informative literature useful to the layman. It has led to a consideration of the

possibilities of authorizing more informative identifying literature

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XII FOREWORD

to be used by distributors in advance of effectiveness of registration.

It has resulted in a consideration of the possibility of encouraging

preeffective use of adequate informative material. One possible rule

now being discussed would allow this pre-effective material to be

supplemented (after effectiveness) with a simple sheet giving missing

information about price, yields, and spreads, so that the pre-effective

material and the supplemental sheet together would constitute the

prospectus. In this way the need for printing and distributing after

effectiveness a wholly new prospectus (duplicating much of the information previously circulated) could be avoided.

These rule revisions are designed to encourage investors to read

pros.l?ectuses and to stimulate distributor interest in making timely

distribution of adequate information. "Whether they are substitutes

for a revision of the statute, which would make it mandatory to provide a prospectus before selling a security, cannot now be stated

with any assurance.

Of particular significance in this report is the record of our progress

under section 11 of the Public Utility Holdin~ Company Act. That

section requires the integration and simplification of holding company

systems, and-under certain circumstances-the elimination of holding companies. These aims are accomplished by voluntary plans,

approved by the Commission and, in many cases, by the courts, for

disposal of holding companies' controlling interests in operating companies, for reorganization of system companies, or for dissolution of

top or intermediate holding companies.

In the 12 years of active administration of these provisions over

$10,000,000,000of assets have been released from jurisdiction under the

Holding Company Act. There remain subject to the act about

$13,000,000,000of assets in holding company systems; and it is guessed

that the Commission will remain with a $6,000,000,000to $7,000,000,000

industry to regulate under the standards of the act.

The completion of this vast program would bring administration

of the Holding Company Act into a new phase. Enormous increases

in utility construction in recent years have put a heavy demand on the

staff for the processing of financing applications. The defense program will continue to require large outlays by the industry for capital

expansion, and that work alone will draw heavily on personnel

resources no longer committed to the section 11 phase of our work.

Of necessity many duties under the act have had to be rationed in

order to concentrate on the task of integration and simplification. A

resurvey of those duties is in progress.

On January 9, 1950, the Commission transmitted to the Congress a

report recommending an amendment to the Securities Exchange Act

of 1934 which would extend to investors in unregistered securities the

protections afforded by the act in respect of the availability of public

information, the provision of data necessary for intelligent exercise

of the right to vote, and the regulation of insiders' short-term trading.

This report supplemented and brought up to date an earlier report

which had been submitted on June 19, 1946.

Economic development since 1946, the report indicated, had made

more essential the need for this legislation. Individual holdings of

cash, deposits, and U. S. Government securities were at a record high,
FOREWORD XIII

and yet investment in equity securities had not correspondingly

increased. Where idle funds were used for the purchase of such

securities, they were used largely to increase the investment in securities subject to the protections of the Securities Exchange Act. The

lack of publicity about companies outside of the scope of the act has,

in our view, been a substantial factor in the lack of investor interest

in these securities. A survey of the financial manuals disclosed that

there were approximately 1,800 companies which would be covered

by the proposed legislation.

After the receipt of these recommendations by the Commission,

there were introduced into the Senate by Senator Frear and into the

House of Representatives by Representative Sadowski identical bills

providing for the amendment of the Securities Exchange Act in

accordance with the Commission's proposals. Hearings were held

before the Senate Banking and Currency Committee, but no committee

report was rendered to the Congress. Senator Frear explained in a

speech delivered on the floor of the Senate that this was caused by

the continuous emergency which faced the Banking and Currency

Committee as a result of the Korean War. According to the Senator,

it was decided that the subcommittee should further study the legislation with a view to action on it at the next session.
COMMISSIONERS AND STAFF OFFICERS

(as of October 20, 1950)

Commissioners Te~~~p;re8

HARRYA. McDoNALD, of Michigan, Chairman-______________________ 1951

DONALDC. COOK,of l\1ichigan, Vice Chairman_______________________ 1954

RICHARDB. McENTIRE, of Kansas_________________________________ 1953

PAUL R. ROWEN, of l\1assachusetts_________________________________ 1955

EDWARDT. MCCORMICK,of Arizona________________________________ 1952

Secretary: ORVALL. DuBOIS

Staff Officers

BALDWIN B. BANE, Director, Division of Corporation Finance. ANDREW

JACKSON,Associate Director.

MORTONE. YOHALEM,Director, Division of Public Utilities.

ANTHOX H. LUND, Director, Division of Trading and Exchange. SHERRY

T. McADAM,Jr., Associate Director.

ROGERS. FOSTER,General Counsel. LOUIS Loss, Associate General Counsel.

EARLE C. KING, Chief Accountant.

MICHAELE. l\100NEY,Director, Division of Opinion Writing.

JEROMES. KATZIN, Executive Assistant to the Chairman.

NATHAND. LoBELL,Executive Adviser to the Commission.

HASTINGS P. AVERY,Director, Division of Administrative Services.

WILLIAM E. BECKER,Director, Division of Personnel.

JAMES J. RIORDAN,Director, Division of Budget and Finance.

XIV
REGIONAL AND BRANCH OFFICES

Regional Administrators

Zone 1-Peter T. Byrne, Equitable Building (Room 2006), 120 Broadway,

New York 5, N. Y.

Zone 2-Philip E. Kendrick, Post OfficeSquare Building (Room 501),79 Milk

Street, Boston 9, Mass.

Zone 3-William Green, Atlanta National Building (Room 322), Whitehall

and Alabama Streets, Atlanta 3, Ga.

Zone 4--Charles J. Odenweller, Jr., Standard Building (Room 1608), 1370

Ontario Street, Cleveland 13, Ohio.

Zone 5-Thomas B. Hart, Bankers Building (Room 630), 105 West Adams

Street, Chicago 3, Ill.

Zone 6-0ran H. Allred. United States Courthouse (Room 103), Tenth and

Lamar Streets, Fort Worth 2, Tex.

Zone 7-John L. Geraghty. Midland Savings Building (Room 822), 444

Seventeenth Rtreet. Denver 2. Colo.

Zone 8-Howard A. Judy. Appraisers Building (Room 308). 630 Sansome

Street. San Francisco 11, Calif.

Zone 9-James E. Newton. 1411 Fourth Avenue Building (Room 810),

Seattle 1, Wash.

Zone lo-E. Russel Kelly, 425 Second Street NW., Washington 25, D. C.

Branch Offices

Federal Building (Room 1074) Detroit 26. Mich.

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

Street, Los Angeles 12, Calif,

Pioneer Building (Room 400), Fourth and Roberts Street, St. Paul, Minn.

Wright Building (Room 327), Tulsa 3, Okla.

United States Courthouse and Customhouse (Room 1006), 1114 Market

Street, St. Louis 1, Mo.

xV

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PART I

ADMINISTRATION OF THE SECURITIES ACT OF 1933

The purpose of the Securities Act of 1933 is to provide full and fair

disclosure and to prevent fraud in the sale of securities in interstate

and foreign commerce and through the mails. To this end, the act

requires that issuers of securities to be offered for such public sale

must file with the Commission registration statements setting forth

prescribed information about the securities; that investors must be

furnished, at or before delivery of the security purchased, a copy of a

required prospectus containing the more significant items of such

information; and civil and criminal penalties are provided for securities frauds. The act does not authorize the Commission to pass on

the investment merits of securities and it makes representations to the

contrary unlawful.

THE REGISTRATION PROCESS

Purpose of Registration

Unless exempted from the Securities Act, securities offered for sale

in interstate commerce or by the use of the mails must be registered.

Securities for which such exemption is provided consist, in general, of

government and municipal securities and the issues of banks, railroads,

cooperatives and other organizations and associations specified in section 3 (a) of the act or covered by exemptions in rules and regulations

adopted by the Commission, as discussed elsewhere in this report, pursuant to section 3 (b) of the act. In addition, while the act contains

no exemption for securities of governmental or other foreign issuers

as such, Public Law 142, 81st Congress, approved by President Truman on June 29, 1949,extended a specific exemption to securities issued

or guaranteed by the International Bank for Reconstruction and

Development from the registration requirements of both the Securities

Act of 1933 and the Securities Exchange Act of 1934.

An integral part of each registration statement is the prospectus,

which sets forth the more pertinent information about the security

offering. As a basic method of direct disclosure to investors, the

prospectus plays a vital role in carrying out the purpose of the act.

The registration statement as a whole discloses material facts

dealing, among other things, with the character, size, and profitableness of the business, its capital structure, the uses to which the company

intends to put the proceeds realized from the sale of the securities,

options outstanding against securities of the issuer, remuneration of

officers and directors, bonus and profit-sharing arrangements, underwriters' commissions, and pending and threatened legal proceedings.

There must also be included in this document certified financial statements of the business enterprise.

915841--51----2 1
2 SECURITIES AJ\TJ) EXCHANGE COMMISSION

The information contained in registration statements filed with the

Commission is not only made available immediately for public inspection at the officesof the Commission but also forms the basis of widespread publicity released by financial news services, financial writers,

and newspapers throughout the nation, which further accelerates the

process of getting this information rapidly before a greatly enlarged

field of potential investors.

While the purpose of registration is thus to secure full and fair

disclosure of material facts about securities to enable prospective

investors to judge the risk involved intelligently, it is not intended

to remove the risk from investment decisions. The Commission is not

authorized under the Securities Act of 1933 to pass on the investment

merits of securities, and an effective registration statement does not

imply that the Commission has in any way passed upon the merits

of or given approval to the securities covered. Section 23 of the act

makes it unlawful to make any contrary representation to any prospective purchaser.

Examination Procedures

One of the Commission's most important undertakings has been

its development of procedures and techniques, which are constantly

undergoing improvements as dictated by experience, for the fast and

thorough examination of registration statements to determine compliance with the disclosure requirements of the act. The need for

speed in the examination process arises not only from the statutory

prescription of an effective date of the registration statement, in the

ordinary case on the twentieth day after its filing, but also from the

Commission's desire to avoid unnecessary interference with financing

plans.

"'Whereexamination shows the registration statement to be inaccurate or incomplete in disclosure of material information, the Commission may resort to its power under section 8 of the act and issue

an order preventing or suspending the effectiveness of the registration

statement. However, the Commission has, during the past five years.

continued its policy of exercising this power sparingly. Instead, it

has relied for enforcement mainly upon the long-standing practice of

securing an amendment to the registration statement. Accordingly,

registrants are informally advised, as promptly as possible after the

statements are filed, of any material misrepresentations or omissions

found upon examination and they are afforded an opportunity to

file correcting amendments before the statements become effective.

This advice is furnished by means of an informal "letter of comment"

which indicates what information should be corrected or supplemented to meet the disclosure standards.

Another informal procedure that has proved effective in speeding

the registration process is the "pre-filing conference" between staff

members and representatives of registrants and underwriters. In this

manner registrants are encouraged to discuss problems in connection

with the proposed filing for the purpose of determining in advance

what types or methods of disclosure may be necessary under the circumstances. This has contributed to the marked reduction in the num-
SIXTEENTH ANNUAL REPORT 3

bel'of instances where the Commission has found it necessary to resort

to stop-order proceedings or other formal action under section 8.

Neither the Commission, the issuer, nor the underwriter desires a

statement to become effective unless it complies with the act. Often,

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

the statement or simply to delay its effectiveness because of changes

in the securities market or for other business reasons. In such cases,

if there is a danger that the registration statement may become effective in defective form or prematurely for the purposes of the issuer or

underwriter, it is customary for the registrant to file a minor amendment, called a "delaying amendment," which starts the 20-day waiting period running anew.

Effective Date of Registration Statement

The 20-day waiting period between the filing and effectiveness of

registration statements was provided by the Congress in order to permit widespread publicity among investors of the information contained in the registration statement before it becomes effective. The

Commission is, however, empowered at its discretion to accelerate the

effective date where the facts justify such action so that the full20-day

period need not elapse before the registration statement can become

effective. In the exercise of this power, the Commission must have

due regard to the adequacy of the information about the security

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

financing, and to the public interest and the protection of investors.

Time Required for Registration

For some years the Commission has made every effort to complete

the registration process within the 20-day waiting period. This

effort has been largely successful, and the median elapsed time from

the filing date of a registration statement to its effective date has been

progressively shortened from 30y:! days in the 1947 fiscal year to 21

days in the 1950fiscal year. A breakdown of this elapsed time for the

1950fiscal year is contained in the following table:

Time elapsed in registration pl'ocess-1950 fiscal year

1949 1950

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

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

Total regrstratlon statements effectiveduring month (num- 39 38 33 ber)__________________________24 24 36 42 25 65 59 67 36

--- --- - -- Elapsed time (median number

ofdays)'

From date of filing ragrstra- tion statement to first

letter of comment. .... ___. 10 10 10 9 9 11 10 10 11 10 10 12

From date of letter or com- ment to first amendment

by registrant. ... ____.___.. 7 7 7 7 6 9 7 5 6 6 6 6

From date of first amend- ment to tbe effective date orregistration ___________ .. 6 3 5 3 4 5 5 4 4 4 4 5

-- - --- --- - - -- - ---- Total median elapsed time (days)___________ 23 20 22 19 19 25 22 19 21 20 20 23

-- - - -- - =
4 SECURITIES AND EXCHANGE COMMIS:SION

A.lthough the median elapsed time from filing to effectiveness was

21 days in the 1950 fiscal year, this time was 20 days or less in six

months of the year, accounting for more than half of all the registration statements which became effective during the year. The Commission intends to continue its efforts to bring the total elapsed median

time down to 20 days or less in all months.'

THE VOLUME OF SECURITIES REGISTERED

Volume of All Securities Registered iu Fiscal Year 1950 1949

Total registered $5,307,077,000 $5,333,362,000

The amount of securities effectively registered during the 1950 fiscal

year was practically the same as that for the 1949 period.

The volume registered in the 1950 fiscal year was distributed over

4872 statements covering 647 issues, as compared with 429 statements

covering 588 issues for the 1949 fiscal year.

Volume of securities registered for cash sale

304,736,000

4,686,051,000

$4, 381, 314, 000

621,027,000

5,307,077,000

19J,9

$4,204,008,000

193,870,000

4,397,878,000

935,484,000

5,333,362,000

1950

Total registeredfor cash sale _ Total registered for other than cash sale _

Total of allregisteredsecurities _

A. ALL SECURITIES

Registered for cash sale for accounts of issuers _

Registered for cash sale for accounts of

others than issuers _

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

OF ISSUERS

Equity securitiesother than preferred stock, Preferred stock _

Total allstock _ All bonds _

TotaL _

1950

$1,786,056,000

467,929,000

2,253,985,000

2,127,330,000

4,381,314,000

191,9

$1,083,117,000

325,854,000

1,408,971,000

2,795,036,000

4,204,008,000

1There Is no necessary connection between the total time elapsed In the registration

process and the 20 day waitIng perIod required by the statute. Under section 8 of the

SecuritIes Act a regtstratlon statement becomes ell'ectIve on the 20th day after filing (unless the CommIssIon has accelerated ell'ectIveness). The filing of an amendment to the

registration statement begins the waIting period running anew, unless the CommIssIon has

consented to or required the filing of the amendment.

After due notice and hearing the CommIssIon may refuse to permit a statement to be- come ell'ective. or may issue a stop-order determinIng the ell'ectiveness of the statement. In view of the tradition of the CommissIon to rely on careful examination of registration statements and the procurement of corrections by voluntary means, emphasis In the regis- tration process is upon correction In response to a stair letter of comment, rather than upon formal procedures to refuse or terminate eftectiveness.

The total time elapsed in the registration process is not completely withIn the control of

the CommissIon. As will be noted from the chart above, a substantial part of this total time

Includes the time taken by the registrant to make corrections pursuant to a letter of com- ment and the subsequent time taken to examIne the amended statement. As the chart shows the median elapsed tIme from the date of filing to the first letter of comment runs between 9 and 12 days. The remainder of the time Is consumed by the

registrant In making corrections and In a revIew of those correctIons by the stall'.

Customarily a statement Is declared eftectlve shortly after the receipt of the corrections

made pursuant to the letter of comment. At times, however, more than one letter is

necessary.

This figure di1l'ers from the 488 shown in the table on p. 176 due to dill'erence in

elasslfteatton as to time of ell'ectIveness of registration statements. See appendix table I,

footnote 2 for details.

•
SIXTEENTH ANNUAL REPORT 5

(Millions of dollars) I

It should be noted that while the volume of bonds registered by

issuers for cash sale decreased substantially, stock so registered showed

a marked increase.

From September 1934 through June 1949 new money purposes

represented 37 percent of the net proceeds expected from the cash sale

of issues registered for the accounts of the issuers. In the 1950 fiscal

year new money purposes represented 51 percent of the expected net

proceeds for the year-large enough to raise the 16-year average 2

points to 39 percent,"

The table below shows the amount of each type of security registered

for cash sale for the accounts of the issuers in each of the fiscal years

1935through 1950as well as the three 5-year totals. In addition to the

totals of the new issues for cash sale, all registrations are shown for the

same periods.

Cash sale for account of issuers

Fiscal year ended June 30 All regis- Total Bonds and Common stock trations Preferred taee-ernount stock and certl1lcates

certificates of participation

1935' __________________________________ 913 686 490 28 168 1936___________________________________ 4,835 3,936 3,153 252 531 1937___________________________________ 4,851 3,635 2.426 406 802 1938___________________________________ 2,101 1,349 666 209 474 1939___________________________________ 2.579 2,020 1,593 109 318

1935--39 15,280 11,626 8,328 1,003 2,293

1940___________________________________ 1,787 1,433 1,112 110 210 1941___________________________________ 2,611 2,081 1,721 164 196 1942___________________________________ 2,003 1,465 1,041 162 263 1943___________________________________ 659 486 316 32 137 1944___________________________________ 1,760 1,347 732 343 272

1940-44. 8,820 6,812 4,922 812 1,078

1945___________________________________ 3,225 2,715 1,851 407 456 1946___________________________________ 7,073 5,424 3,102 991 1,331 1947___________________________________ 6,732 4,874 2,937 787 1,150 1948 6,405 5,032 2,817 537 1,678 1949___________________________________ 5,333 4,204 2,795 326 1,083

1945--49____________________________ 28,768 22,249 13,502 3,047 5,698

1950___________________________________ 5,307 4,381 2,127 468 1,786

I Dollar amounts are rounded to millions and will not necessarily add to totals. I For 10 months ended June 30, 1935.

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

ISSUERS-BY TYPE OF ISSUEB

Tllpe of Issuer

Electric,gas, and water companies _ Financialand investment companies _ Transportation and communication com- panies 1

Manufacturing companies _ Foreign governments _ Extractive companies _ Merchandising companies _ S'erVlcecompames., .

Real estatecompanies ._

1950

$2,038,227,000

1,067,692,000

522,753,000

506,304,000

175,950,000

33,027,000

25,370,000

7,582,000

4,409,000

19./9

$1,796, 709,000

680,600,000

989,911,000

679,447,000

o

33,495,000

14,675,000

9,171,000

°

Total____________________________ 4,381,314,000 4,204,008,000

IDoes not include companies subject to regulation by the Interstate Commerce Commission and there- fore exempt from registration.

See also appendix table 1, pt. 3.

__________________________--

_________ -----------------

_______________• ___________________

_

- _

•
6 SECUR'ITIES AND EXCHANGE COMMISSION

19J,9

$2,758,454,000

962,830,000 557,361,000

1950

$2,927,787,000

Registrations of securities for cash sale by electric, gas, and water

companies exceeded by 13 percent their previous high established in

the 1949 fiscal year. Those for the financial and investment companies exceeded by 18 percent their previous high established in the

1946 fiscal year. These two groups accounted for 47 percent and 24

percent respectively of the total for the year. Manufacturing companies and transportation and communication companies registered

about equal amounts, each 12 percent of the total, decreases of 25 and

47 percent, respectively, from the amounts of the 1949fiscal year.

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

SALE FOR THE ACCOUNTS OF ISSUERS

Amount registered to be sold through

investment bankers:

Under agreements to purchase for resale

Under agreements to use "best efforts"

to selL

Total registered to be sold through investment bankers

Total registered to be sold directly to investors by issuers

3,890,617,000

490,698,000

3,315,814,000

888,194,000

Total 4,381,314,000 4,204,008,000

The Commission's Section of Operational Statistics continues to

study the costs of flotation of security issues. The greatest part of

these costs continues to be commissions and discount, which are the

amounts paid to investment bankers, the balance being distributed

among other expenses such as (a) those not affected by registration:

exchange listings, Federal revenue, stamp taxes, State fees and taxes,

trustees, transfer agents, etc., (b) those partly affected by registration : printing and engraving, legal fees and expenses, accounting fees

and expenses, engineering, appraising, etc., and miscellaneous and

(c) those entirely attributable to registration: the S. E. C. filing fee

of one one-hundredth of 1 percent of the maximum offering price of

the securities registered.

During the past 5 calendar years, 1945-49 inclusive, registrations

of all types of securities (for cash sale and otherwise) amounted to

approximately $29,000,000,000. The cost of flotation of these securities was $2.64 per hundred dollars of gross proceeds. Of this, compensation paid to underwriters amounted to $2.12 and other expenses

amounted to $0.52.

In the 1950fiscal year, investment bankers were used in the sale of

89 percent of the total registered for cash sale for the accounts of

issuers as compared with 79 percent in the 1949fiscal year. Commitments by investment bankers to purchase for resale involved 67 percent of the total registered for cash sale for the accounts of issuers,

as compared with 66 percent in the 1949fiscal year.~

That part of cost of flotation represented by commissions and discounts to investment bankers, but excluding other expenses, is shown

ior each type of security for each of the past 10 fiscal years. The

See appendix tables 1 and 2 for a more detailed breakdown of the dollar volume of

Securities Act registrations.

_

_

_

_

-

•
SIXTEENTH ANNUAL REPORT 7

table below covers securities effectively registered for cash sale through

investment bankers to the general public for the accounts of the regrstrants, but does not include securities sold to existing security holders

of the issuers, securities sold to special groups, and securities of investment companies.

Commissions and discounts to investment bankers

(Percent ofgross proceeds)

FIScalyear ended Bonds Preferred Common Fiscal year cnded Bonds Preferred Common

June 30 stock stock June 30 stock stock

194L_____________ 1 8 4 1 144 1946______________ 9 3 1 80 1942______________ 1 5 4 1 101 1947______________ 9 28 93 1943______________ 1.7 J 6 97 1948______________ .6 4 5 102 1944______________ 1 5 3 1 8 1 1949.-____________ 8 38 7 1 1945______________ 1 J J 1 93 1950______________ .6 2 7 64

ALL NEW SECURITIES OFFERED FOR CASH SALE'

Registered Securities

Securities effectively registered under the Securities Act of 1933

and actually offered for cash sale during the 1950fiscal year amounted

to $3,163,000,000. This total was less than the amount of securities

offered in any of the postwar fiscal years; $4,656,000,000were so offered

during the peak year ended June 1946. The amounts of such offerings

in the last 2 years, valued at actual offering prices, are as follows: 6

Corporate (excluding investment com- panies)

Noncorporate (Foreign Government)

TotaL

Unregistered Securities

CORPORATE

1950 1949

$2,987,000,000 $3,443,000,000

176, 000, 000 0

$3,163,000,000 $3,443,000,000

Some $3,006,000,000of unregistered corporate securities are known

to have been offered for cash sale by issuers in the 1950 fiscal year as

compared with $3,686,000,000 in the 1949 fiscal year. The basis for

exemption of these securities from registration is as follows: 7

Basis for exemption from registration: 1950 1949

Privately placed issues______________ $2,211,000,000 $2,904, ODD, 000

Railroads and other common carriers__ 572,000,000 621,000,000

Commercial bank issues , ____________ lID, 000, 000 25, 000, 000

Intrastate offerings , ________________ 6, ODD, 000 5, 000, 000

Offerings under regulation A 1_ _ _ _ _ _ _ _ 107, 000, 000 121, 000, 000

Other exemptions___________________

°10,000,000

Total $3,006,000,000 $3,686,000,000

IIncludes ouly offerings between $100,000and $300,000ill size. See p. 9[or a more detailed discusslon of

regulation A offuillgs.

See appendix for a detailed statistical breakdown of all securities o[fered for cash sale in the United States_

The figures given In this section exclude securities sold through continuous offertng', such as issues of open-end investment companies and employee purchase plans. 7 Where a security may have been exempted from registration for more than one reason. the security was counted only once.

_

_

_

•

•
8 SECURITIES AND EXCHANGE COMMISSION

NONCORPORATE

1949

$11, 135, 000, 000

2,512,000,000

166,000,000

o

10,000,000

The total of unregistered governmental and eleemosynary securities

offered for cash sale in the United States during the 1950 fiscal year

was $15,673,000,000 as compared with $13,823,000,000 in the 1949

fiscal year. These totals consist of the following:

Issuer: 1950

United States Government $12,068,000,000

State and local governments , ________ 3, 482, 000, 000

Foreign governments________________ 0

International Bank_________________ 101,000,000

Miscellaneous nonprofit organlzations , 22,000,000

Total $15,673,000,000 $13,823,000,000

Total Registered and Unregistered Securities

Proceeds from corporate securities flotations, both registered and

unregistered, applicable to expansion of fixed and working capital

amounted to $3,940,000,000. This is considerably lower than the

volume of securities sold for this purpose during the 1949 and 1948

fiscal years, the amount being approximately $5,800,000,000 in each

of these two periods. Electric and gas companies accounted for 41

percent of the new money financing, manufacturing firms 17 percent,

communication companies 8 percent, railroads 9 percent, and all

others 25 percent. Securities offered for retirement of outstanding

securities and repayment of bank loans amounted to $1,601,000,000in

the 1950 fiscal period compared with $921,000,000 in the preceding

year. The increase was due to a substantial rise in the amount of

securities refunded, particularly by electric and gas utility companies."

REGISTRATION STATEMENTS FILED

During the 1950 fiscal year 496 registration statements were filed

covering proposed offerings in the aggregate amount of $5,220,654,010.

Number and di8position of registration statements filed

Prior to July I, July I, 1949to Total as of June

1949 June 30, 1950 30,1950

Registration statements: Flied •••..•........ ___.• _•. _.. _._....•.•...••. 8,043 496 8,639

Effective-net ...... __..•. _•.•.•.•............ 6,663 1488 17,144

Under stop or refusal order-s-net. .. _____...... 182 10 182

Withdrawn_ ........................ _. ___.•. _. 1,145 23 1,168 Pending at June 30,1949.•.... _... _________... 63 -----------.--.--- ------- ----------- Pending at June 30,1950...................... -.-----------.---- 45

8,043 ------- ------ ----- 8,639

Aggregate dollar amount: As filed___••...•............ _....... _. __..••. _ $57,962,671,149 $5,Z~O,654,010 $63, 183,325,159

As etfective •. _.... __.. _•.•• _.•.•.............. 54,113,698,063 5,307,077,191 59,440,775,254

1 Excludes 2 registration stetements which became etfectlve and were subsequently withdrawn and

includes 1 registration statement previously under stop order. I 7 registration statements which became etfectlve prior to July I, 1949were withdrawn and are counted

in the number withdrawn.

I During the flscel year a stop order was issued agaInst 1registration statement and a stop order on another

registration statement was lifted, making no change in the net number of stop order cases.

See appendix table 4 for statistics in greater detatl as to the use of net proceeds from

the sale of securtttes.

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

•
SIXTEENTH ANNUAL REPORT 9

Additional documents filed in the 1950 ttscal year related to Securities Act

registrations

Nature of document: Number

Material amendments to registration statements filed before the

effective date of registration____________________________________ 764

Formal amendments filed before the effective date of registration for

the purpose of delaying the effective date_________________________ 421

Material amendments filed after the effective date of regtstration.L, , 638

Total amendments to registration statements 1,823

Supplemental prospectus material, not classified as amendments

to registration statements 1,112

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

of 1934 pursuant to undertakings contained in registration

statements under the Securities Act of 1933:

Annualreports___________________________________________ 753 Current reports 2,378

EXEMPTION FROM REGISTRATION UNDER THE ACT

The Commission is authorized by section 3 (b) of the act to adopt

rules and regulations granting exemptions from the registration requirements for issues of securities whose aggregate offering price to

the public does not exceed $300,000.

The Commission has adopted five regulations pursuant to this

authority: Regulation A, a general exemption for small issues; regulation A-R, a special exemption for notes and bonds secured by first

liens on family dwellings; regulation A-M, a special exemption for

assessable shares of stock of mining companies; regulation B, an

exemption for fractional undivided interests in oil or gas rights, and

regulation B-T, an exemption for interests in oil royalty trusts or

similar types of trusts or unincorporated associations.

Small offerings of securities may be made and sold to the public

pursuant to a section 3 (b) exemption on the basis of a less complete

disclosure than that required by the act in the case of a registered

security. For example, regulation A provides for the filing of a simple

letter of notification, containing limited information about the issuer

and the offering, with the appropriate regional officeof the Commission, and provides further that the offering may be made five business

days thereafter.

It should be emphasized, however, that exemption from registration permitted under section 3 (b) carries no exemption from civil

liabilities under section 12 for misstatements or omissions, or from

the criminal liabilities for fraud under section 17. For the proper

enforcement of these sections, the conditions for the availability of the

exemptions provided under section 3 (b) include, with the exception

of regulation A-R, the requirement that certain minimum information

be filed with the Commission and that disclosure of certain inform ation

be made in sales literature, if any sales literature is used. While no

prospectus need be used, selling literature must be filed in advance of

Its use.

Exempt Ofi'erings under Regulation A

Inthe 1950 fiscal year 1,357 letters of notification were filed under

regulation A, covering offerings in the aggregate amount of $171,743,-

472, compared with 1,392 filings totaling $186,782,661during the 1949
10 SECURITIES A1-.TDEXCHANGE COMMISSION

fiscal year. The 1950 fiscal year figures include 136 letters of notification covering stock offerings aggregating $19,909,525 filed by companies engaged in some phase of the oil and gas business.

In addition to the 1,357letters of notification filed in the 1950fiscal

year, 1,159 amendments to these letters of notification were received

and examined and there were 1,844 filings of sales literature to be

used in connection with such offerings.

Of 1,345letters of notification covering completed offerings filed in

the 1950fiscal year, 787 covered proposed offerings of $100,000or less;

218 covered offerings for more than $100,000 and less than $200,000;

and 340 covered offerings of more than $200,000 but not more than

$300,000. Issuing companies made 1,134of these offerings, stockholders made 199, and both issuers and stockholders joined in making the

remaining 12. Commercial underwriters marketed 398of the offermgs,

officers and directors or other persons not regularly engaged in the

underwriting business handled 164, and there was no underwriting

of the remaining 803.

The procedure for making an exempt offering under regulation A

is simple. All that is necessary is to file the prescribed letter of notification, and such sales literature as the offeror intends to employ, with

the appropriate regional officeof the Commission five busmess days

before the offering is to bemade. In processing by the Commission this

material is examined in the field and reviewed by the staff at the Commission's headquarters. This review involves a search for pertinent

information in the Commission's extensive files and an examination

to determine whether the exemption provided by the regulation is

applicable to the particular case and whether the information filed

discloses any violation of any of the acts administered by the Commission. The results of this review are made available promptly to the

regional office. The Commission also follows the practice of cooperating with the proper local authorities in the States in which the securities are proposed to be offered by furnishing them significant data

about the proposed offering.

Exempt Offerings under Regulation A-M

During the 1950fiscal year the Commission received and examined !)

prospectuses covering an aggregate offering price of $303,122for assessable shares of mining corporations exempt from registration under

this regulation.

Exempt Offerings under Regulation B

The Commission maintains a specialized unit in its headquarters

officeto administer regulation B and to advise and assist with technical

phases of all offerings of oil and gas securities arising under other pro- t

visions of the Securities Act. In addition, the Commission maintains "

a petroleum geologist in Tulsa, Okla., who advises the Commission as

to the development of tracts and wells in the Mid-Continent and

Coastal regions. Development has been active in the Rocky Mountains

during the 1950 fiscal year.

The exemption from registration provided by regulation B for

fractional undivided interests in oil or gas rights is limited to a maximum aggregate offering price of $100,000. Regulation B requires that
SIXTEENTH ANNUAL REPORT 11

an offering sheet be filed with the Commission summarizing pertinent

information regarding the security being offered.

In addition to 136 offerings under regulation A which covered oil

and gas securities, 88 offering sheets and 61 amendments were filed under regulation B during the 1950 fiscal year. The following actions

were taken on these filings:

Action taken on filmg8 under regulation B

Temporary suspension orders (rule 340 (a ) ) 14

Orders terminating proceedings after amendmenL________________________ 8

Orders consenting to withdrawal of off'ertng sheet and terminating pro- ceedlng ---____________ 1

Orders terminating- effectiveness of offering- sheet (no proceeding pendlng j ; , l)

Orders consenting- to withdrawal of offering- sheet (no proceeding- pending) __ 1

Orders accepting- amendment of offerin.e; sheet (no proceeding pending) 34

Total orders_____________________________________________________ 66

Oonfidential written reports of sales under regulation B.-Another

function of the Commission in the administration of regulation B

is to determine from confidential written reports of actual sales

that no violations of law occurred in the marketing of oil and gas

securities exempted under this regulation. Such reports are required

to be filed pursuant to rules 320 (a) and 322 (c) and (d) concerning

sales made by broker-dealers to investors and by dealers to other

dealers. During the 1950 fiscal year 1,132 such reports were received

with respect to aggregate sales of $829,875.

Oil and gas investigations.-Most oil and gas investigations arise

out of complaints received by the Commission. They are conducted

primarily to ascertain whether there has been any violation of section

r>, which requires registration, or of section 17, which prohibits fraud

in securities transactions.

A typical investigation was made in the 1950 fiscal year to determine whether certain claims of profits in sales literature used to sell

oil royalties under regulation B were misleading. The offering circular claimed that the royalties would return a profit of 8 to 12 percent and would be a better investment than most stocks and bonds.

The staff made an extensive study of the total income received from

royalties sold by the offeror under offering sheets relating to as many

as 46 tracts since 1940. Inasmuch as information as to production

and income from these tracts was not a matter of published record,

a large part of the necessary data was obtained from the producer

and the purchaser of the oil. Itwas found that out of the 46 tracts

under review, only 2 had returned the capital invested, with a profit;

4 should eventually do so, with a modest profit; and of the remaining

40 tracts only a very few can reasonably be expected ever to return

even as much asthe capital invested.

The offeror agreed to cease claiming an 8 to 12 percent yield, to

cease comparing any return on these royalties with that available from

stocks and bonds, and to describe his royalties as liquidating assets

the return from which cannot be regarded as profit until the capital

invested has been recovered by the purchaser.
12 SECURITIES AA""DEXCHANGE COMMISSION

The Commission instituted 10 new investigations involving oil and

gas securities during the 1950fiscal year and 23 such cases were closed.

This brought the total pending during the year to 135 and the number

pending at the close of the year to 112. As a result of evidence developed in two cases, the Commission secured injunctions in the courts

restraining violations of the registration and antifraud provisions of

the act. The facts in two other cases were referred to the Department

of Justice for criminal prosecution, in which the Commission cooperated. The conviction of Claude Cleve Alfred in connection with

fraudulent sales of oil securities is mentioned in another section of

this report.

FORMAL ACTION UNDER SECTION 8

The purpose of the Commission's informal procedures in processing

registration statements is to get registration statements which comply

with the requirements of the act before the statements become

effective. In almost all cases conference and comment by letter are

sufficient both for the needs of the registrant and for the adequate

protection of investors. It is sometimes necessary, however, for the

Commission to exercise its powers under section 8 in order to prevent

a reg-istration statement from becoming effective in deficient or misleading form or to suspend the effectiveness of a registration statement

which has already become effective.

Under section 8 (b) the Commission may institute proceedings to

determine whether It should issue an order to prevent a registration

statement from becoming effective. Such proceedings are authorized

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

instituted at any time to determine whether the Commission should

issue a stop-order to suspend the effectiveness of a registration statement if it appears to the Commission that the registration statement

includes any untrue statement of a material fact or omits to state any

material fact required to be stated or otherwise necessary to make the

statements included not misleading. Under section 8 (e) the Commission may make an examination to determine whether to issue a

stop-order under section 8 (d).

Stop-order Proceedings under Section 8 (d)

Two stop order proceedings were pending at the beginning of the

1950 fiscal year and one was instituted during the year under section

8 (d). These cases are described below.

Pan American Gold. Limited. (no personai lialJility)-File No.

2-7603.-This Canadian company filed a registration statement covering 1,983,295of its common shares, $1 par value, to be offered at 45

cents per share and net about $670,500 to the issuer. According to

the registration statement, these proceeds were to be used (1) for the

exploration of a gold mining prospect located in South Dakota,

and (2) for the equipment of a South American gold placer mining

property.

Upon examination the registration statement appeared to contain

materially misleading representations, and in the 1949 fiscal year the

Commission authorized a private examination under section 8 (e) to
SIXTEENTH ANNUAL REPORT 13

determine the adequacy and accuracy of certain of these representations and to determine whether stop-order proceedings should be instituted. On the basis of testimony adduced at the examination, stoporder proceedings were instituted. Following these proceedings and

after the registrant filed amendments to the registration statement

which substantially corrected deficiences, the Commission issued its

opinion, deferring issuance of a stop-order pending correction by the

registrant of the remaining deficiencies, at which time the registration

statement could become effective,"

The Commission found that the original registration statement was

materially misleading in numerous respects. The prospectus filed as

a part of the original registration statement contained information

to the effect that the registrant's South Dakota property is located

along the southern border of the famous Homestake Mine. A map,

forming a part of the prospectus, showed what purported to be the

southeasterly "trend" of the Homestake gold ore bodies into and

through the registrant's property. This representation was said to

rest on the authority of United States Geological Survey Atlas Folio

219. The Commission found that the map was not supported by

such folio and that the registrant had no factual basis for portraying

the extension of the Homestake ore bodies into and through its property. The prospectus was amended to omit this unjustifiable claim

and also to delete a report on the property which the Commission held

to be materially inaccurate, inadequate, and misleading. In addition

it was amended to show for the first time that the registrant was aware

of several unfavorable geological reports made after exploratory

drilling.

The South American property of the registrant was described origally in the registration statement as being ready for productive

operation upon installation of mining equipment. The amount of

commercial gravel said to be available for mining was estimated at a

minimum of 5,000,000cubic yards averaging $1 per cubic yard in gold.

The planned rate of production was said to be at least 1,000,000cubic

yards of gravel per year. The registrant stated that it believed that

operations on the property should enable it to obtain steady earning

power from this property. The amended registration statement discloses that the registrant made no investigation of the property, and

has no factual information about the presence, extent, or character of

gravel deposits on the property. The prospectus, as revised, shows

that the registrant intends to test the property as an initial step in

order to determine whether it warrants the installation of machinery

for production. Specifically, it is stated in the revised prospectus:

"If the further exploratory work and shafting as contemplated do not

show sufficient values to justify further development, this property

will be abandoned."

The Maumee Oil Oorporation-File No. fJ-7976.- This case was completed during the 1950fiscal year although instituted previously. The

company was incorporated in Ohio on July 30, 1947 and on May 11,

1949 filed a registration statement covering 8,000 shares of no par

value common stock to be offered at $100 a share. Its assets consisted

• Securl ties Act release No. 3368.
14 SECURITIES A!\'D EXCHANGE COMMISSION

of assignments of oil and gas leases and an undivided one-half interest

in four wells (two of which were not productive) in the Beddo field in

the vicinity of Ballinger, Runnels County, Tex. A.fter examination

of the registration statement, stop-order proceedings were instituted

on May 27, 1949.

From information developed at the hearing it appeared that the

registration statement failed to disclose that the Beddo field was an

inferior field which seldom, if ever, marketed more than 60 percent

of its allowable production, and often much less, and that the number

of dry holes in the field exceededthe number of producing wells. The

registration statement also failed to provide adequate information

with respect to the wells in which the registrant had an interest. The

prospectus stated that two of the four wells were unproductive, but

it failed to state that the other two producing wells had no reasonable

chance of profitable production and were bemg operated on a day to

day basis only because this was more economicalthan to abandon them.

At the time the registration statement was filed the registrant was

in possession of two reports from geologists which indicated that, at

best, only 5 percent of the registrant's acreage had a reasonable chance

to produce oil in any amount. The Commission held that in such

circumstances, where there had been significant exploration in the area

indicating that the possibilities of success were extremely remote, it

was misleading to imply a fair chance of profit by describing the

offering as "speculative," or to state or imply that the area in which

the registrant's properties were located had not been proved, or that

the registrant's own acreage should be regarded as unproved. As

to the registrant's plan for new drilling, to be financed with proceeds

from the sale of the securities sought to be registered, it was held

misleading for the registrant to characterize the projected wells as

"exploratory" without disclosing the information in its possession

indicating that since the projected wells were to be located in the

vicinity of its existing unprofitable wells there was no reasonable

factual basis for an expectation that new wells would be better than

the existing wells.

The registration statement and prospectus failed to name Eldrid~e

S. Price as a promoter although required to do so by the Commission's rules, and to provide a fair disclosure of the registrant's dealings with him. Price, although not an officer,director, or stockholder,

sold assignments of oil and gas leases on some 2,677 acres of his holdings in Runnels County, Tex., to the persons who became the original

shareholders of the company. Price received about $290,340, about

92 percent of all the money obtained by the registrant from the sale

of securities. The original amount paid to Price was $43.75 an acre,

but this was later raised to $100 although Price was apparently at the

same time acquiring additional acreage for about $1 per acre.

The Commission's opinion mentions other omissions and inconsistencies in the registration statement relating to such matters as

the amount of the offering, the liability of certain shareholders for

assessment, the business experience of officers, inaccurate financial

statements, and the failure to file material exhibits." At the close of

10 Securities Act release No. 3354.
SIXTEENTH ANNUAL REPORT 15

the 1950 fiscal year the registrant had not attempted to correct the

deficiencies found to exist in its registration statement and the stop

order was still in effect.

Ralph A. Blanchard and George P. Simons, doing business as

Northwest Petroleumr-File No. 2-8243.-The registration statement

filed in this case covered 350 "undivided Fractional Participating Interests (Oil)" to be offered for sale to the public at an aggregate price

of $175,000. The Commission, alleging generally that there is reasonable cause to believe that the disclosures contained in the registration

statement and prospectus are inaccurate and incomplete in material

respects, challenging 19 items specifically, instituted stop-order proceedings during the 1950 fiscal year that were still pending at the

close of the year."

DEFICIENCIES DISCOVERED IN EXAMINATION OF REGISTRATION

STATEMENTS

The examination of registration statements during the waiting

period brings to light many deficienciesin the registration statements

which would, if undiscovered, be published and furnished to investors.

These are sometimes corrected; often they are of such material character that the statements are withdrawn on discovery of the deficiency.

The following are examples of deficiencies discovered in examination

of registration statements.

Overstated Oil Reserves

An oil-producing company filed a registration statement covering

$2,937,254of 4% percent senior cumulative interest debentures, due

January 1, 1965; $1,147,150of 5 percent junior income debentures, due

January 1, 1970; 30,500 shares of $5 cumulative class A preferred

stock, no par; 51,000shares of $5 cumulative class B preferred stock,

no par; and 2,000 shares of common stock, no par.

Prior to the formation of the company, the promoters of its predecessors had sold working interests in oil leases, in which the promoters

retained overriding royalties, to some 350 investors in and around

Boston. These royalties and other assets were subsequently conveyed

to the company by the promoters. The company appears to have been

continuously short of working capital although, in addition to substantial loans from insurance companies and banks, it had received

additional funds from a syndicate composed of some of the original

investors in the leases. A plan of reorganization was devised which

provided for: (1) A large loan from the RFC; (2) the acquisition

of additional 011 properties; (3) the repayment of part of the outstanding loans; and (4) payments in cash and new securities for the

properties owned and to be acquired. The Commission determined

that the proposed offering of debentures, preferred stock, and common

stock, in addition to cash, to the 350 investors was a public offering

and required the filing of a registration statement.

It became apparent upon review by the Commission of the reports

prepared by various petroleum engineers in respect of the company's

oil and gas reserves, and after conference with such engineers, that

11 Securities Act release No. 3367.
16 SECURITIES AND EXCHANGE COMMISSION

the reserve estimates were too high, that upon a reasonable estimate

of these reserves there was no present value behind the securities proposed to be offered, and that the prospects of any future values were

remote and contingent. Consequently the company proposed, in lieu

of furnishing an estimate of oil and gas reserves in the registration

statement, to state the fact that the securities being offered were without present value and of extremely remote and contingent future value,

and also to make a more detailed statement of such facts on the second

page of the prospectus. This amendment was made and resulted in

furnishing to prospective purchasers in a readily understandable form

the ultimate conclusion as to the effect of the factors of value-such as

the estimated amount of reserves, the dollar value of oil, lifting costs,

and rate of extractions-instead of a mere itemization of these factors

themselves.

Understatement of Liability

The adoption of pension plans during the year presented new problems to some registrants as in the case of a registrant which adopted a

5-year plan to become effective on a date within an interim period for

which unaudited financial statements were furnished as permitted by

the rules. The company's financial statements filed with the Commission included a charge to profit and loss for the interim period pro~>ortionate to the total estimated cost for the 5-year period with an equivalent amount reflected in the balance sheet as a liability. Examination

of the plan indicated that in the first year a much larger number of

employees would be eligible under the plan than in the succeeding

years due to the fact that all employees over the required age and term

of service for eligibility could claim their pension rights immediately,

although not all of them were expected to do so. When this feature

was called to the attention of the registrant the financial statements

were amended to increase the liability shown in the balance sheet under

the pension plan from the previous estimate of approximately $500,000

to $2,000,000, of which $400,000 was classified as current. The previously determined accrual was charged to profit and loss and the remaining $1,500,000 was set up as a deferred charge to be allocated against

future operations. A comprehensive footnote described the pension

plan and indicated that the liability included in the balance sheet was

based upon the best indication at the date of filing of the intention of

eligible employees to retire within the terms of the plan.

Restatement of Reserves

A company filing a registration statement covering 76,983 shares

of 4% percent cumulative preferred stock owned several old established operating mining companies, which followed a widespread

practice of making no provision for depletion of their mining properties. However, in its latest balance sheet accompanying the registration statement the parent company reflected a reserve for contmgencies amounting to $4,000,000, created by a charge to earned surplus

"for the eventual write-off of its investment direct or indirect in mining property upon the exhaustion of any such property." It al?peared

to the staff that one of the mines, the mining property of which was

carried at $4,388,410, was practically in a salvage status. The reserve,

previously described as a contingency reserve, was thereafter changed
SIXTEENTH ANNUAL REPORT 17

to "Reserve for exhaustion of mining property," and shown in the

company balance sheet as a deduction from the carrying value of the

investments in the mining companies and in the consolidated balance

sheet as a deduction from the carrying value of mining property. In

each case, the carrying value was thereby reduced $4,000,000 thus

giving unambiguous recognition to the status at the balance sheet

date, which in the original filing could be determined only by a very

careful reading of pertinent parts of the text of the prospectus.

A significant amendment to the prospectus was also obtained in

view of the indications in the text that one of the principal mines of

the company was practically exhausted. The summary of earnings

was amended to call attention to the present status of the company's

principal revenue-producing mine.

Statement of Potential Profits

A company in the promotional stage included in its prospectus a

statement indicating the company's estimate of annual production in

units of the items to be manufactured and gave the estimated factor

prices of the units, so that a gross sales estimate could have been calculated by a prospective investor. The estimated annual cost of operations was given in round figures, with a minimum of detail, and omitting certain important elements of cost such as depreciation, maintenance, repairs, and rents. The over-all effect was to imply that substantial profits might be realized by the company, despite the disclaimer contained in the prospectus to the effect that the company

could not assure the rate of production upon which the estimates were

based or that the prices quoted would be received for the product.

When these uncertainties were pointed out the registrant deleted those

elements of the presentation which provided the basis for possible

misleading calculations of profit.

Failure to Disclose History and Risks Involved

A company, organized in 1947 as the successor to companies which

have been engaged since 1945 in developing a small automobile, filed

a registration statement on May 10, 1949 covering 5,000,000shares of

co:m,monstock to be offered to the public at $1 per share through an

underwriter pursuant to a "best efforts" arrangement. The prospectus

stated that the registrant's first product was to be a station wagon.

As a result of inadequacies cited by the staff in its letter of comment,

the prospectus was extensively revised and disclosed, among other

things, that: (1) None of the registrant's 18 existing model cars met

the exact specifications proposed for the car to be built, and additional

testing was required which might result in substantial design changes,

increased preproduction expense, and production delays; (2) the

registrant and its predecessors in the period from October 8, 1945 to

June 30, 1949 had received $2,271,482 in cash, including $1,476,633

for dealer and distributor franchise fees, and had paid out $2,150,198,

including $656,351 for salaries and wages; (3) the registrant's balance sheet at June 30, 1949 showed assets in excess of liabilities of

only $12,026; (4) the registrant's cost estimates and production plans

were predicated upon the attainment of an annual production and

sales volume which represented approximately 70 percent of the entire

9111841-51-3
18 SECURITIES AND EXCHANGE COMMISSION

United States domestic station wagon market, based on production

figures for the 18 months ended June 30, 1949; (5) if substantially

all of the proceeds of the issue were not received it would be necessary

to reduce the proposed production llrogram and to raise the selling

price of the car, in which event it might be difficult, or impossible, to

overcome the resultant competitive disadvantages; and (6) there was

no provision for the return of funds to the purchasers of the stock if

the registrant were unable to sell all the shares being offered and carry

out its plans. The registration statement as amended became effective

October 3, 1949.

On February 17, 1950,the registrant filed a petition for reorganization pursuant to chapter X of the Bankruptcy Act, and was declared

bankrupt May 19, 1950. No shares covered by the registration statement had been sold.

Questionable Selling Activities

A registration statement of a Montana corporation, proposing to

engage in the manufacture and sale of ground wood pulp, became effective in August 1949. The corporation was in the promotional stage,

its tangible assets consisting of a plant site in Montana and about

$150,000obtained from the sale of securities in Montana several years

before. The registration statement included a report of a forestry

expert which indicated that the best source of timber for the project

would be in Montana, north of the plant site. Shortly after the registration statement became effective, it was learned that the corporation

was receiving extensive publicity in the Idaho-Washington area about

a proposed purchase of land in Idaho for the purpose of constructing

a paper and pulp plant there. Investigation by the Commission's

regional officerevealed that the land had been purchased and, moreover, that the corporation had been making sales of stock in Montana

without using a prospectus required by the Securities Act and without

a proper license from the State of Montana.

Following this investigation, the corporation filed an amended

prospectus which referred to the purchase of land in Idaho, implying

that it might be used for timber-storage purposes and justifying the

purchase on the grounds that funds for that purpose had not been

obtained from its offering of registered securities. The corporation

was requested to reconcile the proposed use of the Idaho property with

the above-mentioned report of its forestry expert, and to point out in

the prospectus that the use of funds in Idaho was not consistent with

representations made in selling literature employed in the original

sale of securities in Montana, namely that all proceeds would be used

to construct a plant in Montana. The registrant canceled its agreement to purchase the Idaho property and offered to make rescission

to all purchasers of stock who had not received a proper prospectus.

CHANGES IN RULES, REGULATIONS, AND FORMS AFFECTING EXEMPT

SECURITIES

Regulation BW-Repol'ts of Internationai Bank for Reconstruotion

and Development.-'dection 15 (a) of the Bretton Woods Agreements

Act, which was added to that act by the Eighty-first Congress and
8IXTEEKTH AKKUAL REPORT 19

approved by President Truman on June 29, 1949,exempts from registration under both the Securities Act of 1933 and the Securities Exdhange Act of 1934securities issued, or guaranteed both as to princi pal

and interest, by the International Bank tor Reconstruction and Development. However. 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 and for the protection of investors. The Commission has

heretofore expressed its opinion that an exemption is available under

the Trust Indenture Act of 1939.

New rules and regulations were adopted on January 9, 1950,designated regulation BW, to require the bank to file with the Commission

substantially the same information, documents, and reports as would

be required if the bank had securities registered under the Secruities

Exchange Act of 1934. The bank is required also to file a report with

the Commission not less than 7 days prior to the date on which any

of its primary obligations are sold to the public in the United States.

This report and the periodic reports filed make available at the Commission information quite similar to the information which would

be required in a registration statement under the Securities Act of

1933. This carries out the intention which the Commission expressed

to the Congress when the amendment to the Bretton 'V"oodsAgreement Act was under consideration.

The Commission announced at the same time that it was informed

by the hank that no public offering of securities guaranteed by the

bank was presently contemplated." Accordingly, the new rules, insofar as they require the reporting of the proposed public sale of securities, were limited to the sale of primary obligations of the bank.

The Commission at the same time rescinded certain rules previously

adopted under the Securities Act of 1933and the Securities Exchange

Act of 1934with particular reference to the bank.

Regulation A-Ge'fleral eeem.ption. for emall i88ue8.-Three amendments to regulation A, which provides an exemption from registration under the Securities Act for certain small issues, were adopted by

the Commission during the 1950fiscal year."

The first of these amendments raised from $100,000to $300,000the

amount of the aggregate offering price of securities which may be

offered by the estate of a deceased person for the purpose of paying

taxes or other expenses of the estate. There are situations in which

the deceased person did not stand in a control relation with the issuer

but in which the executor or administrator (because of direct or indirect holdings of his own) does stand in such a relationship and would

be prevented from selling without registration. The enlarged exemption is available, however, only if the deceased person was not in a

control relationship with the issuer and would not have been required

to register the securities if the offering had been made by him prior

to his death.

82 Bretton Woods Agreements Act release No. 1. For a further discussion see p. 164 of

this report. 13 Securities Exchange Act release Nos. 3352, 3370, and 3377.
20 SECURITIES AND EXCHANGE COMMISSION

The second amendment is intended to prevent the commencement

or continuance of the sale of securities under regulation A during the

pendency of injunction proceedings instituted by the Commission.

Under a literal construction of the rule previously in effect, a person

who had filed a letter of notification under which a portion of the

securities thereby qualified remained unsold might continue to sell

(insofar as the rule was concerned) such securities without registration despite the pendency of an action instituted by the Commission

to enjoin the issuer or other person affiliated with the issuer from

engaging in or continuing any conduct or practice in connection with

the sale of any security of such issuer.

Itis obviously inconsistent with the Commission's action in securing

an injunction to prevent violations of the act to continue in effect a

discretionary exemption which might tend to a substantial degree to

nullify the relief being sought.

The third amendment makes it clear that the maximum aggregate

amount of securities which may be sold under regulation A in any 12-

month period is $300,000 in actual gross proceeds from the public.

The amendment was made to correct an erroneous impression in some

quarters that if the initial offering price did not exceed that amount,

the entire offering might be sold for an actual aggregate price to the

public exceeding $300,000.

LITIGATION UNDER THE SECURITIES ACT

The bulk of litigation in connection with the enforcement of the

Securities Act deals with persons who fail to register securities before

offering them to the public as required by section 5 and persons who

make fraudulent security sales in violation of section 17. Violations

of section 5 deprive the public of information essential to intelligent

investing and violations of section 17 involve outright deception of

public investors. In either situation, maximum protection is afforded

to the public by enjoining further sales. For this reason, it is customary for the Commission to enjoin t~e illegal activities promptly,

even though criminal action may be instituted later.

Some cases involve violations of both sections of the act; some include also violations of other acts administered by the Commission,

particularly the Securities Exchange Act of 1934, which contains

antifraud provisions.

During the course of the year the Commission obtained temporary

or permanent injunctions against further violations of section 5 in

cases involving sales of securities of mining companies,H oil and gas

corporations," and other types of business." As in the past, some

"S. E. a. v. Pilot Si/vet'-Lead Mines, Ine., Civil Action No. 747, E. D. Wash .• Aug. 5

1949, 8. E. a. v, Lucky Fridall Eztension Mimng 00., Civil Action No 714. E. D. Wash.;

Aug. 5, 1949; 8. E. O. v. Silver Greek Precision ooro., Civil Action No. 50-663. S. D. N. Y.,

July 8, 1949; B. E. C. v. James R Davies. sr., CIVIlAction No. 2673, D. Idaho, Aug. 19,

1949, and S. E a. v. Alhambra Gold Mine Corp., CiVilAction No. 11820, S. D. Calif., Aug. 1,

1950,. B. E. O. v, F. L. Rignell 00., Civil Action No. W 75, D. Kan., Feb. 24, 1950; B. E. a. 5.

A.loha Oil 00., civn Action No 4463, W. D. Okla, June 30, 1949, and B. E. a. v. H. A. Tucker, Civil Action No. 4724, W. D. Okla.. Feb. 28, 1950.

1.8. E. O. v. Westates Agricultural Ohemieo; 00., Civil Action No. 582, E. D. Wash.,

Nov. 2, 1949; 8. E. O. v, Garrette W. Peck~et 01., er-n Action No. 11337-WM. S. D. Calif.. May 5, 1950 «(laboratories) : 8. E. O. v. Johnson Machine Works, et al., Civil Action No.

1892, N. D. Tex., Oct. 5, 1949; S. E. a. v, Automatic SI/stems Corp., et 01., CiVil Action
/SIXTEENTH ANNUAL REPORT 21

of the securities sold were not in conventional form. For example, III the Chinchilla Chateau case 11 promoters offered unregistered investment contracts evidenced by purchase agreements for among other

things, pairs of live chinchillas.

Some of the recurring types of misrepresentation are illustrated in

the following cases. In S. E. O. v. Helcolicon Mines, t-»; et a» the

court enjoined further sales of the stock of Helcolicon Mines upon a

showing that the individual defendants had falsely represented,

among other things, that tests in an area covered by the company's

mining claims had established the existence of gold in sufficientquantities and value to justify large-scale operations and that the Reconstruction Finance Corporation and certain banks in Alaska had agreed

to participate in production loans to the company aggregating

$1,000,000as soon as minerals in the ground covered by its claims had

been evaluated to the extent of $2,000,000. InS. E. O. v. (Iharles A.

Howe and Maryland-Nevada Operating 00., Ino.,19 defendants were

enjoined from violating both sections 5 and 17 of the act on the basis

of a complaint charging that, in order to sell investment contracts,

they falsely stated that they intended to operate certain mining equipment to recover, by using a special process, commercially valuable

gold from about 100 miles of beach on the west coast of California.

S. E. O. v. Diamonds db Metals Exploration 00., Lnc., et aUo was

another mining case where the defendants were enjoined from violations of both sections 5 and 17 of the act. Violation of both sections

were also enjoined in several oil promotions during the past year."

An injunction was issued in S. E. O. v. Empire Insurance Agenoy

and. J elf B. Burleson 22 upon a complaint that the defendants made

untrue statements with respect to the amount of stock of the corporate

defendant subscribed during the first week of public offering, with

respect to the retention of a sizable surplus after paying a dividend

and with respect to leases entered into for occupancy of a building to

be constructed.

Industrial promotions which resulted in injunctions for violations

of both sections 5 and 17 included: S. E. O. v, Olaytonian M amufact1.lll'ingOMp., Inc., et al.,23S. E. O. v. Oo-op Insurance Oo., et al.,214

S. E. O. v. Alfred L. Lodge, et al.25 and S. tEo O. V. Trusteed Fumds,

Inc.26 An injunction based on violation of both these sections was

No. 1750, W. D. Tenn., Feb. 17, 1950; 8. E. O. v. Ohinchilla Ohateau, Ine., et 01., Civil

Action No. 419-50, D. N. J., June 19,1950; S. E. O. v. Ferrel Industries, Inc., Civil Action

No 28263H, N. D. Calif., Aug. 29, 1949 (weapons) ; 8. E. O. v, South Pacific Engineering

Coru., et al., Civil Action No. 5135, D. Oreg., Jan. 12, 1950 (timber and mineral concessions III Equador).

See footnote 16, supra. ]8 Civil Action No. 1401, W. D. Michigan, Nov. 8, 1949. rs CiVilAction 11'0.1290,D. Del., Mar. 6, 1950. 20 S. E. O. v. Diamonds & Metals ExploratiOn 00., Ine., et al., Civil Action No. 2468, W. D.

Wash., Feb. 10, 1950. .. S. E. a. v, William Seyler, et al., Civil Action No. 122 CD, D. S. D., Apr. 13. 1950;

8 E. O. v. The Stevens-Stephens 00., Inc., et al., CIVIlAction No. 1943. N. D. Tex.• Feb. 24,

1950; S. E. a. v. Alwyn H. Wild, et al., Civil Action No. 52-162, S. D. N. Y., Oct. 25, 1949 ; S. E. O. v. Northwest Petroleum, Ltd., et aZ., Civil Action No. 5188, D. Oreg., disposition pending. ,. Civil Action No. 1573, D. N. Mex., Dec. 8, 1949. ea Civil Action No. 50-180, D. Mass., Mar. 15. 1950. 24 Civil ActIOn No. 1496, D. Ariz., June 30, 1950. :IS Civil Action No. 50-92, D. Mass., Feb. 9, 1950. 28 Civil Action No. 8622, D. Mass., Sept. 9, 1949. Although the complaint alleged violations of the prospectus and an tifra ud provtslons of the Securities Act, this case Is described

below at page 14 In connection with its Investment Company Act aspects.

"
22 SECURITIES A~"'D EXCHANGE COMMISSION

also obtained in S. E. O. v, James M. (Iuozeo 21 to terminate a "Ponzi"

type scheme, the defendant having paid back as fictitious profits part

of the proceeds from sales of investment contracts.

In S. E. O. v, Oleo F. Ramsey 28 a complaint seeking an injunction

is presently pending to prevent further sales of stock in corporations

which the defendant allegedly falsely represented to have extensive

and valuable rights, concessions, and properties in Peru. Further

action is also pending in S. E. O. v. Mercer Hicks Oorp.,29 a case in

which a broker-dealer who had formerly operated as a sole proprietor

attempted to continue his business in corporate form by selling the

corporation's stock to the public. No section 5 violation was charged

because a letter of notification had been filed pursuant to the requirements of the Commission's rules relating to the exemption of small

offerings. But the complaint alleged that in the course of sales of

stock there were many violations of section 17. Among them were

failure to disclose the existence of substantial operating deficits and

the fact that dividends had been paid out of capital surplus contributed

by investors in the stock; falsely representing that the corporation

was earning money when it was actually losing money; and appropriating customers' cash and securities without their knowledge or

consent and substituting the stock of Mercer Hicks Corp. Subsequent

to the close of the fiscal year a preliminary injunction was obtained

by the Commission. The Commission also requested the appointment

of a receiver but withdrew its motion when a receiver was appointed

under the New York Martin Act.

As an aid to its investigative function, the Commission often finds

it necessary to subpena witnesses or their records. If Commission

subpenas are resisted the Commission applies to the courts for an order

directing the production of the witnesses or documents. Two cases

during the past year arose out of such applications to the court. They

were S. E. O. v. Ooeur D'Alene Uonsolidated Silver-Lead Mines, Inc.

et ano 3U and S. E. O. v. Alhambra Gold Mine Oorp, et al.31 The Commission was successful in both instances and the documents requested

were produced.

Civil Action No. 8413, D. Mass., .July 11, 1949. 28 Civil Action No. 2233, W. D. Wash. (pending).

29 Civil Action No. 5896, S. D. N. Y. (pending).

30 Civil Action No. 836, E. D. Wash., Aug. 3, 1949.

31 Civil Action No. 10843M. S D Calif. Jan 4. 1950

'"
PART II

ADMINISTRATION OF THE SECURITIES EXCHANGE

ACT OF 1934

The Securities Exchange Act of 1934 is designed to eliminate fraud,

manipulation, and other abuses in the trading of securities both on the

organized exchanges and in the over-the-counter markets, which together constitute the Nation's facilities for trading in securities; to

make available to the public information regarding the condition of

corporations whose securities are listed on any national securities exchange; to provide for the regulation of proxies respecting listed

securities; and to regulate the use of the Nation's credit in securities

trading. The authority to issue rules on the use of credit in securities transactions is lodged in the Board of Governors of the Federal

Reserve System, but the administration of these rules and of the other

provisions of the act is vested in the Commission.

The act provides for the registration of national securities exchanges,

brokers, and dealers in securities, and associations of brokers and

dealers.

REGULATION OF EXCHANGES AND EXCHANGE TRADING

Registration and Exemption of Exchanges

Section 5 of the act requires each securities exchange within the

United States or subject to its jurisdiction to register with the Commission as a national securities exchange or to apply for exemption

from such registration. Exemption from registration may be granted

to an exchange which has such a limited volume of transactions effected

thereon that, in the opinion of the Commission, it is not practicable and

not necessary pI' appropriate in the public interest or for the protection of investors to require its registration.

At the close of the 1950 fiscal year the following 16 exchanges were

registered as national securities exchanges:

Boston Stock Exchange New York Stock Exchange

Chicago Board of Trade Phtladelphia-Baltimoro Stock ExcIJallge

Cincinnati Stock Exchange Pittsburgh Stock E!x:change

Detroit Stock Exchange Salt Lake Stock Exchange

Los Angeles Stock Exchange San Francisco Mining Exchange

Midwest Stock Exchange San Francisco Stock Exchange

New Orleans Stock Exchange Spokane Stock Exchange

New York Curb Exchange Washington Stock Exchange

Four exchanges were exempted from registration at the close of the

1950 fiscal year. These were:

Colorado Springs Stock Exchange Richmond Stock Exchange

Honolulu Stock Exchange Wheeling Stock Exchange

In the latter part of 1!).f\), the Chicago, Cleveland, and St. Louis

Stock Exchanges, all registered national securities exchanges, and the

Minneapolis:St. Paul Stock Exchange, an exempted exchange, entered

23
24 SECURITIES AND EXCHANGE COMMISSION

into an agreement providing for the consolidation of their membership and operations. The plan of consolidation became effective on

December 1, 1949, and provided that the Chicago Stock Exchange

would have the status of a continuing exchange with its name changed

to the Midwest Stock Exchange. Accordingly, the registration of the

Chicago Stock Exchange as a national securities exchange continued

in effect for the new Midwest Stock Exchange; the other three exchanges were liquidated and the registration of the Cleveland and

St. Louis Stock Exchanges and the exemption of the Minneapolis-St.

Paul Stock Exchange were withdrawn. A majority of the members

of the three liquidated exchanges acquired membership in the Midwest Stock Exchange, and a majority of the issuers of securities listed

on such exchanges transferred their listing and registration to the new

exchange. Headquarters of the Midwest Stock Exchange is in the

city of Chicago, and branches have been opened in the cities of Cleveland and St. Louis. These branches are connected directly with the

exchange floor in Chicago by private duplex teletype and buy and sell

orders are transmitted from the branches over these wires to Chicago.

These two branches serve also as local clearing officesfor receipt and

delivery between member firms, in their respective cities, of items

which have been processed through the clearance department in Chicago. Thus, member brokers in branch office cities, as well as those

in other cities using the clearing-by-mail plan (an innovation developed by the Chicago Stock Exchange during the past several years)

are able to handle their own orders without the intermediary services

of a Chicago correspondent clearing house member firm. The consolidation was intended to enlarge and broaden markets in the Midwest for stockholders in that section of the country.

Effective January 1, 1950, the Commission revised its forms and

rules pertaining to the registration and exemption of exchanges.'

The purpose of the revision was to simplify the application for registration as a national securities exchange, or for exemption from such

registration, and to reduce the number of formal amendments required to be filed in keeping the information contained in such an application up to date. As in the previous form, the revised form of

application requires an exchange to furnish information about its

organization, rules of procedure, trading practices, membership requirements, and related matters. The revised application has eliminated the need for an exchange to duplicate in the statement, which is

part of the application, many items of information which experience

has shown are furnished in its constitution and rules filed as an exhibit to the application. Under the revised procedure an exchange

ordinarily will be required to file a formal amendment only once each

year. Changes effected during the year are to be reported by an exchange either by letter or by the filing of copies of notices made generally available to its members. In view of the substantial number of

amendments which had been filed by each exchange to its original

application in 1934, the Commission requested each registered and

exempted exchange to file as an amendment a complete new application on the revised form prior to June 30, 1950.

1Securities Exchange Act release No•• 883.
SIXTEENTH ANNUAL REPORT 25

Including the amendments containing the revised applications, the

exchanges filed a total of 50 amendments during the fiscal year. 'Vhile

many of these amendments contained only periodic information required by the rules, such as membership lists, names of officers and

directors of the exchange and financial statements of the exchange

many other changes relating to the internal operations of the exchanges also were reflected in these amendments. Each amendment

was reviewed to ascertain whether the changes reflected therein were

in the public interest and complied with the provisions of the act. The

nature of the changes effected in the exchanges' rules and trading practices varied considerably; some of the more significant changes occurring during the fiscal year are briefly outlined below:

Boston Stock Exchange amended its rules relating to the execution

of odd-lot orders in securities having a primary market on another

exchange. The amendment provides that unless otherwise specifically

requested such orders involving less than five shares would be filled on

the basis of the last reported round-lot transaction occurring on the

exchange on which the primary market for the security exists. Previously all odd-lot orders were required to be executed on the basis of

the next round-lot transaction occurring on the primary exchange.

Cincinnati Stock Exchange amended its rules with respect to the

execution of odd-lot orders in securities dually traded on that exchange

and either the New York Stock or New York Curb Exchange, to permit the execution of such orders on a round lot sale occurring on the

Cincinnati Stock Exchange, subject to certain conditions. Previously

all odd-lot orders in such securities were required to be executed on an

appropriate round-lot sale occurring on a New York exchange.

Detroit Stock Exchange amended its rules to permit members to

transact business for nonmembers who are members of the National

Association of Security Dealers, Inc., at a commission rate of not less

than 60 percent of the usual minimum nonmember commission rates.

This follows a procedure adopted by several west coast exchanges

some years ago.

Boston, New York, and San Francisco Stock Exchanges and New

York Curb Exchange amended their rules to permit registered employees of members to be compensated on a commission basis as well as

on a salary basis.

New York Stock Exchange amended its constitution to provide for

an increase in the size of its board of governors and to change the

composition thereof. This exchange also adopted new general qualifications for the listing of securities. It revised its schedule of listing

fees and discontinued the optional method of permitting issuers to pay

the listing fee for additional shares on a lump-sum basis rather than

on an annual continuing fee basis. Its board of governors approved

and submitted to the membership for vote a proposed general amendment to its constitution to provide for the permissive incorporation of

members firms and the admission of corporations, under prescribed

restrictions, as member corporations. The proposed amendment was

disapproved by the membership.

After conferences between New York Stock Exchange and members

of the Commission's staff, the exchange again modified its floor-trading

rules which had been originally adopted in 1945. Shortly thereafter,
26 SECURITIES AND EXCHANGE COMMISSION

New York Curb Exchange revised its floor trading rules to conform

with those of New York Stock Exchange. The revised rules removed

certain restrictions on floor traders' purchases at prices below the previous day's close and permitted a limited amount of purchases above

the last sale price even if this purchase price exceeded the previous

day's close. Some restriction was placed for the first time on the

number of purchases a floor trader could effect on his bid at rising

prices. These exchanges also adopted a rule forbidding floor traders

from congregating in or dominating the market.

Disciplinary Actions by Exchanges Against Members

Each national securities exchange, pursuant to a request of the

Commission, reports to the Commission any action of a disciplinary

nature taken by it against any of its members or against any partner

or employee of a member for violation of the Securities Exchange Act

of any rule or regulation thereunder, or of any exchange rule. During

the past fiscal year five exchanges reported taking disciplinary action

against 25 members, member firms, and partners of member firms.

The nature of the actions reported included fines ranging from $25

to $1,000in seven cases,with total fines aggregating $2,375;suspension

of an individual from exchange membership; censure of individuals

or firms for infractions of the rules, and warnings against further violations. The disciplinary actions resulted from violations of exchange

rules, principally those pertaining to capital requirements, floor trading, partnership agreements, and handling of customers' accounts.

REGISTRATION OF SECURITIES ON EXCHANGES

Purpose and Nature of Registration

Section 12 of the Securities Exchange Act forbids trading in any

security on a national securities exchange unless the security is registered or exempt from registration. The purpose of this provision

is to make available to investors reliable and comprehensive information regarding the affairs of the issuing company by requiring an

issuer to filewith the Commission and the exchange an application for

registration disclosing pertinent information regarding the issuer

and its securities. A companion provision contained in section 13 of

the act requires the filing of annual, quarterly, and other periodic

reports to keep this information up to date. These applications and

reports must be filed on forms prescribed by the Commission as appropriate to the class of issuer or security involved.

Examination of Applications and Reports

All applications and reports filed pursuant to sections 12 and 13 are

examined by the staff to determine whether accurate and adequate

disclosure has been made of the specific types of information required

by the act and the rules and regulations promulgated thereunder. The

examination under the Securities Exchange Act, like that under the

Securities Act of 1933, does not involve an appraisal and is not concerned with the merits of the registrant's securities. When examination of an application or a report discloses that material information

has been omitted, or that sound principles have not been followed
SIXTEEKTH AXKUAL REPORT 27

in the preparation and presentation of accompanying financial data,

the examining staff follows much the same procedure as that developed

in its work under the Securities Act in sending to the registrant a letter

of comment, or in holding a conference with its attorneys or accountants or other representatives, pointing out any inadequacies in the

information filed in order that necessary correcting amendments may

be obtained. Here again, amendments are examined in the same manner as the original documents. Where a particular inadequacy is not

material, the registrant is notified by letter pointing out the defect and

suggesting the proper procedure to be followed in the preparation and

filing of future reports, without insistence upon the filing of an amendment to the particular document in question.

Examination of financial data-Applications and reports are examined to make sure that sound accounting principles have been followed

in the presentation of accompanying financial data. At times extensive revisions become necessary. An example of accounting for fixed

assets and depreciation arose during the year in connection with the

financial statements of a large public utility holding company. The

Division of Corporation Finance had commented to the effect that th«

accountants' certificate, which included the phrase "subject to the

adequacy of the companies' provisions for property retirement as to

which we are not in a position to express an opinion" was unsatisfactory under the Comrnission's rules. The company responded that its

auditors were in the process of making comprehensive studies of the

situation and that amendments could not be made until these studies

were completed. In due course a conference was arranged with the

staff of the division in which officers of the company, accompanied

by their accountants and counsel, reported on the results of this study

of the property and provisions for its retirement. Consequently the

company effected a change in property retirement reserve appropriations and accumulated reserves, which resulted in an increase in the

reserve balances of $18,793,528, of which $17,152,641 was charged

to surplus and $1,640,887to current profit and loss. Thereupon the

registrant filed amended financial statements in accord with this

change.

In its 1948 annual report another registrant, engaged in paint and

chemicals manufacturing, set up a reserve of $750,000on the liability

side of the balance sheet with a corresponding charge to earned surplus, to provide for an indicated loss on sale of its investment in a subsidiary company at approximately $750,000less than the book value of

the investment on the parent's books.

Since the reserve was clearly a valuation reserve, the Division of

Corporation Finance requested that it be deducted from the investment account on the asset side of the balance sheet i and, since the

charge was clearly a loss recognized in the year, the division requested

that it be included in the profit and loss statement rather than earned

surplus. The financial statements were amended, showing an increase

from $555,920.64to $1,305,920.64in consolidated net loss for the year.

The sale was consummated in 1949 at an aggregate loss of $859,138.60

or $109,138.60in excess of the $750,000reserve provided in 1948.

Coordination. of annual reports to stockholders and filings ioith. the

Oommission.-Financial statements filed during the year revealed an
28 SECUlHTIES AND EXCHANGE COMMISSION

increasing trend toward the use of the same basic statements (balance

sheet, income and surplus statements) in the annual reports to the

Commission and in the companies' published annual reports to stockholders. The rules of the Commission permit the filing of the report to

stockholders to meet the financial statement requirements of the Form

1Q-K annual report to the Commission insofar as the former substantially complies with the provisions of the latter form. A current example of this growing practice, which avoids duplication of reporting,

may be found in the Form 1Q-K for the fiscal year ended June 30,1949

of the Colorado Fuel & Iron Corp. and subsidiary companies in which

the annual report to stockholders, when supplemented by schedules

not included in the published report and covered by a signed certificate

of the independent accountants, met the requirements of the form in all

material respects.

Statistics of Securities Registered on Exchanges

At the close of the 1950 fiscal year, 2,128 issuers had 3,544 security

issues listed and registered on national securities exchanges. These

securities consisted of 2,573 stock issues aggregating 3,147,684,318

shares, and 971 bond issues aggregating $20,898,718,791 in principal

amount. This represents increases of 182,312,982 shares and $121,-

419,744 in principal amount, respectively, over the aggregate amounts

of securities listed and registered on national securities exchanges at

the close of the 1949 fiscal year. The following table shows the number

of applications and reports filed during the fiscal year in connection

with the registration of securities on national securities exchanges:

Applications for registration of securities on national securities sxchanges., 521

Applications for registration of unlssued securities for "when issued"

dealing on national securities exchanges___________________________ 71

Exemption statements for trading short-term warrants on national se- curi ties exchanges________________________________________________ 52 Annual reports 2,091

Current reports 8,814

Amendments to applications and reports_______________________________ 929

During the 1950 fiscal year 49 new issuers registered securities under

the Securities Exchange Act on national securities exchanges, and the

registration of all securities of 61 issuers was terminated, principally

by reason of retirement and redemption and through mergers and consolidations. Included in these 61 issuers are 16 whose securities were

removed from registration by reason of the termination of the registration of the Cleveland and St. Louis Stock Exchanges on December

1, 1949, such issuers having determined not to transfer the registration

of their securities to the Midwest Stock Exchange.

TEMPORARY EXEMPTION OF SUBSTITUTED OR ADDITIONAL

SECURITIES

Rule X-12A-5 provides a temporary exemption from the registration requirements of section 12 (a) of the act to securities issued in

substitution for, or in addition to, securities previously listed or admitted to unlisted trading privileges on a national securities exchange.

The purpose of this exemption is to enable transactions to be lawfully
SIXTEENTH ANNUAL REPORT 29

effected on an exchange in such substituted or additional securities

pending their registration or admission to unlisted trading privileges

on an exchange.

The exchanges filed notifications of admission to trading under this

rule with respect to 118 issues during the year. In some instances,

the same issue was admitted to trading on more than one exchange,

so that the total admissions to such trading, including duplications,

numbered 211.

Special Offerings on Exchanges

Rule X-10B-2 under the Securities Exchange Act permits special

offerings of large blocks of securities to be made on a national securities exchange provided such offerings are effected pursuant to a plan

which has been filed with and approved by the Commission. A security may be the subject of a special offering when it has been determined

that the auction market on the floor of the exchange cannot absorb a

particular block within a reasonable period of time without undue

disturbance to the current price of the security. A special offering of

a security is made at a fixed price consistent with the existing auction

market price of the security, and members acting as brokers for public

buyers are paid a special commission by the seller which ordinarily

exceeds the regular brokerage commission. Buyers of the security

are not charged any commission on their purchases and obtain the

security at the net price of the offering.

Since February 6, 1942, the date on which rule X-10B-2 was

amended to permit special offerings, the Commission has declared

effective special offering plans of the following nine exchanges on the

date shown opposite each:

New York Stock Exchange Feb. 14, 1942

San Francisco Stock Exchange Apr. 17, 1942

New York Curb Exchange May 15, 1942

Philadelphia-Baltimore Stock Exchange________________________ Sept. 23, 1943

Detroit Stock Exchange_______________________________________ Nov. 18, 1943

Midwest Stock Exchange' Mar. 27, 1944

Cincinnati Stock Exchange June 26, 1944

Los Angeles Stock Exchange___________________________________ May 28, 1948

Boston Stock Exchange_______________________________________ Sept. 15, 1948

2 Formerly the Chicago Stock Exchange; name changed Dec. 1, 1949.

During the past year the New York Stock Exchange, New York

Curb Exchange, and San Francisco Stock Exchange each submitted

to the Commission proposed amendments to their special offering

plans, and the Commission declared effective, for an experimental

period ending December 30, 1950, the amended plans of each of these

exchanges. The purposes of the amendments to the special offering

plans of these exchanges were: (1) To permit the offeror to allot on

a firm basis, to member firms engaged in the distributing business,

not more than 50 percent of the securities involved in the offering. Up

to this time when buy orders in a special offering exceeded the amount

of the offering the entire amount of the offered securities was required

to be allocated in reasonably proportionate amounts. Under the

amendment only those shares not allotted to member firms on a firm

basis must be allocated. (2) To permit members and member firms

to retain the special commission applicable to securities received under
30 SECURITIES A:I\"'DEXCHANGE COMMIESION

a firm allotment for the bona fide purpose of distribution even though

their efforts to distribute such securities are unsuccessful. Under the

old plans members and member firms were prohibited from retaining

any part of the special commission in connection with purchases for

their own account. This modification is designed to supplement and

give effect to the provisions of the amendment mentioned under (1)

above. (3) To provide that the special commission may not be less

than a regular single nonmember commission based upon the per share

rate of 100 shares at the price of the special offering. (4) To make

it permissive rather than mandatory that certain specified factors be

taken into consideration by the exchanges in determining whether a

particular block of securities may be made the subject of a special

offering. This will give the exchanges a certain administrative discretion in determining whether to permit the use of exchange facilities

for a special offering. This amendment also reduces from 6 months

to 1 month the period of time during which price range and volume of

transactions in the particular security must be considered in making

the necessary determination.

Each exchange with a special-offering plan in effect has been requested to report certain information to the Commission on each

offering effected on the exchange under the plan. Such reports showed

a total of 29 offerings effected on the New York Stock Exchange and

New York Curb Exchange during the fiscal year ended June 30, 1950.

These offerings involved the sale of 430,955 shares of stock with an

aggregate market value of $11,129,000and ranging in market value

from $40,400to $1,293,800. Special commissions paid to brokers participating in these 29 offerings totaled $266,000. By comparison, in

the preceding fiscal year a total of 25 offerings involving 263,700shares

of stock having a market value of $5,750,000 were effected on five

exchanges, with special commissions paid to brokers totaling $161,000.

Further details of special offerings during the year are' given in appendix table 10.

During the period February 19, 1942 throuzh June 30,1950, a total

of 435 offerings have been effected. These o1feringstotaled 5,346,855

shares with a market value of $155,464,000and brokers have been paid

special commissions totaling $3,081,800.

Secondary Distributions Approved by Exchanges

A "secondary distribution," as the term is used in this section, is a

distribution over-the-counter by a dealer 01' group of dealers of a comparatively large block of a J?reviouslyissued and outstanding security

listed 01' admitted to trading on an exchange. Such distributions

take place when it has been determined that it would not be in the best

interest of the various parties involved to sell the shares on the exchange in the regular way or by special offering. The distributions

generally take place after the close of exchange trading. As in the

case of special offerings, buyers obtain the security from the dealer

at the net price of the offering, which usually is at or below the most

recent price registered on the exchange. It is generally the practice

of exchanges to require members to obtain the approval of the exchange

before participating in such secondary distributions.
SIXTEENTH ANNUAL REPORT 31

During the fiscal year ended June 30, 1950, 5 exchanges reported

having approved a total of 78 secondary distributions under which

3,705,320shares of stock with a market value of $99,077,000were sold.

Further details of secondary distributions of exchange stocks are given

in appendix table 11.

Termination of Registration Under Section 19 (a) (2)

Where it is found that the issuer of any security registered on an

exchange has failed to comply with any applicable provision of the

Securities Exchange Act or the rules and regulations thereunder, the

Commission has authority under Section 19 (a) (2) of the act, after

appropriate notice and opportunity for hearmg, to deny, to suspend

the effectivedate of, to suspend for a period of not exceeding 12months,

or to withdraw the registration of that security.

The Commission has little occasion to resort to formal action under

this authority, and no such proceedings were instituted during the 1950

fiscal year. However, as noted in the fifteenth annual report, page 38,

proceedings were pending in one case at the beginning of the year.

This case involved the registration of Barnhart-Morrow consolidated

common capital stock $1 par value on the Los Angeles Stock Exchange.

After successive postponements of the hearings at the request of the

exchange and the issuer, the registrant filed, in connection with its

annual reports required under the law, amended financial statements

for the years 1945, 1946, 1947, and 1948,satisfactorily correcting the

deficiencies cited. As a result the Commission dismissed the proceedings.

As originally filed, the balance sheets of the company for those

dates had included under "Intangible assets" an item of about $219,000

captioned "Capital stock issued for services and leases." This represented capital stock issued to the two organizers of the company

for alleged services and for a lease interest acquired from the organizers but abandoned and quit-claimed by the company to the lessor in

1927. Furthermore, the company had been in receivership from 1931

to 1936. After objection was made by the staff to inclusion of the

$219,000item it was deducted from the common stock account.

Unlisted Trading Privileges on Exchanges

A security, unless exempted, which is not registered on a national

securities exchange under section 12 (b) of the Securities Exchange

Act of 1934, may not be traded on such exchanges unless unlisted

trading privileges are available under section 12 (f) of the Securities

Exchange Act of 1934.

Section 12 (f) provides that upon application to and approval by

the Commission a national securities exchange may: (1) continue

unlisted trading privileges to which a security had been admitted

on such exchange prior to March 1, 1934; (2) under certain conditions extend unlisted trading privileges to any security duly listed

and registered on any other national securities exchange; or (3)

extend unlisted trading privileges to any security in respect of which

there is available from a registration statement and periodic reports

or other data filed under the Securities Exchange Act of 1934, or the
32 SECURITIES AND EXCHANGE COMMISSION

Securities Act of 1933, information substantially equivalent to that

filed in respect of a security duly listed and registered on a national

securities exchange. The statute requires that appropriate notice be

issued and an opportunity for hearing provided, and that the applicant exchange establish to the satisfaction of the Commission that

there exists m the vicinity of that exchange sufficiently widespread

public distribution and sufficient public trading activity in the security

to render the extension of unlisted trading privileges on that exchange

necessary or appropriate in the public interest or for the protection

of investors.

The following summarizes the status of unlisted issues on the

registered exchanges as of June 30, 1950:

Listed on some other registered exchange

Not listed on any registered exchange

Total

Total, all stocks and bonds, 958 issues.

Sloch

545

332

877

Bonds

6

75

81

The first grant of an application by an exchange under section

12 (f) (2) for unlisted tradmg in stocks listed on some other registered exchange was in April, 1937. There have been 692 admissions

of such stocks to the various exchanges. Stocks covered by 599 admissions were extant as of June 30, 1950. The number of actual issues

involved is less than this figure because many issues have been

admitted to unlisted trading on two or more exchanges. The numerous admissions, including the record number of 130 during the past

fiscal year, have, however, barely maintained the ratio of listed stocks

traded unlisted on other exchanges to all listed stocks. On June 30,

1945, for example, 21.8 percent of all registered (listed) stock issues

and 54.9 percent of all registered shares were also admitted to unlisted

trading on other exchanges, while 5 years later, after 396 section 12

(f) (2) admissions," the comparable figures were 21.2 percent of the

issues and 54.3 percent of the shares. During this 5-year period, the

number of stocks listed on New York Stock Exchange and traded on

other exchanges has declined from 51.6 to 49.8 percent of all stocks

listed thereon. Securities registered on that exchange are the principal source of unlisted admissions under section 12 (f) (2). Listed

stocks which are also traded unlisted on other exchanges, numbering

545 as of June 30,1950, and were 554 on June 30,1937. However, the

11 regional exchanges which have availed themselves of section 12 (f)

in order to procure trading privileges in securities listed on other

exchanges had only 84 more stocks to trade in on June 30, 1950, than

they had on June 30,1937, and 598 of the total stock issues traded on

those exchanges in 1950 were admitted pursuant to section 12 (f)

(2), without which it appears that these exchanges might have suffered a decline of more than 500 stocks :

"33 in 1945, 78 in 1946, 71 in 1947, 46 in 1948, 38 in 1949, and 130 in 1950, all In

fiscal years ending June 30. Part of the Increase in 1950 Is due to the Commission's re- quests for 12 (f) (2) applications rather than applleatfons for determination of sub

stantlal equivalence pursuant to rule X-12 (f)-2 (b), in numerous cases where new issues were succeeding old ones in corporate changes and where the llsted status of the fss~p made recourse to section 12 (f) (2) possible and appropriate. -,

_

_

_
SIXTEENTH ANNUAL REPORT 33

Stock available for June 30,

trading 1

1~~d~

12 (I) (2)

June 30, June 30, admls- 1937 1950 slons

Boston ______________________________________________________________ 370 383 275 ClncmnatL _________________________________________________________101 110 65 Detroit _____________________________________________________________119 206 « 128

Los Angeles_________________________________________________________ Midwest, 197 261 186 ___________________________________________________________ ,517 454 379 Phlladelphia-Baltlmore _____________________________________________,

538 489 382 Pittsburgh __________________________________________________________ ,

102 126 71 Salt Lake _______________________________________________________ . ___ 107 100 100 San FrancISCOStock ________________________________________________ Washington '337 354 304 ____________________________________________ . ___________ Wheellng 39 41 39 ____________.______. ________. _____________________________ 32 19 16

TotaL _________. __. ___________________________________________2,459 2,543 1,945

IIncludes many duplications of Issues among the exchanges. Includes issues of exchanges merged thereafter.

Includes 10 sec. 12 (I) (2) admissions, , The sole increase over 1937.

New York Curb Exchange does not trade in New York Stock Exchanges issues. The single section 12 (f) (2) extant admission of a

stock on the Curb is Utah-Idaho Sugar common, listed on Salt Lake

Stock Exchange. Stocks available for trading on the Curb have declined from 1,149 in 1937 to 779 in 1950, both figures as of June 30.

New York Stock Exchange does not have any section 12 (f) (2) admissions, since it does not permit trading in unlisted securities. Since the

section 12 (f) (2) adniissions of stocks to the regional exchanges are

principally of issues listed on New York Stock Exchange, and since

these admissions constitute an ever-increasing proportion of the stocks

available for trading on the regional exchanges, their effect is to concentrate trading- on the regional exchanges more and more in the

national, as against the local issues.

The 332 stocks admitted to unlisted trading- without being listed on

any registered exchange aggregated 329,904,324shares, or about 91/2

percent of the total shares admitted to trading on the registered exchanges as of June 30, 1950. Reported volume of trading in the 332

issues for the calendar year 1949 was 21,715,000 shares, or about 41,4

percent of the total share volume on the registered exchanges. In

this compilation "shares" include warrants, American depositary receipts, voting trust certificates, etc. New York Curb Exchange accounted for about 93 percent of the 21,715,000reported share volume,

San Francisco Stock Exchange for about 6 percent and 1 percent was

scattered among 6 other regional exchanges. Reported volumes are

about seven-eighths of actual volumes on New York Curb Exchange,

principally because odd lots are not usually reported on the ticker.

Considering this factor and the volume in stocks removed from unlisted trading during 1949, it appears that approximately one-third of

the share volume in that year on New York Curb Exchange was in

unlisted stocks not registered pursuant to the Securities Exchange Act

of 1934.

In June 1950, the stocks traded on an unlisted basis pursuant to

section 12 (f) (3) were reduced to six, upon retirement of American

Gas & Electric preferred.

9Hi8U-51--4

•

•
34 SECURITIES AND EXCHANGE COMMIESION

Of 592 bond issues available for unlisted trading on exchanges as of

June 30, 1937, only 81 were available on June 30, 1950. These aggregated $879,231,350 face value and most of the issues were on New

York Curb Exchange.

In addition to the unlisted issues discussed above on the registered

exchanges, there were 35 stocks and 1 bond issue admitted only to unlisted trading on the Honolulu Stock Exchange, an exempted exchange.

Applications for Unlisted Trading Privileges

Pursuant to clause (2) of section 12 (f), a total of 131 issues were

accorded unlisted trading privileges during the 1950 fiscal year.

Stock exchange applying: Boston

Cincinnati

Detroit

Los Angeles

Midwest

Philadelphia-Baltimore

Pittsburgh

San Francisco

VVashington

Total

Number oj ueue«

Stocks Bonds

31

16

14

15

20

15

3

15 1

1

130 1

Changes in Securities Admitted to Unlisted Trading Privileges

Rule X-12F-2 under the Securities Exchange Act provides for the

case where a change is made in a security previously admitted to unlisted trading privileges. Under paragraph (a) of this rule if the

change is in the title of the security or the name of the issuer, in the

maturity, interest rate or outstanding aggregate principal amount of

an issue of bonds, debentures or notes, or in the par value, dividend

rate, number of shares authorized or the outstanding number of shares

of a stock, the security as changed is deemed to be the security originally

admitted to unlisted trading privileges on the exchange. The exchange is required to notify the Commission of such changes promptly

after it learns of the change and many such notifications are received

during the year.

Paragraph (b) of rule X-12F -2 provides for changes in a security

admitted to unlisted trading privileges where the change is more comprehensive than those enumerated in paragraph (a) of the rule. In

such case the exchange may file an application requesting a Commission

determination of the effect of the change, describing each change effected in the security and furnishing copies of all written matter submitted by the issuer to its security holders relating to such changes.

If the Commission determines that the security after such change is

substantially equivalent to the security originally admitted to unlisted

trading privileges, than the security as changed is deemed to be the

security originally admitted to unlisted trading privileges on that exchange. Pursuant to the provisions of paragraph (b) of rule X-12F -2,

the Commission granted four applications for a determination of substantial equivalence by New York Curb Exchange and an application

Middle States Petroleum Corp., Feb. 9, 1950: Northeru Indiana Public Service Co.,

Feb. 9, 1950, Kansas Gas & Electric Co., Feb. 20, 1950.

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SIXTEENTH ANNUAL REPORT 35

by New Orleans Stock Exchange with respect to two stocks." One

application by New York Curb Exchange was denied:

DELISTING OF SECURITIES FROM EXCHANGES

Securities Delisted by Application

Section 12 (d) of the Securities Exchange Act provides that upon

application by the issuer or the exchange to the Commission, a security

may be withdrawn or stricken from listing and registration on a national securities exchange in accordance with the rules of the exchange

and subject to such terms as the Commission deems necessary for the

protection of investors. In accordance with this procedure, six bond

Issues and three stock issues were stricken from listing and registration

upon application by exchanges. All six bond issues 7 and one of the

stock issues" were delisted by New York Stock Exchange, on the

ground that the amounts of the issues remaining outstanding had been

reduced to inconsequential proportions by reason of exchanges or redemptions. The two remaining stock issues were delisted by New

York Curb Exchange (and one of them also by Philadelphia-Baltimore

Stock Exchange 9) by reason of reacquisition of most of the shares in

the one case and liquidation in the other.'.

The Commission granted the application by the receivers of one

corporation to withdraw its common stock from registration and listing on New York Curb Exchange on the ground that the company

was insolvent and in process of liquidation." It granted the application of another corporation to withdraw its common stock from registration and listing on Chicago Board of Trade since the company had

already registered and listed the same security upon Midwest Stock

Exchange,"

Securities Delisted by Certification

Securities which have been paid at maturity, redeemed, or retired in

full, or which have become exchangeable for other securities in substitution therefor, may be removed from listing and registration on a

national securities exchange if the exchange files a certification with

the Commission to the effect that such retirement has occurred. The

removal of the security becomes effective automatically after the interval of time prescribed by rule X-12D2-2 (a). The exchanges filed

certifications under this rule effecting the removal of 152 separate

issues. In some instances the same issue was removed from more than

one exchange, so that the total number of removals, including duplications, was 181. Successor issues to those removed became listed and

registered OIl exchanges in many cases.

Ford Motor Co.,Ltd., of Great Britain, Feb. 28, 1950.

J ell'erson Lake Sulphur Co., Mar. 23, 1950. 7 The Long Island Railroad Co., Securities Exchange Act release No. 2484, (1949);

Mortgage Bank of the Venetian Provinces, Securities Exchange Act retease No. 4334,

(1949) ; Chicago, St. Louis and New Orleans Railroad Co., Securities Exchange Act relea~p No. 4426, (1950); State of San Paulo, Securities Exchange Act release No. 4426, (1950) ; City of Porto Alegre, Securities Exchange Act release No. 4426 (1950).

"The Joliet & Chicago Railroad Co., Secuntles Exchange Act release No. 4444 (1950). Cooper Distributing Co., Securities Exchange Act release No. 4275 (1949). reOld Poindexter Distillery, Jnc., Securities Exchange Act release No. 4335 (1949);

Cooper Distributing Co., Securftfes Exchange Act release No. 4275 (1949). 11 Leonard 011 Development eo., Securities Exchange Act release No. 4354 (1949). 12Centlivre Brewing Corp., Securities Exchange Act release No. 4443 (1950).

"

•

•
36 SECURiTIES AND EXCHANGE COMMISSION

In accordance with the provisions of rule X-12D2-1 (d), New York

Curb Exchange removed 16 issues from listing and registration when

they became listed and registered on New York Stock Exchange. This

rule permits a national securities exchange to remove a security from

listing and registration in the event trading therein has been terminated pursuant to a rule of the exchange which requires such termination if the security becomes listed and registered and admitted to

trading on another exchange. Removal under this rule is automatic,

the exchange being required merely to notify the Commission of the

removal.

Securities Removed From Listing on Exempted Exchange

A security may be removed from listing on an exempted exchange

by such an exchange filing an appropriate amendment to its exemption

statement setting forth a statement of the reasons for the removal.

One exempted exchange removed two issues from listing thereon during the year, due in one case to the redemption of the security and in

the other to the expiration of a voting trust agreement.

MANIPULATION AND STABILIZATION

Sections 9, 10, and 15 of the Securities Exchange Act prohibit

manipulation of securities prices. Section 9 forbids certain specifically described forms of manipulative activity. Transactions which

create actual or apparent trading activity or which raise or lower prices

are declared to be unlawful if they are effected for the l?urpose of

inducing others to buy or to sell. Certain practices desiznated as

"wash sales" and "matched orders" effected for the purpose of creating

a false or misleading appearance of active trading or a false or misleading appearance with respect to the market for a security are declared to be illegal. Persons selling or offering securities for sale are

prohibited from disseminating false information to the effect that the

price of a security will, or is likely to, rise or fall because of market

operations conducted for the purpose of raising or depressing the price

of a security. Persons selling or buying securities are forbidden to

make false or misleading statements of material facts, with knowledge

of their falsity, or willfully to omit material information regarding

such securities for the purpose of inducing purchases or sales.

Pursuant to its statutory authority, the Commission has adopted

rules and regulations to aid it in carrying out the expressed will of

Congress. Sections 9, 10, and 15, as augmented by the Commission's

rules and regulations, are aimed at freezing our securities markets

from artificial influence and maintaining fair and honest markets

whose prices are established by supply and demand and are uninfluenced by manipulative activity.

Manipulation

The manipulation of securities prices which in previous years took

millions of dollars annually from the J?ublic, was one of the principal

reasons for the adoption of the Securities Exchange Act of 1934. In

the early days of the Commission's existence, some market operators

attempted to continue their manipulative activities. The Commission

uncovered these activities and as a result various penalties were im-
SIXTEENTH! ANNUAL REPORT 37

posed upon certain operators, including expulsions from exchanges,

Jail sentences, and fines. As a result of the administration of the act,

manipulation is believed no longer to be an appreciable factor in our

markets. However, sporadic attempts artificially to raise or depress

the prices of securities are still encountered, and it is evident that any

relaxation of market surveillance on the part of the Commission would

create a danger of reestablishment of many of the manipulative practices the act was designed to prevent.

During the fiscal year ended June 30, 1950, several actions arising

out of manipulative investigations were undertaken. A permanent

injunction was obtained against Henry M. Stanley on the basis of

attempts to manipulate the market in the stock of Friars Ale Brewing

Co, Public hearings were begun in Chicago to revoke the brokerdealer registration of Adams & Co., Bennett, Spanier & Co., and Ray

T. Haas for their manipulation of the price of Mohawk Liqueur Co.

stock. The registration of W. H. Bell & Co., Inc., was revoked for

Securities Act violations in the stock of Bost, Inc. A series of frauds

perpetrated on an investment trust resulted in the jailing of William

A. Hancock and led to an action to revoke the registration of the firm

of Junger, Anderson & Co. All of the above cases were discovered

during investigations which arose out of the detection methods described in the following paragraphs, A clarification of certain issues

involving the propriety of trading by underwriters was made in an

opinion dealing with the underwriting of bonds of Northern Indiana

Public Service Co.

In administering the antimanipulative requirements there is a premium on prompt action to prevent harm before it occurs, and on the

avoidance of interference WIth the legitimate functioning of the markets. To accomplish this the Commission has continuously modified

and sought to improve its procedures for the systematic surveillance

of trading in securities. Methods used to detect manipulation have

necessarily been flexible, since techniques employed by manipulators

change constantly, increasing in subtlety and complexity.

The staff regularly scrutinizes price movements in approximately

8,500 securities, including about 3,700 issues traded on the exchanges

and 4,800 which have the most active markets over the counter. Information maintained concerning these securities includes not only

data reflecting the market action of such securities, but also includes

news items, earnings figures, dividends, options, and other facts which

might explain price and volume changes. In addition, monthly observations are made of the price movements of thousands of other

issues which occasionally change hands in our public markets. The

markets for securities about to be sold to the public are watched very

closely. In this connection the markets for almost 1,400 issues in the

amount of about $172,000,000,offered under regulation A, were carefully checked for improper pricing or market grooming. Several hundred other securities were kept under special daily observation during

the 1950 fiscal year, for periods ranging from 14 to 90 days, because

a public offering under a registration statement was proposed and

either the underwriter or the Issuer had reserved the right to stabilize

the market for the security. The issues actually offered had a public

offering price in excess of $3,000,000,000.
38 SECURITIES AND EXCHANGE COMMISSION

"Whenno apparent explanation can be found for an unusual movement in a security or for an unusual volume of trading, the matter

may be referred to one of the regional officesof the Commission for a

field investigation. For reasons of policy the Commission keeps confidential the fact that trading in a given security is under investigation, for it has found that knowledge of the existence of such investigations may unduly affect the market or reflect unfairly upon individuals whose activities are being investigated. As a result, the Commission occasionally receives criticism for failing to investigate certain cases when, in fact, it is actually engaged in an intensive investigation.

The Commission's investigations of unusual market activity take

two forms. The "quiz," or preliminary investigation, is designed to

detect and discourage incipient manipulation by a prompt determination of the reasons for unusual market behavior. Often the results of

a quiz point to a legitimate reason for the activity under review and

the case is closed. Frequently, facts are uncovered which require more

extended investigation, and in these cases formal orders of investigation are issued by the Commission. In a formal investigation, members of the Commission staff are empowered to subpena pertinent

material and to take testimony under oath. In the course of such in-'

vestigations, data on purchases and sales over substantial periods of

time are often compiled and trading operations involving considerable

quantities of securities are scrutinized.

The Commission operates on the premise that manipulation should

be suppressed at its inception. Many of the cases investigated never

come to the attention of the public because the promptness of the Commission's investigations, t'hrough the quiz technique, stops the manipulation before it is fully developed. Losses by the public are seldom recoverable even though the perpetrator of a fraud is brought to

justice. Therefore it is believed that these investigatory methods afford more protection to the public than allowin~ unlawful market

operations to continue until it appears that sufficient evidence for a

successful prosecution is obtainable.

Trading investigations

"Quizzes" Formalinvestigations

Pendmg June 30, 1949___________________________________________________________ 137 18 Initiated in period July 1, 1949--June 30,1950 ____________________________________ 117 3

Total to be accounted for __________________________________________________ 254 21

Closed or completed during fiscal year ___________________________________________ 174 10 Changed to formal during fiscal year .. 3

Total disposed of, ______________________________________ 177 10

Pending at end of fiscal year. 1 77 11

Stabilization

During the 1950fiscal year many conferences were held with representatives of issuers and underwriters in order to assist them to

avoid violation of the statutory provisions and rules of the Com-

_________________________ ___________________ ------------

0 __________________

__----------------------- ___________________________
SIXTEENTH ANNUAL REPORT 39

mission dealing with stabilizing, manipulation, and frau~ and many

written and telephone requests were answered. Formal Commission

rules dealing directly with stabilization relate only to offerings "at

the market" or at prices relating to market prices. The practice

applicable to fixed price offerings is embodied in a wealth of interpretive material. It is the Commission's experience that such issuers

and underwriters place great value on the immediate service which

the Commission is able to render them by being at all times available to give them responsible advice as to problems dealing with

proper stabilizing techniques in the offering of securities.

During the 1950 fiscal year the Commission continued the administration of rules X-17A-2 and X-9A6-I. Rule X-17A-2 and Form

X-17A-l (the form on which stabilizing transactions are reported)

were amended in the interest of simplification and clarity. Rule

X-17A-2 requires the filing of detailed reports of all transactions

incident to offerings in respect of which a registration statement has

been filed under the Securities Act of 1933 and where any stabilizing

operation is undertaken to facilitate the offerings of securities registered on national securities exchanges, in which the offering prices are

represented to be "at the market" or at prices related to market prices.

Of almost 500 registration statements filed during the 1950 fiscal

year, 220 contained a statement of intention to stabilize to facilitate

the offerings covered by such registration statements. Each of the

latter filings was examined as to the propriety of the proposed method

of distribution and market support and the full disclosure thereof.

Because a registration statement sometimes covers more than one class

of security, there were 252 offerings of securities in respect of which

a statement was made, as required by rule 426 under the Securities

Act, to the effect that a stabilizing operation was contemplated.

Stabilizing operations were actually conducted to facilitate 59 of these

offerings, principally stocks. Offerings of stock issues aggregating

20,369,462 shares with an aggregate public offering price of $408,-

092,189 were stabilized, but only 1 bond offering, having a principal

amount of $4,000,000,was stabilized. In connection with these stabilizing operations, 7,990 reports were filed with the Commission during

the fiscal year. Each of these reports has been analyzed to determine

whether the stabilizing activities were within permissible limits.

SECURITY TRANSACfIONS OF CORPORATION INSIDERS

Reports of Transactions and Holdings

To give information to the public about transactions by corporation

insiders in securities of their companies, certain reports are required

to be filed with the Commission by persons closely identified with the

management or control of industrial, utility, and investment companies under the conditions specified in three of the acts whic'h the

Commission administers-e-sections 16 (a) of the Securities Exchange

Act of 1934, 17 (a) of the Public Utility Holding Company Act of

1935, and 30 (f) of the Investment Company Act of 1940. An initial

report must be filed disclosing the amount of such security holdings,

and thereafter a report must be filed for each month in which any

c'hange occurs in these holdings. The reports show the relationship
40 SECURITIES AND EXCHANGE COMMISSION

of the reporting insider to his named company; the date, number of

shares, and security involved in each transaction; the character of

the transaction (whether a purchase, sale, gift, exchange, etc.) ; and

the nature of ownership (whether direct or indirect through a holding

company, partnership, trust, etc.),

Publication of Data Reported

The reports filed by insiders are available for public inspection

from the time they are filed. However, it is impossible for the majority of investors personally to inspect them either at the Commission or

at the national stock exchanges, where additional copies of the reports

are filed. Accordingly, the Commission issues a monthly Official Summary of Security Holdings and Transactions which summarizes these

reports. Before the close of the 1950 fiscal year, as a part of the Commission's management-improvement program, a study was made to

reappraise the service afforded by this publication. In that connection, a card was attached to each copy of the summary distributed in

March asking subscribers what use was made of the summary and

what value it afforded them, and inviting their suggestions for ways

in which it might be improved for the benefit of investors.

More than 1,400 replies were received representing nearly 40 percent of the 3,814 subscribers circularized, The replies indicated, in

general, that five out of six subscribers own corporate securities-and

that those who are not stockholders consist mainly of newspapermen,

teachers, students, librarians, and government and trade association

officials. Moreover, it was indicated that each copy of the summary is

used by an average of 8.4 persons. The indirect coverage resulting

from its use by newspapermen as a source for news stories is incalculable (167 newspapermen are subscribers). It was also found that

approximately 50 percent of the summary subscribers are engaged in

some form of the securities business, that 20 percent are primarily

investors, that 20 percent are lawyers, engineers, accountants and corporation executives, and that the remaining 10 percent are journalists,

teachers, and persons engaged in a variety of miscellaneous occupations. By and large the returns demonstrate that the summary is

deemed by its users to be important particularly in reflecting insiders'

opinions of the prospects of the corporation implicit in their transactions and holdings.

Subscribers offered a number of specific suggestions for improvement of the summary. Some of the suggested changes have already

been put into effect, and a number of other suggestions proposed by

subscribers, as well as by members of the Commission's staff, are being

given further consideration with a view to improving the usefulness

of the summary and cutting down its publication costs.

Preventing Unfair Use of Inside Information

For the Jlurpose of preventing the unfair use of information which

may have been obtained by a corporation insider b.Yreason of his relationship to his company, section 16 (b) of the Securities Exchange

Act further provides that any profit he realizes from anI purchase and

sale, or sale and purchase, of any equity security 0 the company

within any period of less than 6 months shall be recoverable through
SIXTEENTH ANNUAL REPORT 41

court action brought by the issuer or by any security holder acting

in its behalf. Corresponding provisions are contained in section 17

(b) of the Public Utility Holding Company Act of 1935 and in section 30 (f) of the Investment Company Act of 1940. The reporting

provisions of these acts have in a number of instances brought to light

transactions involving substantial profits from short-term trades which

were recovered by or in behalf of the issuers, either through voluntary

repayment or as a result of court action.

Volume of Reports Filed and Examined

Members of the staff examine all reports of insider holdings and

trading to determine their compliance with the statutory requirements. Amended reports are obtained where inaccuracies or omissions appear. Details as to the volume and kinds of reports filed

during the year are shown in the following table.

Number of security ownership reports of otflcers, directors, principal security

holders, and certain other affiliated persons filed and eaJamined during the ttscal

year ended June 80, 1950

Description of report I Original Amended Total reports reports

Securities Exchange Act of 1934: Form 4. .•.• . ........•..• _""_" _" ....•..• _. ...... 14,705 858 15,503 Form 5... _. _. ._ .....•...• .• ............ ••............• 424 15 439 Form 6 ..• __.........•• ____•.......... _. ___•.............. _._ ... 2,269 43 2,312 Public utility Holding Company Act of 1935' Form U-17-1 ..... ""_' ............ .. •.•............ 58 0 58 Form U-17-2 ..... _. .. _._ ......•• _. .........•.. _. _' 643 20 663 Investment Company Act of 1940: Form N~OF-l_._ ... _. ...•.......... _. ............. •.. 118 7 125 Form N~OF-2 ... _._ ........ _. .. _. _. 616 33 M9

TotaL ...•• _. ........... _. ............. .......... _. 18, 833 976 19, BOll

I Form 4 is used to report changes in ownership; Form 5, to report ownership at the time any equity

security i~ first listed and registered on a nattonal securities exchange; and Form 6, to report ownership of

persons who subsequently become officers, directors, or principal stockholders of the issuer of such a listed

and registered equity seeurrty, under sec. 16 (a) of the Securities Exchange Act of 1934. Form U-17-1 is used for initial reports and Form U-17-2 for reports of changes in ownership of securities, under sec. 17 (a)

of the Public Utility Holding Company Act of 1935. Form N-1lOF-11s used for initial reports and Form

N~OF-2 for reports of changes in ownership of securities, under sec. 30 (f) of the Investment Company Act ofl940.

SOLICITATION OF PROXIES, CONSENTS, AND AUTHORIZATIONS

The Commission is authorized under three of the acts it administers

to prescribe rules and regulations concerning the solicitation of

proxies, consents, and authorizations in connection with securities of

the company subject to those acts." Pursuant to this authority, the

Commission has adopted regulation X-14, which is designed to protect investors by requiring the disclosure of certain information to

them when their J?roxies are being solicited. The rules afford investors an opportunity for active participation in the affairs of their

company. Under regulation X-14 each person solicited must be

furnished with such information as will enable him to act intelligently upon each separate matter in respect of which his vote or con-

,. Sections 14 (a) of the Securities Exchange Act of 1934. 12 (a) of the Public Utility

Holding Company Act of 1935, and 20 (a) of the Investment Company Act of 1940.

__ __ ____• __ _

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_

__

_ __ ____

___""'"

__ _________ ___

_________ " __ _ __________

_ ____ ___" _
42 SECURITIES AND EXCHANGE COMMISSION

sent is sought. The proxy rules set forth in this regulation also contain provisions which enable security holders who are not allied with

the management to communicate with other security holders when

the management is soliciting proxies.

Statistics of Proxy Statements

During the 1950 fiscal irear, material relating to 1,668 different solicitations of proxies and 'follow-up" material used in connection with

186 of these solicitations was filed with the Commission, 1,653 proxy

statements were filed during the 1949 calendar year, practically the

same number as in each of the four preceding calendar years. The

comparative numbers of proxy statements filed by management and

nonmanagement groups and the principal items of business for which

stockholders' action was sought in these solicitations is shown in the

table below for each of the past five calendar years.

Year ended Dec. 31

1945 1946 1947 1948 1949

--- --- --- --- Proxy statements filed by management ______________ 1,570 1,664 1,613 1,648 1,625

Proxy statements flied by others than management __ 24 21 32 29 28 --- --- --- --- --- Total proxy statements filed ___________________ 1,594 1,685 1,645 1,677 1,653

--- --- --- --- --- For meetings at which the election of directors was one of the items of business ________________________ 1,3.'iO 1,407 1,461 1,534 1,536 For meetings not involving the election of directors __ 213 244 149 115 97 For assents and authorizations not involving a meet- ing or the election of directors ______________________ 31 34 35 28 20 --- --- --- --- --- Total proxy statements fIIed ___________________ 1,594 1,685 1,645 1,677 1,653

The items of business other than that of election of directors were

distributed among a somewhat wide variety of specific proposals as

follows:

Year ended Dec. 31

1945 1946 1947 1948 1949

--------- --- --- Mergers. consolidations, aequisltion of businesses, and pur. 40 chase and sale of property 6.'; 69 46 43

Issuance of new seeuntles, modification 01 existing securities,

recapitalization plans other than mergers or consolidatlons ___ 227 249 223 154 193 Employees pension plans ______________________________________ 94 75 66 59 49 Bonus and profit-sharing plans, including stock options ________ 51 52 60 32 20 Indemnification of officers and directors. 25 36 22 21 12 Change in date of annual meeting 33 28 27 24 9

Other miscellaneous amendments to bylsws. and miscellaneous other matters 217 309 207 215 187 Stockholder appt oval of independent auditors _________________ 296 304 312 365 381

Number of management's proxy statements eontainmg stock- 14 43 holder proposals _____________________________________________ 19 15 38 Number of such stockholder proposals 34 34 29 57 68

Netnumbel of stockholders whose progosals were included in management's proxy statements (eac stockholder is counted only once in each year regardless of the number of companies that included his proposals in proxy statements) _____________ 17 9 13 18 21

Examination of Proxies

While proxy examination work occurs throughout the year, it has

a seasonal peak during the spring. Thus, of 1,517 annual meetings

-

_________________ • _________________

__________ •• __________ _____ •_______________________

__________________________________• _______" ____

___• _____________________
SIXTEENTH Al\'NUAL REPORT 43

for which proxy statements were filed during the 1949 calendar year,

1,085meetings, over 70 percent of the total, were held during March,

April, and May; 544of the total, 36 percent, took place in April alone;

160 meetings were held in the last week of April; and as many as 65

meetings were scheduled for 1 day, the fourth Tuesday in April.

Pension plaJls.-An outstanding feature of the year was the number

of cases in which pension plans were presented to stockholders for

approval. While the plans in a single industry followed a somewhat

general pattern, there were variations due to differences in the financial

condition of the companies and the differing approaches of management. A common characteristic of many plans was the 5-year term

under which some managements insisted that the company's liability

ran only to employees who qualified and elected to go on pension during

the term. One plan of this type, submitted to its stockholders by a

large steel producer, provided for payments into a trust in five annual

installments so that the last payment would be made 4 years after the

final year of the plan. Estimates showing the cost, assuming that all

eligible employees would elect to take pensions, were clearly presented

in a table by maturing classes and payments to the fund. Assuming

that the plan might well be renewed on its expiration, the inclusion

of a statement in the proxy soliciting material was obtained indicating

an approximate range of annual cost if the plan were so continued.

This company disclaimed any intention of funding past service cost

for employees who would not qualify for pensions during the 5-year

term of the plan.

In contrast to the position taken by the above-mentioned company,

one of the leading steel producers solicited proxies with a view to

amending its existing plan to increase the benefits and broaden the

coverage, and presented in its proxy statement its summary of costs

on the assumption that the plan would continue indefinitely even

though the contract covered only 5 years specifically. In this case the

summary presented a comparison of lump-sum costs of past service

and the estimated comparative annual costs during 1950 for the existing and proposed plans. Because of the very substantial figures presented and the technical character of the references to income tax

laws, the staff requested and obtained in the management's introduction to the summaries of costs a clear statement that the figures for

costs were presented before giving effect to income taxes.

REGULATION OF BROKERS AND DEALERS IN OVER.THE.COUNTER

MARKETS

Registration

Brokers and dealers using the mails or other instrumentalities of

interstate commerce to effect transactions in securities on over-thecounter markets are required to be registered with the Commission

pursuant to section 15 (a) of the Securities Exchange Act of 1934;

exemption, however, is granted to those brokers and dealers whose

business is exclusively instrastate or exclusively in exempt securities.

The following tabulation reflects certain data with respect to registration of brokers and dealers during the 1950fiscal year:
44 SECURITIES AND EXCHANGE COMMISSION

Registration of brokers and dealers under scction 15 (b) of the Securities

Ea:change Act of 198.r-ttscal year ending June 80, 1950

Effective registrations at close of preceding fiscal year 3,924

Effective registrations carried as inactive_____________________________ 70

Registrations placed under suspension during preceding year_____________ 0

Applications pending at close of preceding fiscal year____________________ 23

Applications filed during fiscal year___________________________________ 493

Total 4,510

Applications withdrawn during year___________________________________ 13

Applications cancelled during year____________________________________ 0

Registrations withdrawn during year_________________________________ 418

Registrations cancelled during year___________________________________ 43

Registrations denied during year______________________________________ 0

Registrations suspended during year___________________________________ 0

Registrations revoked during year_____________________________________ 12

Registrations expired by rule X-15B-3_________________________________ 1

Registrations effective at end of year 3,930

Registrations effective at end of year carried as inactive________________ 170

Applications pending at end of year__________________________________ 23

Total 4,510

1Registrations on inactive status because of inability to locate registrant despite careful

inquiry.

,Administrative Proceedings

Section 15 (b) of the act provides that registration of a broker or

dealer may be denied for specific types of misconduct on the part of an

applicant. Registration may be revoked for such misconduct if the

Commission finds after an appropriate record has been made that such

denial or revocation is necessary in the public interest. The Commission's staff, therefore, examines all applications for registration and

numerous other available sources of information to determine whether

the applicant has engaged in any violations of law which would constitute a statutory basis for challenging the propriety of giving him the

privileges of registration. When indications of such misconduct are

discovered, the Commission orders proceedings to establish the facts.

The applicant has full opportunity to be heard on the specified charges.

Similar procedures are followed in revocation proceedings against registered brokers and dealers and in proceedings to determine whether to

suspend or expel a broker or dealer from membership in a national securities exchange or association. The following tabulation reflects the

number of proceedings instituted under sections 15 (b) and 15A 14

during the 1950 fiscal year and the disposition thereof.

Record Of broker-dealer registration proceedings and proceedings to suspend or

expel from, membership in a national securities ea:change or association instituted pursuant to the Securities Exchange Act of 1934 tor the 1950 f£8cal year

Proceedings pending at start of fiscal year to : Revoke registration________________________________________________ 5

Revoke registration and suspend or expel from NASD________________ 8

Deny registration to applicanL_____________________________________ 1

Total proceedings pending________________________________________ 14

1& Section 15A of the Securities Exchange Act of 1934, provides for the registration of

securities dealers associations and. among other things, outlines conditions of membership

in such associations.
SIXTEENTH ANNUAL REPORT 45

Reoord of broker-dealer registration prooeedings, eto.-Continued

Proceedings instituted during fiscal year to:

Revoke regffitration________________________________________________ 13

Revoke registration and suspend or expel from NASD_________________ 10

Deny registration to applicants______________________________________ 9

Suspend or expel from NASD and exchanges_________________________ 1

Total proceedings instituted______________________________________ 33

Total proceedings current during fiscal year_______________________ 47

DISPOSITION OF PROCEEDINGS

Proceedings to revoke registration:

Dismissed on withdrawal of registration____________________________ 1

Registration revoked_______________________________________________ 6

Total_________________________________________________________ 7

Proceedings to revoke registration and suspend or expel from NASD: U

Dismissed-registration and membership continued -________ 2

Registration revoked and firm expelled from NASD_________________ ]

Regtstratton revoked-no action taken on NASD membership__________ 3

Total___________________________________________________________ 6

Proceedings to suspend or expel from NASD and exchanges: Dismissed-memberships continued_________________________ __ 1

Total___________________________________________________________ 1

Proceedings to deny registration to applicants:

Dismissed on withdrawal of application_____________________________ 2

Dismissed-registration permitted___________________________________ 6

Total___________________________________________________________ 8

Total proceedings disposed of_____________________________________ 22

Proceeding-s pending at end of fiscal year to:

Revoke registration________________________________________________ 11

Revoke registration and suspend or expel from NASD_________________ 12

Deny registration to applicants____________________________________ 2

Total proceedings pending at end of fiscal year____________________ 2!'i

Total proceedings accounted fOf__________________________________ 47

15 The National Association of SecurIties Dealers. Inc., is the only national securities

association registered with the Commission.

As shown in the foregoing tabulation, nine proceedings involving

the denial of registration as an over-the-counter broker or dealer were

ordered during the 1950 fiscal year and one was pending at the be,ginning of the year. Two applications were withdrawn after the COmmission had given notice of hearing. Six applications for registration were granted. Two proceedings were pending at the end of the

year. One proceeding involved solely the question of suspension or

expulsion from the NASD and various securities exchanges and in its

findings and opinion the Commission determined that the imposition

of a sanction was not necessary. Of the 23 revocation proceedings

against registered brokers and dealers ordered during the fiscal year
46 SECURITIES AND EXCHANGE COMMISSION

and the 13 proceedings pending at the beginning of the year," the

Commission disposed of 13 as follows:

Ilegistration revoked___________________________________________________ 9

Regtstratlon revoked and firm expelled from NASD_______________________ 1

Proceedings dismissed and registration cancelled or withdrawn____________ 1

Proceedings dismissed and registration continued in effecL_______________ 2

Registrations revoked (* indicates eepulsion. from NASD was also ordered)

Securities

Exchange Act

Firm Release No

VVendell ~I. VVeston__________________________________________________ 4312

~'.II.VVinter& Co 4280

Pennaluna & Co. (a partnership) 4314

D. S. VVaddy & Co____________________________________________________ 4322

Brownlng&Co 4333

'Valter J. ~Ianning----------------------------------------------_____ 4446

N. James Elliott*____________________________________________________ 4409

VV. II. Bell & Co______________________________________________________ 4292

S: T. Jackson & Co., Inc_______________________________________________ 4459

J. C. Flannery & Co__________________________________________________ 4459

Most of the proceedings brought against brokers and dealers stem

at least indirectly from the Commission's routine fraud detection

procedures designed to detect and prevent violations of law.

In proceedings brought by the Commission against Wendell Maro

Weston, doing business as Weston & Co. and Assured Warranty Corp.,

for the revocation of their registrations as a broker-dealer and investment adviser, respectively, the Commission found that over a long

course of conduct 1Veston systematically defrauded a client who

reposed great trust and confidence in him.

The client turned over to Weston $97,000 in cash for safekeeping,

and Weston soon induced her to invest $84,631 of this in securities.

Thereafter, 'Weston organized Assured Warranty Corp., in which he

took a controlling interest, which issued 200 shares of preferred stock

in his name. He held the stock for the client and paid the corporation $20,000 of her money. The client entered into an investment

advisory agreement with Assured Warranty by the terms of which

Assured 'Varranty might give orders for purchase and sale of specified securities on her behalf with Weston as broker. Weston thereupon bought and sold securities for her account, utilizing the services

of members of the New York and Boston Stock Exchanges. From

time to time during the course of these transactions, Weston obtained

a total of $50,000 more from the client's account which he used for

the purchase of additonal preferred stock in Assured Warranty.

The Commission found that the client was unaware that her funds

were being syphoned out of her account for the furchase of stock in

an unsuccessful promotional company. The tota gross income of the

company was $7,074 in a period when its expenses amounted to

$68,090, of which $27,000 was paid to Weston as salary and advances.

The total net loss was over $61,000, of which over 90 percent was borne

by her.

The Commission stated that Weston stood in the relation of fiduciary

to his client because of the trust and confidence reposed in him by the

,. Some of these proceedings, as shown In the tabulation, included the question of sus- pension or expulsion from the NASD.
SIXTEENTH ANNUAL REPORT 47

client and because of the more formal obligation which he owed to

her as an investment adviser. As a fiduciary, Weston was required

to act in the utmost faith in every phase of their relations, to invest

her funds carefully, and to exercise any special authority granted to

him in connection with an unusual venture only when accompanied

by full disclosure of the exact nature of the proposition and the risks

undertaken. The Commission found that in putting his client's money

to a speculative use for his personal benefit, and in designedly concealing his scheme by elaborate deceptions, Weston pursued a course

of conduct which operated as a fraud on the client within the scope

of rules X-10B-5 and X-15C1-2 (adopted under sections 10 (b) and

15 (c) (1) of the Securities Exchange Act of 1934), and section

17 (a) of the Securities Act of 1933. The Commission further found

that in failing to deliver confirmations of transactions to the client

Weston had wilfully violated section 15 (c) (1) of the Securities

Exchange Act and rule X-15C1-4 thereunder.

Weston filed annual financial reports in 1945 and 1946 in which he

failed to reflect a substantial claim of the client for the return of her

misused funds and his liability on a promissory note issued in settlement of this claim, which the Commission found to be in wilful violation of section 17 (a) of the Securities Exchange Act and rule

X-17A-5 thereunder.

The Commission revoked the registration of Weston & Co. as a

broker-dealer.

Finding that in its application for registration as an investment

adviser and in supplemental reports Assured Warranty Corp, had wilfully made untrue statements and misleading omissions as to the ownership of its stock and the nature of its activities, the Commission

revoked the registration of Assured Warranty Corp. as an investment

adviser.

Three cases decided during the year involved, in part, violations

of section 5 (a) of the Securities Act of 1933. These cases involved

Green & Co., the S. T. Jackson & Co., Inc., and J. C. Flannery & Co.

All three respondents were found to have distributed the common

stock of Columbia Machinery & Engineering Corp. when no registration was in effect as to such securities. The Commission found that

in 1946 six Columbia stockholders, who constituted members of a

group in control of Columbia, sold all their holdings of Columbia

stock, consisting of 142,600 shares of 200,000 outstanding shares of

common stock and 1,600shares of 2,000shares of outstanding preferred

stock. Of the common stock, 138,300 shares were sold by the three

companies, and the preferred stock was all sold to Jackson & Co. and

Flannery & Co. acting in joint account. The Commission noted that

the selling stockholders, either directly or through their representatives in the Columbia management, constituted a cohesive group which

had organized Columbia and directed its affairs through their control of its board of directors and management. The sales of Columbia

stock by these stockholders were not unrelated independent transactions but were the culmination of continuing efforts by principal

stockholders of Columbia to dispose collectively of their interest.

These efforts were known to the respondent firms which, from early

in 1946, had cooperated among themselves in the sales of the Colum-
48 SECURITIES AND EXCHANGE COMMISSION

bia stock, were close to Columbia, and in fact took a hand in directing

its course.

The Commission concluded that the sales effected by the respondent

companies were knowingly made on behalf of members of a group in

control of Columbia, that the respondents were underwriters within

the definition contained in section 2 (11) of the Securities Act, and

that registration of the Columbia stock which they distributed was

required by that act. It found, therefore, that the S. T. Jackson &

Co. Inc., Stacy T. Jackson, J. C. Flannery & Co., and Joseph C.

Flannery wilfully violated section 5 (a) of the Securities Act in the

sale of the common and preferred stock of Columbia, and that Greene

& Co. and William F. Thompson wilfully violated that section in the

sale of Columbia stock. The S. T. Jackson & Co., Inc. and J. C.

Flannery & Co., in addition, were found to have engaged in fraudulent

practices in connection with their sales of Columbia common and

preferred stock,"

On findings of wilful violations of the antifraud provisions of the

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

other provisions of the latter act, the Commission revoked the registration of the S. T. Jackson & Co., Inc. and J. C. Flannery & Co., and

found Stacy T. Jackson and Joseph C. Flannery to be causes of such

revocations.

Proceedings instituted against Halsey, Stuart & Co., Inc., ("Halsey") and Harold L. Stuart, involved market activities in the 3% percent series C first-mortgage bonds, due 1973, of Northern Indiana

Public Service Co. and sales without delivery of prospectuses required

by the Securities Act.

Halsey was syndicate manager of a group of 92 underwriters, which

in 1943 purchased an issue of $45,000,000 of the Northern Indiana

Public Service Co. bonds from the issuing company. The bonds were

registered under section 5 of the Securities Act but were not traded

on any exchange.

When the underwriting syndicate terminated 12,561bonds remained

unsold. Halsey held 4,772,of these unsold bonds, most of them having

been bought by Halsey from other underwriters at a bid slightly

higher than cost to the underwriters. This bid had the effect of

eliminating overhanging holdings in the hands of other underwriters,

who might have thrown them onto the market with serious consequences to the distribution as a whole and in particular to Halsey's

stake at that time of over $2,000,000in undistributed bonds.

In a period of about 400 business days Halsey published bids or

invited offers of the bonds on 292 business days. In the earlier months

following the close of the syndicate it was the heaviest known buyer

in the dealer market and made most of its purchases from liquidating

underwriters{ often bidding and paying prices at increasingly higher

levels. On the other hand, it sold comparatively few bonds in that

market, confining most of its sales to customers. The post syndicate

market developed in three stages: A first period marked by extensive

While the Commission did not minimize the violation by Greene & Co. and Wllliam F.

Thompson of the registration requirements of the Securities Act, it did not think it neces- sary, in the public Interest, to impose remedial sanctions and dlsmlssed the proceedings with respect to Greene & Co. and Wllliam F. ThompllOn.

"
SIXTEENTH ANNUAL REPORT 49

liquidation by underwriters and a fall in prices to about 101; a second

period marked by a tightening supply, reduced rate of activity, net

accumulation of additional inventory by Halsey, and a price rise to

about 103; a third period in which general activity was further reduced and Halsey undertook a consistent liquidation of net inventory

as prices rose to about 107. Thereafter Halsey's trading thinned out

to insignificant proportions.

The Commission found that Halsey's activities in the market forced

not only its own bids but independent bids as well to be raised in order

to attract bonds. Beginning even prior to the close of the syndicate,

Halsey drained off the potential market over $4,000,000 of bonds.

Thereafter, it was an active purchaser whose pattern of conduct resulted in draining off the supply that came into the market and channeling it to investors who were not likely to become active traders.

Halsey's purchases demonstrably could not have been made to satisfy

existing orders. Halsey's trading created active and apparent activity

and at times it raised prices directly either by bids or transactions.

In addition, throughout long periods following the close of the syndicate, its transactions gave support to the wholesale market and tended

to fix price floors, because of their volume, because of the fact that

Halsey made large purchases while others were relatively inactive, and

because the general pattern of Halsey's trading was to remove overhang from the dealer market and to place the bonds with investors.

The Commission found that Halsey engaged in such practices for

the purpose of inducing others to buy. The Commission stated, "It

is undisputed that it desired, in the period following close of the

syndicate, to preserve as much of its inventory as it could in the hope

and belief that the price would improve. Hope, belief, and motive

are not 'purpose' in the legal sense applicable to this case. But 'purpose' must be inferred when hope, belief, and motive are implemented

by activity objectively resulting in market support, price raising,

sales at higher prices, and the protection of inventory." The Commission pointed out that Halsey had received Securities Exchange

Act release No. 3505, which deals with the legality of transactions

by underwriters during the course of a distribution and states that

conduct which would violate section 9 (a) (2) of the Exchange Act

would also constitute a violation of section 15 of that act and section

17 of the Securities Act.

The Commission found that Halsey had wilfully violated section 17

(a) of the Securities Act and sections 10 (b) and 15 (c) of the Exchange Act and the rules thereunder.

The Commission further found that from September 11, 1944

through April 2, 1945, Halsey sold these bonds without delivery of

prospectuses as required by section 5 (a) (2) of the Securities Act.

The violation was not characterized as wilful since Halsey in practice treated the bonds as fungible and had used prospectuses for a

year to cover all of its sales for the year.

Concluding that it would not be in the public interest to take no

action against Halsey, if it still maintained the view that it was free

to engage in the activities described, the Commission afforded Halsey

an opportunity to assure the Commission that it would in the future

915841-51-5
50 SECURITIES AND EXCHANGE COMMISSION

comply with the Commission's enunciated principles. Halsey filed a

statement of compliance and the Commission thereupon dismissed the

proceedings.

Broker-Dealer Inspections

The broker-dealer inspection program, initiated by the Commission

in 1940 under section 17 (a) of the Securities Exchange Act, which

authorizes the Commission to make periodic, special, and other examination of the books and records of brokers and dealers, is one of

the Commission's important procedures in the detection and prevention of violations of law by broker-dealers. These inspections are conducted by the staff of the Commission's regional offices. They are sometimes limited to a particular phase of a firm's operations, such as its

financial condition or its method of handling particular accounts, but

generally they involve full-scale examination of all characteristic

activities, culminating in a report on the extent to which its operations

are in compliance with the standards established by the act and rules.

Regional officesreported on 906 inspections during the year. In 59

inspections the question of financial condition was a matter for consideration; 56 inspections involved noncompliance with the Commission's hypothecation rules; in 15 inspections secret profits in agency

transactions were reported; in 165 inspections noncompliance with

regulation T was reported, involving chiefly the failure to comply

with the provisions of the regulation respecting cash accounts; other

infractions too scattered to classify were noted in 113 inspections.

As a result of the Commission's policy of explaining the application

of its rules and regulations and of urging management controls which

will afford strict compliance therewith, many violations, particularly

those involving improper hypothecation of securities, or the rule relating to the capital position of the firm, are frequently cured before the

inspection has been completed. However, in connection with more

than 40 inspections post-inspection surveillance or investigation beyond

the scope of the inspection became necessary-to ascertain whether

corrections had been made as promised and to determine whether

disciplinary or remedial action was necessary. Two of the firms inspected retired from business during investigation and revocation

proceedings are pending as to three others.

In addition to inquiry into the various matters mentioned above, the

inspection procedures call for a test check to determine whether the

firm inspected deals fairly with customers at prices reasonably related

to the current market. These test checks have a dual purpose-first

to enforce the principle, judicially established in Oharles E. Hughes

ill 00., Inc. v. S. E. 0./8 that it is fraudulent for a dealer to sell securities to customers, or buy from them, at prices not reasonably related

to the market unless he discloses the variation from the market, and

second to determine the effectiveness of the rules of the NASD relating

to fair prices and fair and equitable principles of trade.

18139 F. 2d 434 (c. A. 1943) ccrt. den. 321 U. S. 786 (1944). On Nov. 25. 1944. the

board of g-overnorHof the NASD adopted an interpretation of sec. 1 of art. III of its Rules

of Fair Practice holding that transactions by dealers at prices not reasonably related to the market constitute conduct Inconsistent with just and equitable principles of trade.
SIKTEE~ ~AL REPORT 51

Pricing Practices

The following tabulation reflects information obtained in inspections made during the year with respect to pricing practices in sales

to customers:

NASD Others Totals members

Number of inspections _____________________________________________ 654 252 006 Number of ins~IOns reportmg sales to customers m which the customer pal more than 5 percent above the current market 242 32 274

~::::; g~:J~~~~~-.-_~::::: ::::::::::::::::::::::: :::::: 16,682 1,559 18,241

Number of sales in which the customer paid more than 5 percent

14,241 1,281 15,522

above the cnrrent market _________________________________________ 1,697 fi75 2,272

I For test purposes inthe case of unlisted securtties the high offer inquotations among dealers as of the date

of the sale is used; on exchange securities the high sale on the date of sale, or If there was no sale, the asked price. as reported by the exchange on which the seeunty IS traded, is used.

Market pnees as of the date of sale are not readily available m all instances. This is often true of securities inactively traded and generally true of secunties having only a local market. There were 2,719 trans

setions reported m these Inspections on whtch no market prices were readily available.

A further breakdown of the last item in the above tabulation shows

substantial concentration of the total 2,272 sales made by members

and nonmembers of NASD at more than 5 percent mark-up.

One hundred and thirty-four inspections in which 8,143 sales were

analyzed accounted for only 384 sales at mark-ups of over 5 percent,

and in no instance was the number of sales at such mark-ups a sub.

stantial part of the test check. However, the remaining 1,888 sales at

such mark-ups, accounted for in 140 inspections, constituted over 25

percent of 7,379 sales analyzed. In each of these test checks, the number of sales made by the firm at mark-ups of over 5 percent constituted

10 percent or more of the firm's sales analyzed. The concentration of

such transactions was in the 140 firms as indicated below:

NASD Others Total members

Number of inspections in which the sales to customers at a mark-up

of more than 5 percent over the current market represented more than 10 percent of the sales analyzed ______________________________ 112 28 140 Number of sales analyzed in such Inspections _______________________ 6,192 1,187 7.379 Number of such sales made at a mark-up of more than 5 percent over the current market ________________________________________________ 1,319 569 1,888

Financial Reports

Brokers and dealers are required by rule X-17A-5 to file reports of

financial condition during each calendar year. During the 1950 fiscal

year a total of 3,581 financial reports were filed. Each report is examined to determine, among other things, whether there has been any

violation of rule X-15C3-1, which provides that the aggregate indebtedness of a broker or dealer shall not exceed 20 times his net capital. When deficiencies are found steps are taken immediately to secure

compliance in this important phase of the Commission's activities in

affording protection to customers.

Failure to file the reports as required is an infraction of the rule and

may lead to disciplinary proceedings. Frequently, small firms doing

' ____

•

-
52 SECURITIES AND EXCHANGE COMMISSION

relatively little or no business fail to file reports on time. These are

handled by a procedure for cancellation of registration when the registrant's inactivity is established. Informal procedures are frequently

used to procure filing by those who do not furnish reports on time.

In some instances action becomes necessary to revoke registration.

Proceedings were instituted during the year to revoke the registrations of six firms for failure to file financial reports.

SUPERVISION OF NASD ACTIVITIES

Membership

At the end of the 1950 fiscal year there were 2,784 members of the

National Association of Securities Dealers, Inc. (NASD), the only

national securities association registered as such with the Commission.

This represented an increase of 89 members in the year, as the result

of 246 admissions and 157terminations of membership. At the same

date there were 28,794 individuals, including generally all partners,

officers, traders, salesmen, and other persons employed by member

firms in capacities which involved their doing business directly with

the public, an increase of 1,545during the year. This increase was the

result of 5,444 initial registrations or reregistrations and 3,899 terminations of registration.

Disciplinary Actions

The Commission received from the NASD during the 1950 fiscal

year reports of final action in 25 disciplinary cases in which formal

complamts had been filed against members. Three of these complaints

were dismissed on findings by the NASD district business conduct

committee of initial jurisdiction that there had been no violations of

the rules of fair practice. In the remaining 22 cases the committees

found violations of such rules and imposed various penalties.

In 13 such cases the complaints were directed solely against member

firms. In 9 of these cases fines were levied ranging from $100 to

$2,000 and aggregating $4,000. Of these 9 firms fined, 5 were also

censured and costs of the proceedings were charged in 4 cases. One

such firm was fined, censured, and suspended from membership for

90 days. In the remaining 4 cases, 1 member was expelled, 2 firms

were censured, and 1 complaint was disposed of by acceptance by the

committee of a statement pledging future observance and compliance

with the rules of fair practice.

In nine other cases complaints were directed not only against member firms but also against registered representatives of such firms.

The significance of this type of action arises from the NASD bylaws

and rules under which registered representatives have the same rights,

duties, and obligations and are subject to the same disciplinary procedures, penalties, and disqualifications as members. Thus, for example, revocation of registration by the NASD of a registered representative would operate as a barrier to membership and to employment

by or affiliation with a member unless the Commission finds it appropriate in the public interest to approve or direct to the contrary.

In three such cases the complaints were dismissed as to the member

firms although one registered representative was censured and two representatives had their registrations revoked; one firm was censured
SIXTEENTH ANNUAL REPORT 53

and its registered representative was fined $200; one firm was censured

and fined $200 and the registration of its representative was revoked;

another firm was fined $500 and both the firm and the representatives

were censured. One such complaint was disposed of by acceptance by

the committee from the firm of a statement of future observance and

compliance with the rules of fair practice and the expulsion of the

representative (who had been a partner) and the revocation of his

registration. Another complaint filed jointly against two member

firms and the principal of one firm, who was also a registered representative, resulted in a decision by the district business conduct committee to expel each firm from membership and to revoke the registration, as registered representatives, of the principal named in the complaint and of two principals of the other firm. In addition, costs to

the maximum allowable amount of $500 were assessed against each

firm. One firm and its two principals appealed this decision to the

board of governors and this appeal was pending at the year end.

During the year the Commission continued its practice of referring

to the NASD, for appropriate action, facts concerning the business

practices of members where there was some indication of possible violations of the rules of fair practice. Five such references were made

in the year here under review and one had been in process at the start

of that year. Reports of disposition were received during the year on

two of these cases, both of which involved formal complaint procedure and are included in the description of the disposition of such

cases recited above. Four such cases were in process at the year end.

During the 1950 fiscal year the Commission was not called upon to

act in any matter arising from denial of membership by the NASD or

on a petition for approval of, or continuation in, membership. At the

year end there was before the Commission, on appeal by the aggrieved

member, one disciplinary decision by the NASD. This was the only

such matter to come before the Commission in the year here reviewed.

CHANGES IN RULES, REGULATIONS, AND FORMS

During the 1950 fiscal year, the Commission made a number of

important changes in its application and report forms and related

rules and regulations under the Securities Exchange Act.

Form 10.-This form, the principal form for the registration on an

exchange of securities of commercial and industrial companies, was

completely revised. The revision merges into this form eight other

registration forms previously prescribed for various classes of registrants. Among the more important changes made were the amplification of the items and instructions calling for a description of business

and property so asto indicate more precisely the information required,

the disclosure of material litigation, and the amendment of the remuneration items to correspond with the requirements of the Commission's

proxy rules.

Form lO-K.-This is the principal form for annual reports of listed

companies under the Securities Exchange Act and for registrants

under the Securities Act required to report under section 15 (d) of

the Securities Exchange Act. It was revised along lines similar to the

revision of Form 10 and likewise supersedes several other forms previ-
54 SECURITIES AND EXCHANGE COMMISSION

ously prescribed for the annual reports of various classes of registrants. The revised form also eliminates certain duplication which

had previously existed between the requirements of this form and

Form 8-K for current reports.

Subsequent to this revision of Form 10-K, it was further amended

to permit electric utilities and natural gas companies which file annual

reports with the Federal Power Commission on that Commission's

Form No.1 or Form No.2 to file copies of such reports with this Commission in satisfaction of most of the requirements of Form 10-Ie

This provision is optional and any company may file its report either

in accordance therewith or on Form 10-K in accordance with the

previously existing requirements.

Form 8-K.- This form prescribed for current reports was amended

to require the reporting of certain events with respect to which reports

had not previously been required. The principal additional events

required to be reported are the acquisition or disposition of a substantial amount of assets; the institution or termination of important litigation; the guaranteeing of securities of other issuers; and defaults

upon senior securities.

Form 9-K.-The Commission also adopted Form 9-K, a new quarterly report form, replacing item 11 of old Form 8-K for reporting

gross sales and operating revenues. Except for providing a separate

form for such reports and some amplification of the instructions to

include certain administrative interpretations, this new form did not

make any substantial change in the requirements with respect to such

reports.

Form 8.-During the year the Commission also revised Form 8

which is a one-page form used as a cover or facing page for amendments to applications for registration, and annual, quarterly, and

current reports filed under the Securities Exchange Act. Use of the

form had previously been restricted to listed companies. However,

under the revision, the form is also available for use by registrants

under the Securities Act which are required to file annual and other

reports under section 15 (d) of the Securities Exchange Act.

Revision of role X-l'2A-lr-Ewemption for certain short-term warrants.-In addition the Commission adopted a revised rule X-12A-4.

This rule exempts certain short-term warrants from registration under

section 12 (a) of the Securities Exchange Act. Previously, the exemption had been limited to issued warrants, and under this revision the

rule has been broadened to exempt unissued warrants as well. The

Commission adopted at the same time a new Form AN-4, which is

prescribed for the exemption statements required by rule X-12A-4,

and rescinded Form 15-AN, heretofore prescribed for such statements.

LITIGATION UNDER THE SECURITIES EXCHANGE ACT

During the past year the Commission's litigation under the Securities Exchange Act consisted principally of injunction actions instituted by the Commission and its participation as amious curiae in

private suits involving important questions of construction of various

provisions of the act and rules thereunder.
SIXTEENTH ANNUAL REPORT 55

Injunction Actions

A permanent injunction was obtained in S. E. O. v. Walter G. Furlong 18 against a broker-dealer who had not registered as required by

section 15.19 In addition to this violation, the complaint alleged that

the defendant had falsely represented that he was employed by a

brokerage firm, had obtained secret profits from its customers by selling securities at prices substantially above the prevailing market prices

and had converted customers' funds to his own use.

A number of other injunctions were sought in cases involving registered broker-dealers." Most of these were based on charges of failure

to conform to required financial standards. The common element in

S. E. O. v. General Stock and Bond Uorp." and S. E. O. v, Adams &

00., et al.22 was solicitation of business by the defendants while their

liabilities exceeded their assets. In the General Stock and Bond case,

where a permanent injunction was obtained by consent, the complaint

also charged violation of the Commission's rule X-15C3-1, in that the

firm permitted its indebtedness to exceed 2'0 times net capital. Additional violations charged in the Adams case included the hypothecation of customers' securities without their consent," In that case

the company's affairs were placed in the hands of a receiver in order

to obtain equitable treatment for its customers. An injunction was

obtained in S. E. O. v. Gordon B. Todd,24 where the defendant had

violated the margin requirements and had failed to keep books and

records in the manner required by law.

Violation of the antimanipulation provisions of the act, sections

9 (a) (1) and (2), was enjoined in S. E. O. v. Henry M. Stanley.25

The complaint alleged that Stanley effected a series of transactions

in a security listed on the Detroit Stock Exchange to create actual and

apparent trading in the security for the purpose of inducing others

to purchase the stock and that he consummated "wash sales" and

entered "matched" orders to cause a false and misleading appearance

with respect to the market for the security.

The Commission's proxy regulations were involved in S. E. O. v.

John A. TOpf!ing,26 where a decree was obtained by consent permanently enjoining a shareholder of Certain-Teed Products Corp., a

registered corporation, from further violation of section 14 (a) of

the act and the rules and regulations issued thereunder. It was based

upon the defendant's failure to file with the Commission letters to

various common stockholders preliminary to a proposed solicitation of

proxies 27 and certain false and misleading statements in this material.

1ll Civil Action No. C 862-49, D. N. J., Nov. 1949. 10 For Violation of the injunction in 8. E. O. v. Kirby. Civil Action No. 25742, N. D. Ohio.

Apr. 28, 1949, agalnst acting as a broker-dealer without registrn tlon, referreil to in 15

SEC Ann. Rep. 66, contempt proceedings were instituted during the fiscal year. See p. 151, infra.

20 For litigation against broker-dealers under the criminal provisions of the Securities Act see pp. 150-151. 21 Civil Action No. 50-236, D. Mass., Mar. 31,1950 .. Civil Action No. 49 C 1145, N. D. Ill., Juiy 18, 1040 (temporary restralulng order

issued and continued at various dates; final judgment still pendlna) . .. The complaint also alleged violations of sees. 17 (a) (2) and (3) of the Securities Act of 1933.

Civil Action No. 55. 384, S. D. N. Y., Feb. 10, 1950. .. Civil Action No. 9079, D. Mich., Mar. 13,19:10. 26 Civil Action No. 50-79, S. D. N. Y., Sept. 27. 1949. 21 See S. E. O. v. ToPPing, 85 F. Supp. 63 (S. D. N. Y.• !lIay 24. 1949) ; 15 S. E. C. Ann.

Rep. 72,

•

'"
56 SECURITIES AND EXCHANGE COMMISSION

The first litigated case in which the Commission relied on its power

to bring an action in the United States district courts to enforce compliance with section 13 of the act and rules thereunder requiring the

filing of annual and quarterly reports by a listed corporation registered under the act was S. E. O. v, Atlas TMk Oorporation." It

was alleged that Atlas Tack Corp. had failed to file annual reports

for the years 1947 and 1948, had submitted materially deficient annual reports for the years 1945 and 1946, had failed to file a number

of quarterly reports and had made such tardy filing in most instances

that investors were deprived of the timely information with which

the statute is designed to provide them. The evidence was clear that

the Commission had made repeated requests for the information before resorting to judicial compulsion. This litigation resulted in a

decree after the close of the fiscal year compelling correction of the

deficienciesin past filings.and requiring the corporation to file reports

at the times and in the manner prescribed by the statute and regulations.

Participation as Amicus Curiae

Most of the cases in which the Commission participated as amious

curiae involved construction of section 16 (b) of the act, which accords

to a corporation the right to recapture Short-swing (less than 6

months) profits realized from transactions in its equity securities by

"insiders." vVhether a production manager was an "insider" within

the intent of section 16 (b) was the question posed in Oolby v. Klune.2

The district court in granting summary judgment for the defendant

held that the employee involved was not an "officer" subjected to liability by the statute. The Commission, though taking no 'Position upon

the ultimate issue, appeared amicus curiae on the appeal and submitted a memorandum urging that whether a person is an officer depends

upon the employee's "responsibility for the policy of at least a substantial segment of the corporation's affairs" and "participation in

executive councils of the corporation as an officer." The appellate

court remanded the case to the district court to take evidence on the

question whether the defendant performed "important executive

duties of such character that he would be likely, in discharging these

duties, to obtain confidential information about the company's affairs

that would aid him if he engaged in personal market transactions." 30

An interpretation dealing with the valuation of stock purchase

warrants was rendered in Trumoale v. Blumberg et al.,31 where plaintiff, a stockholder in Universal Pictures Co., invoked section 16 (b)

to recover on behalf of the corporation profits which he alleged the

defendants, who were officers and directors of the company, had

made. It appeared that, pursuant to an employment contract, the

defendants received 3,000 warrants for the purchase of stock of the

company. At the time they were received, these warrants were

worth $11,500. Within 6 months prior to their receipt the defendants had sold, for $120,688, 3,000 other warrants they owned.

Plaintiff, contending that the warrants had a cost basis of zero, sought

.. Civil Action No. 50-143, D. Mass., July 17, 1950. .. 83 F. SuPP. 159 (S. D. N. Y., 1949). .. Oolby v. Klune, 178 F. 2d 872 (C. A. 2,1949).

1188 F. Supp. 677 (S. D. N. Y., 1950), ajJ'd per curiam BUb nom. Truncale v, SCUlly,

unreported (C. A. 2, Jan. 23, 1950). For another phase of this Ilttzatton see Truncale v. plumberp, et al., 80 :ji'. Supp. 387 (S. D. N. Y., 1948) discussed in 15 SEC Ann. Rep. 70.

'
SIXTEEKTH ANNUAL REPORT 57

to recover the entire sale price. The district court held no profit was

realized. On appeal the Commission took the position that whether

these warrants were considered as compensation or not there was no

recoverable profit. As compensation their cost basis would be the

value of the services performed which might properly be valued in

excess of the sales price. If considered as an incentive payment, no

profit was realized under the circumstances of this case because there

was no causal relationship between the purchase and sale such as the

statute was designed to reach. The court of appeals affirmed on

the basis of the opinion of the district court.

The issue in Arbetman v. Playford, et al.,32in which the Commission appeared amicus curiae, was whether an insider must account

for profits from a purchase and sale within a 6 months period, where

the profit is realized by sale which follows registration but purchase

preceded registration. The Commission took the position that an

insider should be liable under such circumstances because a contrary

construction would defeat the purpose of the statute by allowing an

opportunity for abuse of inside information. No opinion on the

merits was reached, however, because the litigation was terminated

by a settlement between the parties.

In another case, R. Hoe ill Co., Inc. v. I1fcCune,33a corporation proposed to compromise a claim, based on section 16 (b), against one of

its directors and by motion requested a district court to approve the

settlement. In answer to an order to show cause, the Commission

advised that the Court should not undertake to pass upon the acequacy of the settlement in any manner which would prejudice the

right of action of plaintiff's shareholder to sue on behalf of the corporation for the full amount of the profit involved. This position

was adopted by the court in its opinion."

The Commission also participated as amicus curiae in Robinson et

al. v. Difford et al., E. D. Pa., Civil Action No. 10,322, which invoked

section 10 (b) of the act and rule X-10B-5 thereunder. The Commission opposed the contention, presented by a motion to dismiss the

complaint, that the provisions do not apply to so-called private transactions in securities, i. e., transactions in securities not registered on

an exchange nor traded over-the-counter by securities brokers and

dealers. The fraudulent transactions charged in this case were purchases by a majority "control group" (including officers and directors) of a closely held corporation of the stock holdings of minority

shareholders allegedly by means of fraudulent misrepresentations,

half truths and omissions of material facts. As indicated above, the

complaint did not aver that the stock was registered upon an exchange

or had ever been the subj ect of trading by a broker or dealer. On July

14, 1950,shortly after the close of the fiscal year, the court denied the

motion to dismiss in an opinion which upheld the Commission's view

that the section was applicable." The same question, among others,

.. CivlI Action No. 47-278 (S. D. N. Y.) ; see 83 F. Supp, 335 (S. D. N. Y., 1949). .. Civil Action No. 45-311 (S. D. N. Y.) .. Ibid., (S. D. N. Y., Nov. 11, 1949). asCCH Fed. Sec. L. Servo par. 90,486. The court rejected the contention that there can be no private right of action for violation of rule X-I0B-5, relying inter alia upon Karaon

v, National Gypsum 00.,69 F. Supp, 512 (E. D. Pa., 1946), and SlaVin v. Germantown Fire

Insurance 00., 174 F. 2d 799 (C. A. 3, 1949), in both of which the Commission, as an amicus curiae, had successfully argued that such action could be maintained.

•
58 SECURITIES AND EXCHANGE COMMISSION

is now awaiting decision by the Delaware Federal district court in

Speed et al. v. T'ransamerica Oorp., Civil Action No. 480, in which

the Commission is also participating as an amicus ouriae:"

Appellate Proceedings

During the course of the year only one petition for review of an

order of the Commission revoking a broker-dealer registration was

filed, and the case was dismissed by order of the Court because of the

petitioner's failure to prosecute the appeal." The decision on the

merits in Noms &: Hirshberg v. S. E. 0., 177 F. 2d 228 (C. A. D. C.,

1949), sustaining the revocation order of the Commission was handed

down during the past fiscal year. This litigation has been discussed

in previous annual reports."

THE KAISER-FRAZER INVESTIGATION AND THE LITIGATION WITH

OTIS & CO.

Early in 1948, the Commission instituted an investigation into the

circumstances surrounding the failure of a stock offering by KaiserFrazer Corp., and there ensued a series of administrative and court

proceedings which, from the standpoint of sheer volume, have been

among the most extensive in the history of the Commission. By June

30, 1950, the administrative and judicial proceedings (including private suits) aggregated nine in number, not counting numerous appeals, and attorneys for the Commission had prepared a total of 35

briefs or documents in the nature of briefs, and 43 other legal documents such as pleadings and affidavits. The history of these proceedings is discussed in some detail in the Fifteenth Annual Report of the

Commission."

During the past fiscal year the Commission obtained a decision in

the Supreme Court of the United States 40 which left it free to commence hearings in an administrative proceeding under the Securities

Exchange Act to determine whether Otis & Co., an investment banking concern, had violated the act and the rules thereunder in connection with the Kaiser-Frazer stock offering, and, if so, whether the

registration of Otis & Co. as a broker-dealer should be revoked and

whether it should be suspended or expelled from the National Association of Securities Dealers, Inc. (NASD).

After the disposition of various prehearing motions, the hearings

were finally commenced in the Spring of 1950. Thereafter they were

suspended while counsel attempted to settle the details involved in

incorporation by reference of major blocks of testimony adduced in

the Commission's earlier investigation, which had been conducted

without cross-examination. This was the status of the hearings at the

close of the fiscal year .

•• For previous comment on the Bpeed case see 13 SEC Ann. Rep 63, and 15 SEC Ann.

Rep. 72. Oral argument In this case preliminary to judgment on the merits was held on June 22, 1950. 81 Southeastern securtuee Corp. and Eugene F. Luck v, B. E. C., CIvil Action No. 12947,

C. A. 5, Mar. 29, 1950 38 See 13 SEC Ann Rep. 35-36, 41; 13 SEC Ann Rep. 61; 14 SEC Ann Rep. 53; and

15 SEC Ann. Ren. 67-68 . .. Pages 73-77. •0 S. E. C v. Otis &: co., 338 U. s. 888 (1949).
SrKTEE~ ~AL REPORT 59

While the hearings were proceeding at the administrative level, the

Commission was continuing its efforts to clarify certain issues raised

in claims of res judicata advanced by Otis & Co. Following a decision on this point in the Court of Appeals for the District of Columbia Circuit," (which the court indicated was intended to defer the

issue for later consideration) the Commission applied to the Supreme

Court (after the close of the fiscal year) for a petition for a writ of

certiorari."

Meanwhile the NASD had pressed to a conclusion a proceeding of

its own to determine whether Otis & Co., a member of the Association,

had violated the Association's rules in refusing, upon a claim of attorney-client privilege, to supply certain information to an investigating

committee of the NASD which was also examining the Kaiser-Frazer

stock offering. The outcome of this proceeding was a 2-year suspension of Otis & Co. from membership in the NASD. Otis & Co.

appealed to the Commission under section 15A (g) of the Securities

Exchange Act of 1934, which provides for an automatic stay of the

NASD's action pending the Commission's decision. This appeal was

still pending before the Commission at the end of the fiscal year.

Otis & Co. had unsuccessfully attempted in the courts to stay this

NASD proceeding and to stay the Commission from taking any action

in the matter as well. During the fiscal year Otis & Co. had continued

its efforts inthis direction by way of appeal to the United States Court

of Appeals for the District of Columbia Circuit," but this appeal was

voluntarily dismissed following the Supreme Court decision above

noted.

So far as concerns the stockholders' actions which were instituted

against Kaiser-Frazer Corp. after the collapse of its stock offering

in 1948, the Commission, in accordance with its usual practice, had

not participated (except to the limited extent noted at page 77 of the

Fifteenth Annual Report) because of the general absence of issues

bearing on the construction of the securities laws. During the fiscal

year, however, attempts were made by litigants in two of these actions

to subpena large numbers of interpretations rendered by the Commission in matters other than the Kaiser-Frazer stock offering. Upon

the Commission's explanation of the public interest reasons which have

caused it from its inception to keep such interpretations confidential

except in very unsuual circumstances, the subpenas were quashed by

the court."

The various stockholders' actions, which involved largely overlapping claims, moved far towards a conclusion during the fiscal year

when a proposed settlement in one of the suits was approved by the

court after extensive hearings in which the parties to the other suits

were heard on the question of the adequacy of the settlement.w After

the close of the fiscal year, however, certain of the parties filed a notice

of appeal from the order approving the settlement.

41 S. E. O. v. ttarrtso« et al. (No. 10043. C. A. D. C. 1950). .. S. E. O. v. Harrison et al. (No. 345, October Term, 1950) .. An application for an Injunction pending the outcome of the appeal was denied on Sept. 9, 1949. Otis d; 00. v. NASD et al. (No. 10397. C. A D C. 1949) .. Stella v. Kaiser et al. (Civil No. 45-750, S. D. N. Y. 1950) ; In re S. E. a. (No. M8-8\5

S. D. N. Y. 1950). .. Pergament et al. v. Frazier et al. (Clv. No. 7354, E. D. Mich. 1950).

•
PART m

ADMINISTRATION OF THE PUBLIC UTILITY HOLDING

COMPANY ACT OF 1935

The Public Utility Holding Company Act of 1935was passed by the

Seventy-fourth Congress following an extensive investigation by the

Federal Trade Commission. That investigation disclosed a variety

of abusesin public-utility holding company finance and operations, the

more significant of which are enumerated in section 1 (b) of the act:

(1) Inadequate disclosure to investors of the information necessary

to appraise the financial position and earning power of the companies

whose securities they purchase; (2) the issuance of securities against

fictitious and unsound values; (3) the overloading of operating companies with debt and fixed charges thus tending to prevent voluntary

rate reductions; (4) the imposition of excessive charges upon operating companies for various services such as management, supervision

of construction and the purchase of supplies and equipment; (5) the

control by holding companies of the accounting practices and rate,

dividend and other policies of their operating subsidiaries so as to

complicate or obstruct State regulation; (6) the control of subsidiary

holding companies and operatmg companies through disproportionately small investment; (7) the extension of holding company systems

without relation to economy of operations or to the integration and coordination of related properties.

The statute provides for regulation of public-utility holding company systems which are engaged in the electric utility business or in

the retail distribution of natural or manufactured gas. The provisions of the act are in two basic categories. The first deals with the

financing and operations of holding company systems. These regulations, however, are carefully designed not to conflict with, but to supplement and strengthen State regulation. Thus, the jurisdiction of

the act does not extend to rate making and does not authorize the

Commission to prescribe accounting systems for operating subsidiaries,

except in a comparatively few instances where there are neither State

nor other Federal laws prescribing such accounting systems. The

second area of regulatory jurisdiction under the act provides for the

geographical integration and corporate simplification of holding company systems.

THE PUBLIC UTILITY INDUSTRY UNDER THE ACT

Public utility properties subject to the Holding Company Act on

June 30, 1950continue to represent an important segment of the electric and gas utility industries of the United States, despite the release

of 98 companies from the regulatory jurisdiction of the Commission

during the past year. At the close of the fiscal year, there were registered with the Commission 46 holding company systems whose

aggregate consolidated system assets On that date amounted to ap60
SIXTEENTH ANNUAL REPORT 61

proximately $12,822,000,000. These figures may be compared with

46 systems on June 30,1949, having system assets of $14,294,000,000.

The decrease of approximately $1,472,000,000 represents a net

change reflecting primarily the difference between divestments of

companies which are no longer subject to the act with aggregate assets

of $2,231,000,000 and property additions totaling some $600,000,000,

which were occasioned by the tremendous growth in the industry in

evidence since the close of World War II. Because of this expansion

in plant facilities, not only by utility subsidiaries, but also by nonutility subsidiaries of holding- company systems, it is not possible to

present an intelligent comparison of those assets of registered holding

company systems which were subject to the act when the statute was

first enacted with the assets of systems subject to the act at the present

time.

On June 30, 1950 there were 543 companies subject to regulation by

the Commission under the act as registered holding companies and

subsidiaries thereof. These included 68 holding companies, 223 electric and gas utility companies, and 252 nonutility companies. Corresponding data for June 30, 1949 showed 641 companies subject to

regulation, consisting of 72 holding companies, 274 electric and gas

utility companies, and 295 nonutility companies. The changes in the

number of companies subject to regulation under the act during the

past year, and for the entire period of the Commission's administration of the statute, are summarized in the following tables.

Oompanies released from regulatory jurisdiction of the Oommission

Total Sales dis- Compa- compames Absorbed solutions Exernp- Otber messub- subject by merger and other tion by drspos- Total ject to act to act or consoh- divest- rule or als

during dation ments order as of June

penod ! 30

--- --- --- -- -- --- FIscal vear ending June 30, 1950

Holding companies _________________ 73 2 1 2 -------- 5 68 Electric and/or gas companies ______ 275 11 37 4 -------- 52 223

Nonutihties plus utihtres otber

tban electric and/or gas eompan- Ies 307 1 52 2 55 252

Total companies --- --- --- --- -- -- --- 655 14 so 8 112 543

--- --- --- --- -- -- --- Fiscal uear ending June 30, 191,9

Holding companies ________________ 78 3 3 6 72 Electric and/or gas companies ______ 315 9 31 ---------- 1 41 274

Nonutillties plus utihties other

than electnc and/or gas com- pames _______________ 327 3 19 5 5 32 295

--- --- --- --- -- -- --- Total companies _____________ 720 12 53 8 6 79 641

--- --- --- --- -- -- --- Period from June 15, 1938 to June

30,1950

Holding companies _________________ 211 25 73 36 9 143 68 Electnc and/or gas companies ______ 919 147 436 64 49 696 223

NonutUities plus utlhties other

than electric and/or gas com- 92 252 panies ____________________________ 1,035 103 523 65 783

--- --- --- --- -- -- --- Total companies , ____________ 2,165 275 1,032 165 150 1,622 543

, Reflects company additions and classification adjustments during tbe period indicated,

'A few companies have been subject and not subject to the act a number of times, These instances

contnbute some msignlficant duplication to tbe reported company totals.

_________•_____________________ -------- ___•_________ --------

•

•____________
62 SECURITIES AND EXCHANGE COMMISSION

While it is not possible at this date to predict accurately the ultimate

disposition of all holding company systems it is estimated that, when

all problems arising under section 11 (b) have been settled, there will

remain subject to the Commission's continuing regulatory jurisdiction

approximately 20 systems with aggregate assets of 6 or 7 billion dollars.

PROGRESS UNDER SECTION II-OYER-ALL SUMMARY

The fiscal year ended June 30, 1950 has been a significant year from

the standpoint of consummation of reorganization and dissolution

plans under section 11. Seventy-eight companies with aggregate

assets of $2,231,000,000were divested by holding companies and, as a

result, are no longer subject to the act. This compares with the divestment of 44 companies with assets of $1,749,000,000in the fiscal year

1949 and 111 companies with assets of $1,244,000,000 in 1948. In

addition, holding companies divested themselves of 52 other companies with assets aggregating some $2,000,000,000which continued

subject to the act on June 30, 1950 as registered holding companies or

subsidiaries thereof. Of this latter number, 25 companies with assets

of approximately $1,200,000,000 are expected to remain subject to

regulation by the Commission indefinitely as components of simplified

and integrated holding company systems meeting all of the requirements of section 11 (b).

During the entire 15-year life of the statute, 751 companies with

assets of $10,326,000,000have been divested from holding company

control and are, therefore, no longer subject to regulation by the Commission. Divested companies in the "still subject" category for the

15-year period number 233 with aggregate assets of $5,692,000,000.

Of this number, 166 companies with assets of $4,541,000,000 are

presently expected to continue in operation as holding company systems subject to the Commission's regulatory supervision under the act.

Analyses of these divestments by types of companies and method of

divestment are presented in the following tables.

Electric, [Jas, and nonutility companies divested under the Public Utility Holding

Company Act Of 1935 (no longer subject to the act as registered holding companies or subsidiaries thereof as of June 80, 1950)

Dec 1,1935 to June 30,1950 July l,19t9 to June 30,1950

Companies

Number of Assets I Number of Assets' companies companies

Electric utiht y_________________________________ 245 $8,488,717,201 28 $1,953,578,329 Gas utilrty _____________________________________ 147 696, 168, 110 10 137,363,968 Nonutillty _____________________________________ 359 , 1,141,536,507 40 , 140,015,340

TotaL ___________________________________ 751 10,326,421,818 78 2,230,957,637

I As of di vestment date or year end next preceding date of divestment.

I A small percentage of the assets of nonutihty eomparues was meluded in the consolidated assets of the

electric and/or gas unhtres.
SIKTEE~ ~AL REPORT 63 i I : III,1I g i ee ....

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64 SECURITIES AND EXCHANGE COMMISSION

Divestments by sales of partial segments of properties under the Public Utility

Holding Company Act of 1935 ( no longer subject to the act as of June 30,

1950)

Dec. 1, 1935 to June 30, July 1, 1949 to June 30,

1950 1950

Number of Consideration Number of Consideration companies received companies received mvolved involved

Electric utility 87 $91. 172. 569 5 $1,661. 423 Gas utility _____________________________________

N 24 n, 205, 516 ---------------- onunlity _____________________________________49 37,074,458 5 9,464,703

TotaL _. 160 139.452,513 10 n, 126, 126

Divestments of partial segments of electric and gas utility properties still .~ubject

to the Public Utility Holding Company Act as of June 30,1950

Number of selling

compames Consideratlon received

~~'ig- G as Total Electric I Gas Total

Dec. 1,1935, to June 30,1950

1. Purchasers expected to remain subject to theact.__________________________________ 8 5

2. Purchasers expected to be released from jurisdictiOn of the act._____________ ____ 2 2

3. Future status of purchasers cannot be esti- mated at this time_______________________ 2 2

Totals .________________________ 12 9

13 $17,295,208 $1,607,323 $18, 902, 531

4 317,969 638,000 955,969

4 2,407,899 2,237,500 4,645,399

21 20,021,076 4,482,823 24,503,899

July 1, 191,9,to June SO, 1950

1. Purchasers expected to remain subject to the act. .________________ 3 1 4 15,109,801 196,000 15,305,801

2. Purchasers expected to be released from [urrsdietlon of the act, .

3. Future status of purchasers cannot be esti- mated at this time .________________ .

Totals . 3 4 15,109,801 196,000 15,305, 801

Further evidence of the impact upon the utility industry of the

transition in ownership of operating companies under section 11 is

afforded by noting the increase in trading activity in common stocks

of the classes A and B electric utilities, as classified by the Federal

Power Commission. At December 31, 1939,there were 383 companies

in these categories and, of this number, only 56 companies or 14.6

percent had common stock in which there was some evidence of trading activity. At December 31, 1949, the total number of companies

in classes A and B had declined to 316, but of this number, 130 or 41.1

percent had all or a substantial proportion of their common shares in

the hands of the public and hence were listed on an exchange or

traded in the over-the-counter market. Eight additional stocks became available for public trading during the period from January

1 to June 30, 1950. A few of the companies in this group remained

subject to the Holding Company Act because they are holding com-

___• _____________________________

_________•• ______________________

__•• _____

• • _

_ • _

•• _•• •• __
SIXTEENTH ANNUAL REPORT 65

panies as well as operating companies, or because a portion of their

common stock was still held by a holding company subject to future

divestment. Most of the 130companies, however, are now independent

operating utilities no longer subject to Commission jurisdiction.

Of the balance of 186 companies whose stocks were not actively

traded at the close of 1949, 1091 were still subject to the Holding

Company Act, although this number has been further reduced by divestments, mergers, and exemptions which have occurred in 1950.

Most of the companies which are now subject to the Holding Company Act, and whose common stocks are not traded, are expected to

remain in that status as subsidiaries of continuing holding companies.

In these instances, however, the public has access to the common

stocks of integrated parent holding companies which have gone

through the processes of section 11.

PROGRESS UNDER SECTION ll-SURVEY OF INDIVIDUAL SYSTEMS

During the past year the task of bringing the holding company systems into conformity with section 11 has gone forward at a rapid

pace. Many of the important interpretive problems, which in earlier

years required extensive consideration by the Commission as well as

frequent judicial review, are now resolved and the patterns for

achievement of compliance are well established. In addition. the

condition of the security market during the past year has been generally favorable to the consummation of necessary portfolio security

offerings.

Outstanding among the section 11 (e) plans (or segments thereof)

consummated during the past fiscal year were those of the Commonwealth & Southern Corp., American Power & Light Corp., Niagara

Hudson Power Corp. and United Light & Railways Co. During the

same period, the extensive reorganization plans of Long Island Lighting Co. and Pittsburgh Railways Co. were approved by the Commission and, with court approval, were expected to be consummated

within a short time.

The Commission also issued three supplemental orders which determined the respective rights of the preferred stockholders of Electric Bond & Share Co. and Federal Light & Traction Co. and the

prior lien preferred stockholders of New England Public Service

Co. to receive certain cash payments in addition to the sum of involuntary liquidating values and accrued dividends.

The achievements in these and other systems are described in the

following summaries which set forth with respect to each of 19 systems the historical developments and current progress toward compliance with section 11.

Cities Service Company

Cities Service Co., at the time of its registration in 1941, was the

top holding company in a system containing 125 companies of which

49 were electric and gas utility companies with consolidated assets of

1The balance of the classes A and B electric utilities consists of companies which are not subject to the Holding Company Act and whose stocks are not actively traded. Generally speaking, these are either subsidiaries of holding companies exempt from the provl- sions of the act or are companies of small size whose stocks are closely held.

915841-51-6
66 SECURITIES AND EXCHANGE COMMISSION

approximately $1,000,000,000. This system owned or operated properties in each of the 48 States and in several foreign countries. Utility

properties were held by three subholding companies, Cities Service

Power & Light Co., Federal Light & Traction Co., and Arkansas Natural Gas Corp., each controlling one or more utility systems.

In proceedings under section 11 (b) of the act, the Commission

found that Cities should be limited in its operations to those of a single

integrated gas utility system and required Cities to dispose of its other

interests." However, Cities expressed a desire to retain instead its

nonutility businesses and, accordingly, the Commission modified its

section 11 (b) (1) order so as to permit Cities to effect compliance

by disposing of all of its utility interests,"

Cities Service Power & Light Co., pursuant to a plan approved on

March 14, 1944,4simplified its corporate structure by eliminating its

debentures and preferred stocks. InAugust 1946,Power & Light liquidated and dissolved, transferring to Cities its portfolio holdings,"

These consisted of an interest of approximately 65 percent in Federal

Light & Traction Co., the common stocks of four operating utility

companies, Ohio Public Service Co., Spokane Gas & Fuel Co., the

Toledo Edison Co., and Doniphan County Light & Power Co., and

other miscellaneous holdings.

Federal Light & Traction Co. has likewise completed liquidation

proceedings. A number of its smaller properties were sold to individuals or other private purchasers and the stock of Tucson Gas, Electric

Light & Power Co. was sold to underwriters for public distribution.

Federal also merged four of its subsidiaries to form Public Service Co.

of New Mexico and the stock of this company was distributed to Federal's common stockholders.

Federal distributed to its preferred stockholders $100 per share plus

accrued and unpaid dividends, but the Commission at that time

reserved jurisdiction with respect to the right of the preferred stockholders to receive any additional amount. This right was evidenced

by certificates of contingent interest. By order dated June 19t 1950,

the Commission determined this reserved issue and ordered. that

holders of the certificates be paid $10 per share together with compensation for delay in payment at the rate of 5.45 percent per annum

from October 2, 1947.6

On January 26, 1950,Arkansas Natural Gas Corp. filed a new plan

under section 11 (e) designed to effect compliance with the requirements of section 11 (b). It provides for simplification of the company's corporate structure and for the disposition by Arkansas Natural, as a partial liquidating dividend, of its stock holdings in ArkansasLouisiana Gas Co., a natural gas utility subsidiary. Its other subsidiary, Arkansas Fuel Oil Co., will then merge with Arkansas

NaturaI. This plan is still pending before the Commission.

On April 24, 1947,the Commission approved a section 11 (e) plan

filed by Cities for the simplification of its corporate structure. This

plan provided for the issuance of approximately $115,000,000 prin2 Holding Company .Actreleases Nos. 4489 and 4551. , Holding Company .Actrelease No. 5350.

Holding Company .Act release No. 4944.

Holding Company .Act release No. 6865.

Holding Company .Actrelease NOB.9931 and 9981.

•

•

•
SIXTEE~ ~AL REPORT 67

cipal amount of new debentures to the holders of Cities' outstanding

preferred and preference stocks representing a principal amount

equivalent to the redemption prices of the three series of preferred

and preference stocks plus accumulated dividend arrears of approximately $50,000,000/ In addition, provision was made for the immediate retirement of approximately $40,000,000of the company's previously existing long-term debt and for the application of anticipated

proceeds from the disposition of its utility subsidiaries to the retirement of the remaining old debt plus a reduction in the amount of the

new debentures. Since consummation of that plan in June 1947,

Cities has disposed of its interests in the common stocks of Public

Service Co. of New Mexico (acquired through liquidation of Federal

Light & Traction Co.) , Ohio Public Service Co., and the Toledo Edison Co. Proceeds derived from the sales of these holdings together

with other available cash have been employed to reduce the outstanding debt of Cities by more than $87,400,000.

The Commonwealth & Southern Corporation

At the time of its registration as a public utility holding company

in March 1938, the Commonwealth & Southern Corp: controlled a

holding company system consisting of some 43 compames. Its prmcipal subsidiaries were 11 public utility companies all of which rendered electric service and some of which also furnished gas, transportation, and other services. These companies conducted their operations in five Northern and six Southern States. Although some of

the electric properties in the south were interconnected, the northern

electric properties for the most part were situated in separate and

distinct areas. The publicly held securities of the subsidiaries, consisting primarily of bonds and preferred stocks, aggregated about

$711,000,000while Commonwealth's own debt securities and preferred

stock totaled about $52,000,000and $150,000,000respectively. Thus

the system had outstanding an extremely large amount of senior securities ranking ahead of Commonwealth's common stock. Dividends

on this common stock had not been paid since March 1932 and dividends on the cumulative preferred stock had been paid at a reduced

rate for several years resulting in dividend arrearages of ahout

$18,000,000.

Divestments from time to time eliminated from Commonwealth's

holding company system all the transportation companies and nearly

all the small nonutility companies. Commonwealth also sold its interests in three utility subsidiaries operating in Tennessee, South Carolina, and Indiana, and transferred its interests in the public utility

companies which conduct integrated electric operations in Georgia,

Alabama, Florida, and Mississippi to the Southern Co., a newly organized public utility holding company.

The past fiscal year witnessed the consummation of the final section

11 plan of Commonwealth, after its approval by this Commission 8

and upon order for enforcement by the District Court of the United

States for the District of Delaware." This plan, which became effec7 Holding Company Act release No. 736R. 8 Holding Company Act release No. 8633 • 84 F. Supp, 809 (D. Del., 1949).
68 SEetrRI'l'IES AND EXCIlANGE COMMISSION

tive on October 1, 1949,provided for the distribution of common stock

of Consumers Power Co. and Central Illinois Light Co., together with

$1 per share in cash, in exchange for the preferred stock of Commonwealth, and for the distribution of Commonwealth's remaining assets,

after provision for its liabilities, in exchange for Commonwealth's

common stock. These remaining assets consisted chiefly of common

stock of the Southern Co. and Ohio Edison Co. Pursuant to the

plan, Commonwealth was dissolved as of Ocotber 1, 1949,and is in the

final stages of liquidation.

Thus the original system of 43 companies has been resolved into

a number of independent operating companies, and two integrated

regional holding company systems which are expected to continue

under the jurisdiction of the Commission. One of these systems consists of Ohio Edison Co. and its subsidiary, Pennsylvania Power Co.;

the other is composed of the Southern Co. and its 4 interconnected

public utility subsidiaries.

In connection with the consummation of Commonwealth's plan,

the Commission,in September 1949,approved an application to change

the mutual service company of Commonwealth's holding company

system into an independent service company." The Commission, at

the same time, approved the organization of a new company, Southern

Services, Inc., to become a mutual service company for the subsidiary

companies of the Southern Co.

Electric Bond and Share Company

The Electric Bond & Share Co. system was the largest to register

under the Holding Company Act. At the time of its registration in

1938, it controlled 121 domestic subsidiaries including 5 major subholding companies with combined assets of nearly 3lh billion dollars.

These subholding companies were American & Foreign Power Co.

Inc., American Gas & Electric Co., American Power & Light Co.,

Electric Power & Light Corp., and National Power & Light Co. Of

these, American Gas & Electric and American Power & Light have

been severed from the system. Electric Power & Light has been

dissolved pursuant to a plan consummated in May and July 1949.

National Power & Light has disposed of substantially all of its holdings and has few remaining assets.

Pursuant to plans filed in 1945 and 1946,which were approved by

the Commission and ordered enforced by the district court, Bond &

Share paid $100 per share, or an aggregate amount of $104,328,000,

to the holders of its $5 and $6 preferred stocks and, in addition, delivered to each of such holders a certificate evidencing the right to

receive any additional amounts which the Commission or the courts

might approve or direct."

On April 7, 1947, Bond & Share filed plan II-B in which it proposed that no further payment be made to the certificate holders. On

June 19, 1950, after hearings and oral argument, the Commission

issued its order in connection with plan II-B and held that the holders

of certificates issued with respect to the $6 preferred stock should

10 Holding Company Act release No. 9362. 11 Holding Company Act release No. 6768.
SIXTEENTH ANNUAL REPORT 69

receive $10 per share together with compensation for delay in payment

at the rate of 5.45 percent from March 6, 1947, and that no further

payments should be made to holders of certificates issued with respect

to the $5 preferred stock."

In the past, Bond & Share had filed plans with the Commission

which contemplated the divestment of all of its public utility holdings in the United States in order that its status might be changed to

that of an investment company. However, in September 1949, Bond &

Share applied to the Commission for relief from its commitment to

dispose of the stock of United Gas Corp. received in connection with

the dissolution of Electric Power & Light Corp.

The plan described in this application contemplates the disposition

of all domestic utilities other than United Gas, the creation of a "pool

of capital" by Bond & Share to be invested in special situations and the

exemption of Bond & Share from the Holding Company Act except

with respect to reorganization proceedings affecting American &

Foreign Power Co., Inc. and with respect to distributions of securities

not theretofore authorized by the Commission. Hearings have been

completed in respect to that phase of the proceeding involving Bond &

Share's request for relief of Its commitment to dispose of its holdings

in United Gas Corp.

During December 1949, Bond & Share distributed and sold its

holdings of the common stock of Middle South Utilities, Inc. which

had been received in connection with the dissolution plan of Electric

Power & Light Corp." Subsequent to the close of the past fiscal year,

Bond & Share filed an application to acquire 381,0671j2 shares of common stock of the Southern Co. in exchange for its holdings of 254,045

shares of common stock of Birmingham Electric CO.14

American & Foreign Power Company, Inc.

American & Foreign Power Co., Inc. (an Electric Bond & Share

subsidiary) controls a mutual service company and some 70 subsidiary

companies located in Central and South America, Cuba, Mexico, China,

and India. Since the operations of all of Foreign Power's subsidiaries

are in foreign countries, the Commission's principal concern is with

respect to the simplification of the company's corporate structure and

its relationship to Electric Bond & Share Co. Foreign Power's capital

structure at December 31, 1949, consisted of debentures, serial notes,

bank notes, three classes of preferred stock with dividend arrearages of

some $410,000,000, common stock, and option warrants. Bond & Share

holds all the serial notes and substantial blocks of the junior securities.

On October 24, 1944, Foreign Power and Bond & Share filed a plan

for the reorganization of Foreign Power. After extensive hearings,

this plan was amended by the two companies and on November 19,

1947, the Commission approved such amended plan after the filing of

certain additional modifications." The plan, as approved by the ComHolding Company Act release Nos. 9931 and 9980. 12 Middle Sonth Utilities. Ine., was organized in the preceding fiscal year as a new registered holding company to acquire a group of electric utility companics operating in the South

Central States which were formerly direct subsidiaries of Electric Power & Light Corp. U It is contemplated that Birmingham will ultimately be merged into Alabama Power

Co., a subsidiary of the Southern Co. lli Holding Company Act releases Nos. 7815 and 7849.

"
70 SEGUR'ITIES AND EXCHANGE COMMISSION

mission, was subsequently approved by the United States District

Court for the District of Maine.I6

However, because the company could not effectuate the financing

necessary to consummate the plan, both the district court and the

Commission vacated their orders approving it. On May 2, 1949, the

Commission issued an order pursuant to section 11 (b) (2) of the act

requiring Bond & Share and Foreign Power to take steps to reorganize

Foreign Power in such a manner that its resulting capital structure

will consist only of common stock plus such amount of debt as will

meet the applicable standards of the act,"

During December 1949, pursuant to authority granted by the Commission, Bond & Share transferred to Foreign Power $19,500,000principal amount of past due 6 percent debentures of Cuban Electric Co.

and $30,000,000principal amount of past due serial notes of Foreign

Power in exchange for $49,500,000principal amount of new 6-year

notes of Foreign Power. This step was taken to facilitate the reorganization of Foreign Power's Cuban subsidiaries and to enable Foreign

Power to obtain a bank credit of $15,000,000.18

Early in 1950,Foreign Power prepared and made available to representatives of its security holders detailed information concerning the

operations of the company and its subsidiaries. Itinvited suggestions

from security holders with respect to a new overall reorganization

plan. As of the close of the fiscal year, the company was considering

such suggestions and contemplated filing a new plan within the next

few months.

American Power & Light Co.

On August 22, 1942,American Power & Light Co. (an Electric Bond

& Share subsidiary) was ordered to dissolve on grounds similar to

those set forth with regard to National Power & Light Co. At the

time of the issuance of this dissolution order, American controlled

directly or indirectly 35 subsidiaries, 16 of which were public utility

companies. American's capital structure consisted of long-term debt,

two classes of cumulative preferred stock with dividend arrearages of

more than $35,000,000,and common stock. By the close of the past

fiscal year, this company had accomplished the major phases of its program of compliance with section 11 and controlled only 2 utility

subsidiaries.

Earlier steps taken by American included disposition of its interest

in Nebraska Power Co., Arizona Light & Power Co., and New Mexico

Electric Service Co. and retirement of its long-term debt. InOctober

1945, the Commission approved the formation by American of a new

Texas holding company, Texas Utilities Co., which acquired from

American its interest in Texas Electric Service Co. and Texas Power

& Light Co. and from Electric Power & Light Corp., the latter's interest in Dallas Power & Light Co.

In April 1947,two other subsidiaries, Northwestern Electric Co. and

Pacific Power & Light Co. were merged with Commission authorization. The stockholdings of American in Kansas Gas & Electric Co.

1.80 F SuPP. 514 (D. Me.. 1947), 17 Holding Company Act release No. 9044. 1B Holding Company Act release No. 91)89.
SIXTEENTH ANNUAL REPORT 71

were disposed of in two public offerings made in May 1948 and July

1949.

In October 1949, the Commission approved the section 11 (e) plan

of American 19 which was subsequently ordered enforced by the United

States district court. The plan was consummated on February 15,

1950 and pursuant thereto, American distributed to its preferred stock

and common stockholders its holdings of stock of Texas Utilities CO.,2O

Florida Power & Light Co., Minnesota Power & Light Co., and the

Montana Power Co., as well as shares of new common stock in American. Coincidentally with this distribution, settlement of claims

against Bond & Share by American and its subsidiaries was accomplished through the payment to American of $2,500,000 by Bond &

Share. Part of this amount was contributed by American to a number

of its subsidiaries.

Prior to consummation of this plan, American sold its holdings of

common stock of Pacific Power & Light Co. to a group of underwriters

for a cash consideration of $16,125,000. It has since proposed to distribute the proceeds of this sale to its present stockholders. The distribution was approved by the Commission in June 1950 21 and following the close of the fiscal year has been ordered enforced by the United

States district court.

At June 30, 1950, American's remaining assets consisted of the common stock of the Washington Water Power Co., the common stock of

Portland Gas & Coke Co., a substantial amount of cash and other

miscellaneous assets. Portland Gas & Coke Co. has on file with the

Commission an extensive plan of reorganization. Proceedings on this

plan are now in progress."

Electric Power & Light Corp.

At the time the Commission issued its dissolution order against Electric Power & Light Corp. (an Electric Bond & Share subsidiary),

this company controlled directly or indirectly 24 subsidiaries, 10 of

which were public utility companies under the act. Electric's capital

structure at that time consisted of long-term debt, 3 classes of cumulative preferred stock with aggregate arrearages of $53,000,000, common

stock and option warrants. Before consummation of the final section

11 plan, which resulted in the dissolution of Electric during the past

fiscal year, it had already disposed of its holdings in Idaho Power Co.

and Dallas Railway & Terminal Co. through sales to the public. Its

holdings in Dallas Power & Light Co. had been sold to the new Texas

Utilities Co. organized by American Power & Light Co. Its holdings

in Utah Power & Light Co. were disposed of pursuant to a reorganization of the latter company which provided, in part, for the reclassification of Utah's preferred and common stocks into a new common stock. 23

United Gas Corp., Electric's principal subsidiary, was reorganized

under section 11 in a proceeding which resolved alI claims of United

r Holding Company Act release Nos. 9359-A and 9389. ,. In April 1950, the Commission granted an exemption to Texas Utilities Co. from the

provisions of the act. This exemption granted pursuant to section 3 (a) was based upon the intrastate character of its utility operations. HoldIng Company Act release No. 9786. 21 Holding Company Act release No. 9948. .. Holding Company Act release No. 9366. .. Holding Company Act release No. 6212.
72 SECURITIES AND EXCHANGE COMMISSION

and Electric against Electric Bond & Share Co., arising out of the

formation and financing of United."

In 1945, Electric retired its outstanding long-term debt with the

proceeds derived from the disposition of properties described above

and from retained earnings. In addition, the accounts and capital

structures of Electric's remaining subsidiaries were brought into compliance with the requirements of the act.

The dissolution plan filed by Electric and approved by the Commission on March 7, 194925 was subsequently approved by the United

States district court and by the Court of Appeals for the Second Circuit." Stays were denied by the court of appeals and by the Supreme

Court 21 and the plan was consummated by the end of July 1949.

Under the plan a new holding company, Middle South Utilities, Inc.,

was created. It acquired Electric's holdings of the common stocks

of Arkansas Power & Light Co., Louisiana Power & Light Co., Mississippi Power & Light Co., New Orleans Public Service Co., Il~C.,

and Gentilly Development Co. The common stocks of Middle South

and of the United (Jas Corp. previously held by Electric were then

distributed to Electric's stockholders in exchange for its outstanding

securities. At the same time, a settlement of all suits and claims

against Bond & Share by and on behalf of Electric and its subsidiaries

was consummated with a cash payment of $2,200,000by Bond & Share.

Thus the Electric system as such has been entirely eliminated. The

only aspect remaining for determination arises in connection with

applications for compensation and reimbursement of expenses, aggregating approximately $1,300,000. These are now pending before the

Commission.

National Power & Light Co.

On August 23, 1941,pursuant to proceedings instituted by the Commission, National Power & Light Co. (an Electric Bond & Share subsidiary), was ordered to dissolve, because it constituted an undue and

unnecessary complexity in the Bond & Share system." At the time

of the issuance of this order, National had 27 subsidiaries, 9 of which

were public utility companies. The work of bringing about National's

ultimate dissolution is now nearing completion. All of its long-term

debt has been retired through the use of treasury cash and its preferred

stock has been retired partly through a voluntary exchange for common stock of Houston Lighting & Power Co. and in part by cash at

the rate of $100per share derived from the sale of other shares of Houston stock. In May 1946, the Commission approved a plan for the

settlement of all suits and claims against Bond & Share by or on behalf

of National, its subsidiary and certain former subsidiaries, through

payment of $750,000by Bond & Share."

This settlement was subsequently approved by the United States

district court and in August 1946, National distributed the common

stocks of Pennsylvania Power & Light Co., Carolina Power & Light

Co. and Birmingham Electric Co.,its principal remaining subsidiaries,

.. Holding Company Act release No. 5271. ...Holding Company Act releases Nos. 8889 and 8906. 28176 F. 2d 687 (C. A. 2,1949) ...337 U. S. 903 (1949) .. 9 S. E. C. 978. .. HoldIng Company Act release No. 6663.

• •
SIKTEE~ ~AL REPORT 73

pro rata to its common stockholders, including Bond & Share. After

distribution of these companies, National's only remaining subsidiaries

were Lehigh Valley Transit Co., the Memphis Street Railway Co.,

and Memphis Generating Co.

National's interest in Memphis Street Railway was subsequently

eliminated through a reorganization plan consummated in May 1949.

In May 1950, its security holdings in Memphis Generating Co. were

sold to the Tennessee Valley Authority for a consideration of

$1,405,000. In April 1950, National also entered into a contract for

the sale of its holdings of common stock of Lehigh Valley Transit Co.

(received as a result of the reclassification of that company's stock

pursuant to a section 11 (e) plan) to Cincinnati, Newport & Covington

Railway Co., a nonaffiliated company. Upon consummation of this

sale, National's only remaining assets will consist of 34,156 common

shares of Pennsylvania Power & Light Co. and approximately

$2,475,000in cash.

General Public Utilities Corp.

This company is the top holding company emerging from reorganization of the former Associated Gas & Electric Co. system. Associated Gas & Electric Co. and its immediate subsidiary Associated Gas

& Electric Corp. registered as holding companies on March 28, 1938.

At that time, the system consisted of 164 companies, including 11 subholding companies, and was unequalled for the complexity of its

corporate structure. Four of the utility companies were as many as

6 tiers of subholding companies removed from the top holding company. The system was engaged in business in 26States scattered from

Maine to Arizona and in the Philippine Islands; the businesses included such diverse activities as electric, gas, water, ice, street railway,

bus, heating, hotel, insurance, real estate, engineering, marine towing,

toll bridge, coal mining, and ferry operations. Associated Gas &

Electric Co.,itself, had outstanding 10 different kinds of fixed-interest

debt obligations, several series of income debentures, a number of

securities variously known as convertible debenture certificates and

convertible obligations, two different classes of preferred stock, a class

A stock, a class B stock, a common stock and warrants to purchase

common stock.

Most of Associated's subsidiaries also had senior securities outstanding in the hands of the public. The consolidated assets of the system

were stated at a little over $1,000,000,000and the corporate assets of

Associated Gas & Electric itself were stated at approximately

$450,000,000.

In ID40,Associated Gas & Electric Co. and Associated Gas & Electric Corp. filed petitions for reorganization pursuant to chapter X of

the Bankruptcy Act. In 1942, pursuant to the provisions of section

11 (b) (1) of the act, the trustees of Associated Gas & Electric Corp.

were ordered to divest themselves of all their interests in some 114

companies located primarily outside the 3 States of New York, Pennsylvania, and New Jersey, no determination being made at that time

as to the status of the majority of the properties in these last-named

States." Of the 114 companies, 112 have been divested. The two

lOll S. E. C. 1115.
74 SECURITIES AND EXCHANGE CO:MMISBION

that remain operate in the Philippine Islands and as to these our

divestment order has been temporarily suspended.

As at January 1, 1946, a comprehensive plan of reorganization of

Associated Gas & Electric Co. and Associated Gas & Electric Corp.

was consummated pursuant to chapter X and section 11 (f) of the

act. In place of the two companies and their many securities there

was substituted a single company, General Public Utilities Corp.,

which had a security structure consisting of 10-year convertible debentures, bank loans, and common stock. The debentures were redeemed

in 1947 and at June 30, 1950, GPU had outstanding only $3,950,000

of notes payable to banks, maturing during the period 1951 to 1955,

and common equity of $120,000,000.

After consummation of the plan of reorganization in 1946, the

assets of GPU consisted primarily of securities of three subholding

companies which in turn controlled the operating utility properties.

Two of these subholding companies have since been dissolved, and

during the past fiscal year, all debt securities of the third company,

Associated Electric Co., totaling over $52,000,000,have been retired.

Funds for this purpose were derived principally from the proceeds of sales made by GPU of its common stock holdings in New

York State Electric & Gas Corp. ($35,282,208), Rochester Gas & Electric Corp. ($22,998,726), and its preferred holdings in Staten Island

Edison Corp. ($4,000,000). With these proceeds, GPU made capital

contributions totaling $49,000,000 to Associated Electric, less the

amount of $1,492,7M representing consideration paid for 107,000 of

its common shares repurchased from Associated Electric and canceled.

In March 1950, the Commission approved the sale by GPU of its

common stock interest in Staten Island Edison Corp. to Consolidated

Edison Co. of New York, Inc. for $10,720,000.In May, it also approved

the merger of Edison Light & Power Co. into Metropolitan Edison

Co. The latter company is a direct subsidiary of GPo.

Since June 1949,section 11 (b) (1) proceedings have been continuing before the Commission for the purpose of determining what further steps should be taken by General Public Utilities to bring its

system mto conformity with the standards of that section. While

these proceedings have been in progress, GPU has completed the

divestment of all of its New York companies and contends that it

should be permitted to retain its present group of subsidiaries in New

Jersey and Pennsylvania as one or more integrated public utility systems and incidental businesses.

International Hydro-Electric System

At the time of registration, International Hydro-Electric System

(IHES), a Massachusetts voluntary association, owned directly

Gatineau Power Co., a Canadian public utility company, and two

wholesale electric utilities operating in the United States. It also

owned the equity in New England Power Association, which since

its reorganization is known as New England Electric System (NEES).

NEES was a holding company in its own right and while the managements of the two companies were interrelated they functioned separately. Accordingly the reorganizations of the two companies were

bandled in separate proceedings.
SIXTEENTH ANNUAL REPORT 75

Originally, IRES had outstanding debentures due in 1944, preferred stock, class A stock, class B stock, and common stock. The

company was in a precarious financial position, having a huge deficit

in its earned surplus account. It performed no functions for its subsidiaries and voting control was vested in the stock junior to the preferred stock. Moreover, NEES, its subsidiary holding company, had

two layers of intermediate holding companies beneath it, with the

result that the corporate structures of both IRES and NEES violated

the "great-grandfather clause" of section 11 (b) (2) of the act.

The Commission initiated proceedings under section 11 (b) (2) with

respect to IRES. The first important step in these proceedings was

to cause the cancellation of the class B and common stock. Subsequently, in 1942, the Commission directed IHES to liquidate and

and dissolve." However, many system problems had to be resolved

before the portfolio securities of IRES could be distributed. Among

these were litigation of claims on behalf of IHES against its former

parent, International Paper Co., the reor~anization of NEES, and

the merger of IHES's two New York subsidiaries into a single company. These matters were not fully disposed of until 1947, when

the reorganization of NEES was completed and the sum of $10,000,000,

together with other considerations, was finally paid to IHES in settlement of the claims against International Paper Co.

The separate reorganization of NEES was, of itself, a major operation. NEES had five subholding companies, in two tiers, over its

operating subsidiaries. Under a voluntary plan filed under section

11 (e) of the act the subholding companies were eliminated by the retirement of their securities in exchange for cash or new common stock

of NEES.32 NEES emerged from the reorganization with two classes

of securities, debt and common stock, which replaced 18 classes of old

securities. IHES now owns only 8 percent of the common stock of

NEES, and is no longer a holding company with respect to it.

While it is contemplated that NEES will continue indefinitely as a

registered holding company, steps are being taken toward the eventual

liquidation and dissolution of illES. During the past fiscal year, the

Commission approved the second step of the Trustee's four phase plan

of liquidation. This proposal was designed to eliminate all of IHES

outstanding debentures which had previously been reduced by cash

payments from $1,000 to $600 principal amount per unit. With the

approval of the Commission 33and the United States district court,

the Trustee developed a plan which included (1) an exchange offer

to the holders of the debentures of 600,000 shares of Gatineau Power

Co. common stock, (2) an agreement for the underwriting of the

sale or exchange of a minimum of 340,000 shares of Gatineau common

with an option to the underwriters to purchase the balance of 260,000

shares and (3) the negotiation of a 2-year loan of not more than

$10,000,000to secure the balance of funds required to retire the debentures not surrendered for exchange. Consummation of these transactions occurred at the close of the fiscal year.

31 11 S. E. C. 888. 32 Holding Company Act release No. 6470. 13 Holding Company Act release No. 9917.
76 SECUR'ITIES AND EXCHANGE COMMISSION

Long Island Lighting Co.

On March 27, 1936, pursuant to section 3 (a) (1) of the act, the

Commission granted Long Island, as a holding company, and each

of its subsidiary companies as such, an exemption from all the provisions of the act.34 However, on April 21, 1945, pursuant to section

3 (c), the Commission modified the exemption order so as to subject

Long Island and its subsidiary companies to certain provisions of

the act, particularly the reorganization provisions of section 11.35

The order of modification was entered in view of the fact that the

financial situation of Long Island and its subsidiaries had deteriorated

materially since the entry of the exemption order. As the Commission noted in its opinion, Long Island, on December 31, 1935,was not

in arrears on its preferred stock dividends whereas by September 30,

1944, an aggregate of $10,384,075of arrears had accumulated, which

represented unpaid dividends for a period of 6Y2 years. Further,

unpaid dividends on the publicly held preferred stocks of its public

utility subsidiary companies had also accumulated to the extent of

$4,740,699. An analysis of the financial aspects of the system, including the foregoing accumulation of arrears, the grossly inflated property accounts, and the earnings history of the system, caused the

Commission to conclude that the common stock of Long Island exercised voting control of the system with "disproportionately small

investment."

In addition, Long Island, on December 16, 1944, after the Commission had instituted the modification proceeding, had filed in the

officeof the Secretary of State of the State of New York a certificate

of reduction of capital which, among other things, provided for a

reduction of 40 percent in the par value, redemption value, and future

dividend rights of the preferred stock, and for the cancellation of

the then existing common stock and the issuance of 503,800shares of

new common stock to its preferred and common stockholders on the

basis of 1 share of new common stock for each share of preferred

stock and for each 12 shares of common stock outstanding. Under

such plan of recapitalization, the holders of the preferred stock would

have received 50.38 percent of the new common stock and the holders

of the common stock would have received 49.62 percent of the new

common stock. The Commission commented on the plan, although

the plan was not before it for determination, and the Commission

stated that the plan failed to give adequate recognition to the rights

and claims of the preferred stockholders and that it was extremely

doubtful that the plan cold be found to satisfy the "fair and equitable"

standard of section 11 (e) or that the proposed capital structure could

be approved under other standards of the act.

As a result of certain legal proceedings involving the Commission

and Long Island, none of the certificates contemplated by the certificate of reduction of capital has been issued and none of the accounting

entries contemplated in connection therewith has been made upon its

books." After the Commission entered its order modifying the ex-

.. 1 S. E. C. 345. 35 Holding Company Act release No. 5746. .. S. E. O. v. Long Island Lighting 00., 59 F. Supp 610 (E. D. N. Y. 1944), affirmed 148

F. 2d 252 (C. A. 2, 1945), a judgment vacated and remanded to the district court to dismiss

the complaint on the ground the cause became moot. 325 U. S. 833 (1945).
SIXTEENTH ANNUAL REPORT 77

emption of Long Island, the company, on April 23, 1945,filed a notification of registration as a holding company pursuant to section 5 (a)

of the act.

Thereafter, on October 25, 1945, pursuant to section 11 (e), Long

Island filed a plan which, as amended, provided for the consolidation

of itself with its two principal subsidiary public utility companies.

Or, November 9, 1945, the Commission instituted proceedings under

section 11 (b) (2) directed to Long Island and each of its public

utility subsidiary companies in order to determine whether voting

power was unfairly and inequitably distributed among the security

holders of each of the companies and what action, if any, should be

taken.

The two proceedings were consolidated and, on August 25, 1948,

the Commission entered an order in the section 11 (b) (2) proceeding

which ordered each of the companies to be recapitalized on the basis

of a single class of stock, i. e., common stock, and that the new common stock be distributed among the holders of each company's preferred and common stock in a fair and equitable manner."

Subsequently, on November 16, 1949, the Commission approved the

section 11 (e) plan which provided for the consolidation of the three

companies, the resultant consolidated company to have outstanding

only one class of new common stock, which was to be apportioned

among the common stockholders of Long Island and the preferred

stockholders of the three companies." In place of the preferred

stocks of the three companies, having an aggregate par value of

$34,792,200with dividend arrears thereon totaling $27,406,105as at

June 30, 1950, and of old common stock having a stated value of

$3,000,000,the consolidated company would have new common stock

which at June 30,1950, would have a stated value of $33,650,848. The

accounts of the consolidated company would be stated in such form

as to exclude all items in its property accounts in excess of original

cost and all its accounts would be stated in conformity with the requirements of the New York Public Service Commission.

The plan was approved and ordered enforced by the United States

district court on February 17, 1950."9 Upon appeal, by opinion entered June 1, 1950, the court of appeals affirmed the decision on all

issues, except with respect to one item as to which the proceeding was

remanded to the Commission." On July 5, 1950, subsequent to the

close of the fiscal year, upon the filing with the court of appeals by the

Commission of a petition for modification of decision, the court of

appeals modified its former opinion and affirmed the order of the

district court in all respects." A petition for certiorari was filed.

The Middle West Corp.

The Middle West Corp. (Middle West), successor in bankruptcy

to Middle West Utilities Co., registered under the act in December

1935. At that time it had 152 subsidiaries, including 62 electric or

gas utility companies and 15 subholding companies; 16 of the 152sub31 Holding Company Act release No. 8449 58 Holding Company Act releases Nos. 9473 and 9510.

""89 F. Bupp. 513 (E. D. N. Y.) . .., 183 F. 2d 45 (C. A. 2). 61183 F. 2d 45.52 (C. .A. 2).
78 SECUR'ITIES AND EXCHANGE COMMISSION

sidiaries were themselves in process of reorganization under the Bankruptcy Act, and these, in turn, controlled an additional 74 of the

system companies. In contrast, Middle West at June 30, 1950 had

divested itself of every subsidiary company except United Public

Service Corp. which is presently in liquidation.

As a result of proceedings under section 11 (b) (1) of the act,

Middle West was ordered in January 1944 to sever its relations with

all properties, operations, and companies except Central Illinois Public

Service Co. and its subsidiaries, and Kentucky Utilities Co. and its

subsidiaries, jurisdiction being reserved to consider the retainability

of these companies."

In 1947, however, the management of Middle West decided to dissolve the corporation and a resolution was presented to stockholders

who voted in favor of the dissolution. Pursuant to this decision,

Middle West distributed to its stockholders its principal assets, consisting of the common stocks of Central Illinois Public Service Co.,

Kentucky Utilities Co., Public Service Co. of Indiana, and Wisconsin

Power & Light CO.43 Many of its smaller properties were sold or

merged into other companies in the system.

In April 1946, the Commission approved the creation of the Central

& South West Corp. system 44which is comprised of four electric

utility companies of substantial size. The new system was formed by

merging two subholding companies which between them had four outstanding issues of 6 and 7 percent preferred stock with dividend

arrearages totaling about $16,000,000. These shares were retired at

the redemption price plus accrued dividends. The merger also resulted in increasing the combined common equity from 9.5 percent

of total capitalization and surplus to 29.5 percent. The new Central

& South West Corp. continues to be subject to the act as a registered

holdin~ company controlling an integrated electric utility system.

Durmg the past fiscal year, Middle West has completed its divestment program by disposing of its interest in four service companies

and selling its common stockholdings in Upper Peninsula Power

Co. and in Middle West Utilities Co. of Canada, Ltd. In addition,

Sand Springs Water Co., a nonutility subsidiary, sold its water plant

and distribution system and is in process of liquidation. On June 5,

1950, the Commission approved the final plan of Middle West under

which it will make an initial cash distribution to its stockholders and

thereafter seek to convert all remaining assets to cash, in order to

effect a final distribution after December 31, 1951, and bring about

its liquidation and dissolution." This plan was approved by the

United States district court on June 29,1950.

National Gas & Electric Corp.

National Gas & Electric Corp. (National) registered under the

Holding Company Act in December 1935. It had nine subsidiary

companies engaged in the production and sale of manufactured and

natural gas and oil as wen as the sale of electric energy. Its properties were scattered over the six States of Ohio, Michigan, Virginia,

•• 15 SEC. 309. .. Hohllng Company Act releases Nos. 8642 and 8788 .. Holding Company Act release No. 6606. 4$ Holding Company Act release No. 9800.

•
SIXTEENTH ANNUAL REPORT 79

North Carolina, South Carolina, and Colorado. At the time National

registered with the Commission, the total assets of the system

amounted to $6,461,000. Thereafter, through the process of merging

some properties and selling others, the system was reduced to four

subsidiaries, A final plan under section 11 (e) was filed in June 1949.

The Commission approved the plan on November 30, 1949,46after

which it was ordered enforced by the United States district court.

The plan provided, among other things, for the merger of National

into its subsidiary, National Gas & Oil Corp. (Gas & Oil), and for the

distribution to National's common stockholders, in respect of each

share held, of one share of new common stock of Gas & Oil and onehalf share of new common stock of another subsidiary, National Utilities Co. of Michigan (Michigan).

The plan effected a divorcement of Michigan from the system, eliminated National as a holding company and resulted in Gas & Oil, a

nonutility, becoming the parent of Newark Consumers Gas Co., a utility, and the Fritz Oil & Gas Co., a nonutility. The surviving Gas &

Oil and its two subsidiaries are all Ohio corporations and operate

within the State of Ohio.

On June 16, 1950, the Commission issued an order exempting Gas

& Oil and its subsidiaries from the provisions of the Holding Company Act pursuant to section 3 (a) (3).41

New England Public Service Co.

New England Public Service Co. (NEPSCO), at the time of its registration, had five major operating subsidiaries, of which two operated

in Maine, one in New Hampshire and two in New Hampshire and Vermont. It also owned, through an industrial subsidiary, five textile

mills, a paper company, and a forest products manufacturing company. The company was heavily overcapitalized, having outstanding

two classes of prior lien preferred stock and, junior thereto, four

classes of preferred stock. All these preferred issues had substantial

dividend arrearages. As a result of simplification proceedings instituted by the Commission under section 11 (b) (2) of the act, the

company was directed, in 1941, to reorganize on a one-stock basis, or,

in the alternative at its election, to liquidate and dissolve." The

company did not appeal this decision and has elected to dissolve. The

industrial compames were sold for cash. NEPSCO has merged Cumberland County Power & Light Co. into Central Maine Power Co. It

has also caused Public Service Co. of New Hampshire to acquire the

New Hampshire properties of the Twin State Gas & Electric Co. and

Central Vermont Public Service Corp. to acquire the Vermont properties of the Twin State company.

In 1947, the Commission approved a modified plan under section

11 (e) as a result of which NEPSCO paid $100 per share plus accrued

dividends on its outstanding $7 series and $6 series prior lien preferred

stocks and deposited in escrow the difference between these payments

and voluntary redemption values on the two series. The Commission

at that time reserved for future determination the question as to what

.. Holding Company Act release No. 9531. .. Holding Company Act release No. 9929. .. 9 S. E. C. 239.
80 SECURITIES AND EXCHANGE COMMISSION

additional amounts, if any, should be paid on these shares. In June

1950 it acted on this issue and ordered that the $7 series should receive

an additional payment of $12.25 per share and the $6 series $2.25 per

share, together with compensation for delay in payment at the rate

of 5.5 percent per annum from October 10, 1947.49 Since the close of

the fiscal year application has been made to the United States district

court for enforcement of this order.

In February 1950,a motion was filed with the Commission by counsel

for a protective committee for the holders of preferred stock requesting

an order of the Commission affirmatively directing NEPSCO on or

before May 15, 1950, to sell 200,000 shares of the common stock of

Public Service Co. of New Hampshire, or, in the alternative, a sufficient number of shares of common stock of Central Maine Power Co.

to raise an equivalent sum, and to apply the proceeds of such sale

to the payment of outstanding notes payable to banks which then

aggregated $9,900,000.

Oral argument was held before the Commission on this motion after

which the Commission issued a memorandum opinion 50 in which it

afforded NEPSCO an opportunity to amend a pending declaration

so as to effect a sale. Subsequently, NEPSCO filed a new declaration

proposing to sell, at competitive bidding, 260,000shares of its holdings

of the common stock of Central Maine Power Co.

Superimposed on NEPSCO is Northern New England Co., a voluntary association, which owns approximately one-third of the former

company's common stock. The Commission has approved a plan for

the partial liquidation of this company by distribution of cash to its

stockholders." At the same time it directed that the company

liquidate and dissolve. Northern New England Co. is awaiting the

filing and approval of a final plan by NEPSCO, in which the participation to be accorded to the common stock of the latter company will

be determined, before it can take the required steps to complete its

liquidation.

Niagara Hudson Power Corp.

In 1942,the Commission instituted proceedings under section 11 (b)

(2) in respect of the Niagara Hudson Power Corp. system at which

time it included 26 corporate entities. Among the more important

problems under section 11 (b) (2) were those related to the system's

western companies, which were subsidiaries of Buffalo Niagara &

Eastern Power Corp. (BNE), a holding company subsidiary of

Niagara Hudson. In June 1944, an order was issued requiring BNE

to recapitalize on a one-stock basis.

BNE and Niagara Hudson then filed plans providing for the consolidation of BNE and certain of its subsidiaries into Buffalo Niagara

Electric Corp. as a surviving company," To accomplish this reorganization, Niagara Hudson used funds totaling approximately

$63,000,000 in retiring the publicly held second preferred stock of

BNE at its call price plus accrued dividends. These funds were obtained from bank loans, treasury cash, and proceeds from the sale of

•• Holding Company Act releases Nos. 9931 and 9982. .. Holding Company Act release No. 9781. 151 Holding Company Act release No. 840l. OJ Holding Company Act release No. 6083.
SIXTEENTH ANNUAL REPORT 81

certain of Niagara Hudson's portfolio securities. The total effect of

plans and refinancing proposals was to eliminate, by June 30, 1949, 13

corporate entities from the system and to simplify security structures

of the remaining subsidiaries.

During the past fiscal year Niagara Hudson carried forward its

program of merger and consolidation which has now resulted in the

formation of one of the largest utility operating companies in the

United States. Preliminary steps in this program included the merger

of Ticonderoga Electric Light & Power Co. into New York Power &

Light Corp. in July 1949; and in September 1949,the mergers of Old

Forge Electric Corp. into Central New York Power Corp. and Union

Bag & Paper Corp. into New York Power & Light Corp.

On January 5,1950, the "Consolidation plan" and the "Dissolution

plan" of Niagara Hudson became effective pursuant to the order of this

Commission 53 and the subsequent order of the United States district

court." An appeal taken in respect to one phase of the "Dissolution

plan" is still in litigation. In accordance with these plans, the principal remaining subsidiaries of Niagara Hudson, Buffalo Niagara

Electric Corp., Central New York Power Corp., and New York Power

& Light Corp., were merged into a new operating utility company,

Niagara Mohawk Power Corp. The common stocks of the former

subsidiaries were converted into shares of Niagara Mohawk which were

then reclassified into class A stock and new common stock.

Niagara Hudson also contributed to Niagara Mohawk its common

stock holdings in its other subsidiaries including Frontier Corp., the

Oswego Canal Co., and St. Lawrence Co., Ltd., together with miscellaneous investments.

The class A stock of Niagara Mohawk was distributed in exchange

for the outstanding preferred stock of Niagara Hudson. Holders of

Niagara Hudson common shares had the right until July 5, 1950,either

to exchange their shares together with a cash payment for shares of

Niagara Mohawk or to retain their shares until the final distribution

of Niagara Hudson's holdings is effected. Cash payments made by

holders effecting the immediate exchange were applied to the repayment of Niagara Hudson's outstanding bank loan.

After the closing date of the exchange period, July 5, 1950,Niagara

Hudson still held 2,209,955shares of Niagara Mohawk Power Corp.

common stock as compared with 7,473,172shares originally received.

Its bank loan had been reduced from $9,580,000to $1,500,000.

In application for a supplemental order in connection with the

"Dissolution plan," filed after the close of the fiscal year, Niagara Hudson has proposed steps to expedite the liquidation of its remaining

indebtedness and the distribution of its remaining holdings in Niagara

Mohawk. The Commission issued its supplemental order on September 7, 195055 approving the final steps in connection with the consummation of the "Dissolution plan," and on September 28, 1950 the

United States District Court of the Northern District of New York

issued its order enforcing the supplemental order of the Commission.

113 Holding Company Act release No. 9270. .. 86 F. Supp. 697 (N. D. N. Y., 1949), reversed and remanded, 8ub. nom, Lerentrttt v, 8. E. a. et al.. 179 F. 2d 615 (C. A. 2, 1950l. Petition for cert, filed July 20, 1950. .. Holding Company Act release No. 10083.

915841-51--7
82 SECURITIES AND EXCHANGE COMMISSION

The North American Co.

At its registration in 1937, the North American Co. was the top

holding company in a system, which through several subholding companies, controlled 36 utility and 46 nonutility subsidiaries. Electric

utility operations were conducted by system companies in 10 States

and the District of Columbia; gas utility operations were conducted in

9 States. The consolidated balance sheet of North American and its

subsidiaries showed assets of over $900,000,000,and, through the direct

and indirect ownership of securities, North American controlled an

empire whose aggregate value was stated to be approximately

$2,200,000,000.

During the last 5 years, North American has taken substantial steps

toward compliance with the Commission's section 11 (b) (1) order,

which was issued in 1942.56 By a number of means, including dividend

payments in portfolio securities, outright distribution, the issuance of

p_urchasewarrants to its stockholders and sale at competitive bidding,

North American has disposed of nearly all of its assets except Union

Electric Co. of Missouri, Missouri Power & Light Co., and several

minor nonutility subsidiaries.

Among major interests which have been divested are those in Pacific

Gas & Electric Co., Cleveland Electric Illuminating Co., Wisconsin

Electric Power Co., Potomac Electric Power Co., Detroit Edison Co.,

Illinois Power Co., St. Louis County Gas Co., Northern Natural Gas

Co., Des Moines Electric Light Co. and Tllinois Terminal Co.

During the past fiscal year North American sold its interest in the

capital stock of Kansas Power & Light Co. and its holdings in Capital

Transit Co. Itdistributed its investment in West Kentucky Coal Co.

after transferring a portion of that company's assets to the Poplar

Ridge Coal Co. which was organized as a subsidiary of Union Electric

Co. of M'issouri.

The North American Co. which, concurrently with its divestment

program, eliminated all of its outstanding debt and preferred stock,

has indicated its intention to submit to the Commission 8. plan designed

to effect its merger into Union Electric Co. of Missouri its principal

remaining utility subsidiary. However, no formal application in respect to such a program had been received at the close of the fiscal year.

North Continent Utilities Corp.

North Continent Utilities Corp. registered as a holding company in

1938 and, at that time, owned or controlled nine utility and eight nonutility subsidiary companies. The subsidiaries were engaged in the

electric, gas (manufactured and natural), water, ice, cold storage, coal,

coke, oil, feed, and telephone business. The operations of the subsidiary companies were conducted in seven widely separated States,

Arizona, Colorado, Illinois, Kansas, Minnesota, Montana.7 and New

Mexico, and in the provinces of Ontario and Alberta, Canada.

In1943,North Continent filed a plan under section 11 (e) which, as

amended, provided generally for the sale or distribution in kind of its

interests in its subsidiaries and application of the proceeds to the

retirement of its bonds and preferred stock. North Continent had

"11 S. E. C. 194 (1942), affirmed Bub. nMlt. The North AflUlrwan 00. V. 8. E. 0., 133

F. 2d 148 (C. A. 2, 1943), affirmed 327 U. S. 686 (1946).
SIXTEENTH ANl\"'UAL REPORT 83

paid no dividends on its stock for a considerable time prior to a recapitalization effected in 1935 and had paid none thereafter. At the time

the plan was filed the company was faced with the early maturity of its

bonded indebtedness. The plan was consolidated with proceedings

instituted by the Commission and was approved in November 1943,57

the Commission ordering North Continent to take such steps as may

be necessary to cause its' liquidation and dissolution and reserving

jurisdiction with respect of the treatment to be accorded the preferred

and common stockholders.

The plan was enforced by a United States district court shortly

thereafter. 58 Pursuant to the plan, North Continent disposed of six

electric and gas companies, principally by piecemeal sales to cooperatives and municipalities, and two nonutility companies by sales of

securities to the public. North Continent from time to time applied

the proceeds from these sales to the reduction of its bonds and these

were fully retired on July 1, 1947.

In February 1950, the Commission approved a supplemental plan 59

which provided for the allocation of North Continent's assets between

its preferred and common stockholders and for the immediate distribution to its stockholders of all of its available cash and all of its

portfolio securities, except its investment in one foreign public utility

company which was not in distributable form. Pending disposition

of the foreign subsidiary, North Continent was to be recapitalized on

a one-stock basis. This program was ordered enforced by the United

States district court in April and was consummated on June 1, 1950.

Standard Power & Light Corp. and Standard Gas & Electric Co.

The Standard holding company system presented in extreme degree

the evils of corporate pyramiding and scatteration of properties which

the integration and simplification provisions of the act were designed

to eliminate. In 1936, the Standard system consisted of 105 active

companies operating in 20 States and in Mexico; it contained 9 registered holding companies including the 2 top companies, Standard

Power & Light Corp. and its subsidiary, Standard Gas & Electric Co.

By June 30, 1950, the number of active companies had been reduced

to 58 (including 43 street railway companies, which are part of one

transit system) operating in 5 States. The important remaining utility subsidiaries of the system are Duquesne Light Co. (a subsidiary of

Philadelphia Co.), Wisconsin Public Service Corp., and Oklahoma

Gas & Electric Co.

The most significant developments in the Standard system during

the last fiscalyear were concerned with subholding companies of Philadelphia Co.

On October 10, 1949, the United States Court of Appeals for the

District of Columbia unanimously affirmedan order of the Commission

dated June 1, 1948, issued under section 11 (b) of the act, directing

Philadelphia Co. to dispose of its interests in the gas utility and transportation business and thereafter to liquidate and dissolve."

0714 R. E. C. 656 (1943). os 54 F. Supp. 527 (D. Del., 1944). 59 Holdine Company Act release No 9682 eoPhiladelphia CO. V. S. E. C., 177 F. 2d 720 (C. A. D. C., 1949).
84 SECURITIES AND EXCHANGE COMMISSION

In March 1950, Philadelphia Co. effected a reorganization of its

natural gas subsidiaries by transferring its stockholdings in KentuckyWest Virginia Gas Co. and Pittsburgh & West Virginia Gas Co. to

Equitable Gas CO.61and thereafter sold to underwriters the common

stock of Equitable Gas Co. for $45,755,000. Philadelphia Co. utilized

the major portion of the proceeds from this sale to redeem all of its

outstanding funded debt amounting to approximately $36,000,000.

In the reorganization of its former gas subsidiaries, Philadelphia Co.

received $17,500,000principal amount of debentures of Equitable Gas

Co. In June 1950,Philadelphia Co. sold $11,000,000of these debentures utilizing the proceeds to redeem all of its outstanding $6 cumulative preference stock, aggregating $10,000,000in par value. Thus

during the fiscal year Philadelphia Co. eliminated $46,000,000in face

amount of its senior securities.

Substantial progress was also made toward the reorganization of

Philadelphia Co.'s subsidiary, Pittsburgh Railways Co., which has

been in bankruptcy since 1938. Pittsburgh Railways operates the

transit system in the city of Pittsburgh under lease and operating

agreements covering the properties owned by 55separate corporations.

Philadelphia Co. itself has guaranteed the payment of lease rentals,

bond interest, taxes, and other obligations of some of the underlying

companies. During 1949,hearings were held on a combined plan for

reorganization of the railways system which was filed jointly by Philadelphia Co. and the trustee of Pittsburgh Railways under section 11

of the act and chapter X of the Bankruptcy Act. The plan provides

for the formation of a new company to replace all the existing companies; the security structure of the reorganized company would consist of common stock, not more than $6,000,000principal amount of

first mortgage bonds, and equipment obligations. Under the plan,

Philadelphia Co. would be discharged from its guaranty obligations

and would receive 51 percent of the commonstock of the new company.

The balance of the common stock, all the bonds and approximately

$17,000,000of cash would be distributed to the public holders of securities of Pittsburgh Railways and its underliers,

The Commission approved the combined plan on March 27, 1950,

subject to the subsequent reexamination of certain aspects of the

plan 62 and on May 1, 1950,the United States District Court for the

'Vestern District of Pennsylvania entered its order approving the

plan. Thereafter, the plan was submitted to the security holders

for their approval. Subsequent to the close of the fiscal year, the

necessary assents to the plan had been secured and it is expected that

the plan will be consummated in the near future.

In October 1949, Standard Gas filed an amended plan for simplification of the corporate structure of the Philadelphia Co. system.

Itprovided, among other things, for the elimination of the noncallable

preferred stocks of Philadelphia Co. and its inactive subsidiary, The

Consolidated Gas Co. of the City of Pittsburgh. Extensive hearings

were held, but were adjourned pending consummation of the reorganization of the gas properties and the sale of the common stock of

Equitable Gas Co. The plan was thereafter further amended to pro61 Holding Company Act releases NOR.9740 and 9766. .. Holding Company Act release No. 9759.
SIXTEENTH ANNUAL REPORT 85

vide for the retirement of all of Philadelphia CO.'sremaining pre.

ferred stocks and the preferred stock of The Consolidated Gas Co.

of the City of Pittsburgh, having aggregate par values of approximately $31,700,000.

Standard Gas & Electric Co. in September H)49, also effected the

sale of 250,000 shares of its common stock holdings in Louisville Gas

& Electric Co. for $7,441,250. Since this reduced Standard's voting

interest in Louisville to less than 10 percent, that company is no

longer a statutory subsidiary in the Standard system.

The United Corp.

The United Corp. registered as a holding company in March 1938,

at which time its portfolio was comprised largely of the common

stock of four holding company subsidiaries. These subsidiaries, with

the percentage of voting control held by United. were as follows: The

United Gas Improvement Co., 26.2 percent; Public Service Corp. of

New Jersey, 13.9 percent; Niagara Hudson Power Corp., 23.4 percent; and Columbia Gas & Electric Corp. (now the Columbia Gas

System, IInc.), 19.6 percent.

In June 1941, the Commission instituted proceedings with respect

to United under sections 11 (b) (1) and 11 (b) (2) of the act. At

that time the 125 companies in the United system operated in 22

States and in Canada. Their combined total assets approximated

$2,765,000,000. Subsequently, the Commission by order dated August

]4, 1943, directed United to change its existing capitalization, which

consisted of preferred and common stocks, to one class of stock and

to cease to be a holding company."

United has since retired all of its preferred stock by exchanging

therefor certain portfolio securities and cash. Through the retirement of its preferred stock and sales of pOltfolio securities, United

reduced its 'percentage of voting securities to 7.7 percent in UGI,

6.41 percent IIIColumbia and 5.71 percent in Public Service. Through

the reorganization of Public Service it had, however, acquired another subsidiary, South Jersey Gas Co., 28 percent of whose voting

securities it now holds.

On October 20, 1949, the Commission approved a plan filed by

United whereby it distributed to its stockholders, as a special dividend,

one-tenth of a share of common stock of its subsidiary, Niagara Hudson Power Corp., for each share of United common." This distribution reduced United's holdings of the outstanding voting securities

of Niagara Hudson from '28.5 percent to 14.1 percent. Approval

of this plan was granted on condition that United undertake to file

promptly a comprehensive plan under section 11 (e) detailing the

remaining steps to be taken, and the timing thereof, to complete

its transformation into an investment company. Such a plan was

filed in December 1949.

Among the provisions contained in this proposed program, was

the exchange by United of its holdings of preferred stock in Niagara

Hudson for the class A stock of its successor, Niagara Mohawk Power

Corp., and the exchange of its common holdings in Niagara Hudson,

.. Holding Company Act release No. 4478. .. Holding Company Act release No. 9431.
86 SECURITIES AND EXCHANGE COMMIESION

together with the requisite amount of cash, for new common shares

of Niagara Mohawk. It also proposed the prompt sale of the Niagara

Mohawk class A stock to be received by United. These transactions

were approved by Commission orders Issued in February and April

1950.65 Jurisdiction was reserved on other matters and the plan

has been amended several times since initial filing.

As amended, the pending proposals include (1) the sale by United

of its entire interest in South Jersey Gas Co.; (2) an offering to each

qualified common stockholder of United, owning 99 shares or less,

to purchase his shares for cash; (3) an offering to holders of more

than 100 shares to exchange their stock for the common shares of

Niagara Mohawk; and (4) the sale by United of sufficient shares of

its holdings in the Columbia Gas System, Inc., the United Gas Improvement Co. and Niagara Mohawk Power Corp. to reduce its holdings in each to not in excess of 4.9 percent of the voting stock

outstanding.

The United Light & Railways Co.

On February 18, 1938, the United Light & Power Co. registered

as a holding company with a system comprised of 10 holding companies, 7 of which were registered holding companies, 21 electric and

gas utility subsidiaries, 20 nonutility subsidiaries, and a service company. In 1941 the Commission directed the dissolution of United

Light & Power Co. and United American Co., a subholding company."

Bya subsequent order the Commission directed the divestment of the

interests of United Light & Power Co. and the subholding companies

in 22 subsidiaries in order to comply with the standards of section

11 of the act.6T

After a series of transactions designed to enable United Light &

Power to comply with the outstanding order of dissolution, the Commission approved a plan which provided, in substance, for the distribution of United Light & Power's remaining investment, the

common stock of United Light & Railways Co., to its common stockholders." The residual net assets of United Light & Power were

transferred to United Railways, and United Light & Power was dissolved. Thus, United Railways became the system's top holding company with two principal subholding company systems, Continental

Gas & Electric Corp., and American Light & Traction Co.

In June 1947 United Railways and American Light filed a plan

which provided, among other things, for the divestment by United

Railways of its entire interest in American Light and the continuation of the latter as a registered holding company "controlling" an integrated gas utility system. American Light had, in the interim,

embarked on a program to finance -and construct a la.rge interstate

natural gas pipeline from the operating areas of its natural gas subsidiaries to fields in the Hugoton area. Other more important provisions of the plan provided for the divestment of the common stock

of Detroit Edison Co. and Madison Gas & Electric Co. held by American Light and United Railways and the retirement of the preferred

.. Holding Company Act releases Nos. 9652 and 9821. .. 8 S. E. C. 837. 07 9 S. E. C. 833. .. Holding Company Act release No. 3242 and 10 S. E. C. 945.
SIXTEENTH ANNUAL REPORT 87

stocks of the two holding companies. After appeals were taken by

two stockholders, this plan was approved by the court of appeals in

November 194869 and consummated early in 1949. American Light

changed its name and is now known as the American Natural Gas Co.

In February 1949, United Railways and Continental publicly announced their intention to liquidate and dissolve and a plan under

section 11 (e) was accordingly filed with the Commission. On December 30, 1949, the plan was approved by the Commission subject to

certain amendments including provision for cumulative voting rights

and the listing on a national securities exchange of the subsidiary

stocks being distributed within 6 months after the date they became

available for distribution." The company filed appropriate amendments to comply with these requirements.

Pursuant to the plan, the common stocks of St. Joseph Light &

Power Co. and Iowa Power & Light Co. have been distributed and the

stock of Kansas City Power & Light Co. has been sold to the stockholders of United Railways pursuant to a rights offering. In addition, two mining company investments have been disposed of and

Continental has been liquidated. Subsequent to the close of the

fiscal year, distribution of the stocks of Eastern Kansas Utilities, Inc.

and Iowa-Illinois Gas & Electric Co. was also effected. In connection

with each of these divestments certain other transactions have been

required which were designed to strengthen the capital structures of

those operating utilities being freed from holding company control.

THE CONTINUING BOLDING COMPANY SYSTEMS

Although enforcement of the Holding Company Act is bringing

about the complete liquidation of many of the multitiered and widely

scattered holding-company systems of the past, it will not eliminate

the holding company as a useful corporate device in the public utility

field. A holding company system which can measure up to the physical integration and corporate simplification requirements of section

11 (b) is expressly permitted by the act to function and develop as

a regional system. Such a system, of course, remains subject to the

general, regulatory jurisdiction of the Commission with respect to

financing, intercompany transactions, servicing arrangements, and

other transactions in order to insure that there will be no recurrence

of those abuses which reduced the holding company to a state of public

disfavor prior to passage of the act.

A number of the continuing systems have completed their compliance programs; others still have important problems to solve. It

has been estimated that about 20 regional systems with aggregate

assets of $6 or $7 billion will remain permanently subject to the act.

In general, these continuing systems are of three major types. The

first is the electric holdinp company system, which usually consists

of one holding company above a number of interconnected electric

operating companies. In this category one finds such systems as those

of the American Gas & Electric Co., Central and South West Corp.,

the Southern Co., and Middle South Utilities, Inc .

.. Panhandle Eastern Pipe Linc Of) v, S. E. O. ]70 F. 2d 4;:;::;(C. A. 8, 1(J48) and J,C1< is

V. S. E. O. 170 F. 2d 467 (C. A. 8. 1948). TO Holdlng Company Act release No. 9587.
88 SECURITIES AND EXCHANGE COMMISSION

The second type is the natural gas holding company system which

may control gas transmission as well as gas distribution companies.

Typical of this group are Columbia Gas System, Inc., American

Natural Gas Co., and Consolidated Natural Gas Co.

The third type is the operating-holding company system. The holding company in this group derives a substantial portion of its total

income from its own utility operations, but also has one or more subsidiary operating companies. The Delaware Power & Light Co.,

Ohio Edison Co., and Interstate Power Co. are representative of this

type.

The holding company system can be justified as a continuing enterprise only if Its component companies are knit together as a compact

group having basic functional relationships with one another. There

must be a showing of important economies from group operation, and,

in addition, each system should be able to meet the problems of plant

expansion and to undertake the requisite financing on a sound and

economical basis. Because it must approve all proposals for financing

and supervise servicing arrangements and intercompany transactions,

the Commission retains substantial jurisdiction over these systems.

The following summaries provide a review of the more important

actions taken by the Commission during the past year in respect to

several of the continuing holding-company systems. At this point

it should be emphasized that a number of these systems still have

residual problems to be solved under sections 11 (b) (1) and 11 (b)

(2), and, in one or two cases, registered holding companies may eventually be able to qualify for exemption from the act pursuant to the

provisions of section 3 (a).

American Gas & Electric Co.

With consolidated assets of over $750,000,000, American Gas &

Electric Co. is the largest of the continuing holding company systems. Its operations, almost wholly electric, extend over a seven State

area from Kentucky to Michigan. As in other systems, the rapid

post war expansion of electric power demand has required the operating subsidiaries of American to carry forward a tremendous program

of new construction. This, in turn, has been accomplished by the

undertaking of a large amount of financing by the subsidiary operating companies. Before granting approval of $18,000,000 of bank

borrowings by one major subsidiary, Appalachian Electric Power

Co., the Comrnission in July 1949 gave careful consideration to the

over-all financmg program of American as well as to the program of

Appalachian and devoted particular attention to the responsibility

and intentions of the holding company to preserve the balance of

underlying equity in the system.

American, in response to this inquiry, placed before the Commission the details of its 3-year construction and financing program

amounting to more than $250,000,000. Proposed financing included

$86,000,000of mortgage bond offerings, $10,500,000of temporary bank

loans, and common stock financing to the extent of 913,150 shares.

The Commission observed that the financing program" * * * appears feasible and sound in the light of the standards of the act." 71

11 Holding Company Act release No. 9234.
SIXTEENTH ANNUAL REPORT 89

An important step in this program was taken with the sale in October

1949 of 498,081 shares of its common shares by means of a rights

offering. Of the proceeds derived from this sale approximately $20,-

000,000 was earmarked for investment in the equity of Appalachian

Electric Power CO.72 The balance was to be used for equity investments in other subsidiaries and for other purposes. American contemplates the sale of the additional common shares in 1951.

In past years, American has effected several acquisitions of property in the interest of rounding out its service area. This program

was continued during the fiscal year 1950 when its subsidiary, Indiana

& Michigan Electric Co., negotiated an exchange of electric properties

with its nonaffiliated neighbor, Public Service Co. of Indiana. The

exchange of properties was arranged to promote more efficientservice

in each of the companies and to achieve certain economies of operation." Another subsidiary, the Ohio Power Co., purchased from

Public Service Co. of Indiana its interest in Union City Electric Co.

for a cash consideration of $294,000.74

In April 1950, the Commission approved the sale by American of

$27,000,000 of serial notes with maturities of $500,000 in each of the

years 1952 to 1955 and $2,500,000 in each of the years 1956 to 1965. 75

Proceeds of the issue were used by American to redeem the company's

151,623 shares of outstanding preferred stock as well as to repay

$10,300,000 of outstanding serial bank loan notes. The Commission

noted, among other things, that while it generally disfavors the

issuance of senior securities by holding companies, having subsidiaries with publicly-held senior securities, the pending issue was, in

effect a, replacement of senior securities already outstanding. It,

noted also that the effect of the gradual retirement of debt would be

to improve the consolidated capitalization ratios of the system and

the end result would be the elimination of all corporate debt from

the capital structure of American.

American Natural Gas Co.

On December 30, 1947, the Commission approved a plan pursuant

to section 11 (e) of the act which provided, in part, that American

Light & Traction Co. (now American Natural Gas Co.) would be

divested by its former parent, United Light & Railways Co. and

would undergo a comprehensive reorganization of its capital structure. 76 American also proposed to retire its 6 percent noncallable

preferred stock, divest itself of certain nonretainable holdings and

make a substantial investment in a newly organized gas transmission

pipeline (Michigan-Wisconsin Pipe Line Co.) which was to bring

natural gas from the Hugoton field in Texas to the gas utility subsidiaries of American.

The past 3 years have witnessed the consummation of these proposals and the rapid growth of Michigan-Wisconsin Pipe Line Co.

as a major long-distance transmission system. Because of the heavy

cash requirements and the absence of earnings income during the

'l2 Holding Company Act release No. 9371. 73 Holding Company Act release No. 9758. •• Holding Company Act release No. 9776. 16 Holding Company Act release No. 9819 •• Holding Company Act release No. 7951.
90 SECURITIES AND EXCHANGE COMMISSION

construction period, the debt financing of Michigan-Wisconsin presented the Commission with difficult regulatory problems. In this

instance, it permitted the initial bonding of property at 75 percent

of net bondable value instead of the 60 percent rate usually required;

it also granted an exemption from competitive bidding and permitted

private placement of $66,000,000 of first mortgage bonds,"

The first phase of this program is now substantially completed

but American plans to expand the capacity of Michigan-Wisconsin

and to undertake other system construction which, in total, will

amount to approximately $110,000,000 for the 2-year period 1950-51.

This, in turn, will require some $70,000,000 of additional system

financing to be undertaken, subject to Commission approval.

In line with this rapid growth, American increased its common

equity in November 1949 78 through the sale by means of a rights offering to common stockholders of 276,805 additional shares. A second

offering of 380,607 shares was pending at the close of the fiscal year.

On July 25, 1950, the Commission also permitted American's subsidiary, Michigan-Wisconsin Pipe Line Co., to enter a credit agreement with banks to cover note borrowing up to $20,000,000. This is

an interim step after which it is contemplated that additional bonds

and common stock will be issued by the company. 79

On January 24, 1950, the Commission approved the organization

of American Natural Gas Service Co. and conduct of its business as

a subsidiary service company in the American Natural holding coml)any system," The order was conditioned in several respects, however, to enable the Commission to review the company's cost

allocations and operations at any future time and, if necessary, after

notice and opportunity for hearing, to revoke, suspend, or modify

the permission granted to continue operations.

Central and South West Corp.

Central and South West Corp. and its four electric utility subsidiaries were divested by Middle West Corp. in 1947 and have operated

since that time as a separate holding company system, having complied

with the integration and simplification requirements of section 11.

They served a four-State area including communities in Texas, Oklahoma, Louisiana, and Arkansas.

To keep pace with the increased demand for electric service, the

Central and South West system expended over $33,000,000 during the

past fiscal year for new construction. To finance this program some

$17,000,000 of senior securities were sold by the utility subsidiaries and

the parent company in November 1949 undertook its second common

stock rights offering which yielded approximately $9,000,000 in proceeds." As a result of this step, common stock equity of the system

was increased to 34 percent of total capitalization and surplus.

The Columbia Gas System, Inc.

The Columbia Gas System, Inc. (formerly Columbia Gas & Electric Corp.) is the parent company in a large holding company system

'I"l Holding Company Act release No. 8600. 'lS Holding Company Act release No. 950l. .. Holding Company Act release No. 9990. .. Holding CGmpany Act release No. 9625. 81 Hold.lng Company Act release No. 9447.
SIXTEENTH ANNUAL REPORT 91

engaged in the production, transmission, and distribution of natural

gas in an area embracing seven States and the District of Columbia.

Prior to the issuance of orders by the Commission under section 11 of

the act, Columbia Gas was a subsidiary of the United Corp. and, in

addition to its gas properties, controlled through subsidiaries substantial electric facilities in Ohio, Kentucky, and Indiana. The holdings

of the United Corp. have since been reduced to lessthan 10percent and

divestment of Columbia's electric properties was completed in 1946.

Columbia is expected to continue as a registered holding company

system.

Financing procedure in the Columbia system differs somewhat from

that of many other holding company systems. Instead of permitting

subsidiary companies to undertake public senior financing when necessary Columbia retains complete ownership of all outstanding securities

of its operating subsidiaries. Public financing of the system, both in

respect to debt and equity requirements, is provided at the holding

company level. Thus, the senior securities of Columbia Gas take the

form of unsecured debentures having a broad claim on all system

properties rather than the mortgage bond form generally employed

by operating companies for debt financing. The Commission has approved this arrangement as long as overall system capitalization ratios

are maintained in accordance with statutory standards.

During the postwar period, the Columbia system has carried forward

an aggressive program of developing sources of gas supplies and

expanding its transmission service and distribution facilities. It is

presently initiating service to the city of Baltimore, Md.; Charlottesville, W. Va.; and Poughkeepsie, Newburg, Beacon, and Kingston in

the State of New York. Other connections are in prospect.

This growth is reflected in its active program of financing which

has continued without interruption. In January 1950, the Commission approved the sale by Columbia of 304,998shares of its common

stock.82 On June 13, 1950, Commission approval was granted to

Columbia to issue $110,000,000 principal amount of debentures due

1975. Proceeds of this offering were to be used in part for refunding

purposes; the balance for construction." Another declaration proposing an additional offering of $90,000,000of debentures was filed with

the Commission and approved by it just after the close of the fiscal

year.54

Consolidated Natural Gas Co.

Consolidated Natural Gas Co. was organized in 1942 by Standard

Oil Co. of New Jersey. Standard Oil then transferred to Consolidated its holdings in certain operating subsidiaries engaged in the

transmission and distribution of natural gas. By a subsequent distribution of its holdings in Consolidated, Standard Oil completed

divestment of its utility properties."

Consolidated is expected to continue as a registered holding company system. It has operations in West Virginia, Ohio, Pennsylvania, and New York and reports assets in excess of $360,000,000.

.. Holding Company Act release No. 9611. 83 Holding Company Act release No. 9920. .. Holding Company Act release No. 9993. III Holdlns CQmpanr Act release Nos. 4617 and 4864.
92 SECURITIES AND EXCHANGE COMMISSION

Though the system has shared fully in the postwar growth of the

natural gas industry, it has not been required to do as much public

financing as other systems. This factor is explained in part by the

conservative dividend policy of the management which has retained

out of net income approximately $20,000,000during the past 3-year

period.

However, Consolidated has sold, with Commission approval, 545,-

672 shares of common stock with net proceeds of $20,270,000in July

1947,and $30,000,000of debentures in 1948. In March 1950,the Commission approved the additional sale by Consolidated, pursuant to a

loan agreement with four commercial banks, of an aggregate of $14,-

000,000of promissory notes to be issued during 1950.S6 This borrowing was undertaken as an interim step in Consolidated's long-range

financing program. Proceeds will be used primarily to finance the

construction and gas-storage programs of two of the operating subsidiaries. Consolidated had almost no indebtedness prior to the postwar expansion program, and, even with the $54,000,000 of debt

incurred during the past year, the present debt ratio of the system

remains under 20 percent.

Delaware Power & Light Co.

Delaware Power & Light Co. is an operating-holding company subject to Commission jurisdiction because of its operations through subsidiaries in Maryland and Virginia. Delaware was formerly a

subsidiary of United Gas Improvement Co., but achieved independent

status in 1943with the distribution by the latter of its stockholdings

in the company.

Substantial growth in recent years has necessitated considerable

financing activity by Delaware and, beginning in 1947,the Commission approved five proposals submitted by the company. In March

1947, the company sold $5,000,000of preferred stock at competitive

bidding. This was followed by another $5,000,000in July 1949 together with $10,000,000of mortgage bonds. Offerings of additional

common stock to shareholders were made in February 1949and again

in April 1950with proceeds aggregating over $9,000,000. These offerings enabled Delaware, while proceeding with necessary debt financing, to retain a ratio of common equity to total capitalization and

surplus in excess of 33 percent.

Interstate Power Co.

Interstate Power Co. is an operating-holding company which together with its two subsidiaries is engaged principally in the electric

utility business in Minnesota, Iowa, South Dakota, Illinois, and Wisconsin. Pursuant to a plan filed under section 11 (e) of the act,

Interstate underwent a complete financial reorganization in March

1948.S7 Prior to this, the company was burdened with a very topheavy capital structure, including excessive indebtedness and preferred stocks with large dividend arrearages.

Through operation of the reorganization plan, the former parentsubsidiary relationship existing between Ogden Corp. and Interstate

.. Holding Company Act release No. 9727. 81 Holding Company Act release No. 791,)&.
SIXTEENTH ANNUAL REPORT 93

was eliminated and 944,961shares of Interstate's new common shares

were placed in escrow for the benefit of the holders (including Ogden)

of its old securities junior to its old mortgage bonds. Proceedings

relating to the plan for distribution of these escrowed shares are still

inlrogress before the district court and the Commission.

lthough Interstate's reorganization of March 1948 resulted in a

substantially improved financial position, the exigencies of that reorganization nevertheless still left the company's capital structure far

from ideal. This situation required that subsequent security sales

by Interstate be carefully scrutinized by the Commission to assure

that each successive financing operation, in connection with the company's large construction program, would bring about a strengthening of Interstate's common stock equity, preserve its financial integrity, and facilitate the economical financing of its expanding business.

In November 1949,Interstate's new money requirements were met,

with Commission approval, by the sale of 300,000shares of additional

common stock." In May 1950, after extensive preliminary conferences with the Commission's staff, the company consummated a broad

financing program, which not only satisfied its capital requirements,

but greatly strengthened its capital structure. This undertaking

included the sale of $3,000,000of mortgage bonds, 100,000shares of

new preferred stock and 275,000shares of additional common stock."

Proceeds were applied, in part, for construction needs and also to the

retirement of certain outstanding debt securities. In addition, Interstate successfully negotiated with the holder of its $5,000,000 outstanding 4% percent Debentures for a reduction of interest rate to

3%, percent.

The rapid improvement in the company's credit rating is clearly

indicated by a comparison of the annual interest cost of 4.5 percent

on its mortgage bonds sold in October 1948 with those sold III May

1950at a cost of 2.9 percent. This substantial change is due in large

part to the fact that, in the period following Interstate's reorganization in 1948, its common equity, after giving effect to the sale of

common stock in May 1950, has increased from 17 percent to 26.5

percent of total capitalization and surplus. If the new preferred

issue is included, aggregate underlying equity as a percentage of

capitalization and surplus has now reached 37.6percent.

Middle South Utilities, Inc.

Middle South Utilities, Inc. is a registered utility holding company

serving through its subsidiaries a three-State area including Arkansas,

Louisiana, and western Mississippi. "Whileits revenues are derived

predominantly from sales of electricity, it is also engaged in the sale

of natural gas and in transportation operations. The company was

organized in May 1949 and acquired from Electric Power & Light

Corp., the latter's holdings in four subsidiary utility companies and

a small land company. Since the divestment by Electric and its

parent, Electric Bond & Share Co., of their holdings in the company,

Middle South has become an independent regional holding company

system. The Commission has reserved jurisdiction, however, to insti-

.. Holding Company Act release No. 9435. .. Holding Company Act release No. 9845.
94 SECURITIES AND E~CHANGE COMMISSION

tute such further proceedings under section 11 (b) with respect to

Middle South as it may consider necessary or appropriate.

The construction program of the Middle South system has been estimated to require expenditures over the 2-year period 1950-51 of more

than $92,000,000. To finance the initial portion of these requirements,

Middle South sold 640,000shares of its common stock in January 1950

for which it received net proceeds of $11,868,000.90 In June 1950,

the Commission approved additional financing proposals. These included the sale of mortgage bonds by two subsidiaries, the sale of new

preferred stock by three subsidiaries and an offer by Middle South to

holders of outstanding preferred in the three subsidiaries to exchange

new shares of Middle South common for shares of outstanding preferred." The sale of new preferred by the subsidiaries and the exchange offer by Middle South were proposed primarily to facilitate

elimination of the high dividend preferred stocks of three subsidiaries

and to provide funds for construction.

After submitting both the bond and preferred stock offerings to

competitive bidding, sales of the two subsidiary bond issues were consummated promptly, yielding approximately $13,500,000in proceeds.

However, all bids on the preferred offerings were rejected as not representing fair value for the securities offered. This, in turn, caused

Middle South to request a suspension of action on other related proposals until a further amendment could be filed.

National Fuel Gas Co.

The construction program of National Fuel Gas Co., unlike most

systems, has been on a modest scale and has not required any long-term

financing during the past year. However, progress has been made in

further simplifying the system by effecting a reduction in the number

of subsidiary corporate entities and effecting through mergers and

consolidations a number of operating economies,

On June 15, 1949the Commission approved the merger of Iroquois

Gas Corp. a gas utility subsidiary of National, with Wanakah Gas

Corp., its wholly owned gas utility subsidiary." The merger was

effected on November 18, 1949. On August 12, 1949,the Commission

also approved the dissolution of Hanover Gas Corp., a small producing subsidiary and the distribution of its remaining assets to National."

In June 1950,National and five of its utility subsidiaries filed a joint

declaration proposing the merger of the five subsidiaries into one gas

utility company. On June 30, 1950, the Commission approved certain transactions proposed to be effected prior to the merger and

reserved jurisdiction over all other aspects of the proposed trans.

actions." .

New England Electric System

New England Electric System (NEES) has the largest number of

subsidiary companies of all the registered holding company systems.

As previously indicated, NEES underwent a major reorganization in

soHolding Company Act release No. 9595. , Holding Company Act release Nos. 9916 and 9919. .. Holding Company Act release No. 9166. .. Holding Company Act release No. 9272. .. Holding Company Act release No. 9956.

•
SIXTEENTH ANNUAL REPORT 95

1947 and, since that time, it has been confronted with the need for

extensive system expansion, which is not expected to be completed

until 1952.

Of direct concern to the Commission has been the approach of the

system to its problems of permanent financing for this construction.

In the middle of 1948 and early 1949, the Commission permitted 23

of the subsidiary companies to borrow on promissory notes as a temporary step in the financing program." It was represented at that

time that the subsidiaries would obtain a substantial amount of cash

to retire a portion of their note indebtedness from the sale of common

stock to NEES, and that NEES would purchase these shares, in part,

out of proceeds derived from the sale of its own common stock.

In 1949,however, NEES indicated that, while it contemplated the

issuance of common stock, it was not able to state when additional

stock would be sold nor the amount to be sold. In April 1949, the

Commission reconsidered its approval of the issuance of the promissory notes and ordered 96 that NEES, and the subsidiary companies

involved show cause why its order should not be amended to the

extent necessary to terminate, in whole or in part, its authorization

with respect to notes not already issued, or to impose additional terms

and conditions with respect to such notes. In a memorandum

opinion 97 the Commission stated that the system had financed its

needs almost wholly by the issuance of debt securities and stated

that NEES should sell additional common stock. Subsequently, as

part of its financing program for the current fiscal year, NEES made

a public offering of common stock in the amount of $7,029,000.

Subsequent to this offering, NEES submitted a general financing

program proposing the sale of $7,500,000of convertible preferred

stock and $5,000,000of debentures by the parent company. In a

second memorandum opinion dated September 29, 1949,98the Commission found that the proposal was faulty in failing to provide for

additional common equity to balance the large amount of senior

securities proposed to be issued. It indicated that a minimum acceptable position might be reached if the $7,500,000now proposed to

be raised through convertible preferred stock were raised instead

through the sale of additional common shares.

New England Gas &Electric Association

New England Gas & Electric Association (NEGEA), a Massachusetts trust, registered as a holding company in 1938. Because

of a top-heavy capital structure, which included five debenture issues

and two classes of preferred shares with large arrearages, the Commission instituted section 11 (b) (2) proceedings against NEGEA

in September 1941.99 Added to the capitalization problem was the

presence of a complex situation involving claims and counterclaims

between NEGEA and the trustees of Associated Gas & Electric Co.

and Associated Gas & Electric Corp. After lengthy hearings and

extensive consideration by the Commission a second plan, which was

.. Holding Company Act release Nos. 8253 and 8927. .. Holding Company Act release No. 8995. OT Holding Company Act release No. 9212 . .. Holding Company Act release No. 9377 .. Holding Company Act release No. 3035.•
96 SECURITIES AND EXCl!ANGE COMMISSION

an alternate to the initial plan of recapitalization.'?" was approved

by the Commission and consummated in April 1947.101 It is expected

that NEGEA, which now has a simplified capital structure, more

equitable voting rights for stockholders and restated investment accounts, will continue as a holding company system.

Like other systems, NEGEA is presently carrying on an extensive

construction program to meet additional demands for service and

to replace existing property. An estimate of net additions to be

made in the period from 1949to 1952totals approximately $23,700,000.

On September 16, 1949,the Commission approved the sale by NEGEA

of 124,601 shares of additional common stock for approximately

$1,400,000. At the same time it approved the sale of notes by seven

subsidiaries.>" A second sale of 173,126common shares with proceeds

of $2,500,000was approved by the Commission in May 1950.103 Proceeds of the second stock sale were used by NEGEA to acquire additional common stock in its subsidiaries. Proceeds of the prior sale

were used to retire outstanding bank debt previously incurred by

the parent company for the same purpose.

During the past fiscal year, NEGEA participated with two other

nonaffiliated companies in the organization of the Algonquin Gas

Transmission CO.'04 The new company was organized for the purpose

of building or participating in the building of a pipeline for the transmission of natural gas from points in New York, New Jersey, or

Connecticut to the New England area. Participating with New England Gas & Electric are Eastern Gas & Fuel Associates and the Providence Gas Co. Other gas companies in New England have also been

invited to invest in the new enterprise.

Northern Natural Gas Co.

The primary business of Northern Natural Gas Co. is the purchase,

transmission, and wholesale distribution of natural gas which is

carried from gas fieldsin Texas, Oklahoma, and Kansas to utility companies located principally in Minnesota, Iowa, and Nebraska. The

company has one wholly owned gas utility subsidiary, Peoples Natural

Gas Co., and as a holding company is therefore subject to regulation

by this Commission. On September 25,1950, however, Northern filed

an application with this Commission pursuant to section 3 (a) (3)

seeking exemption for itself as a holding- company and for each subsidiary thereof as such from the provisions of the act.

Financing undertaken by the company to meet its construction needs

has been planned so as to preserve the substantial equity ratio which

has been a characteristic of the system for many years. Thus, in

March 19-19.the company sold 406,000 common shares pursuant to a

rights offering and realized gross proceeds of $11,977,000.'05 Again

in May HJ50, all additional 304,500shares were sold in the same manner

yielding proceeds of $9,5l.J1,750ylG Subsequent thereto, the company

100 The original plan of recapita lieatron could not be consummated after its approval by the Commission and by the United States district court because of adverse market

condttrons,

Holding Compan\" Act releases Nos. 7181 and 7205. 102 Holding Company Act release No. 9340. 103 Holding Company Act release No. 9843. '0< Holding Company Act release No. 9694 "ll5 Holding Company Act release No. 8963. 106 Holding Company Act release No. 9833.'"'
SIXTEENTH A~~AL REPORT 97

completed its financing program for 1950with the sale of $40,000,000

of 2% percent serial debentures after approval was granted by the

Commission on May 29, 1950.107

Northern States Power Co.

Northern States Power Co. is a holding operating company engaged, either directly or through subsidiaries, in the electric and gas

business in the States of Minnesota, 'Wisconsin, North Dakota, and

South Dakota. Incorporated in Minnesota, it was formerly controlled

by a company of the same name, organized in Delaware. The latter

company was dissolved in December 1949.10S

The construction program of Northern States (Minnesota), which in

1947 was expected to amount to $96,000,000over a 5-year period, has

since been increased to the present estimate for the same period of

$160,000,000. During 1948 and 1949, mortgage bonds and preferred

stocks totaling $55,000,000were issued by the system. Since the system had been financed for some time by the sale of senior securities,

the staff of the Commission indicated its concern over the prospective

deterioration of the system's capital structure and its lack of equity

financing. Before the issuance of bonds was approved by the Commission, Northern States amended its declaration stating that it would

offer common stock within the succeeding few months. On November

17,1949, the company, with Commission approved, made a rights offering of 1,584,238shares to its stockholders. The offering yielded

proceeds of $16,238,677.109

During the past fiscal year Northern States also accomplished a

further step in the simplification of its system. Two subsidiaries, Interstate Light & Power Co. (Delaware) and Interstate Light & Power

Corp. (Illinois) were merged with and into a third subsidiary, the

Elizabeth Light & Power Co. Upon effectuation of the merger in

August 1949, the name of the surviving company was changed to

Interstate Light & Power Co. The latter company will continue as

a direct subsidiary of Northern States.>"

Ohio Edison Co.

Upon consummation of the section 11 (e) plan of Commonwealth

& Southern Corp. on October 1, 1949,1llOhio Edison Co. became an

independent operating-holding company, subject to the jurisdiction

of this Commission by virtue of its stock ownership in Pennsylvania

Power Co., its only subsidiary.

Shortly after its divestment by Commonwealth & Southern Corp.,

Ohio Edison made application to acquire from Cities Service Co., at

a cost of $35,000,000,the latter's holdings in Ohio Public Service Co.

common stock as an initial step in a program to merge Ohio Public

Service into Ohio Edison. Funds for this purchase were to be derived from an underwritten offering of additional common stock by

Ohio Edison, subject to a rights offering to existing common stockholders. Ohio Edison also proposed an exchange offer of its com.

linHolding Company Act release No. 9890. 108 Holdmg Company Act releases Nos. 7950 and 7976.

Holding Company Act release No. 9484. 110 Holding Company Act release No. 9305. 111 Holding Company Act release No. 8633.

915841-51-8

""
98 SECUlHTIES AND EXCHANGE COMMI&SION

mon stock for shares of Ohio Public Service common stock held by

the public.

In addition to financial problems posed by this application and

declaration of Ohio Edison, substantial questions were present under

section 10 (c) (2) of the act which provides that the Commission

shall not approve an acquisition of securities unless it finds that "such

acquisition will serve the public interest by tending towards the

economical and efficient development of an integrated public utility

system." On December 2, 1949, the Commission issued its findings

and opinion approving the proposed transactions.'> In reaching

this decision, the Commission considered among other things, the fact

that the operating areas of the two companies were contiguous for

some 200 miles. Some interconnections had been made in the past

and combined operation offered many possibilities for additional tieins. Evidence indicated that substantial economies could be effected

through coordination of facilities and unified operations. Although

the resultant system would be a large one, the Commission noted the

populous and highly industrialized area of its operations and found

it "not so large as to impair the advantages of localized management,

efficient operation, and effectiveness of regulation."

In February 1950, after acquiring- about 97 percent of the common

stock of Ohio Public Service, Ohio Edison filed an application-declaration for authority to merge the two companies. This proposal involved the assumption of the debt of Public Service by Ohio Edison,

an exchange of Ohio Edison preferred stock for Public Service preferred stock, and an exchange of Ohio Edison common stock for the .

remaining publicly held common stock of Public Service. The proposals were approved by the Commission on March 29, 1950,= and

were consummated shortly thereafter. The resultant Ohio Edison

Co. and its subsidiary, Pennsylvania Power Co., have a combined

gross utility plant of about $306,000,000and annual operating revenues approximating $80,000,000.

The Southern Co.

Like Ohio Edison Co., the Southern Co. became an independent

holding company upon consummation of the section 11 (e) plan of

the Commonwealth & Southern Corp. in October 1949. The integrated electric system which it controls furnishes service, through

four electric utility subsidiaries, in Georgia, Alabama, Florida, and

Mississippi. Consolidated system assets are about $615,000,000and

annual electric revenues are in excess of $115,000,000. It is second

largest of the continuing holding company systems.

During the calendar year 1949,capital expenditures for the system

total $57,345,000and the company expects to make additional expenditures during the period 1950-52of approximately $197,000,000. This

rapid rate of expansion has given rise to substantial financing problems

during the past fiscal year and will pose similar recurring problems

for the management and the Commission in the years ahead. In

November 1949, the Commission approved the sale by Southern of

112 Holding Company Act release No. 9539. 110 Holding Company Act release No. 9771.
BIXTEENTLI ~UAL REPORT 99

1,500,000 additional shares of its common stock.'> Proceeds realized

from this sale at competitive bidding were in excess of $17,300,000. As

a result of this sale consolidated common stock equity in relation to

total capitalization and surplus was raised from 26 percent to 29

percent.

In the early months of 1950, bond financings were carried out by

three of the subsidiaries and at the close of the fiscal year there was

pending a declaration filed by Southern covering the proposed sale of

1,000,000 additional common shares to assist further in the financing of

construction expenditures by the subsidiaries. After a temporary

postponement due to unsettled market conditions, this sale was consummated in October 1950 with proceeds of approximately $10,950,000.

Subsequent to the close of the fiscal year, the Southern Co., together

with Electric Bond & Share Co., filed applications and declarations

proposing, among other things, that Southern acquire from Bond &

Share the latter's common-stock holding in Birmingham Electric Co.

through an exchange of the Southern Co.'s common shares. The exchange proposal was also to be made to the public stockholders of

Birmingham. Alabama Power Co., a subsidiary of the Southern Co.,

proposed to acquire the outstanding shares of Birmingham's preferred

stock through an exchange offer of its own preferred. Other steps

contemplated the eventual disposition by Birmingham Electric of its

transportation properties and the acquisition of that company's electric

properties by Alabama Power through merger, liquidation or otherwise. Approval of these transactions was granted by the Commission

on August 24,1950.115

On September 23, 1949, the Commission approved Southern Services, Inc. as a mutual service company for the Southern system.v"

While an appropriate showing was made that Southern Services

would be operated economically and efficiently for the benefit of the

companies which it proposes to serve, the Commission conditioned its

order in several respects to permit a review of its cost allocations and

operations at any future time.

Utah Power & Light Co.

Utah Power & Light Co. was removed from the control of Electric

Power & Light Corp. as a result of its recapitalization plan approved

by the Commission in 1945.117 The company is an operating-holding

company, subject to Commission jurisdiction by virtue of its ownership of securities in Western Colorado Power Co.

The expansion program of Utah Power & Light and its subsidiary

calls for expenditures of $61,000,000 during the period 1949 to 1953.

During the past fiscal year, the parent company sold $3,000,000 of

mortgage bonds with Commission approval, as well as 148,155 common

shares marketed pursuant to a rights offering to stockholders with

proceeds of $3,481,000.l1s In March 1950, the company received

authorization to borrow up to $10,000,000 from banks on a short-term

11< Holding Company Act release No 9503 n8 Holding Company Act release No. 10055. n6 Holding Company Act release No. 9362. 117 Holding Company Act release No. 6212. U8 Holding Company Act release No. 9309.
100 SECURITIES AND EXCHANGE COMMISSION

basis.u9 It was indicated that subsequent permanent financing to be

undertaken later in 1950would include the sale of additional common

stock as well as mortgage bonds.

The West Penn Electric Co.

The West Penn Electric Co. is the parent company in a utility system which derives about 90 percent of its revenues from sales of electric

power and services a territory located principally in Pennsylvania,

West Virginia, and Maryland, also in small adjacent sections of Ohio

and Virginia. West Penn was formerly a subsidiary of American

Water Works &, Electric Co., which was liquidated in January 1948.120

During the past fiscal year, .West Penn has consummated a number

of transactions designed to simplify the corporate structure of the

system and, in addition, a thorough-going recapitalization of the

parent company was successfully completed. Prior to July 1949,the

common stock of West Penn Power Co. and the common stock of

Monongahela Power Co., two of the three principal utility subsidiaries

of West Penn, were held in two separate blocks within the system.

Two-thirds of West Penn Power's common stock was owned by West

Penn and 27.9 percent by West Penn Railways, with a small percentage

publicly held; 45.3 percent of the common stock of Monongahela was

owned by 'Vest Penn and 54.7 percent by West Penn Power. As a

result of the section 11 (e) plan approved by the Commission on July

28, 1949,121all of the cross holdings of stock in West Penn Power and

Monongahela have now been eliminated and all shares held by the

system are owned by West Penn. In addition, the same plan provides

for an accounting reorganization of West Penn Railways and the

elimination of substantial inflation in the statement of its assets.

In September 1949,West Penn effected a complete recapitalization.

Prior to this financing, the company had one class of debt securities,

three classes of preferred stock, a "class A" stock and common stock

outstanding. Upon consummation of the refinancing, .WestPenn had

outstanding $31,000,000 of 31/2percent sinking fund collateral trust

bonds and 3,200,000 shares of common stock. A small issue of West

Penn Traction Co. bonds, assumed by West Penn in connection with

the corporate simplification, remained in its capitalization. The new

collateral trust bonds are to be retired through annual sinking-fund

payments over their 25-year life. The new common stock, to the

extent of 388,274shares, was offered to holders of preferred and class

A stock, in exchange for their holdings; the remaining 468,621shares

were offered to the holders of common stock. In each instance the

offers were oversubscribed and no shares remained for distribution

by the underwriters. The approved plan also resulted in a downward

adjustment by West Penn of its can'yil1~ value in subsidiary companies

and necessitated charges to its earned surplus and capital surplus

accounts of $1,402,324and $14,078,119respectively.

In its opinion approving the recapitalization.t" the Commission

commented "that the resulting consolidated common stock equity is

substantially less than we consider appropriate for utility systems"

11. Holding Company Act release No. 9731. 110 Holding Com.pany Act release Nos. 7091 and 7208. 121 Holding Company Act release No. 9255. 12: Holding Company Act release No. 9329.
BIXTEEl-,"'TH ANNUAL REPORT 101

and that "the issuance of debt by a holding company whose subsidiaries

have substantial amounts of debt and preferred stocks in the hands of

the public also raises a serious problem under the standards of the act."

Itnoted, however, that the proposed sale of new common stock by West

Penn was a substantial one which increased the number of outstanding

common shares by 37 percent, and that the sinking-fund provisions on

the new debt called for its complete retirement by maturity. Since the

program also facilitated the future financing of system construction

requirements, the Commission determined that it could be approved,

indicating its intention, however, to require that future financings be

designed to strengthen the common equity of West Penn in all possible

ways.

ISSUES OF SECURITIES, ASSUMPTIONS OF LIABILITY, AND

ALTERATIONS OF RIGHTS

During the past fiscal year, 319 applications and declarations covering issues of securities under sections 6 and 7 and assumptions of liabilities and alterations of rights under section 7 were filed with the

Commission, Action was completed and Commission approval granted

in 337 cases, including some which were instituted prior to that period.

As in the preceding year, most applications under sections 6 and 7 were

undertaken to enable electric and gas utility companies under the Commission's jurisdiction to proceed with their plans for extensive plant

expansion. However, there was also a noticeable increase in the number of bond-refunding operations.

On an industry-wide basis, construction expenditures of electric and

gas utilities, exclusive of expenditures by natural gas transmission

companies, are estimated to have been in excess of $2,500,000,000in

the past fiscal year. While it had been envisioned that these expenditures would begin to taper off within the near future as increased

facilities approached power requirements, the recent trend of domestic

and international events suggests that no early decline in the pace of

growth is in sight.

The sustained volume of construction has, of course, necessitated a

heavy program of financing. This is demonstrated by the following

tabulation showing security sales of electric and gas utilities for the

fiscal years 1948 to 1950.
102 SECURITIES AND EXCHANGE COMMISSION

Security issues sold for cash. and issued in el1Johangefor refunding purposes by

electric and gas utilities-fiscal years 1948 to 1950 (includes all issues subject

to provisions ot the Public Utility Holding Oompany Act ot 1935 and to registration requirements under the Securities Act of 1933) 1

July 1, 1947, to July 1, 1948, to July I, 1949, to

June 30, 1948 June 30, 1949 June 3fl. 1900

Bonds ....... .. ........ _._ ... _. $1,087,266,075 $899,414, m ~953, 782, 240 Debentures, ........ _. ........ ... ........ . _._ 110,307,321 241, 238, roo 104, 700, 235

Preferred stock ... 229,443,828 192, 779, 280 362. 015, 050

Common stock .... : :::::::::::::::::::::::::::::::::::: 226,439.06.1 364.016,666 001,460,071

Total ............ . ......•. .. _. ... 1,689,456,287 1,697,469,175 1,921,957,596

1 This table IS presented in order to ztve some data on an industry-wide baSIS. It includes Ilnaneing

effectod b)' companies subject to the [unsdietion of the Comnnsslon under the Public Utihty Bolding

Company Act as well as financing by otber public trtility eompanies whose securities were registered under

the seeunties Act of 1933. Smce pnvate placements are not registered under the latter cet the chart does not include data With respect to private placements of pubhc unlrties not subject to the junsdrction of the Public Utillty Holding Company Act

The amount of private placements by companies not subject to the act is estimated to have been in the

area of $300,000,000 during the last fiscal year.

, In addrtion, utility eompames subject to the Bolding Company Act, sold notes With maturities of 5 yearS

or more in the following amounts: 1948.. _._ •. .• .. .. •...• •........•.•.. _._ ...•...... , .....•.•. $79,200,000 1949....•••.•....•.• _._._ _._ .. _. ._._._ ..........•. . $62,090,000

1950...••......•.. •.•.... _., .•.... ._. .. .•...•......•.••....•..•• •.. $23,200,000

Total financing during the past fiscal year was higher than that of

the two preceding years, and a portion of this increase is attributable

to a renewal of refinancing activity. Of particular significance, however, is the steady upward trend in the proportion of common stock

financing from 13.4 percent for the fiscal year 1948 to 26.1 percent for

the fiscal year 1950. This trend may be accounted for irr part by the

receptivity of the market to new common stock offerings during most

of the past year, but it also reflects an awareness and responsiveness

on the part of public utility management to the necessity of maintaining a strong foundation of equity capital. As a result, utility

companies not only are assured of meeting their cash requirements

for near term construction needs but are afforded protection against

periods of market uncertainty when it becomes more difficult to obtain funds through offering of common stock.

As the program of integration and simplification under section 11

progresses and companies are divested from holding company systems, that segment of electric and gas utility financing subject to the

provisions of sections 6 and 7 declmes accordingly. Although some

further contraction is anticipated new financing undertaken by those

holding companies and subsidiary operating companies which are

expected to remain subject to regulation by the Commission, will

continue to represent a substantial portion of the industry total. The

following tables set forth, in summary form, security sales approved

under sections 6 (b) and 7 of the act for the fiscal years 1950 and 1949.

Information is provided with respect to registered holding companies

and their electric and gas subsidiaries and nonutility subsidiaries.

These totals include all cash sales and refundings accomplished by

direct exchanges. Sales from portfolios and issues offered in connection with reorganization under section 11 are excluded.

_____________________ ____

__ __ _ __ __"

----- ' ____ _ _ _ ________

__ __ _ _ _ _

_

_

__

__ _

_ _ _

__ _ '

_••

__
SIXTEENTH ANNUAL REPORT 103

Bales of securities ana application of net proceede approvea under tile Public

Utility Holding Oompany Act of 1935 during the fiscal year July 1, 1949, to

June 30,19501

A ppheation of net p' oceeds

Num- Total Refinancing berof security

issues sales , New money of short- Refunding purposes term bank

loans'

Sales by electric and gas ututues: Bonds _______________________________ 39 $402, 095, 63,1 $219,628,040 $103,853, 561 $73,618,144 De bentures 2 45,523,735 41, Oil, 210 4, 100,000 Notes' 21 23,200,000 2'3,173,710 ----9~869~959------------- Preferred stock ______________________ 15 58,064, 970 42,812,177 4,018,743 Common stock ______________________ 73 235,380, 176 182,875,058 46,016,170 3,006,452

TotaL 150 764, 264, 516 509,500,195 163,8.39,690 80,643.339

Sales by holding companies. Bonds (eollateral trust), _____________ 1 31,783,060 8,633.353 -------------- 22,751,416 De bentures __________________________ 2 125,883,050 30,990 (J.34 93,750,000 Notes' 1 27,259, .168 53,887 ---T492;"20i 26,978,530 Common stock ______________________ 12 114, 983, 705 87,911,631 19,717,423

Total. _____________________________ 16 299, 909, 383 127, 588, 905 3,492,201 163,197,369

Sales by nonutllity oompames Bonds. ______________________________

Notes' ______________________________ 4 48,010,000 43,891,620 4,001,8.50 ----.------- 12 17,600,000 17,594,779 Common stock ______________________ ------498~iJ5i) 4 6,812.500 5,566,660 -----675~000

Total ______________________________ 20 72,422,500 I 67,053.059 4,499,000 675,000

1 Data lnmted to sales by Issuing companies: offerings from portfolio are not included.

, Difference between total security sales and total proceeds IS represented by notanon costs to the issuing

companies . Notes and bank loans of less than Ii years matunty, usually for construction purposes .

Includes sales by registered operating-holding companies which dertve a substantial proportion of income

from their own operations, but WhICh also may have one or more utrhty subsidlanes .

With matunnes of 5 years or more.

Bales Of securities ana application ot net proceeds approved uruier the Public

Utility Holding Oompany Act ot 1985 during the fiscal ywr July 1, 1948, to

June 30, 1949 1

Appheauon or net proceeds I

Num- Total Reflnancmg beror security Ncw issues sales I moncy of'short- Refundlng term bank purposes loans'

Sales by electric and gas utlltties.s

.16 $.368,209,514 $246. 174, 609 $95, 620, 052 Bonds -r $17, 955, 072 Debentures __________________________ 5 l00,Ii5l,165 46,615,225 41,358,800 17,303,000 Notes 31 62,090,000 44,793,050 14, 8.50,000 2,100,000 Preferred stock ______________________ 17 74,859,040 43,062,350 26,254,700 4, 000, 000 Common stock ______________________ 74 197,610,057 146, 218, 297 30,713,805 18,730,750

TotaL _____________________________ 183 809, 319, 776 526,863,531 208, 797,357 60,088,822

Sales by holding' companies: Debentures _________________________ 2 33,878,815 20,646,890 -------------- 12,850,000 Notes' ______________________________ 6 18,272,500 3,272,500 -------------- 15,000,000 Common stock 8 69,893,184 68,546,045 -------------- ------------

TotaL .. 16 122. 044, 499 92, 465, 435 ------.------- 27, 8.50,000

Sales by nonutihty companies. Bonds _______________________________ 4 49,295,080 I 43,807,210 5,000,000 Common stock. ._0_. 8 9,875,000 9,279,301 --575;000 ----.-.-------

TotaL 12 I 59,170,080 53,086,511 5,000,000 575,000

I Data limited to sales by issuing companies; offerings from portfolio are not Included .

Difference between total seeunty sales and total proceeds IS reprcsented by flotation costs to the issuing

companies.

• Notes and bank loans of less than 5 years maturity, usually for construction purposes •

Includes sales hy registered operating-holding companies which derive a substantial proportion or Income from their own operations, but which also may have one or more utilIty subsidiaries

WIth maturities of 5 y~ars or more.

'

_______________• _____• ____ ____________• _________________ -----------

•• ___•_______________________

______________________________ ----------~---

•

•

•

__________________________ ---

•______________________________

__• ___________________

_______• ___________________

___ _____________ ---

_________• ___________________

•

•

•
104 SECURITIES AKD EXCHANGE COMMISSION

A comparison of the security sales by electric and gas utilities, approved under sections 6 (b) and 7, in the fiscal years 1949 and 1950

reflects a decline in the number of offerings from 183 to 150 and in the

total dollar volume of sales from $809,319,776to $764,264,516. Sales

of both mortgage bonds and common stocks increased during 1950,

whereas sales of other securities declined. Mortgage bonds, moreover,

represented 52.6 percent of total security sales in 1950 as against 45.5

percent in the fiscal year 1949. The proportion of common stock

financing climbed from 24.4 percent to 30.8 percent, and the relative

proportions of other types of financing declined.

Because the common equity of so many utility subsidiary companies

is wholly owned by the parent holding companies, the subsidiaries are

primarily dependent on the holding companies as sources of equity

capital. In the fiscal year 1949, registered holding companies purchased common shares of subsidiary companies to the extent of $150,-

000,000. During 1950, this figure amounted to $134,000,000. The

availability of funds for these intrasystem stock purchases depends

directly upon the adequacy and appropriateness of public financing

undertaken by the holding companies.

In past years, substantial amounts of cash have been made available

from the sale of nonretainable subsidiaries, but this source of funds

ceases to be important as holding companies become streamlined. As

a result, sales of common stock by registered holding companies are

increasing. They rose from $70,000,000in 1949 to $115,000,000in the

fiscal year 1950. (These figures exclude sales by operating-holding

companies.)

The Commission must bear in mind standards designed to assure

that the pressure of heavy cash requirements will not result in any

over-all deterioration in the consolidated capital structure and in the

quality of securities outstanding. By insisting that parent holding

companies undertake common stock financing periodically to match

increases in system debt financing, the Commission seeks to prevent

a return of the high-leveraged, unwieldly structures which led to the

legislation it now administers. Many holding companies have recognized their responsibilities in this respect and a number of the regulated systems have already reached a point. where the market receptivity to their common stock offerings is almost comparable with that

accorded to the stock of good quality operating companies.

COMPETITIVE BIDDING

Offerings of securities by issuing companies under sections 6 (b)

and 7 of the act and portfolio offerings by holding companies under

section 12 (d) are required to be made at competitive bidding in

accordance with the provisions of rule U-50. Certain types of sales

are automatically exempted from the requirement. In addition, the

Commission retains the right to grant exemptions in other instances,

when unusual circumstances make such action appropriate.

Securities sold at competitive bidding under rule U-50 from its

effective date, May 7, 1941,to June 30, 1950,total in excess of $6,216,-

000,000. A tabular presentation showing the various classes of securities, number of issues, and the respective amounts, is set forth below:
SIXTEENTH ANNUAL REPORT 105

Sale8 of securities pur8uant to rule U-50-May 7, 1941, to June 80, 1950

Number of

issues Amount

Bonds . '_ •. Debentures . . . Notes . . Preferred stock . Common stock . .. .

261 I $4,295,679, 000

30 1 614, 43S, 000

5 1 52,750,000

77 688,964.700 62 , 564,807,836

TotaL •. . 435 6,216,639,536

1 Principal amount . Par value . Proceeds to company.

While the experience of the Commission during the past 9 years has

amply demonstrated the workability of rule U-50 and its effectiveness

in achieving competitive conditions and minimum costs of flotation,

the Commission has always recognized that appropriate administration of the rule requires flexibility of application. Thus, in the

period since the rule became effective, a total of 192 security issues

amounting to $1,414,000,000have been exempted by Commission order

from competitive bidding requirements. This is exclusive of the automatic exemptions. The following table summarizes the exempted

sales by type of security and also provides a breakdown of the total

amounts showing those issues which were underwritten and those completed without an underwriting:

Sales of securities pursuant to orders of the Commission. granting exemptions

from competitive bidding requirements under the pl'ovi8ion8 Of paragraph (a)

(5) of rule U-50 '-May 7,1941, to June 30, 1950

Underwri tten trans- Nonunderwritten 'I'otal-e-all issues actions transactions

Num- Num- Nurnber of Amount' ber of Amount' ber of Amount.

issues Issues Issues

onds ______________________________ 4 $27,027, 500 53 $462, 4!l4, 714 57 $489,512,214 ebentures 3 83,425,000 5 36,779,939 8 120, 204, 939 otes -------- -------------- 19 32,894,158 19 32,894,158 referred stock _____________________ 10 60,868,70.3 2.3 257,610,344 33 318,479,047 ommon stock ___________________ 31 275,074, 100 44 178, 392, 341 75 453, 466, 441

TotaL ________________________ 48 446, 395, 303 144 968,161,496 192 1, 414, 556, 799

B

D

N

P

C

1 Exclusive of automatic exemptions afforded by clauses (1) through (4) of paragraph (a) of rule U-50 .

Proceeds to the company.

As the foregoing table reveals, most of the exempted transactions

were not underwritten. The major portion of the underwritten

exempt sales consisted of common stock offerings aggregating $275,-

074,100. While these exemptions may not be attributed to any single

factor, they reflect the greater difficulties sometimes encountered in

the marketing of common stocks owing to either the nature of the

issue or to security market conditions. By comparison, however, common stock sales through underwriters at competitive bidding were

twice as much in both amount and number of issues.

_ • • ___ __ •• • _ • _

_ • _

_

•

•

__________0 __________ 0 ___

_____0 __________ 0 __________ 0 ___

_0

•
106 SECURITIES AND EXCHANGE COMMISSION

The substantial number of exemptions granted with respect to both

underwritten and nonunderwritten preferred stock transactions represented principally the exchange of new lower dividend preferred

stocks to refund outstanding shares of higher rate. Beginning with

the Oklahoma Gas & Electric case in March 1946,123 however, the

Commission announced the policy that future preferred stock exchange offerings would be required to be made at competitive bidding.

More recently, the limited receptivity accorded to medium grade

preferred issues has also necessitated the granting of exemptions for

some underwritten issues.

Most of the exempted nonunderwritten bond and debenture offerings are represented by private placements made by the issuers. The

aggregate figure comprises a considerable number of issues of small

size and a small group of very large offerings exempted because of

unique circumstances present at the time of sale. Of the note offerings, exempted and not underwritten, only a small portion was placed

with banks and insurance companies; the balance was represented by

sales of an unusual nature to private persons or groups, to other utilities or holding companies, or to other parties. Exempted common

stock sales which were not underwritten consisted mainly of (1) sales

to other utilities, other holding comJ?anies, or to private persons or

groups (portfolio sales) and (2) rights offerings to stockholders

made without underwriting assistance.

Because rule U-50 covers not only sales by issuers under sections

6 (b) and 7 of the act, but also portfolio sales under section 12 (d),

there is substantial variety in the nature of circumstances which, over

the years, have necessitated the granting of exemptions. Each exemption request, however, has been appraised in the Iight of the particular

situation under which it is made.

In general, rule U-50 is now recognized as a practical and successful

aid to regulation. The Federal Power Commission during the past

fiscal year adopted a similar rule.

Cooperation With State and Local Regulatory Authorities

Despite the fact that there were 100 fewer companies subject to

regulation under the act on June 30,1950 as compared with a year ago,

activities involving cooperation with State and local regulatory authorities have continued undiminished. During the past year, there

were six Holding Company Act proceedings before the Commission

in which representatives of States or municipalities either participated

or exchanged views on questions of mutual interest. This compares

with seven such instances in the preceding year.

The cooperative efforts of the past year have encompassed a wide

variety of problems. Several of the proceedings have dealt with

financings, recapitalizations, and property sales or acquisitions, where

the questions of mutual interest related to accounting, protective provisions of securities, and capital structures. An example may be

found in a recent application made to this Commission by Milwaukee

Gas Light Co. seeking approval of a $3,500,000bank-loan agreement.

The proceeding raised four questions which required careful consideration by this Commission and by the Public Service Commission

,::I Holding Company Act release No. 64.9,
SIXTEENt.1'H ANNUAL REPORT 107

of the State of Wisconsin. These pertained to: (a) The pending

application of the company before the State commission for authority

to amortize over a 10-year period the cost of converting to natural

gas; (b) the question of immediate or accelerated retirement of the

manufactured gas equipment; (c) adjustments in the company's present reserve for depreciation; and (d) the company's proposal for a

permanent financing program. After a helpful exchange of views

with the chief accountant of the Wisconsin commission, the questions

raised by the application were disposed of to the satisfaction of both

commissions. It was also agreed that a similar exchange of views

would be sought when the company submits its permanent financing

plan at a later date.

Early in 1950'Visconsin Electric Power Co. presented an informal

program for: (1) The acquisition by it of the electric properties of

its subsidiary, Wisconsin Gas & Electric Co., at a purchase r-rice of

about $13,800,000; (2) the redemption of the latter company s bonds

in the principal amount of $10,500,000; and (3) the issuance of

$15,000,000principal amount of new bonds and 585,405shares of new

common stock by Wisconsin Electric.

After preliminary examination of the proposals, the staff concluded

that the overall objectives were desirable, but that it would be necessary to work out certain accounting, indenture, and capital structure

problems before recommending favorable action by this Commission.

Since these problems were also of interest to the Public Service Commission of Wisconsin, they were discussed at length with the chief

accountant of that commission and, as a result, the staffs of both commissions arrived at a mutually satisfactory position with respect to

each point. The company amended its proposals to reflect these views,

and thereafter the plans were approved by both commissions.

The Portland Gas & Coke Co. filed a voluntary plan of reorganization under section 11 (e) of the act proposing a reclassification of the

outstanding preferred and common stocks into a single issue of new

common stock. The Commissioner of Public Utilities for the State

of Oregon was represented in the proceedings by his chief accountant

who, at the request of counsel for the division of public utilities of

this commission, testified with respect to matters over which the

Oregon commissioner had jurisdiction and, in addition, participated

in several conferences with the staff of the division. These exchanges

of views have been very helpful to the Commission in its consideration

of the complex issues in this proceeding.

Three other proceedings during the year involved cooperation with

local authorities. In the first, it was proposed that the Interstate

Light & Power Co. (Wisconsin), a subsidiary of Northern States

Power Co. (Minnesota), sell its Platteville division to Wisconsin

Power & Light Co., and that another subsidiary of Northern States

Power Co., the Interstate Light & Power Co. (Illinois) sell all of

its properties to Northwestern Illinois Gas & Electric Co. The city

of Galena, Ill., in March 1950,submitted a request to this Commission that final approval of these proposals be deferred pending further

investigation by the city to determine whether its interest would be

adequately safeguarded. The Commission withheld action on the

matter until June 1950, when it received notice from the city that it
108 SEctJRITIES AND EXCHANGE COMMISSION

would interpose no further objection to consummation of the

transaction.

In last year's report reference was made to certain proposals by

American Power & Light Co. as to the disposition 'of its interests in

its two subsidiaries, Pacific Power & Light Co. and the Washington

Water Power Co. In substance, the first plan provided that American

donate its holdings in Pacific to Washington Water Power, and in

the second American proposed that it be permitted to continue in

existence as a holding company with respect to both of the companies.

The Public Service Commission of the State of Washington and the

Oregon commissioner were vitally concerned with these proposals

and participated actively in the proceedings.

The plans met with considerable opposition and were withdrawn.

Subsequently, American filed another plan with this Commission proposing the sale of its holdings of all the common stock of Pacific to

a purchasing group which indicated an intention to sell the physical

properties of Pacific on a piecemeal basis to municipalities or other

interests. The Washington commission, the Oregon commissioner

and the city of Portland were represented at the hearings. Representatives of the two State commissions testified in opposition to

the plan on the ground that the disposition intended by the purchasing

group would not be in the public interest.

This group then dissolved and a second purchase group sought

authority to acquire the stock of Pacific, indicating an intention to

dispose of it at a later date through public sale. This proposal was

approved by the Commission and consummated. Recently, the purchase group sold the stock to a syndicate of underwriters for public

distribution.

On February 15, 1950,American Power & Light Co. made effective

a plan under which it distributed to its security holders all of its

assets other than the common stocks of the Washington Water Power

Co. and the Portland Gas & Coke Co., cash, and certain miscellaneous

assets. In May 1950, the Washington Public Service Commission

filed a petition requesting this Commission to enter an order requiring that American cease to be a holding comJ?anywith respect

to 'Washington Water Power Co. by causing American to either (a)

distribute to its stockholders all of its holdings of WaShington Water

Power capital stock, or (b) offer the stock for sale at competitive

bidding pursuant to rule U-50. The petition further requested that

this Commission hold a hearing on the matter. At about the same

time the Public Utilities Commission of Idaho filed a petition stating

that it joined in, and adopted the petition of the Washington Public

Service Commission. On June 9, 1950,this Commission ordered that

oral argument on these petitions be heard on June 19, 1950, which

date was later advanced to June 27, 1950. The two State commissions subsequently advised that it was not possible for them to enter

appearance on that date, but this Commission advised them that it

would be necessary to proceed with the argument as planned since

the issues raised by their petitions had been presented in similar petitions by stockholders of American. The Commission indicated, however, that it would entertain any further requests by either of the

State regulatory authorities subsequent to the date of the argument.
SIXTEENTH ANNUAJL REPORT 109

The argument was concluded and the proceeding is still pending before

the Commission.

The cooperative efforts in connection with specific proceedings, however, tell only a part of the story. The entire Holding Company Act

was designed to complement and strengthen local regulation. This

objective is clearly set forth by the Congress in paragraph (C) of section 1 where it is expressly declared to be the policy of the act that all

provisions thereof shall be interpreted to meet the problems and eliminate the abuses enumerated in paragraph (b). From the following

quotation of paragraph (b), it is readily apparent that many of these

evils and abuses were found to be harmful to local regulation and to

stem directly from the imposition of unregulated holding companies

upon operating utility companies.

The act has helped State regulation to exercise the powers necessary

to meet local responsibilities. During the 15-year period in which the

Holding Company Act has been in operation, 392 electric and gas

utility companies, with assets aggregating some $9,185,000,000have

been divested and, as a result, are now operating independently of

holding-company control. Furthermore, this newly won independence

is protected by the provisions of section 2 (a) (7) (B),2 (a) (8) (B),

2 (a) (11) and 9 (a) which contain appropriate safeguards against

the recurrence of detrimental holding company and affiliate relationships. Section 11 (b) limits the size, character of business and corporate structures of existing holding companies and sections 9 and 10

impose standards which must be met in the creation of new holding

company systems or in the enlargement of existing systems. All of

these last three sections are expressly geared to the preservation of the

effectivenessof local management and local regulation.

Other sections of the act, principally sections 12 and 13, provide for

comprehensive supervision over transactions between companies within

a holding company system. Section 13 requires that all services rendered to operating utility subsidiaries by system service companies be

rendered at cost, fairly and equitably allocated among the client companies and for the benefit of the client companies. Paragraph (e) of

this section, limits the operation of affiliated servicing organizations

and paragraph (f) provides for maintenance of competitive conditions

and adequate disclosure of information by servicing organizations

principally engaged in the performance of services for public utility

and holding companies in interstate commerce. The statutory safeguards contained in sections 2, 9, 10, 11, 12, and 13,by their mere existence, serve as an effective barrier to any recurrence of those impediments to local regulation enumerated in section 1 (b) and, in the

aggregate, they constitute what may be appropriately described as an

important area of passive cooperation.

LITIGATION UNDER THE PUBLIC UTILITY HOLDING COMPANY ACT

During the 1950fiscal year the Commission participated in 26 judicial proceedings involving issues arising under the Holding Company

Act. Fifteen of these proceedings concerned the enforcement of voluntary plans filed under section 11 (e) of the act, 1 was to enforce a

plan under section 11 (d), 9 were initiated by petitions to review orders
110 SECURITIES AND EXCHANGE COMMISSION

of the Commission, and 1 involved an application for an injunction to

prevent a subsidiary of a registered holding company from filing with

the Commission an amendment to a pending plan. The Commission's

activity in the courts is shown in the followmg tables:

ACTIONS TO ENFORCE VOLUNTARY PLANS UNDER SEC. 11 (e)

Applications pending in United States district courts, July 1, 1919____ 2

Applications filed, July 1, 1949, to June 30, 1950 13

Plans approved and not appealed__________________________________ __ 9

Plans approved and appeals taken to courts of appeaL_____________ __ '4

Applications pending, June 30, 1950________________________________ __ 2

Totals______________________________________________________ 15 15

Appeals from orders of district courts approving plans, pending in

courts of appeal, July 1, 1949____________________________________ 4

Appeals taken from orders of district courts approving plans, July 1, 1949, to June 30,1950 4

Appeals dismissed____________________________ _ __ 2

Orders of district courts affirmed___________________________________ 2

Orders of district courts reversed or modified________________________ 2

Appeals pending, June 30, 1950____________________________________ 2

Totals______________________________________________________ 8 8

ACTIONS TO ENFORCE TRUSTEE'S PLAN UNDER SEC. 11 (d)

Applications filed, .Iuly 1, 1949, to June 30, W:iO____________________ 1

Plans approved and not appealed__________________________________ 1

Totals______________________________________________________ 1 1

PETITIONS TO REVIEW ORDERS OF THE CO:YMISS~ONUNDER SEC. 24 (a)

Petitions pending in courts of appeal, July 1, 1949____________________ 4

Petitions filed, July 1, 1949, to June 30, 1950________________________ ;,

Orders of S. E. C. affirmed________________________________________ __ 3

Petitions dismissed or withdrawIL_________________________________ __ 3

Petitions pending, June 30, 1950____________________________________ __ :3

Totals______________________________________________________ 9 9

PETITIONS FOR DITERVENTION

Applications filed, July 1, 1949, to June 30, 1950______________________ 1

Commission permitted to intervene, and Injunction denied '__________ 1

Totals______________________________________________________ 1 1

1In the case of 1 plan, 2 appeals were taken from separate orders of the district court,

and were pending at the end of the fiscal year. , See dtseussion of Market Street Railway Co. proceedings, infra.

Enforcement Proceedings Under Section 11 (e) of the Act

Two applications for enforcement of voluntary plans under section

11 (e) were pending in United States district courts on July 1, 1949.

The district courts approved the two plans during the fiscal year and

appeals were taken in each case, both of which were pending on June

30,1950.

The first of these two plans provided for the liquidation of the Commonwealth & Southern Corp. The district court approved the J.?lanas

submitted to it by the Commission.>' An appeal was taken, objecting

m The GommonweaUh &: Southern Gorp., 84 F. Supp. 809 (D. Del., 1949).
SIXTEENTH ANNUAL REPORT 111

to that part of the plan which provided that the holders of option warrants should not participate ill the liquidation of Commonwealth &

Southern, and this appeal was pending at the end of the fiscal year.

Thereafter, the court of appeals affirmed the district court order.l25

After consummation of the plan, a securities dealer petitioned the district court for leave to intervene in the proceedings on behalf of persons who had traded in the prospective rights of security holders to the

residual assets of Commonwealth & Southern, which, under the plan

as amended prior to consummation, were to go to the Southern company. The district court denied the petition and an appeal was taken,

which was pending in the third circuit court of appeals at the end of

the fiscal year.

The second plan involved the liquidation of Federal Water & Gas

Corporation. The district court had approved the plan except as to

that part which accorded to certain former preferred stockholders of a

predecessor company the limited amounts which had been approved by

the Commission in an order, affirmed on appeal,t26approving an earlier

plan for the reorganization of the predecessor company. On January

11, 1950, the district court approved the latter portion of the plan.v"

An appeal was taken from that order of the district court and was

pending in the third circuit court of appeals on June 30, 1950. Appellants also petitioned the Supreme Court for direct review of the district court order. Their petition for certiorari was denied after the

close of the fiscal year.l28

During the fiscal year 1950, the Commission filed 13 applications

with the United States district courts seeking approval of voluntary

plans under section 11(e) . Nine of the plans were approved by the

district courts and no appeals were taken from these orders. One of

the nine plans involved the recapitalization of Interstate Power Co.

Following approval thereof by the district court and a memorandum

of the court granting certain objectors time to apply to the Commission

for a rehearing,129the Commission requested that it be permitted to

reconvene hearings upon the plan in order to determine whether circumstances had so changed as to make the plan no longer fair and

equitable. The court granted the petition and the plan is now under

further consideration by the Commission.

A second plan involved a discharge of Philadelphia Co. from its

position as a guarantor on the debt of its underliers. This plan was

combined with a plan of reorganization of Pittsburgh Railways Co.

under chapter X of the Bankruptcy Act. Following the conclusion

of hearings on the combined plan, the Commission made its findings,

entered an order approving the plan of Philadelphia Co., and rendered

an advisory report on the plan of Pittsburgh Railways. The district

court approved the Philadelphia Co. plan under section 11 (e) and

approved the plan of Pittsburgh Railways under chapter X}30

In one of the remaining seven cases, a holder of preferred and

common stock of American Power & Light Co. objected to the plan

1%5_ F. 2d (C. A. 3,19(0) ..68. E. C. v. Chenery Oorp., 332 U. S. 194 (1947), rehearing denied, 332 U. S. 783

(1947). 1%7 In re Peaera; Water & Gas Corp., 87 F. SUllP. 289 (D. Del., 1949). 128 Chenery Corp. v. 8. E. C., - U. S.- (1950).

In re Interstate Power Co., 89 F. SUIlI!. 68 (D. Del., 19(0). -.en rePhiladelph'a 00., unreported (W. D. Pa., No. 8676).

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'"
112 SECURITIES AND EXCHANGE COMMISSION

of that company for distribution of its assets on the ground that the

plan was not fair. The district court rejected these objections and

approved the plan.>" A plan for recapitalization of Eastern Gas &

Fuel Associates was objected to as unfair and inequitable by certain

preferred and common stockholders. The district court, however,

deemed the plan to be fair and equitable and overruled the contentions of stockholders that the Commission's valuation was not supported by substantial evidence.i'" Court enforcement of a plan for

the merger of Iowa Public Service Co. into its parent, Sioux City

Gas & Electric Co., and the acquisition by Sioux City of the properties and assets of its remaining three subsidiaries, was opposed by

the secretary of state of the State of Iowa on the ground that the

proposed merger did not comply with the law of the State of Iowa.

The district court overruled the objections and approved the plan.l33

The remaining four plans, which provided, respectively, for the liquidation of the Middle West Corp., National Gas & Electric Corp., and

North Continent Utilities Corp., and for the the elimination of crossholdings in the West Penn Electric Co. system, were enforced without

opposition.

District court approvals of two plans submitted during the fiscal

year were appealed to United States court of appeals. One of these

plans involved the reorganization of the Niagara Hudson Power

Corp. system by merger of three major operating companies into a

single operating-holding company, Niagara Mohawk Power Corp., and

the liquidation and dissolution of Niagara-Hudson. The plan provided that holders of option warrants of Niagara-Hudson should not

participate in the reorganization since the warrants had no value

for reorganization purposes. The court of appeals reversed the district court, which had excluded the warrants from participation,

and remanded the plan to the Commission for further consideration.!" After the close of the fiscal year, the United States Supreme

Court granted certiorari to review the court of appeals order.>"

The other of these plans involved a reorganization of the Long

Island Lighting Co. system which provided for the consolidation of

Long Island and two of its subsidiaries to form a new operatingholding company. Common stockholders of Long Island appealed

from the order of the district court 136 approving the. plan on the

ground, among others, that the Commission in arriving at its estimate of future earnings had failed to give consideration to savings

which would result from consolidated operations. The court of

appeals upheld the district court in all other respects, but remanded

the plan to the Commission upon this sole issue.':" The Commission

petitioned for modification of the decision and filed its supplemental

findings and opinion, clarifying its discussion of savings which resulted from consolidated operations. After the closeof the fiscalyear,

the court of appeals granted the Commission's petition, modified its

former opinion, and affirmed the order of the district court, and the

131 In re American Power d: Light Co. unreported (S. D. N. Y., No. 52-324).

In re Eastern Gas Fuet Associates, 90 F. Supp, 955 (D. Mass., 1950). w t« re Swu,,, ou« Gas d: Electric o«, unreported (N. D. Iowa, W. D., No. 571).

Leventritt v. S. E. C., 179 F. 2d 615 (C. A. 2, 191iO). '35 S. E. C. v. Leventritt, - U. S. - (1950). ,." WI In re Long Istand Lighting Oo., 89 F. SuPP. 513 (E. D. N. Y., 1950). :I3T Common Stockholders Commitee v. S. Fl. C., 183 F. 2d 45 (C. A. 2, 1950).

- '"

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SIXTEENTH ANNU.AJL REPORT 113

Supreme Court denied certiorari.138 Two applications filed during

the fiscal year were pending in the United States district courts on

June 30, 1950.

Four appeals were pending at the beginning of the fiscal year from

orders of United States district courts approving and enforcing voluntary plans under section 11 (e) which had been approved by the

Commission. The first of these appeals was taken from an order of

the district court directing that dividends paid bY'Illinois Power Co.

on the shares of its common stock allocated to public stockholders of

North American Light & Power Co., between the date of the enforcement order and the date of consummation, should be distributed to

such stockholders along with the illinois Power Co. stock. On appeal

the order of the district court was aflirmed.l39 The second plan involved the liquidation of Electric Power & Light Corp. and the organization of a new holding company, Middle South Utilities, Inc.

Applications for a stay of consummation had been denied during the

previous fiscal year.l40 Three appeals were taken; one was dismissed

by the court of appeals, and in the others, the court of appeals affirmed

the order of the district court.l41 The appeals pending at the beginning of the fiscal year in the other two cases, involving plans of Electric Bond & Share Co. and the United Corp., were dismissed without

opinion.

Petitions to Review Orders of the CoJllDlission

Four petitions to review orders of the Commission were pending in

court of appeals on July 1, 1949. One of these petitions, for review

of an order of the Commission allowing fees, was dismissed during

the fiscal year; 142 inthe other three cases, the Commission's orders were

affirmed. One of these cases involved an order of the Commission

directing that Pennsylvania Edison Co. pay from an escrow fund, to

the former holders of its preferred stock, the difference between the

investment value of the stock found by the Commission to equal its

call price, and the $100 per share paid upon the retirement of the

stock, together with compensation for the time elapsed between date

of retirement and payment of the balances found to be due, at rates

measured by the yields on the preferred stock.143

The second affirmance involved an order of the Commission denying

effectiveness to a declaration of a common stockholders' committee of

Long Island Lighting Co., proposing to solicit funds from the common

stockholders of Long Island. The court held that the Commission

had acted reasonably, and within the scope of its authority.>' After

the close of the fiscal year, the Supreme Court denied certiorari.l45

The third case in which the Commission was affirmed was an appeal

from an order directing, pursuant to section 11 (b), that Philadelphia

Co. dispose of certain gas and transportation interests, and Iiquidate

and dissolve. Philadelphia Co. urged that the gas and electric prop-

""'- u. s. (1950). uo Appeal 01 Norih American. Light & Power 00., 180 F. 2d 975 (C. A. 8. 19(0). uo In re lIlectrio Power & LfgAt OOrp" unreported (C. A. 2. No. 49-347) ; 387 U. S.

903 (1949). 111 In re lllectric Power cf Light Oorp., 176 F. 2d 687 (C. A. 2. 1949) . ... ct. In re National Power d Light 00" 80 F. Supp. 759 (S. D. N. Y•• 1948).

""In re Penn8I1!1JaniaEdiBon 00., 176 F. 2d 764 (C. A. 8. 1949) ....Halstead v.s.». 0.,182 F. 2d 660 (C. A. D. C., 19(0). UII_ U. S. (1950).

915841-51-9

-

•

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114 SECURITIES AND EXCHANGE COMMISSION

erties constituted a single system, and that their separation would

involve a loss of substantial economies. The court rejected these contentions and affirmed the order of the Commission.>"

During the fiscal year 1950, five petitions to review orders of the

Commission were filed pursuant to the provisions of section 24 (a) of

the act. One of these petitions was dismissed for lack of jurisdiction

and a second was withdrawn when the petitioner instituted a parallel

proceeding in a different circuit. The other three proceedings were

pending at the close of the fiscal year.

Petitions for Intervention

In the action for an injunction to prohibit Market Street Railway

Co. from filing with the Commission an amendment to its pending

plan, the court granted the Commission's petition to intervene, dissolved a temporary restraining order, and denied the requested injunction, issuing (with the consent of all parties) an injunction

against the execution of a certain release except pursuant to a court

enforcement order in the plan proceedings.>" Thereafter the amendment was filed by Market Street and approved by the Commission;

the Commission then filed an application for court enforcement, which

was pending at the end of the fiscal year.

14. Philadelphia 00. v. S. E. C., 177 F. 2d 720 (C. A. D. C., 1949). 1<1 Jones v. Market Street Railway 00., unreported (N. D. canr., No. 29, 699).
PART IV

PARTICIPATION OF THE COMMISSION IN CORPORATE

REORGANIZATIONS UNDER CHAPTER X OF THE BANKRUPTCY ACT, AS AMENDED

Chapter X of the Bankruptcy Act provides a procedure for reorganizing corporations (other than railroads) in the Federal courts.

The Commission's duties under chapter X are, first, at the request

or with the approval of the court to participate in proceedings to

provide, for the court and investors, independent expert assistance,

and second, to prepare for the benefit of the courts and investors

formal advisory reports on plans of reorganization submitted to it

by the courts. The Commission has no statutory right of appeal

in a chapter X proceeding, although it may participate in appeals

taken by others.

COMMISSION'S FUNCTIONS UNDER CHAPTER X

The role of the Commission under chapter X differs markedly from

that under the acts which it administers. The Commission does not

administer chapter X. It acts in a purely advisory capacity. It

has no authority either to veto or to require the adoption of a plan

of reorganization or to render a decision on any other issue in the

proceeding. The facilities of its technical staff and its recommendations are at the services of the judge and the security holders, affording

them the views of experts in a highly complex area of corporate

law and finance.

During the year the immediate supervision of chapter X matters

at the central officeof the Commission was transferred from the Division of Corporation Finance to the Division of Public Utilities.

THE COMMISSION AS A PARTY TO PROCEEDINGS

Generally, the Commission has sought to participate only in proceedings in which there is a public investor interest; $250,000 of

publicly held securities is the rough guide used in deciding if there

is enough public interest to make it worth while for the Commission

to participate. Sometimes the Commission has entered smaller cases

where public-security holders are not adequately represented, where

it appears that the proceedings are being conducted in violation of

important provisions of the act, or if the Commission may otherwise

be useful by participating.

Because of its Nation-wide activity and its experience in chapter X

cases the Commission is able to respond to requests for help in the

interpretation and application of chapter X when it does not participate as a party.

115
116 SECURITIES AND EXCHANGE COMMISSION

SUMMARY OF ACTIVITIES

The Commission actively participated during the 1950 fiscal year in

71 reorganization proceedings involving the reorganization of 98 companies with aggregate stated assets of $965,157,000 and aggregate

stated indebtedness of $851,254,000.1 During the year the Commission with court approval filed notices of appearance in 5 new proceedings under chapter X. These 5 new proceedings involved 9 companies with aggregate stated assets of $24,985,000 and aggregate stated

indebtedness of $29,006,000. At the close of the year, the Commission

was actively participating in 59 reorganization proceedings involving

83 companies with aggregate stated assets of $950,862,000 and aggregate stated indebtedness of $837,863,000.

Activities Relating to the Trusteeship

A fundamental feature of chapter X is that in every case involving

a corporation of substantial size an independent trustee is ap~ointed

to be primarily responsible for the operation of the corporation s business durin~ the proceeding, to examine and evaluate the reasons for

the debtor s financial difficulties, to appraise the ability and fidelity

of its management and to formulate and file a plan of reorganization.

The success of the reorganization depends largely on the thoroughness,

skill, and loyalty with which he and his counsel perform their tasks.

The Commission usually examines the qualifications of trustees in the

light of the standards of disinterestedness prescribed by the statute

for trustees and their counsel.

In one case during the past fiscal year the Commission and a security

holder petitioned for the removal of counsel for trustees on the ground

that they were not disinterested as required by the statute." The

Commission contended that the attorneys had represented creditors of

the debtor at the time of their appointment and that the formal termination of their representation of creditors could not eliminate the

conflicts of interest engendered by their prior relationship. The Commission further pointed out that the danger of an active conflict of

interests was accentuated in this case because actions taken by the

creditors prior to the chapter X proceedings, when the attorneys represented them, gave rise to possible counterclaims on behalf of the

estate which the attorneys as counsel for the trustees would be required

to prosecute. In addition, issues had been raised between the creditors and other parties to the proceedings as to certain priorities and

the validity of a pledge of certain assets which also involved adverse

interests. The attorneys resigned prior to argument on the motion.

In reorganization proceedings involving two debtors, the Commission filed objections to the final accounts of a trustee who had resigned,

and urged that he be surcharged u~on the ground, among others, that

he had knowingly permitted certain of his employees to trade in the

securities of the debtors and their subsidiaries despite the fact that

he was buying similar securities for the debtor," These employees

1Appendix table 19 contains a complete list ot reorganization proceedings In which the

Commission participated during the year ended Jnne 30, 1950. Appendix table 18. etasslfies these debtors according to Indnstry. In "8 80la,. ManUfacturing co., D. N. J. 81" re Federal Faoiutka Realty Trust, Natwnal Realty Trust, N. D. III •
SIX'l'E'ENTR ANNUAiL REPORT 117

had access to confidential information respecting the debtor, in some

instances had actively run the debtors and subsidiaries, and had purchased bonds from the public and sold them to the trustee at a profit.

After hearing, the special master agreed that trading in these securities was a breach of fiduciary duty and that the trustee's knowledge

and acquiescence rendered him culpable and liable for surcharge to

the extent of the profits. The district court approved the recommendation of the special master. On appeal, the court of appeals reversed

the decision insofar as it surcharged the trustee. A petition for rehearing is pending.

Problems in the Administration of the Estate

A major defect of section 77B (the predecessor statute to chapter

X) was its failure to provide assurance that judicial supervision of

the reorganization process and creditor and stockholder participation

therein would be based upon complete and impartial information

regarding the affairs of the debtor. Chapter X endeavors to achieve

this goal by requiring the independent trustee, at the direction of the

court, to investigate the acts, conduct, property, liabilities, and financial condition of the debtor, the operation of its business, and the desirability of the continuance thereof, and to transmit a report of his

investigation to creditors and stockholders. Such reports enable security holders and other parties to a proceeding to make helpful and

effective suggestions for a plan of reorganization, aid the court in

considering problems in the administration of the estate as well as

the fairness and feasibility of a plan of reorganization, and give security holders the necessary information to determine the desirability

of accepting a proposed plan.

The Commission has continued its policy of consultation through

its staff with trustees in connection with their investigations and the

preparation of their reports. On the basis of its own investigations

and its wide experience the Commission has been able to supply data

and suggestions useful to the trustee. It has also continued to assist

trustees ill their investigation of possible claims against the old management and other persons.

With respect to the operation of the companies in reorganization

the Commission takes the position that important steps should not be

taken except upon a complete disclosure to the court and the parties

of all relevant factors. Inone case, trustees had obtained competitive

bids for certain paving work. However, they had delayed taking

action on the matter and making a report to the court until the lowest

bidder had withdrawn his bid and the work was assigned to and

partially performed by another bidder. The Commission looked into

and brought out all the facts when the question of approval of the

contract came before the court. While the court approved the contract because it had been practically completed, it expressly reserved

the question of the trustees' culpability in the matter.

A recurrent question is whether the enterprise should be liquidated

through a sale or continued as a going concern through an internal

plan of reorganization. The Commission does not support the sale

type of reorganization merely because of its simplicity or certainty of

result, but urges a decision based upon what will yield the largest
118 SECURITIES AND EXCHANGE COMMISSION

benefit for creditors and stockholders. Where the decision has been

made to sell the assets of the debtor, there has been some tendency

to attempt to complete the sale as an administrative matter prior to,

and not as part of, a plan of reorganization with its attendant safeguards for investors. The Commission has urged that where substantially all the assets of the debtor are sold the sale should be part

of a plan of reorganization, unless some emergency is involved, such

as the need to dispose of perishable property.

This position was upheld by the Court of Appeals for the Third

Circuit in the chapter X proceedings involving Solar Manufacturing

Corp.' The court rejected the argument that an emergency situation

can be created simply by a condition imposed by a prospective purchaser that his offer of purchase must be accepted within a very short

time. Itreversed the order of the district court which authorized the

sale, saying that "the safeguarding provisions of chapter X are not

to be ignored in the sale of the assets of a business unless an emergency

exists." It may be noted that the abortive proposal involved a price

of $525,000, and that subsequently the assets were sold for $815,000

pursuant to a plan of reorganization subject to competitive conditions.

Responsibilities of Fiduciaries

Assuring adherence to the high standards of conduct required of

fiduciaries has continued to be one of the important activities of the

Commission in chapter X proceedings. We have indicated above

our concern that the independent trustee be free from any conflicts

of interest. The Commission is concerned also with the qualifications

of other fiduciaries in the proceeding, such as indenture trustees, com.

mittees, attorneys, and other representatives of security holders. In

one case the Commission sought to disqualify members of a stockholders' committee on the ground that their interests conflicted with

those of the stockholders," The Commission contended that the conflicts of interest arose from the facts that: (1) The chairman and

sponsor of the committee owned and controlled a large block of debentures, ranking prior to the stock, (2) the chairman had traded

in the stock after assuming to act as chairman, (3) companies affiliated

with the chairman were engaged in partial competition with the

debtor and the debtor had claims against some of them, and (4) the

chairman of the committee intended apparently, to acquire control

.of the debtor for purposes not necessarily compatible with the interests

of stockholders. After the Commission filed a petition for disqualification with the court, the committee voluntarily dissolved and rescinded all authorizations, notifying stockholders of its action.

Where a fiduciary has traded in the securities of a debtor in reorganization, he has been considered guilty of a breach of trust which

courts have punished by the denial of any fees or reimbursement of

expenses. In such situations courts have also prevented fiduciaries

from profiting by such trading through the limitation of their claims

to cost or through an accounting for any profits. The application of

the sanction of limitation to cost was advocated by the Commission

in several cases in which the fiduciary purchased claims against the

In re Solar Manufacturing Corp., 176 F. 2d 493 (1949). Gln re Norwalk Tire <E Rubber Oo., D. Conn. •
SIXTEENTH ANNUAL REPORT 119

corporation at a discount prior to the institution of the chapter X

proceedings but during a period when the corporation was insolvent.

The Commission expressed the view that the fundamental basis of

the rule, the clash of adverse interests created by the trading in claims

against the debtor, is applicable whether the corporation is not actually

in reorganization, but is insolvent and in need of rehabilitation with

respect to its liabilities, or is actually undergoing judicial reorganization. The Supreme Court, however, in a case under chapter XI of

the Bankruptcy Act, in which the Commission filed a brief as amicus

curiae, rejected this position as applied to a purchase by directors

of "unmatured obligations of a corporation which, though technically insolvent, remains nevertheless a going concern." 6 The court

held that, on the record, the probability that an actual conflict of

loyalties arose from the opportunity to purchase claims of the debtor,

while it was a going concern, was not great enough to warrant the

limitation of the purchaser's claims to cost. The court pointed out,

however, that the possibilities of a conflict of interests in the purchasing director are intensified as the corporation becomes less a going

concern and more a prospective subject of judicial relief, adding the

following significant language to its opinion:

"A word of caution as to the scope of our decision is desirable in

view of Judge Learned Hand's opinion below. He suggested that if

in fact liquidation had been imminent at the time of respondents'

purchases or if it were fairly demonstrable, as a matter of experience,

that a director free from all potential self-interest would be more

likely to initiate liquidation proceedings or to effect a debt settlement

than one not wholly disinterested, a court of equity should explore

such issues and not dismiss them out of hand. ThIS decision is not

meant to negative the relevance of these issues when raised by a

proper record. We mention these matters because the Securities and

Exchange Commission urges the importance of a decision in this case

for questions that may well arise in proceedings under chapter X. In

such proceedings the Securities and Exchange Commission, acting

as the statutory advisor to the court, would be within its rightful

function in submitting to the court the light of its experience in dealings of the general kind disclosed in this case."

In another case where the Commission had urged limitation to cost,

the Court of Appeals for the Seventh Circuit affirmed the decision of

the court below which limited to cost a claim based on bonds purchased by a member of a bondholders' committee/ In this case, the

debtor had defaulted on its interest payments and a bondholders'

committee had designated one of its own members to manage its property, when the purchases were made. The chapter X proceedings

were not commenced until 5 years after the purchases although rehabilitation or reorganization was in contemplation throughout the

period of the purchases. The court held that the rule that a trustee

can make no profit out of his trust was absolute and should be applied in the circumstances of this case. The court, as urged by the

Commission, relied upon section 212 of chapter X which provides that

6 Manufacturers Trust Go. v, Becker, 338 U. S. 304 (1949). "In re Franklin Building Oo., 178 F. 2d 805 (1949), certiorari denied, June 1950.
120 SECURITIES AND EXCHANGE COMMISSION

the judge may limit claims acquired by fiduciaries "in contemplation or

in the course of the proceeding."

The court in the Franklin Building case did not, however, accept

the Commission's contention that close relatives of members of the

bondholders' committee should also be limited to cost. In another

case the district court rejected contentions of the Commission similar

to those made in M'(Lnujacturers Trust 00. v. Beeker and permitted

a director and his business associate to participate for the full amount

of securities purchased prior to the chapter X proceeding although

the company was insolvent," The court did, however, limit to cost

claims based upon securities purchased by the director at a time when

the chapter X proceeding was in contemplation.

Activities With Respect to Allowances

The Commission in its advisory capacity endeavors to protect the

estate from exorbitant and inequitable charges for fees and expenses

while at the same time providing fair treatment to applicants which

will adequately compensate them for services rendered and encourage

legitimate creditor and stockholder participation in the reorganization process.

The Commission itself receives no allowances from estates in reorganization. It attempts to obtain a limitation of the aggregate fees

to an amount which the estate can feasibly or should fairly pay. In

each case, the applications are carefully studied and recommendations

are made in the light of apJ?licable legal standards and, in general, on

the basis of beneficial contributions to the administration of the estate

and to the adoption of a plan of reorganization. Specific recommendations are made to the courts in cases in which the Commission has

been a party and in which it is familiar with the services of the various

parties and all significant developments in the case.

The role of the Commission with respect to the recommendation of

allowances was clearly delineated by the Court of Appeals for the

Second Circuit in the Ohilds 00. case." Claimants had requested fees

aggregating over $1,400,000; the Commission recommended approximately $750,000; and the district court awarded a total of approximately $965,000. On appeal, the court of appeals pointed out that

the allowances granted by the judge amounted to 10 percent of the

value of the estate and 26 percent of the net income received during

the reorganization; that in a reorganization proceeding the aggregate

of fees must bear some reasonable relation to the estate's value and,

hence, attorneys cannot always expect to be compensated at the same

rate as in litigation of the usual kind. The court referred also to evidence of duplication in the representation of creditors and stockholders and wasteful labor in matters involving the administration of

the estate which the trustee was handling more than satisfactorily.

Indicating its view that the amounts allowed were excessive, the

court stated:

"We should have had more doubts as to our conclusions just stated,

had they not been re-enforced by those of the Securities and Exchange

8 In r8 Wade Park Manor Oorp. N. D. OhIo.

'In re Finn v. Ohild8 00., 181F. 2d 431 (1950).
SIXTEENTH ANNUAiL REPORT 121

Commission. In a reasoned statement discussing each petition the

Commission presented grounds for limiting the various allowances to

sums totaling $750,000. These amounts individually and collectively

seem to us quite generous, indeed, perhaps more so than some of us

would have granted as judges of first instance. They appear to support the statement of the Commission's able spokesman that these are

not intended as minima to be increased by the court, but that in fact

the Commission has raised its standards to match the compensation

awarded by other judges in other cases. * * * "Since the Commission's recommendations represent the expert opinion of a disinterested agency skilled and experienced in reorganization

affairs, they should be a valuable aid to a judge in performing a difficult task. 6 Collier on Bankruptcy pp. 13.02, p. 4498, 14th Ed. 1947.

Some courts have refused to give S. E. C. recommendations as to fees

more weight than the suggestions of any other party, e. g., Oooke v.

Bowersock, 8 Cir., 122 F. 2d 977, 985; In re Detroit International

Bridge 00., 6 Cir., 111 F. 2d 235, 237-8. True, the Commission's

function in a reorganization proceeding is purely advisory; and it

does not have the power to fix a maximum amount for fees which it

has with regard to the reorganization of public utility holding companies under 11 (f) of the Holding Company Act, 15 U. S. C. A.

79k (f), and which the Interstate Commerce Commission has with

regard to a railroad reorganization under 77 (c) (2), (12) of the

Bankruptcy Act, 11 U. S. C. A. 205 (c) (2), (12). Nevertheless

the figures presented by the S. E. C. are not 'mere casual conjectures,'

but are 'recommendations based on closer study than a district judge

could ordinarily give to such matters.' Frank, supra, 18 N. Y. U. L. Q.

Rev. 317, 1941. We agree with District Judge Kirkpatrick's apt statement "that the Commission is about the only wholly disinterested

party in the proceeding and that, while it may not be entirely familiar

with 'the problems of making both ends meet in a law office' referred

to by counsel, its experience has made it thoroughly familiar with the

general attitude of the courts and the amounts of allowances made in

scores of comparable proceedings." In re Philadelphia & Reading

Ooal & Iron Oo.?-D. C. E. C. Pa., 61 F. Supp. 120, 124. See also

Note, 18 N. Y. U. L. Q. Rev. 399,469-70, 1941, which suggests that the

recommendations as to fees of the S. E. C. may be the only solution

to the 'very undesirable subjectivity with variations according to the

particular judge under particular circumstances' which has made the

fixing of fees seem often to be 'upon nothing more than an ipse dimit

basis.' And see Securities and Exchange Commission, Tenth Annual

Report 148, 1944, Fourteenth Annual Report 85-6, 1948."

The court remanded the applications for allowances "for the further

consideration of the district judge, particularly in the light of the

recommendations made by the Commission," and directed that those

recommendations should not be exceeded without definite findings and

conclusions showing why this step is deemed necessary. To expedite

the reconsideration of the fees, the court stated that the Commission's

recommendations, if adopted, would be considered affirmatively reasonable and properly allowable.

~

~

~

~
122 SECURITIES AND EXCHANGE COMMISS'lON

In the reorganization proceedings involving Chicago Surface

Lines 10 and Chicago Rapid Transit Co. the requests for fees and

expenses totaled $6,774,695 and $1,043,235 respectively. Previous

amounts allowed in these cases, primarily to trustees, receivers, and

their counsel were extremely large, totaling $5,000,686and $1,296,590

in the respective proceedings. The Commission, in a detailed memorandum, recommended $1,918,139 and $362,673 respectively. The

special master designated to hear the applications recommended $3,-

605,616and $656,375. The reason for the substantially lesser amounts

recommended by the Commission was partially due to the fact that

the Commission believed that many applicants were not entitled to a

fee or reimbursement of expenses as a matter of law. The Commission was of the opinion that certain applicants were barred from

receiving an allowance because they represented conflicting interests

in the proceedings, because they bought or sold securities during the

proceedings in contravention of section 249 of chapter X or of the

equitable rule which the section codifies, because they represented

classes of securities excluded from any participation in the reorganization and could show no benefit to the estate or contribution to the

plan; and because of other reasons. The special master's reports in

these cases and the objections of the Commission and others thereto

are pending before the district court for decision.

Another issue decided in the Ohilds 00. case, discussed previously,

involved the application of section 249. The Commission argued that

two preferred stockholders, seeking compensation for services rendered in the proceeding, and who had traded in the stock of the

debtor, should be denied any compensation because their activities in

connection with the reorganization placed them in a "representative

capacity" within the meaning of section 249. The Commission also

argued that the interests of the applicants were not entirely consistent

with other stockholders of their class in that they were seeking to

obtain control of the reorganized company with its accompanying

perquisites, and emoluments of management. The district court rejected these contentions but the court of appeals agreed that the applicants had acted in a "representative capacity" and were therefore

barred from receiving any compensation under the provisions of section 249. The court stated that the record was clear that applicants

had created a bloc of stockholders amenable to their directives, had

maintained its unity by frequent communication, asserted its strength

during the formulation and confirmation of a plan, and exerted its

power to assure the selection of a new management satisfactory to

themselves. The court reiterated the rule in chapter X that one who

undertakes to act on behalf of any part of a class becomes the representative of the whole class, and may not deal for any part of it

alone.

The court did not sustain the Commission's position on a different

point in the Ohilds 00. case. The Commission was of the view that a

certain stockholders' committee and its counsel had contributed directly to the reorganization proceedings and rendered services of

benefit to the estate although they were rendered prior to the re-

'0 The constltuent compnnlos are Chicago Railways Co., Chicago City Railway Co., and

Calumet & South Chicago Railway Co.
SIXTEENTH ANNUA.L REPORT 123

organization proceeding. The court pointed out that the services

had consisted principally of defeating a voluntary reorganization

and the dismissal of a prior involuntary petition in chapter X on

the ground that it was collusive, and the court concluded that such

activity did not seem to have been of benefit to the estate. The court

held that chapter X did not sanction awards for uncertain and somewhat problematical benefits resulting from activities prior to the reorganization and in order to be compensable such services must not

only be clearly beneficial but specifically directed to the rehabilitation

of the debtor which then actually Oc~Ul'S.

In Berner v. Equitable Office Building Oorp.,ll the Court of Appeals

for the Second Circuit held that the disclosure by an attorney of

private information regarding the reorganization proceeding to his

brother-in-law, on the basis of which his brother-in-law had profited

by the purchase of stock of the debtor, was a breach of trust. Itheld,

however, that it was within the discretion of the district court to

determine to what extent any fees earned by the attorney should be

reduced because of this breach. The court suggested that the amount

of reduction might well be not less than the loss to those who had

sold stock to the brother-in-law. On remand the district judge held

that the attorney would have been entitled to a fee of $100,000,and

that this amount should be reduced by the losses incurred by the

sellers of stock to the brother-in-law, plus an amount to make up for

the cost to the estate of the litigation that grew out of the breach of

trust, an aggregate of $30,000. The resulting figure of $70,000 was

substantially in excessof the Commission's recommendation of $15,000,

although the court accepted the Commission's suggestions as to the

amount of the loss. The judge sustained the Commission's view that

the fact that the purchases were made from short sellers was not

material, particularly since most of those selling stock owned other

securities of the debtor. The judge stated that a court of equity

should not be overly astute in an endeavor to relieve a tort-feasor from

responsibility to his trust.

The doctrine of the Berner case was followed in Silbiaer v. Prudence

Bonds (Iorp., decided by the Court of Appeals for the Second Circuit

in March 1950. The opinion recognized that, in ordinary litigation,

an attorney who has served conflicting interests must be denied all

compensation but indicated that a more lenient rule could be applied

in corporate reorganizations. In such cases the court suggested that

it is reasonable not to impose an entire forfeiture of the allowance

when the allowance is to be paid by a group which was not prejudiced

by the attorney's divided allegiance rather by those who might have

been. The court indicated that those affected by the attorney's disloyalty were probably adequately represented but that the attorney

failed in his duty when he did not present the matter to the court and

asked to be freed of his responsibility. The court remanded the case

to the district court to fix the extent to which the attorney's allowance

should be reduced. Itstated that in its view a reduction of less than

one-third would be an abuse of discretion, although it did not wish to

indicate that it believed that a reduction of one-third was enough.

11175 F. 2d 218 (C. A. 2, 1949).
124 SECURITIES AND EXCHANGE COMMISSION

A petition to the Supreme Court for a writ of certiorari has been

filed by the successor corporation and the Commission has filed a

memorandum as amicus curiae in support thereof. The Commission's

view is that any allowances of a fee to an attorney who represents

conflicting interests in a corporate reorganization is in direct conflict

with the rule laid down by the Supreme Court in the landmark case of

Woods v. Oity Bank 00.,313 U. S. 262 (1941). The Commission feels

that in making an exception to the requirements of loyal and disinterested service by fiduciaries as an absolute prerequisite to receiving

any compensation whatsoever the decision of the court departs from

the fundamental principles of equity; that the nature of a corporate

reorganization proceeding is such that, rather than affording a reason

for laxity, it requires the application of the highest standards of

fiduciary conduct.

Institution of Chapter X Proceedings

In accordance with the legislative spirit and intent with which

chapter X was enacted, the Commission generally strives for a liberal

interpretation of its provisions in order to make the benefits and safeguards of chapter X fully available to security holders. The Commission opposed a motion to dismiss the chapter X reorganization

proceeding involving New Union Building CO.12 Against a contention that there was no need for relief because 98 percent of the bonds

had been deposited with a committee which had made no demand for

payment although principal and interest were past due, the Commission argued that the insolvency of the debtor and its inability to meet

its debts as they matured were sufficient to show the need for relief

and that reorganization under chapter X would preserve goingconcern value for the benefit of all creditors. The Commission also

argued that the fact that a large bondholder, who was also a director

and committee member, was charged with instituting the proceedings

to gain control of the property and avoid a foreclosure, and to continue

to buy bonds at a discount, constituted no basis for a finding of lack

of good faith. The Commission pointed out that the desire to effectuate a plan which would be binding upon dissenters, if two-thirds of

the bondholders approved, was hardly a circumstance indicating bad

faith since such a result was one of the purposes sought to be achieved

by the reorganization statute to remedy a recognized deficiency in

receivership proceedings. As to the trading activities of the bondholder, the Commission alluded to the broad and flexible powers of the

chapter X court as a court of equity with jurisdiction to prevent or

punish any inequitable or unjust conduct by any insider or fiduciary

in the proceeding. The district court sustained the Commission's

position and denied the motion to dismiss. The moving party appealed but, after the Commission had filed its brief, the appeal was

withdrawn.

PLANS OF REORGANIZATION UNDER CHAPTER X

The formulation and consummation of a fair and feasible plan of

reorganization is, of course, the primary purpose Qf the proceeding

PE. D. Mich.
SIXTEENTH ANNUAJL REPORT 125

under chapter X. Accordingly, the most important function of the

Commission under chapter X is to aid the courts in achieving this

objective.

Fairness of Plan

Basic to the Commission's approach to questions involving the fairness of reorganization plans under chapter X is the fixed principle,

firmly established by Supreme Court decisions, that full recognition

must be accorded to claims in the order of their legal and contractual

priority either in cash or in the equitable equivalent of new securities

and that junior claimants may participate only to the extent that the

debtor's properties have value after the satisfaction of prior claims

or to the extent that they make a fresh contribution necessary to the

reorganization of the debtor. A valuation of the debtor is essential

to provide a basis for judging the fairness as well as the feasibility

of proposed plans of reorganization. In its oral statements and in its

advisory reports the Commission has continued to urge that the proper

method of valuation for reorganization purposes is primarily an

approJ?riate capitalization of reasonably prospective earnings. An

exception to this general position was dealt with during the 1950fiscal

year by the Commission in an advisory report in the proceedings

involving Central States Electric Corp., discussed below.

In connection with the fairness of plans and the treatment of claims

against the estate, the Commission has given careful consideration to

situations where because of mismanagement or other misconduct on

the part of a parent company or a controlling or affiliated person the

claims of the parent or affiliate should be subordinated to the claims

of the public investors or these claims limited to cost. All the

facts and circumstances in these instances are investigated since

they form an integral part of the concept of the "fair and equitable"

plan. Plans of reorganization involving problems of this type during

the past fiscal year were considered by the Commission bthe following proceedings: Pittsburgh Railways 00./3 Industrial Office Building Oorp.,u International Railway 00./5 International Power Securities Oorp.,IS Silesian-American Oorp.,l1 and the related cases of

American Fuel & Power 00., Inland Gas Oorp., and Kentucky Fuel

Gas 00.,18 In the first three of these proceedings, settlements and

compromises of the subordination and limitation issues were approved

by the court, the Commission supporting the result in the first two

proceedings and opposing the result as rnadequate in the third. A

compromise offer in the fourth of the foregoing proceedings is presently the subject of hearings before the district court. In the SilesianAmerican case, discussed below, plans of reorganization were the

subject of an advisory report.

In the related American Fuel, Inland Gas, and Kentucky Fuel cases

the Court of Appeals for the SIXth Circuit had previously ruled that

the controlling person, Columbia Gas & Electric Corp., should be

subordinated to claims of public investors. The question of the extent

uw. D. Pa.

"D.N.J.

UN. D. N. Y.

18S. D. N. Y.

17D. N. J.

18E. D. Ky.
126 SECURITIES AND EXCHANGE COMMISSION

of such subordination is presently the subject of an appeal. Inland

Gas Corp. owns practically all the assets of the system. A plan of

reorganization for that company subordinates Columbia's claims to

those of publicly held claims of Inland but permits Columbia a participation in Inland's assets prior to the claims of creditors of American Fuel and Kentucky Fuel. The Commission urged, in an advisory

report, that the inequities which gave rise to the decision that Columbia be subordinated to the public creditors of Inland also require that

Columbia be subordinated to public creditors of American Fuel and

Kentucky Fuel, which companies own practically all of the stock of

Inland.

In the Pittsburgh Ra{!lWays 00. case, hearings on over $76,000,000

of claims of the parent company, Philadelphia Co., had commenced

before a special master in 1947. Objections to these claims had been

raised, based upon alleged misuse by Philadelphia Co. of its control

over the Pittsburgh Railways System (consisting of Pittsburgh Railways Co., Pittsburgh Motor Coach Co., a wholly owned subsidiary,

and 53 so-called "underlier" companies linked to the System through

intricate lease and operating arrangements). It was contended that

Philadelphia Co.'s claims should be completely subordinated to the

$27,000,000of publicly held claims and stock interests of the system,

or that its claims should be limited to cost. By the end of 1948,

Philadelphia Co. had not completed its affirmative case of showing

that its claims were free from infirmity although the record contained

over 10,000pages of testimony and hundreds of exhibits. The primary burden of investigating the claims of Philadelphia Co., the

circumstances of their acquisition and the enormously complex history

of over 50 years of control over the railways system was carried by

the Commission's staff. This was particularly necessary since the

former "independent" trustee had filed a cursory report concluding

that Philadelphia Co. should not be subordinated. Subsequently the

Commission and others initiated proceedings to remove this trustee

alleging, among other matters, that the trustee had permitted his

report to be prepared for the most part by an officer of the debtor,

associated with the parent company, and. hence, that it could hardly

be expected to be an impartial study, or the trustee be considered

independent. The trustee resigned May 31, 1949, after a special

master had rendered a report recommending his removal.

Beginning in January 1949, the Commission's staff and other interested parties explored the possibilities of settling the Philadelphia

Co. subordination litigation as well as the numerous other conflicting

claims and problems which had already delayed the reorganization

for 10years and gave promise of delaying it for a further long period.

As a result of these discussions, Philadelphia Co. submitted a compromise proposal, agreed to by the new disinterested trustee, by

various parties, and the Commission's staff. On the basis of this offer,

a "combined plan" was filed by the trustee, contemplating a single

company to take over the various properties comprising the Pittsburgh

Railways system. The new company will issue up to $6,000,000of

bonds in addition to new common stock and the estate will distribute

not less than $17,000,000 in cash. To the extent that more cash is

distributed less bonds will be issued. Holders of bonds and stocks
SIXTEENTH ANNUMJ REPORT 127

secured by guarantees of Philadelphia Co. will be paid in full by

receipt of cash of almost $11,000,000, approximately equal to the

principal amount and par value outstandmg, no interest or dividends

being in arrears; holders of bonds of the system not affected by guarantees will receive cash and new bonds aggregating $11,700,000,equal

to the principal amount outstanding, and will receive also 14 percent

of the new stock, interest being in arrears; holders of unguaranteed

stock with a par value of $4,500,000will receive $450,000 in cash and

35 percent of the new stock; Philadelphia Co. for all its claims and

interests will receive 51 percent of the new stock and will be discharged

from all its guarantees.

The "combined plan" was submitted to the Commission for its approval under sections 11 (e) and 11 (f) of the Public Utility Holding Company Act. Section 11 (e) was applicable insofar as the plan

related to the discharge and cancellation of the guarantees of Philadelphia Co., a company subject to the Holding Company Act. Section 11 (f) was applicable since that section provides for the Commission's prior approval of a plan of reorganization for a company

subject to the Holding Company Act. Litigation regarding the validity of the Commission's modification of an exemptive rule which

had excluded Pittsburgh Railways Co. from the purview of the Holding Company Act had, 111 the meantime, been settled by the withdrawal

by Philadelphia Co. of its objections to the modification. After notice

and hearing, the Commission concluded that the "combined plan" was

fair and feasible and on March 27,1950 entered an order approving it.

Finding a value of $17,000,000 for the new company, after giving

effect to the proposed cash payments, the Commission analyzed the

treatment accorded to the claimants in the light of the contentions as

between Philadelphia Co. and public security holders, as among public

security holders themselves and as between claimants not holding

securities and the estate or security holders. The Commission stated

that it was impossible to treat each of the 55 companies of the system

as a separate entity or to identify the property of each company in

view of the intermingling of assets, failure to keep separate records,

and operation of the system as a single unit for approximately 50

years. The Commission aJ>proved the realistic approach of the "combined plan" in dealing WIth the system as an integral whole. As to

the major problem of the standing of Philadelphia Co.'s claims, the

Commission referred to the staff's summary of the various contentions

relating to the subordination issue and an extensive statement of facts

derived from the record before the special master presented in an appendix to the staff's recommended findings. The Commission observed

that there was evidence supporting the claim of misuse of control by

Philadelphia Co.; on the other hand, it noted Philadelphia Co.'s denials, its voluntary adjustments in the system structure with alleged

benefits to security holders and its defense of laohes.

The participations accorded by the plan to Philadelphia Co. and to

public security holders were compared with parity treatment in the

estate. Under parity treatment, Philadelphia Co. with two-thirds

of the outstanding bonds and stocks would receive $22,667,000 of the

$34,000,000 estate and would still be liable on its guarantees of close

to $11,000,000; while public security holders would receive $11,333,000.
128 SECURITIES AND EXCHANGE COMMISSION

Under the plan, Philadelphia Co. receives 51 percent of the stock of

the new company and is discharged of its guarantees; public security

holders receive an aggregate of $23,000,000 in cash and new bonds

and 49 percent of the stock. The improvement in the position of the

public security holders was considered to represent a reasonable settlement of difficult and intricate litigation. Upon approval of the

"combined plan" by the Commission, It was submitted. to the district

court which likewise gave its approval. The plan was then submitted

to security holders for a vote, the material sent including a report_prepared by the Commission under section 11 (g) of the Holding Company Act to assist them in deciding whether to accept the plan. Security holders overwhelmingly accepted the plan.

Feasibility of Plan

A prerequisite to the court's approval of a plan of reorganization

is its feasibility. In order to assure sound reorganizations, which will

not result in the company's return under the "chancellor's umbrella",

because of financial difficulties, the Commission gives a great deal of

attention to factors affecting feasibility. The Commission is thus

concerned with the adequacy of working capital, the relationship of

funded debt and the capital structure as a whole to property values,

the adequacy of corporate earning power in relation to interest and

dividend requirements, the necessity for capital expenditures, and the

effect of the new capitalization uEon the company's prospective credit.

The Commission's views on feasibility as relating to particular types

of enterprise have been published in some detail during the past fiscal

year in several advisory reports dealing with a transit company, a

motor transportation company, an investment company and a company organized to liquidate frozen assets.

Consummation of Plan

The Commission gives detailed scrutiny to the corporate charters,

bylaws, trust indentures, and other instruments which are to govern

the internal structure of the reorganized debtor. In general the Commission strives to assure to investors the inclusion of protective features

and safeguards which its experience has shown to be desirable.

The Commission's interest in the entire reorganization process includes not only the consummation of the plan and the winding up of

the affairs of the trusteeship (which may occur many years after a

plan has been consummated) but may also extend to the execution of

the terms of the plan by the reorganized company. Inthe proceedings involving PIttsburgh Terminal Coal Corp. the need for such

continued interest has been dramatically high-lighted. The plan of

reorganization in that case, as an alternative to bankruptcy liquidation or forced sales at an inopportune time, provided for the creation of

a realization corporation to liquidate the assets in an orderly manner.

The plan, which was consummated in 1945, incorporated certain safeguards for investors: The life of the corporation was limited to 5 years

to assure reasonably expeditious liquidation, the purpose of the corporation was restricted to liquidation of its assets, and total compensation to officers and directors was not to exceed $5,000 per annum.

These provisions were incorporated in the plan over the opposition of
SIXTEENTH ANNUM.. REPORT 129

a large preferred stockholder and his associates who apparently anticipated getting control of the new corporation.

Despite the explicit nature of these provisions, evidence was obtained by the trustee and the Commission's staff indicating that the

plan was being flouted, that salaries far in excess of $5,000 were being

paid to near relatives of the controlling stockholder, that the reorganized company, instead of liquidating, intended to finance near relatives

of the controlling stockholder in mining operations on the company's

property, that the cost of operation of the realization corporation exceeded what might be expected of that type of company, and that the

controlling stockholder intended to change the bylaws of the company to remove the $5,000 restriction so as to enable him to receive

indirectly as a bonus compensation for his services during the reorganization proceedings as chairman of a preferred stockholders' committee, compensation which he did not request the court to allow and

which might have been barred under section 249 of chapter X bl

reason of the fact that he and his family had traded in the debtor s

stock.

At about the time this evidence was obtained, a special meeting of

stockholders had been called to amend the bylaws of the reorganized

company to extend the company's existence for a period of 5 years and

to increase the salary limit. Before the date of the meeting, the Commission filed a petition with the chapter X court for an order authorizing an investigation of the trading activities of members of the preferred stockholders' committee. At the same time, the trustee, with

the Commission's support, asked for an injunction restraining the holding of the stockholders' meeting and for an order authorizing an investigation to determine whether the terms, intent, and purpose of the

plan of reorganization were being carried out. The court granted

both petitions in December 1949, although permitting the company's

existence to continue for another year.

Pittsburgh Terminal Realization Corp., the reorganized company,

appealed from the order staying the stockholders' meeting and authorizing the investigation sought by the trustee on. the ground that

the reorganization court did not have jurisdiction to supervise the

affairs of a going enterprise which had emerged from reorganization.

The Commission, in its brief in support of the district court's decision,

pointed out that the reorganization court has jurisdiction to protect

Its decrees, to prevent interference with the execution of the plan and

to aid in its operation. The Commission contended that the facts

alleged in the trustee's petition and in related affidavits clearly warranted the relief granted by the district judge to assure that the objectives of a plan painstakingly formulated and consummated under

judicial supervision with carefully thought-out legislative safeguards

should not thereafter be thwarted.

In an incisive opinion, the Court of Appeals for the Third Circuit

affirmed the order enjoining the stockholders' meeting and authorizing

the investigation." Holding that the reorganization court has jurisdiction to see that a plan is carried out, the court stated that, in view

uIn,.6 Pittsburgh Terminal Ooal 00"".,- F. 2d (J"uly 17,1950).

915841--51----10

-
130 SECURITIES AND EXCHANGE COMMISSION

of the charges made, which were not seriously disputed, the trustee

"would have been remiss in his duty if he had not brought this matter

to the attention of the court and urged that the charges be investigated." The court held that the charges concerned an important phase

of the plan in the process of being carried out, that the charges were

serious and substantial and that, under the plain mandate of the corporate reorganization law, the problem was definitely within the

Jurisdiction of the court.

ADVISORY REPORTS

The preparation of advisory reports pursuant to section 172 of chapter X does not represent the major part of the activities of the Commission in chapter X proceedings. Nevertheless, because they often

deal with complex or novel legal and analytical problems, and because

they are usually filed in the larger cases with a greater public interest,

the advisory reports occupy a prominent position in the reorganization

field. In effect they represent a means whereby the Commission's

views on chapter X matters are made known to the public. In fact,

however, the Commission has not filed formal advisory reports in the

bulk of the cases in which it has participated, but in all these cases it

has advised the court in detail, orally or by memorandum, of its views

with respect to the various plans of reorganization proposed in the

proceeding.

During the year the Commission prepared and filed three advisory

reports and five supplemental reports. Two of these supplemental

reports dealt with the trustees' plan of reorganization in the proceedings involving International Railways Co., with respect to which the

Commission had issued an advisory report during the previous fiscal

year. The supplemental reports related to amendments which had

been filed to the trustees' plan. Most of these amendments were in

accordance with suggestions made in the advisory report, covering

matters such as cumulative voting in the election of directors and preemptive rights to subscribe to new stock. However, certain other suggestions recommended by the Commission and proposed by a bondholders' committee were not adopted by the trustees and the Commission reiterated its position in this respect. These recommendations

were that nominees for the new board of directors be selected by

creditors in accordance with their interests in the estate, and that

bondholders who had not collected interest prior to the chapter X

proceedings receive this uncollected interest in cash rather than in

new securities in order to place them on an equal footing with all other

bondholders. The second supplemental report suggested a method

for distribution among public bondholders and creditors of certain

of the new stock of the reorganized company which was to be turned

back to the estate as part of a settlement of a subordination proceeding

against former controlling persons. The suggestion made by the

Commission were thereafter substantially adopted.

Another supplemental report related to a revision of the trustee's

plan in the Inland Gas Corp. proceedings, with respect to which the

Commission had issued an advisory report during the previous fiscal

year. The major points dealt with concerned a provision for creating

a capital surplus which purported to provide a cushion for the new
S[KTEE~ ~AL REPORT 131

debt of the re~rganized company, as well as for its stock, and to improve the feasibility of the plan. The Commission pointed out that

the creation of the capital surplus out of the residuary equity would

n~t in fact effect any additional protection for security holders but

might on the contrary supply the means by which some of the existing

equity cushion for bondholders could be dissipated through payment

of unearned dividends or purchase of outstanding stock. In addition

it was pointed out that the provision was unfair to the recipient of

the residual equity since it transferred part of this equity into surplus

in which other security holders also receiving stock under the plan

would have a proportionate interest. The plan was thereafter

amended to exclude the provision for capital surplus.

Another point dealt with related to the purchase of property by the

reorganized company valued at $400,000 in exchange for stock of the

reorganized company having a par value of $600,000. In its original

advisory report the Commission indicated that the proposed step-up

of 50 percent over the value of the property was excessive, although

it agreed in principle that since the property was to be paid for in

stock rather than cash, it was appropriate to issue a greater amount

of stock. However, the Commission had recommended that the stock

to be issued in excess of the value of the property should be taken on

a pro rata basis from the shares of stock which would otherwise have

been allocated to the security holders of the debtor in order to avoid

the use of watered stock. The plan as amended followed this suggestion in its endeavor to avoid the aspect of stock watering but placed

the entire burden upon the recipient of the residual equity in the case

rather than upon all of the new stockholders of the reorganized com-

-pany. The Commission's supplemental report pointed out what appeared to it to be the inequity of the proposed procedure. Nevertheless, the plan was approved as amended. In this respect, as well as

in others, the order approvin~ the plan of reorganization for Inland

Gas Corp., has been appealed, and the matter IS pending before the

Court of Appeals for the Sixth Circuit.

In the proceedings involving Keeshin Freight Lines, Inc., and three

subsidiary debtors, the district court requested the Commission to

participate in the reorganization and to submit an advisory report

on two plans of reorganization." The Commission issued its advisory

report on these plans in August 1949. The primary matter dealt with

by the Commission was the valuation of the debtor. Reviewing the

evidence relating to prospective earnings of the enterprise and to an

appropriate rate of capitalization, and considering- the expert testimony, the Commission concluded that the valuation of the debtor,

including a small amount of excess working capital, was about $2,200,-

000. On this basis, the Commission concluded that the trustees' plan

of reorganization which provided for a sale of the property at an

upset price of about $1,400,000 was unfair, the price being grossly

inadequate. The Commission concluded that the other plan of reorganization

was unfair in that it gave to creditors of the parent c?mpany new

securities worth less than they wer~ entitled to. Notinz that the

parent company creditors and certain creditors of the sJilisIdIarIeS,

"N. D. Ill.
132 SECURITIES AND EXCHANGE COMMISSION

consisting of a few large business corporations and individuals, had

voluntarily agreed to receive treatment under this plan different from

that which they were entitled to under the terms of their claims, the

Commission stated that since these persons did not constitute members of the investing public, it could see no objection to their agreement to receive less than that which fairness required. The Commission also considered the feasibility of the second plan since it provided

for the issuance of new securities in part to the creditors of the debtor

and its subsidiaries. The Commission concluded that while the capital structure proposed under the plan was initially top-heavy and

complicated and should be simplified, it appeared to be feasible, particularly since a good }?art of the proposed debt obligations would

be retired within a relatively short time under the program envisaged

by the plan.

The district court disagreed with the Commission's conclusions as to

valuation and reached a determination that the property was worth

only $1,'700,000. The court concluded that both plans were unfair

and that in addition the second plan was unfeasible. The trustees'

plan providing for sale at an upset price was amended to conform to

the court's determination of value. However, before this plan could

be acted upon, an offer to purchase all the assets of the debtor and its

subsidiaries was received from another trucking concern which had

purchased all the claims against the parent company. Under this plan

all creditors of the subsidiaries would be paid in full. While the total

effective price to be paid by the purchaser could not be determined,

because the amount of claims against the subsidiaries could not be

determined until objections to claims were passed upon, the maximum

commitment of the proposed purchaser exceeded $2,000,000. A plan of

reorganization embodying the proposed purchase was approved and

confirmed by the court.

In the proceedings involving Central States Electric Corp., the Commission's advisory report covered five plans of reorganization. The

issue arising in the case were both varied and complicated. On the subject of valuation, the Commission departed from the customary procedure of capitalizing the reasonably expected earnings of the

enterprise, on the ground that an investment company which deals in

marketable securities, none of which represents a controlling interest,

cannot be valued on this basis. The Commission rejected as sheer

prophesy arguments that future capital gains had to be considered,

and pointed out that a capitalization of earnings would result in a

lower figure than a market valuation. It was further held that the

pyramided structure of the system of the debtor, which has two subsidiaries, American Cities Power & Light Corp. and Blue Ridge Corp.,

the former holding 42 percent of the stock of the latter added no additional value to the enterprise. Itwas the Commission's view that there

is no justification or economic basis for piling one investment company upon another, with needless increase in expenses, duplication,

and potentialities for abuse; that the common stockholders of the top

company might have some speculative advantage at the expense of

senior security holders but that all investors in the aggregate do not

benefit therefrom.
SIXTEENTH ANNUAL REPORT 133

The Commission severely criticized four of the proposed plans

because they involved retention of the three-tiered system of investment companies, having as its objective the interposition of debt obligations or preferred stock in the bottom and intermediate company

so as to increase the leverage, or speculative potentialities, of the

common stock of the top company if the stock market should rise.

The Commission also criticized the failure of these four plans (proposed by the junior classes of the debtor, with little or no equity on

the basis of market values) to provide adequate asset coverages for the

bonds and preferred stocks contemplated by their plans. In considering both of these economic problems, the Commission recommended that the court should impose as minimum standards of

feasibility, those provisions of the Investment Company Act of 1940

regarding asset coverage for senior securities and prohibition of

pyramiding even though that act itself provided exemption in the case

of a reorganization. The Commission pointed out that the exemption

did not modify the findings of the Congress that the interests of investors are adversely affected by the undue speculation resulting from the

issuance of excessive senior securities and from pyramiding and the

abuses flowing therefrom.

The trustees' plan of reorganization, contemplating the emergency

of a single investment company with a single class of stock, after the

dissolution of American Cities Power & Light Corp. and the merger of

Blue Ridge Corp. with Central States Electric Corp., was considered to

be sound and feasible. The claim of the 7 percent preferred stock, next

in rank to the debentures, will be measured by its liquidating preference

and accrued dividends. The Commission expressed the opinion that

this treatment was required in equity and by judicial precedent. A

lawsuit against the former controlling person of Central States was

segregated, the suit to be handled by the trustee and any recovery to be

distributed to those classes of securities which had not been paid, in

part or in full, in the order of their priority. The Commission considered this appropriate and fair in order not to delay the reorganization,

pointing out that continued delay in consummating the reorganization

places in jeopardy the interests of the senior securities and permits the

junior interests to speculate at the risk of the seniors. Since the proceedings have been pending 8 years, any further unnecessary delay was

considered inequitable. The Commission discussed each of the other

proposed Elans in detail and concluded that they were unfair in that,

in genera, they provided for participation by junior classes at the

expense of senior security holders.

The district court thereafter adopted the recommendations of the

Commission, approved the trustees' plan, subject to suggested modifications, and disapproved all plans proposed by the junior interests.

The trustees thereupon amended their plan accordingly and the Commission in a supplemental report stated that the plan was fair and

feasible in all respects. The court approved the plan and directed

that it be sent to security holders for a vote. In the meantime, the

question of the dissolution of American Cities Power & Light Corp.

came before the court. The Commission urged that that company be

dissolved immediately as an administrative step in the proceeding 00-
134 SECURITIES AND EXCHANGE COMMISSION

cause it was an uneconomic and unjustified complexity in the Central

States system. The junior interests argued for a delay on the ground

that their plans were based on the continued existence of American

Cities and that the status guo should be maintained pending appeals

from the order disapprovrng their plans. The Commission pointed

out, however, that the insistence that American Cities be retained in the

system could only mean that the junior interests intended to reinstate

the highly complicated, speculative system that had originally brought

financial collapse to the debtor and imposed heavy losses on security

holders; and that in no event could any plan be considered feasible

that did not eliminate American Cities as an unwarranted corporate

monstrosity. The district court denied the stay and authorized the

trustees of Central States to vote the stock of American Cities in

favor of the proposed dissolution. The Court of Appeals for the

Fourth CirCUIt affirmed the approval of the trustees' plan and the

authorization to proceed with the dissolution of American Cities, and

dissolved the stay it had granted pending appeal. Applications to

stay the proposed dissolution pending the filing of petitions for writs

of certiorari to review the approval of the trustees' plan were filed

in the Supreme Court.

In the proceedings involving Silesian-American Corp.," the questions confronting the Commission in reporting on various plans of reorganization were primarily legal questions. The debtor was promoted

as an aftermath of World War I by W. A. Harriman & Co and Anaconda Copper Mining Co. It acquired its principal asset, a Polish

mine, from a German mining company which received $5,000,000 of

the debtor's preferred stock and 49 percent of its common stock as

well as a $6,000,000 loan from the debtor. The promoters received

$7,000,000of the debtor's preferred stock and 51 percent of its common

stock for a cash contribution of less than $38,000. The promotion was

financed by selling $15,000,000of the debtor's bonds to the public. In

1937, the German mining company ceased making payments on its

indebtedness to the debtor, now amounting to $5,000,000.

After World War TI, the Polish properties of the debtor were taken

by Poland without compensation and at present the debtor has only

a claim for compensation under the Polish nationalization law. Certain transactions occurring during the war, however, giving rise to

additional claims on behalf of the estate, were uncovered. When

World War II broke out, Germany seized the Polish properties of

the debtor and placed them under the supervision of the German

company, which exploited them until hostilities ceased in 1945. Soon

after the seizure, the German company and the Hitler government

developed a scheme for the German repatriation of the American

interest in the Polish mine and the indebtedness from the German

company. To accomplish this scheme, an arrangement was made with

a syndicate of Swiss banks, to whom the German company was also

indebted, to act as a cloak for the Germans. Funds for the repatriation were to be supplied by shipments to Switzerland of zinc extracted

from the Polish and German mines. With the consent of the Swiss

and German Governments, the proceeds of the metal shipments were

"'S.D. N.Y.
SIXTEENTH ANNUAL REPORT 135

exempted from the restrictions of the Swiss-German clearing treaty,

thus leaving the proceeds with the Swiss banks.

As an initial step in the repatriation scheme, the Swiss banks acquired $640,000 of the debtor's bonds. These purchases, however,

caused market rises in the price of the bonds which rendered it impracticable and unprofitable to the Swiss banks (whose profit depended

upon the price of the bonds) to continue the acquisitions. Accordingly, the Swiss banks entered into negotiations with the AnacondaHarriman promoters, who held a majority of the debtor's stocks, for

a cash purchase of their interest and full payment of the remaining

bonds outstanding against the debtor. This transaction required

licenses from the United States Treasury Department, from whom

the Swiss banks concealed the German interest. The licenses were

denied.

Despite this obstacle to consummation of the German repatriation

program, the zinc shipments to the Swiss banks continued until

Germany's surrender. The shipments were made as a result of representations to the German Government that the repatriation had been

effected in part and would be completed as soon as feasible. The net

proceeds of the shipments approximated $6,000,000. Out of these

funds, the Swiss banks reimbursed themselves attar for the $640,000

of the debtor's bonds although the securities ha been purchased at

prices ranging from 28% to 71. Additionally, they used substantial

portions of the funds as credits against principal and interest on

prewar obligations of the German company to them. During the

same period, the debtor received nothing on its unpaid indebtedness

from the German company.

After the termination of hostilities, a Dr. Schulte, who had originally conceived the repatriation plan in his capacity as the German

company's chief executive, worked with the Swiss banks to come

to some agreement with the trustee of the debtor. The remainder of

the :funds accumulated in Switzerland (approximating $1,700,000

in cash plus the $640,000 of the debtor's bonds) had been exempted

from Swiss-German clearing for the express purpose of acquiring

the debtor's securities. It was feared that unless used for the intended purpose, the moneys would be regarded as German assets

subject to seizure by the Swiss Government. If an arrangement with

the trustee could be effectuated, it would be represented that the objectives of the clearing exemption had been achieved and the Swiss

banks would be free to use the remainder of the fund for their own

purposes. The trustee's plan embodied a Swiss proposal under which

about $650,000 would be released for a cash distribution to bondholders. For this, the Swiss banks would receive first-lien securities

on a parity with the balance due to public bondholders (over

$2,000,000); for the $640,000of the debtor's bonds, they would receive

second-lien securities.

By reason of the questions raised in the case as to the possible liability of the promoters of the debtor arising from its organization, the

issuance of its securities, and the management of its affairs, and as to

the claims against the Swiss banks, the Commission's advisory report

portrayed in some detail the history of the debtor as revealed by an
136 SECURITIES AND EXCHANGE COMMISSION

extensive and largely documented record, though lacking the completeness that can usually be attained in a domestic situation. In an appendix to the report the Commission set forth the evidentiary facts

surrounding the promotion and organization of the company and in

another appendix the history of the transactions involving the ~b

ment of metals to Switzerland and the activities of the Swiss ba

and the German mining company in relation thereto. Against this

background the Commission concluded that the trustee's plan was

neither fair nor feasible.

The report concluded that the plan was unfair in the following

principal respects: It embodied an inadequate compromise of claims

which were believed to be legally and practicably enforceable against

the Swiss banks; 22 it accorded to the Swiss banks a dominant interest

in the reorganized company on terms unfair to public bondholders;

it made participation of stockholders dependent upon an arbitrary

value for the Polish claim instead of giving stockholders certificates

of interest contingent upon possible recoveries after satisfaction of

creditors; it failed to provide for prosecution by the trustees of causes

of action against the promoters of the debtor and instead recognized

their bonds, stock, and other claims in full; it failed to provide for the

prosecution by the trustee of claims against the German mining company; it failed to limit to cost bonds acquired by certain insiders during the proceeding; it disfranchised security holders through the

creation of a voting trust. The trustee's plan was also considered not

feasible in that it provided for the issuance of interest-bearing debt obligations with a fixed maturity although there is no assurance or basis

for expecting that the interest and principal will be paid when due.

The plan also failed to provide adequate working capital to enable the

proper prosecution of claims constituting the primary assets of the

estate.

The Commission considered that a plan proposed by a bondholders'

committee was fair in rejecting the Swiss compromise and in providing

for the prosecution of causes of action against the Swiss banks, the

promoters, and the German mining company, but it suggested that the

plan might appropriately provide for the issuance of contingent certificates of interest to stockholders in the event that a sufficient recovery was had upon the claims against Poland and others. The plan was

.. As to the SwiBBtransactions, the CommiBBionconclnded trom the record that Dr.

Schulte's connection with the negotiations was tor the probable purpose ot salvaging an interest tor the German company in these funds as well as to aid in getting some participa- tion tor the Swiss banks in the debtor's reorganization. The proposal embodied in the

trustee's pian, which the United States Officeot Alien Property regarded as in furtherance

of the German repatriation scheme and thus Violative of the Trading with the Enemy Act, was considered the culmination of these negotiations. The CommiBBionpointed out that

the record showed that the funds in controversy were deriVed in substantial part from

metals extracted trom the Polish mines belonging to the debtor; that they were intended to be used tor the benefit of the debtor's security holders; and that they were accumulated

by a German company heavily indebted to the debtor. It was also pointed out that the

$640,000 ot bonds, originally purchased by the Swiss banks, were paid tor out of these

funds and, at a minimum, as property ot the German company, were SUbject to cancellation on account of the unpaid obligations to the debtor.

On the merits ot the SwiBBproposal, the Commission concluded : "In view ot what has already been said, we believe the so-called compromise must be

rejected. The bait which it holds out in the torm ot an immediate partial cash distribution to public bondholders, who have long been deprived of any return on their Investment, cannot be permitted, in the light of the tacts as they now appear, to serve as a lure for

approval of a proposal deficient in satisfying objective equitable standards. What may

appear on the surface as a benefit is shown by analysis and inquiry into the facts to be a means ot accomplishing a gross preference in favor ot the SwiBBbanks. It the Swiss banks are not wiIiing to make a superior proposal, the machinery is at hand to deal with them

promptly in the reorganization court."
SIXTEENTII~AL REPORT 137

considered not feasible, however, because it failed to provide adequate

working capital. Other plan proposals offered by the debtor and

stockholders were considered unfair and unfeasible for reasons substantially similar to the reasons for considering the trustee's plan

unfair and unfeasible.

Despite the views urged by the Commission in its advisory report,

the district court in April 1950 approved the trustee's plan, subject

to certain minor modifications, and disapproved all other proposals.

The trustee then filed an amended plan which was submitted to the

Commission for a supplemental report. The supplemental report,

filed in May: 1950, found the plan still unfair and unfeasible. Some

of the modifications met certain objections raised by the Commission

but these related to relatively small matters. The basic features of

the trustee's plan, unfair and unfeasible in the Commission's view,

remained the same.

A bondholders' committee, among others, appealed from the order

approving the plan. Contending that certain aspects of the voting

on the plan contemplated by the trustee were unfair, the committee

moved for a stay of the voting pending the appeal from the plan

approval as well as the manner of votmg. The Commission supported the motion for a stay on two principal grounds. The Commission objected to the classification of the $640,000 of bonds held

by the Swiss banks in the same category as publicly held bonds because

of the direct conflict of interest of the two groups. The manifest

unfairness which would result if the votes of the Swiss banks were

considered in determining whether bondholders wished to accept the

offer of the Swiss banks was discussed. Additionally, the refusal

to permit the bondholders' committee to communicate with bondholders regarding acceptance or rejection of the plan concurrently

with the trustee was urged as another reason for the stay. The

statute, judicial precedents, and the equity of the case were relied

upon to support the Commission's view that an equal opportunity

to the committee was required and that thelrocedure contemplated

by the trustee was unjust. The Court of ppeals for the Second

Circuit granted the stay without opinion.
PART V

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, sold, or delivered

after sale through the mails or in interstate commerce (except as

specifically exempted by the act) be issued under an indenture which

meets the requirements of the act and which has been qualified with

the Commission.

NATURE OF TRUST INDENTURE REGULATION

Individual holders of bonds, notes, debentures, and similar debt

securities often find it difficult and expensive to enforce their rights

under indentures and generally must rely upon the trustee named in

the trust indenture to protect them. The Trust Indenture Act of

1939 requires the inclusion in the trust indenture of specified provisions which facilitate the protection and enforcement of such rights.

Thus, there must be a corporate trustee free from stated conflicts

of interest; such trustee must not after default, or within 4 months

prior thereto, improve its position as a creditor to the detriment of the

indenture securities; it must make annual and periodic reports to bondholders; it must maintain bondholders lists to provide a method of

communication between bondholders as to their rights under the indenture and the bonds; and it must be authorized to file suits and proofs

of claims on behalf of the bondholders. The act prohibits exculpatory

clauses used in the past to eliminate the liability of the indenture trustee

to the indenture security holders and imposes on the trustee, after default, the duty to exercise the rights and powers vested in it, and to

use the same degree of care and skill in their exercise, as a prudent

man would use or exercise in the conduct of his own affairs. Specified

evidence must be supplied by the obligor to the indenture trustee

with respect to the recording of the indenture and with respect to

conditions precedent to action to be taken by the trustee at the request

of the obligor.

INTEGRATION WITH SECURITIES ACT OF 1933

The exemption provisions of the Trust Indenture Act of 1939 incorporate most of the exemptions contained in the Securities Act of

1933 and include certain other exemptions. The provisions of these

acts are so integrated that registration pursuant to the Securities Act

of 1933 of securities to be issued under a trust indenture and not

exempt from the Trust Indenture Act of 1939, is not permitted to

become effective unless the indenture conforms to the requirements

of the latter act, and such an indenture is automatically "qualified"

138
SIXTEENTH ANNUAL REPORT 139

when registration becomes effective as to the securities themselves. An

application for qualification of an indenture, covering securities not

required to be registered under the Securities Act of 1933, which is

filed with the Commission under the Trust Indenture Act is processed

substantially as though such application were a registration statement

filed pursuant to the Securities Act of 1933.

STATISTICS OF INDENTURES QUALIFIED

There was a drop in the number and dollar amount of debt securities

Tor which qualification under the Trust Indenture Act was

sought in the 1950 fiscal year. Thus, during the year there were 96

new indentures filed representing an aggregate dollar amount of

$1,741,775,670,compared with corresponding figures in the 1949 fiscal

year of 127 new filings representing $2,605,823,365. However, the

addition of the year's new filings to the 9 indentures (aggregating

$298,141,600), which were pending at the beginning of the period

makes a total of 105 indentures aggregating $2,039,917,270 which

required examination by the staff during the past year and which were

disposed of as shown in the table below:

Total number of indentures filed under the Trust Indenture Act of 1999

Aggregate

Number amount

Indentures pending June 30, 1949____________________________________________ q $298, 141, 600 Indentures filed during fiscal year _________________________________________ 96 1,741,775,670

TotaL ---.----- 105 2,039,917,270

D~~:~~~=J-:~~------------------------------ _________________ 97 1,865,254,799 Amount reduced by amendment ________________________________________ ----------- 3,130,596 Indentures deleted by amendment or withdrawn ________________________ 4 116,531,875 Indentures pending June 30,1950 ________________________________________ 4 55,000,000

TotaL _________________________________________________________________ 105 ~,039, 917, 270

During the 1950 fiscal year the following additional material relating to trust indentures was filed and examined for compliance with

the appropriate standards and requirements:

Statements of eligibility and qualification under the Trust Indenture AcL 121

Amendments to trustee statements of eligibility and qualification_________ 13

Supplements SoT, covering special items of information concerning indenture

securities registered under the Securities Act of 1933__________________ 90

Amendments to supplements S-T_______________________________________ 17

Applications for findings by the Commission relating to exemptions from

special provisions of the Trust Indenture Act of 1939___________________ 15

Reports of indenture trustees pursuant to sec. 313 of the Trust Indenture Act of 1939 -_________ 608

_________• _____________________________________________
PART VI

ADMINISTRATION OF THE INVESTMENT COMPANY

ACT OF 1940

The Investment Company Act of 1940 requires registration and

provides for certain types of regulation of investment companiescompanies engaged primarily in the business of investing, reinvesting,

and trading in securities. Among other things, the act requires disclosure of the finances and investment policies of these companies in

order to afford investors full and complete information with respect

to their activities; prohibits such companies from changing the nature

of their business or their investment policies without the approval of

the stockholders; bars persons guilty of security frauds from serving

as officers and directors of such companies; regulates the means of

custody of the assets of investment companies and requires the bonding

of officers and directors having access to such assets; prevents underwriters, investment bankers, and brokers from constituting more than

a minority of the directors of such companies; requires management

contracts in the first instance to be submitted to security holders for

their approval; prohibits transactions between such companies and

their officers and directors except on the approval of the COmmission;

forbids the issuance of senior securities of such companies except in

specified instances and prohibits pyramiding of such companies and

cross-ownership of their securities. The Commission is authorized to

prepare advisory reports upon plans of reorganizations of registered

investment companies upon request of such companies or 25 percent

of their stockholders and to institute proceedings to enjoin such plans

if they are grossly unfair. The act requires face amount certificate

companies to maintain reserves adequate to meet maturity payments

upon their certificates.

REGISTRATION UNDER THE ACT

During the 1950 fiscal year, 26 new investment companies registered

under the Investment Company Act of 1940-predominantly open-end

management companies (companies which redeem their shares on

presentation by the stockholders). During the nearest comparable

period for which data are available, the 12 months ended March 31,

1950, about 196 registered open-end management and closed-end management investment companies reported to the Commission sales to

the public of approximately $440,000,000 of their securities, and redemptions and retirements of approximately $135,000,000, leaving a

net investment by the public in such companies over the period of

approximately $305,000,000. As of June 30, 1950, 366 investment companies were registered under the act, and of that date it is estimated

that the value of their total assets was approximately $4,700,000,000

140

~
SIXTEENTH ANNUAiL REPORT 141

This represents an increase of $1,000,000,000 in such valuation over

the corresponding total at the beginning of the year.

The 26 investment companies registered during the 1950 fiscal year

are classified as follows:

~anageDlent open-end______________________________________ 18

lIanageDlent closed-end_____________________________________ 4 lJnit --________ 4

Total________________________________________________ 26

The 366 investment companies registered at June 30, 1950, are

classified as follows:

lIanageDlent open-end______________________________________ 150

ldanageDlent closed-end_____________________________________ 105

lJnit_______________________________________________________ 95

Face 8D1ount_______________________________________________ 16

Total________________________________________________ 366

TYPES AND INVESTMENT POLICIES OF COMPANIES FORMED

As indicated above, most of the investment companies formed during

the period have been of the open-end type, investing primarily in

common stocks. Three of these companies have adopted a policy of

investment in so-called "growth stocks" (variously defined by each of

them) and one company has adopted a policy of investing primarily

in companies owning or engaged primarily in the development of

natural resources.

The year was also marked by the appearance of brokers and dealers

as direct sponsors and investment advisers of open-end companies

formed primarily as an investment medium for customers of the firms

and characterized by either the absence, or only a nominal amount,

of, sales load. Two such companies were formed, one in New York by

a member firm of the New York Stock Exchange and one in Boston.

Another interesting development during the year has been the formation of funds designed to enable investors to purchase on the installment plan over a period of 10 years common stock of a single company

in whose securities there is local interest. For example, a fund has

been formed in Washington, D. C., for investment in the common stock

of Potomac Electric Power Co. on the installment plan; a similar

fund was formed in Winston-Salem, N. C., for investment in the

common stock of R. J. Reynolds Tobacco Co. Both plans were characterized by the fact that over a half of the first year's installment

payments were not invested in the underlying stock, but were absorbed

as selling loads and other charges.

Semng Literature

The act requires literature (other than the statutory prospectus)

used by issuers or underwriters in selling open-end investment company shares to be filed with the Commission within 10 days after such

literature is first employed as selling material. During the 1950 fiscal

year there was a substantial increase in the use of both literature

purporting to describe investment companies generally and literature

purporting to describe a specific company. Of considerable concern

to the Commission was the fact that in a substantial number of cases
142 SECURITIES AND EXCHANGE COMMISSION

this literature used by issuers, underwriters, and dealers to attract

investors might be materially misleading in many respects. In addition, there was serious doubt that certain of such literature could be

generally circulated under the Securities Act of 1933. Accordingly,

during the year the Commission with the cooperation of the National

Association of Securities Dealers undertook a study of such literature

in an attempt to eliminate any misleading elements contained therein.

After the close of the year there was promulg-ated, as a result of the

cooperative effort of the Commission and the National Association of

Securities Dealers, a statement of policy governing the contents of

such literature.

Other Data

The number of documents filed under the act by registered investment companies during the 1949 and 1950 fiscal years, together with

other related statistics, are tabulated below:

Number of registered investment companies: ~~=~a cg=-yoor ~~~~:::::::::::::::::::::::::::::::::::::::~ ~~~::::::::::: Terminations of registrations during year Number of cotnpames registered at end of year Notifications of regtstration Registration statements Amendments to registration statements Annual reports

~:~SI;~~rts~-~~I- ~:~~~::::::::::::::::::::::::::::::::::::::::::: ::::::::::

Periodic reports, containing financial statements sent to stockholders

Reports of repurcbase of securities by closed.•md management companies Oopies of sales literature

Applications for exemption from various provisions of the act

App1Jcations for determmation that registered investment company has ceased to be

A::~~~~Ser; ~~W~~roiiS~ .; ::::::::::::::::::::::::::::: ::::::::::::::::::: :~::

Total appheatlons: Beguming of year

~~ie:::~~;g~~:~ ~~ ===========:: ::=:::::::::::: :==== :::::

Fiscal year ended

June 30-

1949 1950

359 358

12 26 13 18

358 366

12 26

12 26

31 51 228 224

46 23

788 818

662 637

72 73

1,910 2,121

49 77

14 18

35 38

44 32

63 95

75 93

32 34

APPLICATIONS FILED

One of the functions of the Commission under the act is to pass on

applications by investment companies for exemptions which the act

permits under appropriate standards.

Some of the most complex problems arise out of the provisions of

the statute which forbid, III the absence of approval by the Commission,

purchases or sales of property or securities among investment companies and their affiliated persons. To approve such transactions

the Commission must find that they are fair as to price and involve

no overreaching. As a result, the applications in many instances

involve unusual questions of valuation and inside influence. During

the year 30 applications of this type were filed.

During the year 95 applications were filed under the various provisions of the act, 77 of these for orders of the Commission relating to

_

_

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SIXTEENTH ANNUAL REPORT 143

exemption from requirements of the act, and the remaining 18 for a

determination by the Commission that the applicant has ceased to be

an investment company within the meaning of the act. At the beginning of the year 32 applications were pending, which (together

with the 95 filed during the year) made a total of 127 applications

requiring examination and consideration by the Commission during

the year. As a result of the Commission's action 93 of these applications were disposed of during the year and 34 were pending on

June 30, 1950. The various sections of the act under which these

applications were filed, and the disposition of the applications during

the fiscal year, are shown in the following table (since an application

may involve more than one section of the act, the numbers are not

totaled) :

Nature and. disposition of various appUcatio1ts (iled. under the Investment Company Act of 1940 during year ended. June 30, 1950

Number Filed Number

Section of the act under which appllcation pendmgat dunng Disposed of during year pending was filed June 30, at June

1949 year 30, 1950

3 (b) (2) Determination that :applieant is 1 1 0__________________________ 2 not an investment company. 6 (b) Employees' security company exemp- 1 1 1 granted __________________ 1

tion.

6 (c) Various exemptions not speeiflcally 8 zr 25granted, 3 withdrawn ___ 7

~rovided for by other sections ofthe act. 8 f) Determlnation that a registered invest- 3 18 16 granted, 2 withdrawn __ 3 ment company has ceased to be an invest- ment company. 9 (b) Exemption of Ineligible persons to 13 2 I granted __________________ 14 serve as directors, officers, etc. 10 (f) Exemption of certain underwriting ------------ 1 1 granted __________________ --------_. transactions.

11 (a) A~rOVal of terms of proposed seen- --------.--- 2 2 granted __________________ ---------. rity ex ange offers.

17 (b) Exemption of proposed transactions 7 30 30 granted, 2 withdrawn .. 5

between investment companies and affili- ates. 17~d) Approval of certain bonns and profit- 2 16 13granted, 1 withdrawn ___ 4

acing plans. 23 (c) (3) Terms under which closed-end 1 4 4 granted __________________ 1

Investment company may purchase its

outstanding securities.

LITIGATION UNDER THE INVESTMENT COMPANY ACT

In only two instanc-es during the 1950 fiscal year did the Commission resort to injunction proceedings to enforce the obligations devolving on investment companies and their officers under the Investment Company Act. In S. E. O. v. F. L. Andrews Investment Trust

(Civil Action No. 8845,D. Mass. Nov. 30, 1949) the officer,who served

as president, treasurer, and sole trustee of the investment company,

caused the company to make unsecured loans to various business corporations which he controlled. According to the complaint, he received rebates, secret profits, and commissions for arranging these

loans, and received salaries from both the investment company and

the corporations he controlled for serving as an officer of these enterprises. The Commission brought an action which sought to prohibit

the officer from being employed by any investment company in any

capacity, and a consent decree was entered granting the relief re-

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144 SECURITIES AND EXCHANGE COMMISSION

quested. In addition, on motion of the Commission, the court appointed a receiver to hold the assets of the investment company subject

to an order to liquidate and distribute them.

In 8. E. O. v, Trusteed Funds, Ina. (Civil Action No. 8622, D. Mass.,

Sept. 9, 1949) an action was brought to enjoin the sponsor and principal underwriter of an investment company from selling its securities

by means of sales literature which had not been filed with the Commission and which contained the false statement that the investment

company was guaranteed against loss by the United States Government. In this case, too, an injunction was entered as requested and

a receiver was appointed.'

1The complaint also charged violation of the prospectus standards, sec. 15(b) (2). and

the antifraud provisions, sec. 11 (a) (1), (2) and (3), of the Secnrities Act of 1933.
PART VII

ADMINISTRATION OF THE INVESTMENT ADVISERS

ACT OF 1940

The Investment Advisers Act of 1940 requires the registration of

investment advisers, persons engaged for compensation in the business of advising others with respect to securities. The Commission

is empowered to deny registration to or revoke registration of such

advisers ifthey have been convicted or enjoined because of misconduct

in connection with security transactions or have made false statements in their applications for registration. The act makes it unlawful for investment advisers to engage in practices which constitute

fraud or deceit; requires investment advisers to disclose the nature of

their interest in transactions executed for their clients; prohibits profitsharing arrangements; and, in effect, prevents assignment of investment advisory contracts without the client's consent.

Statistics of i1l/Vestment adviser registrations, 1950 fiscal year

Effective registrations at close of preceding fiscal year 1, 044

Applications pending at close of preceding fiscal year__________________ 14

Applications filed during fiscal year__________________________________ 119

Total 1,177

Registrations cancelled or withdrawn during year______________________ 116

Registrations denied or revoked during year____________________________ 1

Applications withdrawn during yeaL_________________________________ 4

Registrations effective at end of year 1,043'

Applications pending at end of year___________________________________ 13

Total 1,177

Approximately 242 registered investment advisers represent in their

applications that they engage exclusively in supervising their clients'

investments on the basis of the individual needs of each client. The

services of about 335 others are chiefly through publications of various

types; 232 investment advisers are registered also as brokers and dealers in securities. Most of the remainder offer various combinations of

investment services.

Administrative Proceedings

Two proceedings, involving investment advisers, one of which was

pending at the be~ing of the 1950 fiscal year and the other which

was instituted durmg the year, were determined during the year. The

latter case, Assured Warranty Corp., is discussed in the section of

this report on the regulation of brokers and dealers under the Securities Exchange Act.

915841--51----11 145
146 SECURITIES AND EXCHANGE COMMISSION

In the other case, the Commission brought action to determine

whether it was necessary in the public interest to revoke the registration of Frederick N. Goldsmith, doing business as F. N. Goldsmith

Financial Service, who was permanently enjoined by a decree of

the supreme court of New York from acting- as an investment adviser,

broker, or dealer. At the hearing, Goldsmith stipulated the facts and

filed a notice of withdrawal.

Goldsmith's subscribers were led to believe that he was a skilled investment adviser applying his judgment to generally accepted objective data and that he was in a position to obtain additional or advance

information by his close contacts with particular issuers and large

holders of securities. In view of these representations, the Commission found that his dissemination of advice, admittedly based in part

on the comic strips in which he believed there existed a code which,

interpreted by him, would reflect future movements of certain securities on the stock exchanges, was fraudulent, reckless, and without concern for the public welfare. However, the Commission concluded

that, under all the circumstances, including Mr. Goldsmith's advanced

age of 84 years and the fact that there had been no previous complaints

about the conduct of his business, it would be consistent with the public

interest to permit him to withdraw from registration as an investment

adviser. The Commission noted that the existence of the injunction

would supply a statutory basis for reviewing the public interest if he

should seek re-registration at some future time.
PART VIII

OTHER ACTIVITIES OF THE COMMISSION UNDER

THE VARIOUS STATUTES

THE COMMISSION IN THE COURTS

Civil Proceedings

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.

At the beginning of the 1950 fiscal year there were pending in the

courts 20 injunctive and related enforcement proceedings instituted by

the Commission to prevent fraudulent and other illegal practices in

the sale of securities, 34 additional proceedings were instituted during

the year and 36 cases were disposed of, so that 18 of such proceedings

were pending at the end of the year. In addition, the Commission participated in a large number of reorganization cases under chapter X

of the Bankruptcy Act ;" in 22 proceedings in the district courts under

section 11 (e) of the Public Utility Holding Com'pany Act and in 38

miscellaneous actions, usually as amicus curiae, or intervenor, to advise

the court of its views regarding the construction of provisions of statutes administered by the Commission which were involved in private

lawsuits. The Commission also participated in 53 appeals. Of these,

12 came before the courts on petition for review of an administrative

order; 14 arose out of corporate reorganizations in which the Commission had taken an active part; 4 were appeals in actions brought by or

against the Commission; 12 were appeals from orders entered pursuant to section 11 (e) of the Public Utility Holding Company Act;

and 11 were appeals in cases in which the Commission appeared as

amicus curiae or intervenor.

Certain significant aspects of the Commission's litigation during

the year are discussed in the section of this report devoted to the

statute 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 Commission, largely through

its regional offices, investigates suspected violations and, in cases where

the facts appear to warrant criminal proceedings, prepares detailed

reports which are forwarded to the Attorney General. The Commission, primarily through its employees who have participated in the

investigation, also assists the United States attorneys in many of

1For comment on some of these cases see section herein on the participation of the

Commission in corporate reorganlsattons under chapter X.

147
148 SECURITIES AND EXCHANGE COMMISSION

these cases in the presentation to the grand jury, the conduct of the

trial, and the preparation of briefs on appeal. It also transmits

parole reports prepared by its investigators relating to convicted

ofl'enders. Where the investigation discloses violations of statutes

other than those administered by the Commission, reference is made

to the appropriate Federal or State agency.

Indictments were returned against 2,601 defendants in 453 cases

developed by the Commission prior to June 30, 1950.2 This includes

37 defendants in 22 cases in which indictments were returned during

the past fiscal year. At the close of the fiscal year 422 cases had been

disposed of as to one or more defendants, and convictions had been

obtained in 370 cases 3--over 87 percent--against a total of 1,271

defendants. Convictions were obtained against 20 defendants in 15

cases during the past year.' In addition, criminal contempt proceedings were instituted during this period against two defendants in two

cases. One such defendant was convicted and the other is awaiting

trial," Judgments of conviction were affirmed on appeal as to two

defendants during the year, and one case involving a single defendant

remained pending in the court of appeals at the close of the fiscal year.

Criminal cases developed and prosecuted by the Commission during

the past year covered a wide variety of promotions. In general, they

included fraudulent promotions of various mining ventures, fraud

in the sale of securities relating to oil and gas properties, new businesses and inventions, and frauds perpetrated by securities brokers

and dealers and their representatives. Frequently, the defendants,

in employing these fraudulent schemes, wilfully avoided compliance

with the registration provisions of the Securities Act of 1933, which

are designed to provide investors with a full and fair disclosure of

material facts about the securities being sold. As a result, a number

of fraud cases involved violation of these registration provisions.

In one of the cases dealing with mining securities the fraudulent

representations made to investors were characterized by the trial court

as more fantastic than the tales of Baron Munchausen (U. S. v.lngwold S. Steensland (D. Minn.j ), Steensland was convicted of defrauding investors of an estimated $100,000 in connection with the

promotion of what he represented to be a coal mining -and timber

project in British Columbia, Canada. The defendant sold securities

in a fictitious corporation claimed to have been organized under a

"Canadian Secret Corporations Act." There is no such statute. According to the testimony of investors, the defendant represented to

them that the late President Roosevelt was obligated to an associate

in the venture by reason of his services in recovering for the Federal

Government some $23,000,000from persons who had committed frauds

against the Government. Investors were told that as a result of the

intercession of the late President on behalf of the venture and because

of their gratitude for American participation in World War II, the

The status of all criminal cases pending during the past fiscal year is set forth in

appendix tables. Condensed stattstteal summaries of alI criminal proceedings developed by the Commission is set forth in the appendix. The 52 remaining cases. which resulted in acquittals or dismissals as to all defendants.

included a number where the indictments were dismissed because of the death of defendants

involved.

One of these cases is still open as to six defendants.

The criminal contempt proceedings are set forth in the appendiL

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SIXTEENTH ANNUAl. REPORT 149

British and Canadian authorities had approved a grant of 10,000

square miles of British Columbia land to the defendant containing

vast coal and ore deposits and tremendous timber reserves. Investors

were told that the governments of China, Australia, India, and New

Zealand were interested in the project and that the World Bank

would advance many millions of dollars to finance it.

Other convictions involving mining promotions were obtained

during the past year in U. S. v. William A. Snyder et al. (D. Colo.)

and U. S. v, Walter A. Stogsdill (N. D. Okla.). The first involved

sales of the stock of the Southern Potash Co., an insolvent company,

as to which it was charged misrepresentations were made regarding,

among other things, the status and value of the company's leases of

acreage from which it proposed to extract potash. In the second

case the conviction was obtained on a plea of nolo contendere to charges

of violation of the registration provisions of the Securities Act of

1933 in selling interests in a purported lead and zinc mining venture

known as the Little Beaver Mining Co.

Convictions were obtained in several cases involving the fraudulent

sale of securities relating to the promotion of oil and gas properties.

The indictments in such cases alleged false representations concerning, among other things, the options and leases purportedly owned

by the corporation and the status of its oil production and earnings

(U. S. v. Robert L. Burch et al., N. D. Tex.) ; 6 the use to which money

received from investors would be put (U. S. v. Galen B. Finch, S. D.

CaL), and the qualifications of a geologist (U. S. v. Glaude Oleoe

Alfred, E. D. Tenn.). In the Finch case the defendant was charged

with diverting to his own use funds which he represented would be

used solely for the purpose of drilling wells. The defendant in the

Alfred case told investors that he had been a geologist in the Federal

Government, that he had discovered an oil pool in a particular area,

and that in the past he had drilled 42 wildcat oil wells of which 40

were commercially producing wells. An additional conviction was

obtained during the year in the Oactue Oil 00. case 7 where the charges

against the defendants included the payment of corporate "dividends"

out of capital for the purpose of inducing investors to make repeated

purchases of stock.

The fraudulent sale of securities in the promotion of a so-called

"kickless automatic sport shotgun" was the basis for the conviction

during the past year in U. S. v. William Ray Baldwin (D. Del.).

Among other things, it was charged that Baldwin falsely informed

investors that the promotional corporation shortly would receive

from the United States Government some $800,000 for the use of

patents owned by the corporation which would make it possible for

the corporation to pay dividends to stockholders and that the money

received from the sale of securities would be used to develop and

manufacture a new sport shotgun. Itwas alleged that the defendant

Three individual defendants were convicted. On motion of the United States attorney the indictment was dismiBBedas to the corporation, the remaining defendant.

Misrepresentations respecting the quantity of oU being produced are included in the

charges in U. 8. v. George E. Baldwin (N. D. Ill.), a pending case, in which an indictment was returned during the past year. 7 See 14th Annual Report of Securities and Exchange Commission, p, 101. Subsequent to the conviction of the two individual defendants the indictment as to the corporate defendant was dismissed.

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150 SECURITIES AND EXCHANGE COMMISSION

omitted to disclose to investors that the corporation was insolvent,

that all money received from them was being used for the promoters'

personal use and benefit, and that the Government had advised that

it did not owe any money to the corporation.

Other allegedly fraudulent activities involving the promotion of

mechanical devices were the subject of indictments obtained in the

past year in U. S. v. Doak Norwood, (N. D. Ill.) (desk pad device)

and U. S. v. Philip M. Carter et al. (S. D. N. Y.) (acoustical material),

both of which cases are pending.

Other business promotions resulting in criminal proceedings during

the past year were involved in U. S. v. Alfred L. Lodge et al. (W. D.

Okla.) (production, manufacture, and sale of brooms), U. S. v. Jim

May (S. D. Tex.) (grain trading venture), and U. S. v. Paul A.

Schumpert et al. (M. D. Tenn.) (small loan company). The defendants in the first two cases were indicted during the year and

convictions were obtained after the close of the fiscal year. In the

Schumpert case convictions were obtained during the year on an

earlier indictment," and another indictment was returned during the

year against additional defendants. In the Lodge case the misrepresentations included such matters as the use to be made of the proceeds

obtained from securities sales, the profits and property owned by

the corporations, and the approval of the securities by the Commission. Both the May and Schumpert cases involved, among other

things, a "Ponzi" type of swindle where, to induce further investment,

capital was returned to investors in the guise of profits.

Convictions involving securities brokers and dealers and their

representatives were obtained during the past year in U. S. v, D. S.

Walldy (W. D. Ark.), where the defendant operated a securities business while insolvent, converted customers' funds and securities, filed

false and misleading financial statements with the Commission, and

failed to keep the books and records required by section 17 (a) of the

Securities Exchange Act of 1934 and by the Commission's rules thereunder; in U. S. v. Louis A. Starling et al. (W. D. Va.), where the

defendants, under the pretense of rendering impartial investment

advice, induced their customers to purchase the defendants' personally

owned shares of a tobacco company by misrepresenting, among other

things, the financial condition of the company and by failing to disclose

that the stock was being sold for the personal profit of the defendants;

and in U. S. v. Stanley M. Brown (D. D. C.), U. S. v, Alvis Roy Davis

(W. D. Mo.), and U. S. v. Otto F. Herald (N. D. Ill.), in which cases

the conversion of customers' money or securities constituted a part of

the frauds charged. The defendant in the Herald case was convicted

also of violating the broker-dealer registration provisions of the Securities Exchange Act of 1934, since he had engaged in the business of

effecting securities transactions without being registered with the

Commission as required by section 15 (a) of the act.

Indictments involving securities brokers and dealers are presently

pending in U. S. v. Frederick F. March (N. D. IlL), U. S. v. Ed1lJin R.

Hawley (D. Ariz.), and U.S. v.EugeneF. Luck (S. D. Fla.). March

is accused of fraudulently selling interests in a purported investment

8 See 15th Annual Report of Securities and Exchange Commission. p. 165.
SIXTEENTH ANNUM.. REPORT 151

plan to be operated by him by misrepresenting, among other things,

the nature of the investment plan and the profits which investors would

make on their investments in this plan. In fact, according to the

indictment, the defendant converted to his own use and benefit, and

used for gambling purposes, a large part of the money which he obtained from investors. In addition, the indictment charges him with

paying back to investors, as "profits" resulting from the operation of

his plan, portions of their capital contributions. The frauds charged

in the Hawley and Luck cases involve, among other things, the conversion of customers' funds and securities. As a part of the alleged fraud

employed in the latter case, it is charged that the defendant forged

various documents and sold stock of his securities brokerage firm to

his customers by means of various false representations.

Criminal contempt proceedings were instituted during_ the year in

u.S. v, James Nelson (S. D. Cal.) and U. S. ex rei. SEO v, Josiah

Marshall Kirby (N. D. Ohio). Nelson was convicted for violating a

1944 injunction decree which enjoined him from selling securities in

violation of the registration provisions of the Securities Act of 1933.

Despite this decree, Nelson sold securities, which had not been registered with the Commission, relating to certain syndicates known as the

"Apache Golden Treasure Syndicate" and the "Tayopa Golden Treasure Syndicate." The contempt proceeding in the Kirby case is

pending. The petition alleges that Kirby continued to act as an overthe-counter securities broker and dealer, without registration under

section 15 (a) of the Securities Exchange Act of 1934, in violation of

preliminary and final injunction decrees obtained in 1948 and 1949

respectively.

In the only appellate case involving criminal prosecution decided

during the fiscal year, Nemec et a. v, U. S., 178 F. 2d 656 (C. A. 9,

1949), certiorari denied 339 U. S. 985, the conviction of defendents

for the fraudulent sale of securities in connection with the promotion

of a purported gold mining venture was sustained.

COMPLAINTS AND INVESTIGATIONS

The Commission is authorized under the acts it administers to investigate possible violations. Among the sources of information about

violations are the examination by the staff of material filed with the

Commission (e. g., ownership reports indicating transactions in equity

securities by officers and directors) information furnished by other

governmental agencies, better business bureaus, State authorities, and

complaints made by members of the public. Complaints from the

public provide the chief source of leads with respect to such violations. During the 1950 fiscal year 9,335 letters were received by the

principal office relating to possible violations of the Securities Act of

1933 and the Securities Exchange Act of 1934. This volume of complaints represented an increase over the preceding year of more than

30 percent.

Investigations are classified generally as preliminary or docketed

investigations. A preliminary mvestigation is one instituted for the

purpose of determining whether probable violations have occurred

and this type of investigation is carried on largely through corre-
152 SECURITIES AND EXCHANGE COMMISSION

spondence, office research, or limited interviews. If the information

developed in the preliminary investigation indicates such violations

of the law as to require a full-scale field investigation, the, case is

transferred to a docketed investigation. In a great many instances,

however, the preliminary investigation discloses that the violation, if

any, is of a minor nature warrantmg neither a full-scale investigation

nor the imposition of any of the sanctions provided by law. These include situations in which the violation comes to the attention of the

Commission shortly after its inception, where the violation appears

to be inadvertent, and where immediate steps have been taken by the

offender to comply with the law.

The Commission has subpena powers and designates officers for the

purpose of conducting investigations, issuing subpenas, and administering oaths. Subpenas are used only where the investigation cannot

be concluded without their use and only after a preliminary report and

reasons for the necessity of issuance of the subpenas have been presented to the Commission. During the 1950 fiscal year the Commission authorized use of subpenas by issuance of formal orders for investigation in 35 cases.

The extent of the investigatory activities of the Commission during

the 1950 fiscal year under the Securities Act of 1933, the Securities

Exchange Act of 1934, sections 12 (e) and (b) of the Public Utilities

Holding Company Act of 1935, the Investment Company Act of 1940,

and the Investment Advisers Act of 1940 is shown in the following

table:

Investigations of violations of the acts administered by the Commission 1

Preliminary , Docketed' Total

Pending at June 30, 1949__________________________________________ 536 1,050 1,586 Opened July I, 1949to June 30, 1950: New cases____________________________________________________ 341 159 500 Transferred from preliminary -----p 50 50

Total number of cases to be accounted Cor___________________ 877 1,259 2, 136

Closed________________________________ , ___________________________ 511 718 1,229 TransCerred to docketed 50 50

Pending at June 30,1950------------------------------------------1

316 541 857

1 Tbese figures include 011 and gas investigations wlI1ch are separately tabulated and discussed elsewhere

in this report. 'investigations carried on through correspondence and limited field work.

Investigations assigned to field investigators.

Canadian Situation

During the 1950 fiscal year illegal offerings in the United States

of oil and mining securities emanating from Canada continued to be

of grave concern to the Commission. Practically all of these offerings

are made by mail from Toronto, Ontario. Complaints from the public, better business bureaus, and State authorities have been received

in large numbers from all parts of the United States. State authorities have continued to issue cease and desist orders where solicitations

have been made inviolation of their securities laws. Newspapers and

magazines have performed a valuable service by warning the public

about these violations. The Post Office Department has continued

to cooperate with the Commission in trying to prevent the losses caused

_________________________________ ----------

__________________________________________ ------------

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SIXTEENTH ANNUM, REPORT 153

by these illegal mass mail campaigns. During the year the Post Office

Department issued orders against 14 individuals and firms who have

conducted such mail campaigns, based upon the use of fictitious names.

In addition, the Post Office Department, based upon information furnished by the Commission, issued fraud orders to stop the delivery

of mail to 27 firms in Toronto who, were offering shares by means of

fraudulent representations and omissions.

All of these cases involved violations of the registration provisions

of the Securities Act of 1933. Every full investigation has shown that

unregistered securities being offered and sold in the United States from

Toronto have been offered and sold by means of false and fraudulent

representations.

It is believed that the vigorous campaign by the Commission, with

the cooperation of other governmental agencies, has been effective in

reducing these violations. However, they have not been completely

eliminated. The Commission has continued its efforts to improve

the extradition provisions of our treaties with Canada so as to enable

the Government of the United States to bring the fraudulent operators to trial.

Section of Securities Violations

Inthe first year of its existence the Commission established a section

of securities violations for assistance in the enforcement of the various

statutes which it administers and to provide a further means of preventing fraud in the purchase and sale of securities. This section has

developed files which provide the basis of maintaining a clearing

house of information concerning persons who have been charged with

violations of various Federal and State securities statutes. The specialized information in these files has been kept current through the

cooperation of the United States Post Office Department, the Federal

Bureau of Investigation, parole and probation officials, State securities commissions, Federal and State prosecuting attorneys, police

officials, and members of the United States Chamber of Commerce.

By the end of the 1950 fiscal year these records contained data concerning 53,162 persons against whom Federal or State action had been

taken in connection with securities violations.

During the past year alone additional items of information relating

to 6,324 persons were added to the records of this section, including

information concerning 1,997 persons not previously identified therein.

Extensive use is made of this clearing house of information. During the past year, in connection with the maintenance and preventive

application of these records, the Commission received 4,298 "securities

violations" letters or reports (apart from those which are classified

~s "complaint enforcement") and dispatched 3,007 communications

III turn to cooperating agencies,

ACTIVITIES OF THE COMMISSION IN ACCOUNTING AND AUDITING

Many of the reports or documents required to be filed each year

with the Commission contain financial data, mostly in the form of

financial statements and related schedules. These are always a vital,

often the most significant, element of the information the investor

must have upon which to predicate investment decisions. Because
154 SECURITIES AND EXCHANGE COMMISSION

the Congress recognized that accounting and accountants perform such

an important role in achieving the statutory purpose of disclosure,

and because financial statements lend themselves readily to misleading

inferences or even deception, whether or not consciously intended, the

statutes administered by the Commission deal extensively with accounting, and activities of the Commission in the field of accounting

are necessarily significant.

Thus, for example, the Securities Act not only provides for inclusion in prospectus of balance sheets and profit and loss information

"in such form as the Commission shall prescribe," 9 but authorizes the

Commission to prescribe "the items or details to be shown in the balance sheet and earning statement, and the methods to be followed in

the preparation of accounts. * * *" 10 Similar authority is contained in the Securities Exchange .Act,ll and more comprehensive

power is embodied in the Investment Company .Act 12 and the Holding

Company .Act.13

The Securities Act provides that the required financial statements

shall be certified by "an independent public or certified accountant." 14

The other three statutes above mentioned provide that the Commission

may require that such statements be accompanied by a certificate of

independent public accountants." The Commission's rules require

that statements filed pursuant to the Securities Exchange Act and

the Investment Company .Act be so certified. The value of certification

has for many years been conceded but the requirement as to independence, long recognized by some individual accountants, was for the

first time authoritatively and explicitly stated by its introduction into

the statutes. Out of this initial provision in the Securities Act and

the resulting rules established by the Commission 16 there have grown

concepts that have materially strengthened the protection afforded

investors by eliminating certain unhealthy accountant-client relationships which theretofore were quite common.

Although the statutes administered by the Commission give it wide

rule-making power, accounting, based as it is largely upon convention

and existing financial and business concepts, is of such a nature that

the Commission has not yet found it necessary or desirable in most

areas to establish extensive accounting rules and regulations dealing

with accounting problems. The Commission has prescribed uniform

systems of accounts for certain public utility holding companies and

for public utility mutual and subsidiary service companies. It has

adopted rules under the Securities .Act governing accounting and

auditing of exchange members, brokers, and dealers. In the wider

area dealing with industrial, commercialhand investment companies

under the Securities Act, Securities Exc ange .Act, and Investment

Company .Act the form and content of most financial statements are

governed by the Commission's regulation S-X.

Sec. 10 (a) (1) (Schedule A, par. 25, 26). 10 Sec. 19 (a). 11 Sec. 13 (b). :12 SeC6.30, 31. 13 Sees. 14, 15. l< Sec. 10 (a) (1) (Schedule A, par. 25, 26). 15 SecurIties Exchange Act. sec. 13 (a) (2): Investment Company Act, sec. 30 (e);

HoldIng Company Act, sec. 14. 18 See, for example, rule 2-01, regulation S-X.

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SIXTEENTH ANNUAiL REPORT 155

The rules and regulations thus established do not prescribe the

accounting to be followed except in certain basic respects. In the

large area not covered by such rules the Commission's principal reliance for the protection of investors is on the determination and

application of accounting standards which are recognized as sound

and which have come to have general acceptance. This policy of the

Commission is expressed in accounting series release No.4 (1938) (one

of the series of such releases inaugurated in 1937to publish accounting

statements and opinions which are of general interest).

One of the inevitable results of this policy has been constant

contact and cooperation between the Commission and other governmental agencies and accountants both individually and through such

groups as the American Institute of Accountants, the American Accounting Association, the Controllers Institute of America, the National Association of Railroad and Utilities Commissioners and others.

The importance of this cooperation is emphasized by the great influence

and responsibility inherent in the Commission's authority over the several thousand financial statements filed every year with it by most of

the important commercial and industrial companies in the United

States.

The accounting staff of the Commission is organized to handle the

many day-to-day accounting problems that arise in the course of its

work and to provide central responsibility for aiding the Commission

in matters of accounting policy. The chief accountant has general

supervision with respect to accounting and auditing policy and its

application. He is assisted directly by a staff of trained accountants,

and, in addition, by assistant chief accountants assigned to and responsible for the examination of financial data and other operating

work in the Division of Corporation Finance, Division of Trading and

Exchanges and Division of Public Utilities.

Examination of Financial Statements

The majority of the accounting problems with which the Commission

is concerned arise from examination of financial statements or other

data required to be filed with the Commission. In general, deficiencies

revealed by examination are called to the attention of the registrant

by letter. These letters of comment and the corresJ?ondence or conferences that follow have proved to be a most convement aid in effecting corrections and improvements in financial reporting. Few matters

involve prolonged discussion or dispute in spite of the tremendous

volume of financial data reviewed each year by the Commission; and

it is only in rare instances that formal procedures are necessary in

order to procure disclosure.

Many problems arise as a result of inquiry by representatives of

registrants, their accountants or counsel in advance of the actual

filing of the material involved. Advance discussion of this kind is

encouraged and experienced practitioners regularly follow this procedure in dealinz with unique problems-thus saving valuable time for

themselves and their clients. As a natural outgrowth of the fact that

the Commission studies and is the repository of a vast reservoir of

financial data, the staff is frequently called on to aid in the preparation
156 SECURITIES AND EXCHANGE COMMISSION

of studies of current problems such as those involved in formulating

the background of legislative proposals.

Proposed Amendment of Regulation SOX

Regulation S-X is the Commission's basic accounting rezulation

relating to the form and content of financial statements filed under

tbe Securities Act, the Securities Exchange Act, and the Investment

Company Act. This regulation was promulgated in February 1940

and in many respects simply brought together requirements theretofore contained in the separate registration and annual report forms.

The only major changes in the regulation since its issuance in 1940

have been the addition in 1942 of article 6A relating to unit investment trusts, the complete revision in 1946 of article 6 relating to

management investment companies and a new article 5A, adopted in

1948, applying to commercial, industrial, and mining companies in

the promotional, exploratory, or development stage.

Many accounting and reporting problems have arisen during the

10 years that have elapsed since the adoption of regulation S-X. Both

the incidence and solution of some of these matters have involved

changed viewpoints, not only of industry and the accounting profession, but also of the Commission. Furthermore, entirely new situations have developed requiring the establishment of new procedures.

For these reasons it has been thought desirable to revise the regulation.

When the present proposal to amend regulation S-X was made in

September 1949, copies of the preliminary draft were sent to 325 persons and an additional 15 or more were sent to persons who requested

copies, mostly as a result of an item in the October 1949 Journal of

Accountancy which invited readers to obtain and comment upon the

preliminary draft. Several accounting firms and professional groups

requested additional copies so that, in all, approximately 600 copies

were sent out. Approximately 115 persons, including 46 controllers

or principal accounting officers of corporations, submitted comments.

The large number of comments and recommendations received was

given a great deal of careful study. Amendments originally proposed

were reconsidered as a result of these comments and the final revision

of the proposed amendments was sent out and formal notice of amendment was given under the Administrative Procedures Act on July

12, 1950. In view of the ~reat importance of the regulation, the

most careful consideration will be given to the additional comments

and suggestions expected to be received before enactment of amendments.

Other Developments in Accounting and Auditing

The Commission's fifteenth annual report mentioned the disclosure

and accounting problem that arose from the increasingly popular

form of financrng by means of long-term leases or more particularly

the sell-and-Iease-back device. To a considerable extent the Commission's disclosure requirements applicable to such transactions have

been inexistence for a number of years. Thus, item 5 of the schedule

of "Supplementary Profit and Loss Information," rule 12-16 of regulation S-X, requires that there be stated certain minimum data as to

annual rentals, if significant. In view of the very important nature
SIXTEENTH ANNUAL REPORT 157

of lease-type financing, particularly the fixed character of the commitment undertaken, the Commission has in the past several years

asked that there also be given, by a brief reference in a footnote to

the balance sheet, the principal details of significant transactions occuring within the year or years covered by the report. The Commission also has indicated that where the transaction is such that it

is in substance a purchase of property, the transaction must, despite

the lease form, be accounted for as a purchase. The principles were

also adopted in the recommendation of the Committee on Accounting

Procedure, American Institute of Accountants, in its Accounting Research Bulletin No. 38 issued in October 1949.

Although the Commission had earlier indicated its position with

respect to accounting for the obligations created by corporate pension

plans, during the current year it was found desirable to give further

consideration to the matter. This did not involve the one-time

troublesome question of the proper disposition of expenditures to fund

payments or liabilities determined upon the basis of past services of

employees. The propriety of charging such amounts direct to income

rather than to surplus is no longer challenged. Accounting Research

Bulletin No. 36 in November 1948 by the American Institute of Accountants is, in principal, in agreement with the Commission's view.

However, there arose again the problem of the accounting for possible or implicit liabilities associated with past service elements of

pension plans where the corporation is under no contractual obligation to continue the plan beyond the current year or few years immediately following. In the case of actual liability arismg from

an irrevocable commitment to the future payment of pensions it was

not difficult to conclude that any unfunded liability for past service

benefits, actuarily determined, should, under accepted accounting

principles, be set up in the accounts. At the date of adoption of the

plan such liability would, of course, relate not only to employees

actually retired or qualified for retirement but also to the past service

of those employees who would not qualify for retirement until a future

date.

Such completely irrevocable commitments apparently occur rarely,

if at all. In recent months union-management negotiations, particularly in the steel industry, have led to the adoption of various plans

which might not legally bind the employers to fund past-service elements even though in a typical instance the plan is, by contract, to

continue for 5 years. Question arose as to the extent of disclosure required to be given in proxy statements coming before the Commission

for examination.

As an accounting matter the Commission had earlier concluded that

even though there is no contract, or the pension contract may run for

a short period only, it would be unrealistic to ignore the probability

that, once having installed a plan or entered into a short-term contract,

the company will continue it. Accordingly it was believed that there

should be disclosed in a brief footnote to the balance sheet not only the

important terms of the plan, including estimates of amounts payable annually, but also the company's best estimate of the amount that

would be necessary to fund, or complete the funding of, past service

obligations at the balance sheet date on the assumption that the plan
158 SECURITIES AND EXCHANGE COMMISSION

is to be continued. In the case of employees who have retired or are

eligible to retire, an equally realistic approach seems to require that,

apart from any question as to legal liability, balance sheet provision

should be made in an amount equal to the sum necessary to fund the

obligation.

Upon request, in connection with the proxy material filed with it,

the Commission informally reconsidered its position and concluded

that it could find no sound and reasonable basis for a different view

than that held earlier as to the appropriate treatment in financial

statements. The Commission also indicated that the disclosure requirements in proxy material, to be furnished to stockholders as a basis

for stockholder action on the pension plan, are essentially the same as

in the case of financial statements and that therefore substantially the

same treatment should be given to the facts.

InSeptember 1949,the British Government announced a very material devaluation of its currency in terms of the United States dollar.

Devaluations were almost immediately announced by many other foreign governments with the result that a large number of domestic

corporations engaged in business in these countries were presented with

problems as to how to state the accounts of their foreign subsidiaries

and branches interms of United States currency. Since many of these

corporations publish quarterly financial data for the benefit of stockholders and others, prompt decisions were necessary. Although the

Commission generally does not exercise jurisdiction over stockholders'

reports as such, many inquiries as to the Commission's views were

received from registrants in anticipation of the later filing of their

annual reports.

The first problem presented in many instances was whether to continue the previous practice of consolidating foreign and domestic operations. The Commission recognized that the decision on this point

is one primarily to be reached by the company and its independent

accountants, having due regard for all the facts, and having in mind

the objective of most clearly exhibiting the financial condition and results of operations of the parent company and its subsidiaries. While

not then called upon to make a decision in any particular case, the staff,

in answer to a number of inquiries, indicated its general conclusion

that the consolidation question might well be determined upon the

basis of the degree of integration of the foreign operations with

domestic operations.

Ifsuch foreign operations are essentially an arm or extension of domestic operations, and are actively being conducted, the view held is

that there is a presumption in favor of the consolidation thereof, despite the probable impact upon the foreign operations of unfavorable

political and economic factors. If, in an instance of this kind, remittances to the parent company are restricted, appropriate disclosure

of the facts would be necessary and the consolidated profit and loss

statement should reflect only earnings of foreign subsidiaries which are

available to the parent in terms of United States dollars. If, on the

other hand, the foreign operations constitute a complete and separate

business unit in and of themselves, and serious economic problems are

presented, nonconsolidation would generally appear to be indicated.

In the examination of reports filed with the Commission since these
SIXTEE~ ~AL REPORT 159

developments it has been observed that in a substantial number of

cases foreign operations previously included in consolidation have

been removed therefrom and, where falling within the Commission's

tests of significance, have been reported on separately.

A more persistent question was whether, as a result of widespread

devaluations and foreign conditions generally, any new principles were

applicable with respect to the conversion of foreign assets into a dollar

equivalent. It was the staff's opinion, expressed in numerous instances, that no new problem existed and that the well-established

practices of the past are quite adequate and appropriate to cope with

any situation that has come to its attention. The general principles

applicable in the case of conversion of foreign net assets are well expressed in Accounting Research Bulletin No.4 (1939) of the American

Institute of Accountants. Question arose, however, concerning the

extent to which losses recognized in connection with the devaluation

should be recognized by charges against income. The staff's position,

concurred in by the Commission in a recent informal ruling, is that

losses of this nature, even though large in amount, are a risk incident

to doing business and are therefore proper charges against income.

This conclusion was arrived at independently of the general question

of the propriety of charges and credits to earned surplus.

Among the proposed amendments to regulation S-X are provisions

dealing in certain important respects with the above described problems as to long-term lease commitments, pension plans, accountin~ for

operations of foreign subsidiaries, and the impropriety of direct

charges to earned surplus.

Several of the annual reports of the past few years have commented

upon a group of accounting cases that arises in the administration of

rules X-17A-3 and X-17A-5 under the Securities Exchange Act,

governing securities brokers and dealers. As has been noted, most of

the difficulties encountered in this field of regulation are due to the

large number of small firms and the fact that many of the required

audits are performed by accountants unfamiliar with the Commission's

requirements and apparently not well trained in the improved procedures of brokerage accounting and auditing practice. During the past

year the Commission's staff, through correspondence and through direct contact by regional office representatives, continued to devote

considerable time to improvement in this area. In most cases it was

apparent that inexperience rather than deliberate evasion was the

cause of the unsatisfactory reports filed. There were a number of

cases involving certifying accountants, however, in which, although

formal proceedings under rule II of the rules of practice were not necessary, the audit work failed completely to approach generally accepted auditing standards and required that informal action, usually

warning or admonition, be taken.

The various changes by the Commission in its forms are described

in the preceding sections discussing the administration of the various

acts. There were no material changes affecting the work of accountants although of interest was the elimination of the well-known Form

I-MD and the extension of Form 10-K to annual reports pursuant to

both sections 13 and 15 (d) of the Securities Exchange Act.
160 SECURITIES AND EXCHANGE COMMISSION

DIVISION OF OPINION WRITING

The Division of Opinion Writing aids the Commission in the

preparation of findings, opinions, and orders promulgated by the

Commission in contested and other cases arising under the Securities

Act of 1933, the Securities Exchange Act of 1934, the Holding Company Act of 1935, the Trust Indenture Act of 1939, the Investment

Company Act of 1940, and the Investment Advisers Act of 1940. These statutes provide for a wide variety of administrative proceed1~ which require quasi-judicial determination by the Commission.

Formal opinions are issued in all cases where the nature of the matter

to be decided, whether substantive or procedural, is of sufficient importance to warrant a formal expression of views.

The Division of Opinion Writing is an independent staff office

which is directly responsible to the Commission. It receives all

assignments and instructions from and makes recommendations and

submits its work to the Commission directly. It is headed by a director, who is assisted by an assistant director, supervising attorneys,

and a staff of drafting attorneys and a financial analyst.

While engaged in the preparation of opinions assigned to the Division of Opinion Writing, the members of this division are completely

isolated from members of the operating division actively participating

in the proceedings and it is an invariable rule that those assigned to

prepare such an opinion must not have had any 'prior participation

m any phase of the proceedings with respect to which the opinion is to

be prepared. Commission experts are from time to time consulted on

technical problems arising in the course of the preparation of opinions

and findings, but these experts are never individuals who have participated in the preparation of the case or testified at the hearing.

The director or assistant director of the Division of Opinion Writing, together with the members of the staff of the division who are

assigned to work on a particular case, attend the oral argument of

the cases before the Commission and frequently keep abreast of current

hearings. Prior to the oral argument, the division makes a preliminary review of the record and prepares and submits to the Commission

a summary of the facts and issues raised in the hearings before the

hearing officer, as well as in any proposed findings and supporting

briefs, the hearing officer's recommended decision, and exceptions

thereto taken by the parties. Following oral argument or, if no oral

argument has been held, then at such time as the case is ready for

decision, the Division of Opinion Writing is instructed by the Commission respecting the nature and content of the opinion and order

to be prepared. In preparing the draft of the Commission's formal opinion, the

entire record in the proceedings is read by a member of the staff of

the Division of Opinion Writing_and in some cases he prepares a

narrative abstract of the record. Upon completion of a draft opinion

and abstract of the record, and after review and revision of the

opinion within the Division of Opinion Writing, they are submitted

to the Commission. If the study of the record in the case by the

Division of Opinion Writing has revealed evidence of violations warranting a reference to the Attorney General for criminal prosecution, or has disclosed the desirability or th~ 'need for any changes in
SIXTEENTH ANNUA,L REPORT 161

administrative procedures or techniques, appropriate recommendations are made to the Commission at the time the draft opinion in the

case is submitted.

The draft opinion as submitted may be modified, amended, or completely rewritten in accordance with the Commission's final instructions. When the opinion accurately expresses the views and conclusions of the Commission, it is adopted and promulgated as the official

decision of the Commission. In some cases concurring or dissenting

opinions are issued by individual Commissioners who wish to express

their separate views on matters covered by the opinion adopted by

the majority of the Commission. In such casesthe Division of Opinion

Writing is occasionally instructed to prepare drafts of such concurring or dissenting opinions and confers respecting them with the

individual Commissioners involved, submits drafts directly to them,

and makes such modifications and revisions as are directed.

The findings of fact, opinions, and orders adopted and promulgated by the Commission serve as an aid and guide to the bench and

bar. With minor exceptions (e. g., certain opinions dealing with

requests for confidential treatment) all are publicly released and

distributed to representatives of the press and persons on the Commission's mailing list. In addition, the findings and opinions are

printed and published bic the Government Printing Office in bound

volumes under the title' Securities and Exchange Commission Decisions and Reports."

The creation of the Division of Opinion Writing as an independent

staff unit in 1942 was based on the view that the fair exercise of the

Commission's adjudicatory functions in many types of cases made it

appropriate that it be assisted in that function by members of its staff

who were independent of units engaged in investigation or prosecution of cases. Originally initiated as a matter of Commission policy,

the desirability of this arrangement was subsequently given express

recognition in specific provisions of the Administrative Procedure

Act, which in certain types of cases requires that there be a complete

separation of function between quasi-prosecutory functions and quasijudicial functions. The existence of the Division of Opinion Writing

thus made it possible for the Commission, even before the passage of

the Administrative Procedure Act, to meet fully the separation of

function requirements contained in sections 5 (c), 7 and 8 of the act.

The Commission, through its revised rules of practice, has sought

to provide a flexible J?rocedure which will be suited to the needs and

desires of the participants in the proceeding before it, as well as

guarantee to them the procedural safeguards required by the general principles of due process and the provisions of the Administrative

Procedure Act. Thus, at the request of some participants, the Commission has in many cases availed itself of the assistance of the Division of Opinion Writing in the preparation of its findings even though

separation of functions was not required by law.

Further, under rule In of the Commission's rules of practice, the

moving party may, subject to a contrary determination by the Commission, specify the procedures considered necessary or appropriate

in the proceedings, with particular reference to (1) whether there

9l58fl--51----1~
162 SECURITIES AND EXCHANGE COMMISSION

should be a recommended decision by a hearing officer; (2) whether

there should be a recommended decision by any other responsible

officer of the Commission; (3) whether the interested division of

the Commission's staff, or only the Division of Opinion Writing

may assist in the preparation of the Commission's decision; and

(4) whether there should be a 30-day waiting period between the issuance of the Commission's order and the date it is to become effective.

Other parties may object to the procedures or specify other procedures, but in the absence of such objection or specification of additional procedures they may be deemed to have waived objection to

the specified procedure and to the omission of any procedure not

specified.

In addition to its primary function, the Division of Opinion Writing is also given assignments of a general nature which are not inconsistent with the objective of the separation of the investigatory and

quasi-judicial functions. Thus, the division has been assigned continuing joint responsibility with the officeof the General Counsel in

dealing with problems arising under the Administrative Procedure

Act. It has also been given the responsibility of preparing a compilation of administrative decisions and other authorities under the

various statutes administered by the Commission.

The Division of Opinion Writing assists the operating divisions

of the Commission in the preparation of opinions in certain uncontested cases where participation by the operating division in the

decisional process is proper under the Administrative Procedure Act.

In some instances members of the Division of Opinion Writing are

assigned to assist the Officeof the General Counsel in connection with

court appeals taken from Commission decisions initially drafted in

the Division.

Some of the more significant opinions issued by the Commission

during the year are commented upon in this report under the discussions of the various statutes.

FOREIGN FINANCIAL AND ECONOMIC MATI'ERS-THE INTERNATIONAL

BANK

Registration statements covering $230,738,915 of securities issued

by foreign issuers, private and governmental, were filed during the

fiscal year 1950 under the Securities Act of 1933. About $190,000,000

of these securities were issued by governments; and about $175,000,000

of these governmental issues emanated from Canada.

Upon the outbreak of World War II United States national securities exchanges suspended dealings in all securities of German,

Japanese, Italian, and other axis origins. Shortly thereafter the

Commission, after consultation with the Departments of State and

Treasury, requested that brokers and dealers refrain from effecting

transactions in these securities. Following the filing of a registration statement by the Republic of Italy in December 1947, covering

an offer of exchange for outstanding dollar bonds of the Kingdom

of Italy and certain municipal and corporate obligations, the Commission withdrew its cease-trading request as it affected Italian

securities.
SIXTEENTH ANNUAL REPORT 163

In recognition of the interest of United States bondholders the

Commission has consulted with the Departments of State, Treasury,

Justice, and with the Armed Services on the questions involved in

the eventual resumption of trading in German, Japanese, and other

former Axis issues. Events which have taken place since these bonds

were suspended from trading have been reviewed. The uncertain

status of prewar dollar obligations of Germany, the lack of a peace

treaty, and the substantial dollar obligations it had incurred during

the period of occupation have been noted.

Through the supreme commander of the Allied Powers the Commission has (in consultation with the Ministry of Finance of the

Japanese Government) endeavored to get current information filed

with respect to the status of Japanese dollar bonds which were outstanding prior to the war. The Japanese Government has expressed

the intention of complying with the Commission's requirements for

the filing of data so that United States investors will be fully informed

as to the status of these bonds. The public availability of reliable

information of this kind is a necessary condition of any resumption

of dealings in the bonds.

The Commission has continued its representation on the staff committee of the National Advisory Council on International Monetary

and Financial Problems and has continued to cooperate with other

agencies concerned with the development of the Government's foreign

economic program.

The Commission has also contributed to the development of the

President's Point IV program for the provision of technical assistance

to and the encouragement of private investment in underdeveloped

countries. It has participated in studies relating to the revival of

private foreign investment for developmental projects. It has also

consulted with the Department of State on the inclusion in Treaties

of Friendship, Commerce and Economic Development of clauses intended to protect investors in foreign securities.

The Commission, as a member of the Board of Visitors of the

Foreign Bondholders Protective Council, Inc., continued consultation

with the Department of State on problems referred to the Board by

officersof the Council.

The Commission has during the year had discussions with representatives of several foreign governments on the laws, regulations, and

procedures applicable to the issuance of and trading in foreign securities in United States capital markets.

By amendment to the Bretton Woods Agreements Act securities

issued or guaranteed as to principal and interest by the International

Bank for Reconstruction and Development are deemed to be exempted

securities under the Securities Act of 193317 and the Securities Ex17 Because of the exemption from the SecurIties Act the bank Is not required to register Its securitIes III connection wIth any public offerIng thereof, nor does it have to register securIties guaranteed by It as to principal and Interest.

The crimInal sanctions for fraudulent sales of securitIes under thc SecurIties Act con- tinue to apply to transactions in the bank's securIties and In securItIes guaranteed by the

bank-In spite of the exemption. However, the exemptIOn has the effect of eliminating cIvil llabllltIes under the Securities Act. SInce the CIvil liabilities provIsions of section

11 apply only In cases of inadequate registration statements, and those of section 12 (1) apply only in the event securIties are sold in vIolation of the regIstratIon provIsIons, exemptIon of these securities from registratIon has the effect of avoiding the application of these

sanctions.
164 SECURITIES AND EXCHANGE CQlMMISSI0N

change Act of 1934.1S The Commission in consultation with the

National Advisory Council on International Monetary and Financial

Problems is authorized to suspend the provisions of this amendment

at any time.

Pursuant to regulation BW, adopted by the Commission under

the amendment to the Bretton Woods Agreements Act, the bank files

with the Commission information comparable to that which would be

required if its securities had been registered under the Securities Act

of 1933 and the Securities Exchange Act of 1934:. The amendment

requires the Commission to include in its annual reports to Congress

such information as it shall deem advisable with regard to the operation and effect of the amendment, and in connection therewith to

include any views submitted for such purpose by any association of

dealers registered with the Commission. The Commission has received no views from such association of dealers.

In January 1950,the bank refunded $100,000,000of its outstanding

10-year 2% percent bonds by selling an issue of serial bonds in the

same amount. The 2% percent bonds, originally issued at par in 1947,

were replaced by a 2 percent issue and the refunding bonds were originally sold at a premium resulting in a net interest cost to the bank of

1.92 percent.

The refunding bonds were sold at competitive bidding. Syndicates

consisting of investment houses, securities dealers, and banks, with a

wide geographical distribution, participated in the bidding. The

winning syndicate consisted of 37 commercial banks and 99 securities

dealers located in 25 States and the District of Columbia. In all,

bidding groups had an aggregate membership of 393-0f which 63

were commercial banks and 330 were securities dealers.

The bank made available to .bidders and to participating dealers

copies of a prospectus relating to the new serial bonds giving information about the bank's structure and operations and including audited

financial statements. The bank thus gave effect to representations

made by it in connection with the adoption of the amendments to the

Bretton Woods Agreements Act which exempted securities issued and

securities guaranteed as to principal and interest by the bank. In

connection with the adoption of this legislation its proponents had

Section 12 (2) provides for civil llabillties for sales of securities (whether or not regis- tered) made through material misrepresentations and omissions. Ilowever, securities ex- empted by section 3 (a) (2) of the Securities Act do not fall within the proviSions of section

12 (2). Since the amendment to the Bretton Woods Agreements Act requires these

securities to be deemed exempted "within the meaning of" section 3 (a) (2), the e1fect of

that amendment is to eliminate civil liability pursuant to section 1ll (a). 81 The amendment to the Bretton Woods Agreements Act requires that securities issued or guaranteed as to principal and interest by the bank shall be deemed to be exempted within the meaning of section 3 (a) (12) of the Securities Exchange Act of 1934.

The elfect of this exemption is to take these securities out of the purview of rules fixing margin requirements and of rules relating to borrowings on securities by brokers and

dealers. As exempted securities. these securities may be traded on exchanges without the

formalities of reglstratton or literal compliance with information requirements or other

exemptive provisions.

Brokers or dealers doing a business exclusively in the bank's exempted securities and

other exempted securities, would not be required to register with the Commission.

Section 10 (b) of the Securities Exchange Act makes it unlawful to use deceptive or manipulative devices, in contravention of ruies and regulations of the Commission, in

connection with the purchase or sale of secnritie&--whetlier or not registered on a securities exchange. Pursuant to this provision the CoIllJu1ssionhas adopted rules which apply whether or not securities are exempted.

Recent litigation has emphasized the poss1billty that these rules a1ford civil relief as well as a basis for criminal action.

The exemption of the bank's securities does not dect the operation of this provision.
SIXTEENTH ANNUAL REPORT 165

stated to the Congress that the bank intended to give purchasers full

information about the bank and its securities.

A fuller discussion of the operations of the bank is contained in the

second special report of the National Advisory Council on International Monetary and Financial Problems (May 1950).

Since this issue is the only issue of the bank's bonds effected since

enactment of the amendment the Commission does not, in this report,

comment upon the operation and effect of the amendment.

ADVISORY AND INTERPRETATIVE ASSISTANCE

The Commission has continued to make freely available to the public

the informal advisory and interpretative assistance of its professional

and technical staff, on matters arising under the statutes. Correspondence, conference, and telephone inquiries are handled by staff experts

familiar with the problems involved. It is impossible to estimate the

number of inadvertent violations forestalled as a result, or the amount

of time that goes into work so intimately related to the regulatory

duties of the Commission.

CONFIDENTIAL TREATMENT OF APPLICATIONS, REPORTS,

OR DOCUMENTS

Under five of the acts which it administers-the Securities Act of

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

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

Investment Act of 1940-the Commission is authorized to grant confidential treatment, upon application by registrants, to information

contained in reports, applications, or documents which they are required to file under these statutes. Under the Securities Act of 1933

the Commission has adopted rule 580, which provides that information

as to material contracts, or portions thereof, will be held confidential

by the Commission if it determines that disclosure would impair the

value of the contracts and is not necessary for the protection of investors. The other four statutes, in general, empower the Commission

to hold confidential under certain conditions any information contained in any reports required to be filed under those statutes. Disclosure of information confidentially filed under the latter statutes is

made only when the Commission determines that disclosure is in. the

public interest.

The following table indicates the number of applications for confidential treatment received and acted upon during the 1950 fiscal year

and the number pending at its close:

AppZications for confidential treatment-1950 jiscalllear

Number Number Number

Act under which filed pending Number Number derned or rundlng

July I, received granted with- une30.

1949 drawn 1950

Securities Act of 1933 1 15 16 ----------4- -----------8

Securities Exchange Act ofl934 .- 10 26 24

Investment Co. Act 00940 1. 65 65

TotaL -. 11 106 105 4 8

Flied under rule 485, Securities Act of 1933

Filed under rule X-24B-2 and role X-13A-6B, Seeurities Exchange Act of 1934.

1Filed under rule N-45A-l, Investment Company Act of 1940.

•_____________________

•• _______ ______________ ------------ ------------ ------------

_____•___•__________------- --

• • •
166 SECURITIES AND EXCHANGE COMMISSION

Registrants may seek judicial review of decisions made by the

Commission regarding confidential treatment adverse to them, but

no such petition for judicial review was filed during the past year.

STATISTICS AND SPECIAL STUDIES

In general, the statistical activities of the Commission relate to

(a) data of general application on groups of companies subject and

not subject to the legislation administered by the Commission and

(b) operational data derived from officialfilings with the Commission.

The purpose of the latter studies is to organize and present in meaningful form the masses of information filed with the Commission.

Saving Study

The Commission continued its series of quarterly releases on the

volume and composition of individuals' saving in the United States.

These releases show the aggregate volume of individuals' saving as

well as the components contributing to the total, such as changes in

securities, cash, insurance and consumers' indebtedness, etc. These

data have been extremely useful in the determination of fiscal policy

and as a measurement of the inflationary potential.

Financial Position of Corporations

The Commission, together with the Department of Commerce, continued the joint series of quarterly releases on the plant and equipment expenditures of United States business other than agricultural.

Shortly after the close of each quarter these releases present industry

totals on the actual capital expenditures of that quarter and anticipated expenditures for the next two quarters. In addition a survey

is made at the beginning of each year of the plans of business as

regards expansion during that year. These data have provided a

useful index of present and future activity in the capital markets and

of business in general. In view of the volatile nature of capital

expenditures and their relation to the level of production and employment, the series has been of considerable importance for business

management and in the formation of government policy.

The series of quarterly releases on the working capital position of

all United States corporations exclusive of banks and insurance companies was also continued. These releases show the principal components of current assets and current liabilities and an abbreviated

analysis of the sources and uses of corporate funds. These data are

important in measuring the liquid position of the corporate segment

of the economy taken as a whole.

The Commission, together with the Federal Trade Commission,

continued the joint series of quarterly industrial financial reports.

These reports developed as an extension of the working capital series

and present a complete balance sheet and an abbreviated income

account for manufacturing corporations as a whole. In addition the

data are shown for various size groups of corporations and for minor

mdustry groups. The financial report program includes data on

manufacturers' profits, which are extremely important in the formulation of a tax program and renegotiation policy. The data are basic

to any appraisal of corporate financial position and any analysis of

corporation finance and the capital markets.
SIXTEENTH ANNUAL REPORT 167

Capital Markets

The Commission has also continued its monthly series on new

securities offerings published in the Statistical Bulletin, and a quarterly series published together with a brief analysis in release form.

These data show the volume and character of all securities offerings

in the United States, both registered and unregistered, public offerings, and private placements. Collateral studies based on these data

have been undertaken from time to time pursuant to the Commission's

needs and requests from other branches of the government, and the

public. These included a study of the cost of flotation of privately

placed securities and a survey of issues offered under regulation A.

Operational statistics (in reality organized and segregated data on

a basis necessary for an understanding of the over-all facts revealed

by filings with us) are regularly collected with respect to the following matters and, except for those marked with an asterisk are

regularly published:

Registration statistics.

Underwriting statistics.

Cost of flotation.

Broker-dealer financial data.

Investment company data.

Accounting and financial characteristics of registrants. * Balance sheet and plant data. *

PERSONNEL

As of June 30, 1950, the personnel of the Commission consisted of

the following:

Commissioners___________________________________________ 5

Staff:IIeadquarters oflice 677

l1egional oflices_____________________________________ 316

993

Total________________________________________________ 998

During the fiscal year 1950, a limited appropriation required a

reduction-in-force of 60 employees. Further staff reductions resulted

by allowing positions left vacant through resignations to remain unfilled. The 998 employees on duty as of June 30, 1950, represents a

reduction of 129 from the total of 1,127 as of June 30,1949. During

the last 5 years the Commission's average employment has dropped

from 1,204 during the 1946 fiscal year to 1,043 for the fiscal year just

ended.

The division of personnel is responsible for the administration of

the Commission's personnel program. Its regular work embracer

placement and separation; job evaluation and classification; employee

relations and services; training; operation of various committees and

boards such as the Committee of Expert Exammers (which conducts

examinations for positions peculiar to the Securities and Exchange

Commission); wage administration; the uniform efficiency rating.

system; administration of Commission regulations governing the personal securities and commodities transactions of its personnel ; am;

processing, recording, and reporting of all personnel matters. Following the reduction of four employees early in the fiscal year, these

-
168 SECURITIES AND EXCHANGE COMMISSION

functions were carried out with a staff of 8 employees-a ratio of 1

personnel employee per 130 Commission employees.

In addition, the division of personnel is responsible for the conduct

of preappointment character investigations, leave administration and

accounting, retirement counseling, and the maintenance of an emergency medical unit staffed by a registered nurse. Four additional employees are assigned to the division of personnel to carry out these

functions.

While the volume of appointments and other personnel transactions

was considerably below normal during the fiscal year, the reductionin-force and related developments created many personnel problems.

For example, every effort was made to assist employees released inthe

reduction-in-force in locating suitable employment. One of the major

personnel problems was that of allocating and reassigning available

personnel to achieve maximum operating efficiency throughout the

Commission. In the sustained effort to preserve vital services, employees were interchanged, reassigned and shifted from unit to unit

as the pressure of work dictated. Supervisory officials cooperated in

this effort by releasing sorely needed employees to units where the

work program was at the moment the most critical.

Just prior to the beginning of the fiscal year the Bureau of the

Budget's personnel records system was installed. The system was

tested during the entire fiscal year and has contributed substantially

to the efficient operation of the personnel program. Under the system

paper work and record keeping are reduced to a bare minimum, conserving time and money for the more productive phases of personnel

administration.

FISCAL AFFAIRS

Appropriations and Expenditures

The following is a summary of the appropriation and expenditures

for the 1950 fiscal year:

llppropriation $5,878,250

lUxpended 5,873,450

lJnexpended balance_________________________________ 4,800

Receipts

The Commission receives fees (a) for the registration of securities

under the Securities Act of 1933 (1/10Oth of 1 percent of the maximum

price at which securities are proposed to be offered); (b) from registered national securities exchanges (lj500th of 1 percent of the aggregate dollar volume of the sales of securities on such exchanges) ;

(c) for applications for the qualification of indentures under the Trust

Indenture Act of 1939 ($100 for each application); (d) for the sale

of photocopies of documents or portions thereof filed by corporations

under one or more of the acts the Commission administers; and (e)

various receipts, such as a bonus for the award of the contract for

stenographic reporting services, for which $27,000 was received during

the fiscal year 1950, and from other sources, such as the sale of excess

or surplus Govermnent property, the sale of waste papers, etc.
SIXTEENTH ANNUAL REPORT 169

The following is the amount of fees received in the 1950 fiscal year:

Character of fees: .d.mOtlnt

Registration of securities issues --- $520,420

Qualification of trust indentures_______________________________ 800

From registered exchanges____________________________________ 228,867

Sale of copies of documents or portions thereof__________________ 12,411

Miscellaneous receipts_________________________________________ 2:7,545

Total 790,043

Fees and other receipts must be turned in to the General Fund of the Treasury

and are not available for expenditure by the Commission.

PUBUCATIONS

Public Releases

Releases of the Commission consist primarily of official announcements of filings under and actions taken pursuant to the several acts

which it administers. These include notices of filings, hearings,

orders, decisions, regulations, and related matters issued by the Commission. The Commission has endeavored to improve its service and

to effect economies in connection with its mailing lists by (1) a reclassification of releases enabling persons to select releases on a particular subject without receiving nonrelated matter and (2) by issuing

digests which set forth briefly the subject matter of the more voluminous releases. This procedure avoids the full-scale distribution of all

releases except to those persons who are sufficiently interested to make

a special request therefor.

The announcements issued during the 1950 fiscal year included 33

releases under the Securities Act of 1933; 193 under the Securities

Exchange Act of 1934; 754 under the Public Utility Holding Company

Act of 1935; 170 under the Investment Company Act of 1940; and 4

under the Investment Advisers Act of 1940. In addition, nine releases

were issued concerning the Commission's activities in corporate reorganization under Chapter X of the Bankruptcy Act, and four releases

were issued under the Trust Indenture Act of 1939. The following

breakdown of the releases for the month of June 1950 is fairly illustrative of the general nature of releases issued throughout the year:

Announcements of filings, orders for hearing, and notices giving opportunity to request hearing______________________ 32

Interim and final decisions and orders______________________ 55

The balance of the Commission's releases were of an informational

nature, the following having been issued during the year: seventy-five

announcements of publication of reports on corporate survey and

statistical studies; 76 reports of court actions ill injunction and

criminal prosecution cases initiated by the Commission; and 5 miscellaneous announcements regarding appointments of Commissioners,

staff officials, and related matters.

Other Publications Issued Duriug the 1950 Fiscal Year

Daily Registration Record: Registration statements filed with the

Commission.

Monthly Statistical Bulletin: Statistics on capital markets and

securities exchanges. Bound volume 16 of the Decisions and Reports,

May 15, 1944 to September 30, 1944: Decisions and reports issued by

the Commission.
170 SECURITIES AND EXCHANGE COMMISSION

Twelve monthly issues of the Official Summary of Securities Transactions and Holdings of Officers, Directors, and Principal Stockholders: Summary of security ownership data required to be filed with the

Commission.

The Fifteenth Annual Report of the Commission: The Commission's annual report to the Congress.

List of Securities Traded on Exchanges under the Securities Exchange Act of 1934, as of December 31, 1949.

List of Companies Registered under the Investment Company Act

of 1940,as of December 31, 1949.

Accounting Series Release No. 68, July 1949.

Proposal to Safeguard Investors in Unregistered Securities, Supplemental Report to Congress, 1950: Proposed legislation to require

disclosures of information by companies meeting certain standards.

Registered Public Utility Holding Companies, J nne 30, 1949: List

of companies registered under the Public Utility Holding Company

Act of 1935.

Securities Registered under the Securities Act of 1933, Cost of Flotation-1950, first quarter: Study of the costs of issuing and selling

securities registered under the Securities Act of 1933.

Volume and Composition of Individuals Saving: Quarterly estimates of individuals' saving.

Plant and Equipment Expenditures of Business: Quarterly series

showing actual and planned expenditures for plant and equipment.

Quarterly Industrial Financial Report: Quarterly balance sheet

and income account for all manufacturing corporations classified by

size of company and industry.

Net Working Capital of Corporations: Quarterly estimates of the

net working capital and components for all corporations.

New Securities Offered for Cash: Quarterly compilations of new

securities offerings, public and private, registered and nonregistered,

as well as use of proceeds.

Information Available for Public Inspection

The Commission maintains public reference rooms at the central

office in Washington, D. C., and in its regional officesin New York

City, N. Y. and Chicago, Ill. Copies of all public information on file

with the Commission contained in registration statements, applications, reports, declarations, and other public documents are available

for inspection in the public reference room in Washington. In addition to providing facilities for personal inspection of registered public information, the public reference room handled thousands of letters and telephone calls from persons requesting public information

and copies of forms, releases, and other material <if a public nature.

During the 1950 fiscal year 4,195 persons visited this public reference

room seeking such information. Through the facilities provided for

the sale of photocopies of public registered information, 1,813 orders

involving a total of 134,783pages were filled. In addition to the sale

of photocopies, the Commission mailed 1,096,555 pieces of mail containing releases, forms, acts, etc., to persons requesting them.
SIXTEENTH ANNU.A:L REPORT 171

In its New York regional office,located at 120 Broadway, facilities

are provided for the inspection of certain public information on file

with the Commission. This includes copies of (1) applications for

registration of securities on all national securities exchanges except

the New York Stock Exchange and the New York Curb Exchange, together with copies of annual reports, supplemental reports, and amendments thereto, and (2) annual reports filed pursuant to the provisions

of section 15 (d) of the Securities Exchange Act of 1934 by issuers

having securities registered under the Securities Act of 1933. During

the 1950 fiscal year 13,324 persons visited the New York public reference room and about 7,000telephone calls were received from persons

seeking registered public information, copies of forms, releases, and

other material.

In the Chicago regional office at 105 West Adams Street, copies of

applications for registration of securities on the New York Stock

Exchange and the New York Curb Exchange, together with copies

of all annual reports, supplemental reports and amendments thereto,

are available for public inspection. During the 1950 fiscal year 3,301

members of the public visited this public reference room and approximately 1,434telephone calls were received from persons seeking registered public information, forms, releases, and other material of a public

nature.

In addition to the material which is available in the New York and

Chicago public reference rooms, copies of all prospectuses used in public offerings of securities effectively registered under the Securities Act

of 1933 are available in each of the Commission's regional offices.

Duplicate copies of applications for registration of brokers or dealers

transacting business on over-the-counter markets, together with supplemental statements thereto, filed under the Securities Exchange Act

of 1934, and duplicate copies of applications for registration of investment advisers and supplemental statements thereto, filed under the

Investment Advisers Act of 1940, are available for inspection in the

regional office having jurisdiction over the zone in which the registrant's principal officeis located. Also, inasmuch as letters of notification under regulation A (which provides an exemption from small

issues of securities from the registration requirements of the Securities

Act of 1933), may be filed with the regional officeof the Commission

for the region in which the issuer's principal place of business is located, copies of such material are available for inspection at the

regional officewhere filed. . In the Commission's San Francisco regional office,in which complete facilities are provided for registration of securities and qualification of indentures, copies of registration statements and applications for qualification of indentures filed at that officeare available for

public inspection. Copies of all applications for permanent registrations of securities on national securities exchanges are available for

public inspection at the respective exchange upon which the securities

are registered.
172 SECURITIES AND EXCHANGE COMMISS10N

PUBUC HEARINGS

The following number of public hearings were held by the Commission under the indicated acts during the 1950 fiscal year:

Securities Act of 1933___________________________________________________ 1

Securities lnxchange Act of 1934________________________________________ 24

Public Utility Holding Company Act of 1935____________________________ 71

Trust Indenture Act of 1939

Investment Advisers Act of 1940_________________________________________ 1

Investment Company Act of 1940______________________________________ 1

Total 98

Formal hearings under Commission's Rules of Practice which were made

public during fiscal year____________________________________________ 1

Formal hearings under Commission's Rules of Practice which were not made

public during fiscal year_____________________________________________ 1

Total____________________________________________________________ 2

Total hearings for year___________________________________________ 100

_
PART IX

APPENDIX

STATISTICAL TABLES
174 SEICURITIES AlN'D EXCHANGE COMMISSION

TABLE 1.-Registrations fully effective under the Securities Act of 1933

PART I.-DISTRIBUTION BY MONTHS, FISCAL YEAR ENDED JUNE 30, 1950

[Amounts In thousands of dollars] I

All effectively registered Proposed for sale for account of issuers

Year and month Numberot Number otl Amount Numberot Numberot Amount statements Issues statements issues

1940 July __________________________ 25 52 412,778 25 50 399,052 August- ______________________ 24 29 275, 081 22 25 262,597 September ____________________ 32 44 336, 8.~7 23 27 271,965 October _______________________ 39 57 258,209 30 44 219,252 November ____________________ 41 50 389,247 38 43 303,821 December ____________________ 28 37 199,761 26 33 153,858

1950 January ______________________ 39 50 558,344 31 34 484,188 February _____________________ 32 37 293,488 32 36 263,409 March ________________________ 63 78 707,735 48 M 523,319 ApriL ________________________ 58 86 560,831 56 78 435,476 May __________________________ 62 78 732,002 55 64 536,939 June __________________________ 44 49 582,743 34 38 527,440

Total fiscal year 1950____ , 487 647 5,307,077 420 526 4,381,314

PART 2.-BREAKDOWN BY METHOD OF DISTRIBUTION AND TYPE OF SECURITY OF

THE VOLUME PROPOSED FOR CASH SALE FOR ACCOUNT OF THE ISSUERS, FISCAL

YEAR ENDED JUNE 30, 1950

[Amounts in thousands ot dollars] I

Type of security

Method ot distnbution and group to whom offered Secured Unsecured Preferred I Common Other AJltypes bonds bonds stock stock types'

All methods ot distribution __________ 4,381,314 959,933 1,023,524 467,929 1, MO, 578 389,350

To general public ________________ 3,383,498 959,933 934,021 334,614 786,811 368,119 To secunty holders ______________ 903,669 ----------- 79,515 129,227 694,927 ---------- To other spccial groups __________ 94, 148 ----------- 9,988 4,088 58,841 21,232

Through investment bankers ________ 3,890,617 955,933 1,003,536 454, 404 1,120,687 356,056

By purchase and resale __________ 2,927,787 955,933 1,000,536 447,720 523,598 ----------

To general public ____________ 2,365,089 955,933 921,771 321,383 166,002 ---------. To security holders __________ 560,279 -.--------- 78,765 126,337 355,177 ---------- To other Special groups ______ 2,419 ----------- -.-------.- ----------- 2,419 ----------

On best efforts basis _____________ 962,830 . ----------- 3,000 6,685 597,089 356,056

To general public ____________ 949,871 ----------- 3,000 6,685 684,130 356,056 To security holders. _________ 12,959 ----------- ----------- ----------- 12,959 To other special groups ______ ----------- ----------- ----------- ----------- -----------

By issuers ___________________________ 490,698 4,000 19,988 13,524 419,892 33,294

To general public ________________ 68,538 4,000 9,250 6,547 36,679 12,062 To secunty holders ______________ 330,431 750 2,890 326,790 --.------- To other special groups __________ 91,729 ----------- 9,988 4, 088 56,422 21,232

See footnotes at end or table.

-------~---
SIXTEENTH ANNUAL REPORT 175

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SIXTEENTH ANNUAL REPORT 191

TABLE 5.-A 17-year 8ummary of corporate bonae? publicly offered and privately

placed in each year-1934 through 1950-by calendar year

[Millions of dollars]

Total Publicly Placed Percent 01

Year offerwgll offered privately total placed

privatelY

1934____________________________________________

1935 372 280 92 24.7

1936____________________________________________ 2,225 1.840 385 17.3 4,029 3,660 369 9.2 1937____________________________________________ 1.618 1,291 327 20 2 1938 2,044 1,353 691 33.8 1939 1,979 1,276 703 35.5 1940 2, 386 1,628 758 31.8 194L ___________________________________________ 2,389 1,578 811 33.9 1942____________________________________________ 917 506 411 44.8 1943____________________________________________ 990 621 369 37.3 1944____________________________________________ 2, 670 1,892 778 29.1 1945____________________________________________ 4.855 3,851 1,004 20.7 1946____________________________________________ 4,882 3,019 1,863 38.2 1947____________________________________________ 5,036 2, 889 2, 147 42.6 1948 5,973 2, 965 3,008 50.4 1949____________________________________________ 4,890 2, 437 2,453 50.2 1950 5,206 2,966 2, 240 43.0

I Bonds, notes, and debentures. 1PreIrminary figures estimated on basis of figures through July 1950.

______________________________• _____________

_______• ____________________________________ ______________________________• _____________

___• ________________________________________

___________________• ________________________

' ___________________________________________
192 SECURITIES .AND EXCHANGE COMMISSION

TABLE 6

A SEVENTEEN-YEAR SUMMARY OF NEW SECURITIES

OFFERED FOR CASH IN THE UNITEO STATES AS TO TYPE OF' ISSUER, TYPE OF SECURITY. WHfTHER PUBLICLY OFFERED OR PRIVATELY PLACED,

AND THE IN1I[NDED USE OF THE PROCEEDS --1134 THROUGH 19~. 8'1' CALENDAR YEAR

GROSS PROCEEDS

DOl.lAR' 8ILLI0,.S

60

50

40

30

20

10

o

1

6

o

1

6

5

o

NET PROCEEOS

DOLLARS BILLIONS

7

6

o 1934

ALL NEW SECURITIES CLASSIFIED BY TYPE OF ISSUER

I

CORPORATE: AND OT"£R

~1i STATE AND MUNICIPAL

U 5 GOVERNMENT

OUn;CT AND GUARANTEEO

NEW CORPORATE BONO ISSUES, PUBLICLY OFFERED AND PRIVATELY PLACED

j

"REFUNDING AND

Al.L OTHER PURPOSES

WORICING CAPITAL

PLANT "liD EQUIPMENT

GROSS PROCEEDS

DOLLARS,ILlIONS 60

50

40

30

20

'0

o

7

6

o

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6

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JJ 'RUHII .. "", "GURES nTI ... n:O ON '''''S 0' DATATHROUGH JULY InD.
BrKTEENTH ~NL REPORT 193

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194 SECURITIES AND EXCHANGE COMMISSION

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SLXTEENTH ~AL REPORT 195

TABLE S.-Market value and volume of sales effected on securities exchanges for the

three 6-month periods ended June 30, 1950

PART1.-6 MONTHS ENDED JUNE 30,1949

ON ALL REGISTERED EXCHANGES

[In thousands]

Stocks I Bonds' Rights and warrants Total

Exchange market

value Market Number Market Principal Market Number (dollars) value of shares value amount value of units (dollars) (dollars) (dollars) (dollars)

--- All registered exchanges_____ 4,973,402 4,631,816 206,232 321,881 443,074 19,705 16,793

Baltimore --- Boston 481 414 23 67 129 ----.----- 73,333 72,297 1,865 4 5 1,032 879 Chicago Chicago Board Stock _______________

of Trade _____ 134 134 14 ---------- .-.---.---- ._-------- ---.------ 79,737 79,531 3,171 0 0 206 214 Cincinnati __________________ 6,014 5,978 192 0 0 36 71 Cleveland ___________________ Detrolt 6,602 6,569 230 ----.----.- 33 55 18,048 18,026 1,281 -----_.-- . .---.------ 22 23 Los Angeles_________________ 57,983 57,742 4,206 36 35 205 256 New Orleans 295 253 10 42 40 --------.- _._- New York Curb ____________ 399,922 376,379 29,692 18,133 24,959 5,410 3,119 New York Stock ____________4,193,387 3,878,782 149,263 302,526 416,787 12,079 11,322 Philadelphia 24,651 24,522 886 128 127 1 57 Philadelphia-Baltimore 27,523 27,056 986 169 261 298 325 Pittsburgh __________.______ 6,679 6,642 372 0 0 37 46 St. LouIs ____________________ 5,189 5,164 177 3 3 22 20 Salt Lake . 879 879 5,690 ----.------ --------.- --------.- San Francisco Mlning 243 243 2,515 --------.- San Francisco Stock _________ 68,279 67,315 4, 570 640 601 324 406 Spokane ____________________ 799 799 968 WashIngton ------i33- ------.---- .-------.- ---------- 3,224 3,091 121 127 ----._----

Breakdown of 6-month totals by months

19+9 January _____________________915,095 853,531 36,546 60,686 SO,599 878 523 February.

March_. ____________________ 772,313 719,267 30,841 52,009 70,OSO 1,037 668 809,738 751,761 34,692 56,225 SO,637 1,752 2,223 ApriL ___________________ •• __ 905,742 845,336 37,750 53,189 76,590 7,217 2,934

~~::::::::::::::: ::::::::: 816,042 760,298 33,135 50,767 67,997 4,977 4,276

764,472 701,623 33,268 49,005 67,171 3,844 6,169

ON ALL EXEMl'TED EXCHANGES

All exempted exchanges_____ 3,734 3,721 348 13 14 ---------- ------._-- Colorado Springs ____________ --- 94 94 120 Honolulu ----------- --------.- ________________

Minneapolls-St. 2,029 2,016 161 13 14 ------.--- -- -------- Richmond __________________ Paul _______ 1,024 1,024 53 ---------- ----------- ---------- ---------- 295 295 5 0 0 Wheeling ---------- -------_ ..- 292 292 9 ----------

Breakdown of 6-month totals by months

19+9 6 6

rr~::::::::::::::::::: 704 698 65 ---------- ---------- 701 699 44 2 2 ---------- ---------- 594 594 56 0 0 ---------- ---------- tfar:::::::::::: ::::::::::::: 510 509 74 1 2 ---------- ---------- 648 647 69 1 1 1une ---------- 577 574 40 3 3 ---------- ----------

See footnotes at end of table, p. 197,

' __________________ ______________________ ----------

______________________ ----------

________________ ------

' ______________

•____

___ _______________ ---------- _______ ---------- ----------- ----------

_________________ ----------

__•_______________

•__ ---------- ----------

___________________ ---------- ----------- ----------

________________________ ----------
196 SECURITIES AND EXCHANGE COMMISSION

TABLE B.-Market fJalue and volume of sales effected on securities e:cchangesfor

three 6-month periods ended June 80, 1950-eontinued

PART 2.-6 MONTHS ENDED DEC. 31, 1949

ON ALL REGISTERED EXCIIANGES

(In thousands]

Stocks I Bonds' Rights and warrants

Total

Exchange market

value Market Number Market Principal Market Number (dollars) value of shares value amount value of units (dollars) (dollars) (dollars) (dollars)

--- All registered exchanges _____ 6,469,931 6, 082, 574 271,666 381,589 489,879 5,768 21,035

--- Boston ______________________ 79,934 79,911 2,034 4 6 19 41 Chicago Board ______________ 40 40 7 Chicago Stock , _____________ ------iS9- -------i76- --------i- -------ias 73,673 73,483 2,884 Cincinnati- 7,108 7,108 203 0 0 Cleveland ---------- , _________________ Detroit 5,214 5,214 181 --------.- ----.------ .... 23,801 23,671 1,797 ---------- ---------.- 130 654 Los Angeles _________________ 65,058 65,016 4,404 14 13 28 47 Midwest ,___________________ 32,377 32,370 1,283 6 6 1 7 New Orleans 481 481 23 0 0 New York Curb ____________ ----3~693- 545,390 521,427 38,333 20,270 24,898 3,663 New York Stock ____________ 5,480,612 5,119,042 204, 112 359,886 463,390 1,684 14,908

Philadelphia- Baltimore _____ 62,309 61,537 2, 295 595 782 177 1,463 Pittsburgh 6,995 6,995 497 0 0 St. LoUIS , 4,670 4,670 160 0 0 Salt Lake ---------- 544 544 5,352 -------_ ..- San Francisco Miulug _______ 112 112 1,854 ------i95- ----------- San Francisco Stock _________ -------ii4 78,148 77, 918 5,225 180 35

~~~n~::::::::::::::::527 527 905 ------430- -------428- ---------- ---------- 2,938 2,508 117 ---------- ----------

Breakdown of 6-month totals by months

19.jJ} July ________________________608,347 624,733 33,028 72,616 87,224 998 4,923 August ______________________ 867,865 806, 674 38,453 60,737 78,549 454 604 September __________________ 918,344 870,487 39,811 47,468 59,560 389 646 October _____________________ 1,134,148 1,081,952 48,613 51,480 68,959 716 2,842 November 1,286,948 1,220,770 49,081 64,646 84, 467 1,532 6,165 December 1,564,279 1,477,958 62,680 84,642 111,120 1,679 5,855

ON ALL EXEMPTED EXCHANGES

All exempted exchanges _____ 3,386 3,351 305 34 35

--- Colorado Springs 81 81 94 Honolulu --------35- ---------- 1,726 1,692 149 34

Rlchmond

Mlnneapo1is-St. Paul , ______ 923 923 48 ---------- .. ..--------- ---------- Wheellng 408 408 7 0 0 ...

247 247 7 ---------- ---------- -_.-------

Breakdown of 6-month totals by months

19.jJ} July _________________________ August 489 469 31 20 21 .. 491 487 42 4 4 September 585 580 60 5 5 October ---------- -------_ ..- November 668 668 59 0 0 -_ .. 654 653 46 1 1 December ---------- 498 494 67 4 4 ---------- ----------

Bee footnotes at end of table, p. 197.

_________________ ---------- ______________________ ---------- --------

________________ ----------

__________________ ---------- ---------- __________________ ---------- ___________________ ---------- ----------- ----------

_________ • ________ _________• _________

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

___• ________ ---------~ ---------- ___________________ ---------- ---------- __________________ ---- ------ ___________________ ----------- ---------- -- -------

______________________ ------ --- ---------- __________________ ---------- ---------- _____________________ ---------- ------- ____• _____________ ___________________ ----------
SIXTEENTH ANNUAL REPORT 197

TABLE B.-Market value and volume of sales effectea on securities emchangesfor

three 6-month periods endedJune 80, 1950-Continued

PART3.-6 MONTHS ENDED IUNE 30, 1950

ALL REGISTERRD EXCHANGES

[In thousands]

Stocks I Bonds I Rights and warrants Total

Exchange market

'Value Market Number Market Prinelpal Market Number (dollars) valns of shares 'Value amount 'Value of units (dollars) (dollars) (dollars) (dollars)

---- Tots! all exchanges 10,876,534 10,330,139 422,268 527,264 652,446 19,131 25,156

Boston Stock ---- 117, B33 117,817 2,895 13 10 3 3 Chicago Board 18 18 2 Clnclnnatl --------0- --.-------- ------785-

Detrolt 13,129 12, 344 316 0 163

41,446 41,443 2,427 -_.----_.- --.-------- 3 17 Los Angeles 108,493 108,225 7,371 135 131 133 282 Midwest 243,990 243,593 9,114 9 10 3BB 189 New Orleans 392 3B9 18 3 3 .-.------- New York Curb 792,088 762,413 58,045 19, BBB 27,364 9,787 4, 181 New York Stock 9,317,797 8, B04, 105 320,418 506,262 623,767 7,430 18,878 Phlladelphla-Baltlmore 96,784 96,357 3,115 349 615 78 195 Pittsburgh 12, 425 12, 423 778 1 1 1 1 Salt Lake 795 795 8,161 --.-.----- --._------ San Francisco Mlnlng 185 185 2,364 -_.------- .-._------ ---------- San Francisco Stock ._ 127,571 126,643 6,373 427 370 501 998

Wa::~ii~===== .: .: .: .: .: 549 54q 735 -_.------- -------22- 3,039 2,840 136 177 175 249

Breakdown of s-rnontn totals by months

1950 Ianuary 1,770,942 1,662,225 71,911 107,958 144,088 759 1,895

1,441,484 1,373,028 57,261 67,512 84, 939 944 1,979

Aprll 1,778,623 1,688,006 67,872 88,493 116,471 2,124 5,682

May 1,885,385 1,800,521 81,301 77,916 97,114 6,948 5,038

1,950,917 1,860,689 73,184 84, 941 96,720 5,287 7,905 June ._ 2,049,183 1,945,670 70,739 100,444 113,114 3,069 2, 657

34 39

o 0

34 39 471

185

2728

6

131

2,409 374

213

3,127

ALL E"l[EMPTED EXCHANGES

3,161 I

2,m! 213

Tots! ell exchanges

Colomdo Springs Honolulu

Richmond

Wheellng ._

Breakdown of (;.month totals by months

1950 January 450 44B 61 2 2 ~.~..-_ .._- ----------

~~%~-~ 550 546 7B 4 4 --._------ ---------- Aprll 670 670 129 0 0

May 358 358 41 0 0 --._------ 541 539 97 2 2 --------_ .. Inne. . ._ 592 566 65 26 31 --._----.- -----.----

I "Stocks" Includes 'Votingtrust certificates, American depositary receipts, and certificates of deposit. 2 "Bonds" Includes mortgage certificates and certificates of deposit for bonds. Since Mar. 18, 1944, Unltad

States Government bonds have not been Included In these data. I The Baltimore Stock Exchange and the Philadelphia Stock Exchange etfectad a plan of merger of the

businesses of the two exchanges which resulted In the termmanon of the activltles of the Baltimore Stock

Exchange with the close of business Mar. 5, 1949. Etfecti'Ve Mar. 7, 1949, the name of the Phllsdelphia Exchange was changed to the Phtladelpbla-Baltlmore Stock Exchange. A branch 01llce is In operation In Baltimore . The Chicago Stock Exchange, the Cleveland Stock Exchange, the Minneapolis-St. Paul Stock Ex.

change, and the St. Louis Stock Exchange etfected 8 plan of merger of the four exchanges. This resulted in the termination of actinties of the four exchanges with the cIose of business No'V. 3D, 1949, and In the

formation of the Midwest Stock Exchange on Dec. 1, 1949, with main officesIn Chicago and branch offices

In Cleveland, Minneapolis, and 1St. Louis. Earlier data for the Minneapolis-St. Paul Exchange are In.

eluded In exemptad exchanges totals. The other three merged exchanges were registered exchanges.

NOTE.- Valua and 'Volumeof sales etfectad on registered securities exchanges are reported In counection

with fees paid under sec. 31 of the Securities Exchange Act of 1934. For most exchanges the figures repre- sent transactions cleared during the calendar month. Figures may diller from comparable data In the

Statlsticsl Bulletin due to re\'lllions of data by exchanges.

__________

_______________

______________ __________________ ______________________ _________________ ____________________ ________________

____________

____________

______ __________________

___________________ _______

_______

=

-----------

-----------

-----------

----------

----------

_____________________

~~~ ________________________ =================== ________________________

______________________

__ _

_

_

_ _

_

•_______•____________

• ~================= •

•____________ ______________________ ___________

____________________

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

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

•
198 SECURITIES AND EXCHANGE COMMISSION

TABLE 9.-Speoial offerings effected, on national securities ercchanges for fiscal

year end,ed,June SO, 19501

Number of shares Value Aggre- Number of offerings

of gate by duration

shares special

Num- sold comExchange ber (thou- mission 'I'erml- Others Not termade Inorig- Sub. sands (thou. Dated termi- mi.

inal scribed Sold of dol- sands In 15 nated nated

offer of dol. min. same same lars) lars) utes day day

-' ------------------ ------ --- Ail exchanges:

TotaL ... ___... _.. __...• 29 440,908 534,142 430,955 11,129 266 11 15 3

--- --- --------- --- --------- Completed ........ _. 26 397,838 503,512 400,325 10,654 254 11 14 1 Not completed, .... 3 43,070 30,630 30,630 475 12 0 1 2

--- ------ --- ------= --- --- New York Curb Exchange: TotaL ..••.....• _.... ___ 1 26,970 21,005 21,005 168 1 0 1 0

------ --- --------------- --- Completed ......... 0 0 0 0 0 0 0 0 0 Not completed ..•.. 1 26,970 21,005 21,005 168 1 0 1 0

= --- ------ --- ------ --- --- New York Stock Exchange:

Total. ...•.•... .... 28 413,938 513,137 409,950 10,961 259 11 14 3

------------------------ --- Completed .•...... __ 26 397,838 503,512 400,325 10,654 254 11 14 1

Not completed ...... 2 16,100 9,625 9,625 307 5 0 0 2

1 See part II of text for a description of special offerings.

TABLE lO.-Second,ary d,istributions Of listed, stocks approved, by national

securities emchangesfor fiscal year ended,June SO, 1949 1

Number of shares Value Number of secondaries

of by duration

Num- shares

Exchange ber sold Others Not

made Available (thou- Terml. terml- terml- In origt- for dis- Sold sands nated nated nated nal offer trlhutlon of dol- same next next lars) day day day

--- --- --- ------------ Ail exchanges:

TotaL •........•...• ___..• 18 3,624,327 3,708, 173 3,105,320 99,077 49 18 11

Completed ••..... __. __ --- --- --- --- --- ------- 16 3,610,927 3,695,373 3,698,475 98, 857 49 17 10 Not completed .••.. .• 2 13,400 13,400 6,845 220 0 1 1

Chicago Stock Exchange: TotaL ...... ___•..... _,,_, 3 27,650 27,650 27,650 617 1 1 1

------ --- --- ------------ Completed. .. .. ,. 3 27,650 27,650 27,650 611 1 1 1 Not completed .••..... 0 0 0 0 0 0 0 0

------ --- --- --- Detroit Stock Exchange:

Total .••...... 3 19,388 19,388 19,388 284 3 0 0

------ --------- Completed •••... ...•• 3 19,388 19,388 19,388 284 3 0 0

Not completed •.••.... 0 0 0 0 0 0 0 0

Midwest Stock Exchange: ---

Total ••••••...••..•.....•.• 8 158,380 162,230 162,230 2,421 4 1 3

------ --- Completed ••...••..••• 8 158,380 162,230 162,230 2,421 4 1 3

Not completed •••..... 0 0 0 0 0 0 0 0

--- New York Curb Exchange: TotaL •...... .. ""'_ 22 659,483 680,963 677,510 17,597 13 5 4

--------- --- ------------ Completed ..•.. 20 646,083 667,563 670,665 17,377 13 4 3 Not eompleted , ... __._ 2 13,400 13,400 6,845 220 0 1 1

--- --- New York Stock Exchange: TotaL ••....•••....• ..•.. 42 2,759,426 2,818,542 2,818,542 78,158 28 11 3

------ --- --- ------------ Completed .•.....••••• 42 2,759,426 2,818,542 2,818,542 78,158 28 11 3

Not completed ••••.•.. 0 0 0 0 0 0 0 0

1 Secondary distributions which exchanges have approved for member participation and have reported

to the Commission. See pt. II of text for a description of secondary offerings.

_

_

_

"" _

_

= =

"" _

"""" "'"

_

_ " __

•• "'"

= = _
SrKTEENTH ANNnJAL REPORT 199

TABLE n.-Classification by imLustry of issuers having securities registered on

national securities e3Jchangesas of June 30, 1949 and as of June SO, 1950

As of June As of June

30,1949 30,1950

7 6

49 45

91 94

88 87

127 130

104 102

71 72

56 55 77 76 207 207 11\7 162 19 20

223 224

40 40

53 52

36 36

40 42

21 21 15 15

36 34 52 51

68 66 18 18

236 228

172 169

26 27

12 13

83 90

2,194 2,182

Industry

AgrlcuIture

Beverages (dlstil1eries, breweries, sort drInks)

Bun~ and related companies (ineluding lumber building materials, and conForeign governments and political subdivisions thereof,

Foreign private issuers other than Canadian, Cuban, and Philippine Iron and steel (excluding maehmery)

Machinery and tools (excluding transportation equipment) Merchandising (chain stores, department stores)

Rnbber and leather products

~

Services (advertising, amusements, hotels, restaurants)

~~~= ~~~~~~~~~~=====:=:::.: ::====:=:::::::::::::::::::::: :::::::: Transportstlon and communication (railroads, telephone, radio) Transportstion equipment

Utility holding comrca.mes(electric, gas, water)

gmfg~=:~~~~-~-~~~~~~::::==============:======:=: .:======== .: :=::1----1---- TotaL

TABLE 12.-Number and amount of securities classified acc07"ding to basis for the

admission to dealing on all exchanges as Of June 30, 1950

STOCKS

Column I I Column II'

Issues Number of Issues Numhcrof

shares shares

Reglstered 2,573 3,147,684,318 2,573 3,147,684,318 T:rarily exempted from registration 20 8,634,386 20 8,634, 386

A tted to unlisted trading privileges on registered 332 329, 904, 324 exchanges 877 2, 038, 851, 048 Listed on exempted exchanges 116 117, 013, 924 78 33,149,815

Admitted to unlisted trading privileges on exempted 35 3,093,606 exchanges 40 6,681,419

Undupllcated total of stock issues and number of

shares admitted to dealing on all exchanges 3,038 3, 522, 466, 449

See footnotes at end of table, p. 200.

_

_

i;;i;~iif~~~~~~~~~~~~~

_

_

_

_

_

~J~~#E~~~~~~~~~~~~~~~~~~~

1~~~~I~~~r~~~~~~~~~

_

_

_

_

_

_

_____________________________________________

•_______________

____________________________________________

__________________________

____________________________________________

______-------- ---------- ------
200 SECURITIES AND EXCHANGE COMMISSION

TABLE 12.-Number and amount of seourtue« classi{ted according to basis for the

admission to dealing on all exchanges as of June 30, 195O-Continued

BONDS

Issues Principal Issues Principal

amount amount

Registered 971 $20, 898, 718, 791 971 $20, 898, 718, 791 'I'emporarily exempted from registration , ._ 4 51,848,000 4 51,848,000

Admitted to unlisted trading privileges on registered exchanges . . 81 829, 231, 350 75 596, 528, 150 Listed on exe:d exchanges 7 22,250,000 7 22, 250,000 Admitted to ted trading privileges on an exempted exchange 1 140,000 1 140,000

Unduplleated total of bond issues and ~ciPal amount admitted to dealmg on all exe ges ..-----.- ----------~_._-- 1,058 21, 686, 293, 681

I The purpose of column I Is to show the number and amount of securities admitted to dealing under the

various bases for the admission of securities to dealing on exchanges under the act. (Issues exempted from registration under sec. 3 (a) (12) of the act, such as obligations of the United States, States, counties, cities, and United States-owned corporatrons, are not shown In this table.) Each security Is counted once under

each basis for its admission to dealing. Thus, a security which is registered on 2 exchanges and also admitted

to unlisted trading privileges on 3 exchanges would be counted once under "registered" and once under

"admitted to unlisted trading privileges." Because of such duplications, column I is not totaled

The purpose of column II is to show the unduplleated total of all securities admitted to dealing on all

exchanges. Each security is counted only once, and the elimination of the duplication In column I is made

in column II in the order In which the various bases for admission to dealing is given above. , Includes securities for which the Oommlssion has granted, by general rules, temporary exemption from

registration for stated periods and under certain conditions, such as stock Issues of certain operating banks

and securities resulting from modification of previously listed securities

Includes 8 bond issues In pounds sterling In the aggregate amount of £16,808,740. This amount in

sterling has been excluded from the amount m dollars given above.

TABLE 13

PART I.-NUMBER AND AMOUNT OF SECURITIES CLASSIFIED ACCORDING TO THE

NUMBER OF REGISTERED EXCHANGES ON WHICH EACH ISSUE WAS ADMITTED

TO DEALING AS OF JUNE 30, 1950

Stocks Bonds

Issues Shares Issues Principal

amount

1. Registered on 1 exchange 1,608 I, 113, 280, 658 892 $17, 597, 834, 391 2. Unlisted on 1 exchange. .•. _._ ._. 321 305,999,574 75 596, 528, 150

3. Registered on 2 or more exchanges . . 420 325, 456, 936 73 3,068, 181,

4. Unlisted on 2 or more exchanges 11 23,904,750 ---'--82;"385;500 5. Registered on 1 exchange and unlisted on 1 exchange, 208 216, 376, 795 6

6. Registered on 2 or more exchanges and unlisted on 1 exchange. . 66 148, 148, 738 1 150, 317, 700

7. Registered on 1 exchange and unlisted on 2 or more exchanges. _. . _. 167 706, 659, 413 ... -._-- 8. Registered on 2 or more exchanges and unlisted on 2 or more exchanges . 104 637,761,778 --------.- 9. Temporarily exempted from registration on 1 ex- 2, 125, 205 3 46,106,000 change 16 10. Temporarily exempted from registration on 2 or

more exchanges. 4 6, 509, 181 1 6, 742,000

Total ••. 2, 925 3, 486, 223, 028 1,050 21,547,094,941

PART 2.-PROPORTION OF REGISTERED ISSUES THAT ARE ALSO ADMITTED TO

UNLISTED TRADING PRIVILEGES ON OTHER EXOHANGES AS OF JUNE 30, 1950

1. All registered issues (pt. l,lines I, 3, 5, 7, and 8) 2, 573 3, 147, 684, 318 971 $20, 898, 7111, 791

2. Registered issues that are also admitte to unlisted

trading privileges on other exchanges (pt. 1, lines

232, 703,~ 6,6,7, and 8) ._. 545 I, 708, 946, 724 6

3. Percent of registered Issues that are also admitted to unlisted trading privileges on other exchanges. 21.2 54.3 .6 1.1

•__________________________________• _________

___• ________

___________________ ________ _______________

________• _________________

_______• _____• ______• ______• _________________

• ___

•

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____________•

__

__ _________________

_____ _________ __ _______ --------

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_________• _____• __________• _________ ___

_________________ _________________ -------- -- -- ------

_______ ________________________

____ • _________• ____________________________

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

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• ____•

___ --- _______________ _______

_____________________________ ____ _

~ ___

________________________• _______ __

_____
SIXTEENTH ANNUAL REPORT 201

TABLE 13--Continued

PART 3.-PROPORTION OF ISSUES ADMITTED TO UNLISTED TRADING PRIVILEGES

THAT ARE ALSO REGISTERED ON OTHER EXCHANGES AS OF JUNE 30, 1950

Stocks Bonds

Issues Shares Issues Principal

amount

1. All Issues admitted to unlisted trading privileges (part l,lines 2, 4, 6, 6, 7, and 8)___________________ 877 2,038,851,048 81 $829,231,350 2. Unlisted issues that are also registered on other ex- changes (part 1,llnes 5, 6, 7, and 8)_______________ 545 I, 708,946, 724 6 232, 703, 200 3. Percent of issues admitted to unlisted trading privileges that are also registered on other exchanges ___ 62.1 83.8 7.4 28.1

PART 4.-PROPORTION OF ALL ISSUES ADMITTED TO DEALING ON REGISTERED

EXCHANGES THAT ARE ADMITTED TO DEALING ON MORE THAN 1 REGISTERED

EXCHANGE AS OF JUNE 30,1950

1. All issues admitted to dealing on registered ex- changes (pt. I, totalj., ___________________________ 2,925 3, 486, 223,028 1,050 $21, 547,094, 941

2. Issues on more than 1 exchange (pt. I, all lines ex- eept I, 2, and 9) _____________________ ._._ . ___. ___ 980 2, 064, 817,591 80 3,307, 626, 400

3. Percent of all Issues admitted to dealing on all registered exchanges that are admitted to dealing on more than 1 registered exchange ______. __ ._______ 33.5 59.2 7.6 15.4

TABLE H.-Number of issuers having securities admitted to dealings on all

e31changesas of June 80, 1950, cla8sified according to the basis f01' admis8ion

of their seeurttie« to dealing

Column I I Column If s

Basis of admission of secunties to dealing

Number of Number of

issuers Issuers

1. Registered ________________________________________________________ 2,182 2,182 2. Temporarily exempted from registration _____________________________________ 22 18 3. Admitted to unlisted trading privileges on registered exchanges ___... _________ 847 307 4. Listed on exempted exchanges ______________________________________________. 100 67 6. Admitted to unlisted trading privileges on exempted exchanges _______________ 38 34

6. Total number of issuers having securities admitted to dealing on all ex- changes. ______________________________________________________________ ------------ 2, fI08

J The purpose of column I is to show the number of Issuers having securities adrmtted to dealing on exchanges under tho varlons bases for the admission of securities to deallng under the act. (Issuers whose

securities are exempted under sec. 3(a) (12) of the act, such as obhgatlons of the United States, States,

counties, cities, and United States-owned corporations, are not shown in this table.) Each Issue is

counted once under each basis for admission of secunties to deahng. Thus, an issuer having seeuntres registered on two or more exchAnges and unlisted on 2 or more exchanges is counted once under "registered"

and once under "unlisted." Because of these dupllcatlons, column I is not totaled.

J The purpose of column II Is to show the net number 01 issuers having securities admitted to dealing on

all exchanges under tho aet, Each Issuer JS counted only once, and the elimination of the duplications In eolumn I Ismade In column II In the order of the various bases for admission to dealing given above.

TABLE 15.-Number of tseuer« having stocke only, bond8 only, and both stooks

and bond8 admitted to dealing8 on all eeebanoee as of June 80,1950

Numherof Percent of

issuers total issuers

1. Issuers having only stocks admitted to dealings on exchanges _____________ 2, 123 81.4 2. Issuers having onl[; bonds admitted to dealings on exchanges ______________ 262 10.0 3. Issuers having bot stocks and bonds admitted to dealings on exchanges ___ 223 8.6

Totallssuers ________________________________________________________ 2,608 100.0 4. Issuers having stocks admitted to dealings on exchanges (lines 1 plus 3) ____ 2,346 900

6. Issuers having bonds admitted to dealings on all exchanges (lines 2 plus 3)_ 485 18.6

' ___________
202 SECURITIES AND EXCHANGE COMMISSION

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SIXTEENTH ANNUM:. REPORT 203

TABLE 17.-Number of issues admitted to unlisted trading pursuant to clauses

2 and 3 of sec.12 (f) of the Securities El1Jchange.4.ctof 1934 and volume of

transactions therein 1

[Stock volumes in shares; bond volumes in dollars of prtnclpaljamount]

Number of Issues Percent of Aggregate

Volume total 1949 volume

reported volume on reported

each ex- for the Name of stock exchange Remain- for the change In calendar Admlt- calendar

ted total ing June year 1949 stocks and years 1937

30,1950 hands re- to 1949,

spectively inelusrve

Stocks pursuant to clause 2: 546,313 14.0 4, 768, 326 Boston ______________________________ 118 2108 CinclnnatL _________________________ 46 45 155,050 39.2 991,280 Cleveland ___________________________ 35 0 199,051 48.5 980,048 Detroit ______________________________ 85 78 533,275 17.3 4,271,109 Los Angeles _________________________ 82 75 943,420 11.0 5,518,391 Midwest ____________________________ , 82 '75 2,071,189 28.2 13,685,528 New York Curb _____________________ 6 1 194, 325 .3 6,870,635 Philadelphia- Baltimore ______________ 117 '107 583,933 14. 0 3,473,026 Pittsburgh __________________________ 70 55 127,009 14. 6 1,603,358 St. Louis ____________________________ 6 0 61,975 18.4 157,683 Salt Lake __________________________ 1 0 0 0 35,633 San Franclsco Stock 55 '50 597,377 6.1 3,961,634 Washington_._. _____________________ Wheeling 2 2 28,222 11.9 34, 084 ____________________________ 6 '3 1,598 100 17,692

--- Total 692 599 5,962,737 46,368,427

--- Stocks pursuant to clause 3: Midwest ____________________________ 1 1 16,714 .2 30,700 New York Curb _____________________ 9 6 1,631,529 2.4 4, 508, 415 Salt Lake ___________________________ 1 1 4,971 .05 11,684

--- Total stocks _______________________ 703 , 607 7,615,951 ------------ -- 50,919,226

--- Bonds pursuant to clause 2: Los Angeles _________________________ 1 1 $47,400 100.0 $63,400 New York Curb _____________________ 3 1 $817,000 1.6 $14, 928, 000 San Franclsco Stock _________________ 4 0 $769,500 98.5 $3,423,600

Bonds pursuant to clause 3: New York Curb _____________________ 45 15 $17,824, 000 35.8 $162, 163,000

--- Total bonds 53 17 $19, 457, 900 $180, 578, 000

I For enactment of clauses 2 and 3 and procedure thereunder, see tenth annual report under "Unlisted

Trading Privileges on Securities Exchanges." For volume reported in each of the years 1937 through 1944,

see eleventh annual report appendix table 18. For subsequent volumes see tables in subsequent reports .

Only odd-lot trading Is permitted in 6 of these issues .

Includes 19 issues acquired from Cleveland Stock Exchange and the volumes therein subsequent to the

merger of Dec. I, 1949. The 692 admitted total excludes this duplication, The 599 remaining total Is tho

sum of the figures as shown Only odd-lot trading is permitted in 1 of these issues.

, Includes San Francisco Curb figures prior to the 11138merger.

, Wheeling is an exempted exchange. All others shown are registered.

, This figure included duplications arising from admission of various Issues to unlisted trading on more

than 1exchange.

•

________________~

____________________________•• --------------

_______________________ --------------

•

•

• •
204 SECURITIES AND EXCHANGE COMMISSION

TABLE 18.-Reorganization cases institutetZ untZer chapter X antZ sec. 71-B ot the

NationaZ Bankruptcy Act in which the Commission filed notice oj appearance

and in which the Commission activeZy participated dU1'ing the fiscal year ended

June 30,1950

DISTRIBUTION OF DEBTORS BY TYPE OF INDUSTRY

Number of Total assets 1 Total indebtedness 1 debtors

Industry

Prlnei- Subsid- Amount Percent Amount I Percent

pal lary (thousands of grand (thousands of grand

omitted) total omitted) total

AgrleulturaL

Mining and otber extractive __________ ------if ------i- -----$6;476- -------ii~67- -----$i;485- --------ii:i7

Manufacturing _______________________ 13 2 25,001 2.59 17,793 209 Financial and InvestmenL ___________ 5 1 124,222 12.1>1 121,078 14.22 Mercbandising ________________________ 2 1 1,452 .15 1,720 .20 Real estate ____________________________ 24 3 87,337 9.05 75,528 8.87 Construction and allled _______________ ______ r_

------------ .----------- Transportation and communication ___ 9 12 404,750 41.94 328,469 38 59 Service. ______________________________ 6 1 25,043 2.59 13,070 1.54 Utilities' electric, water, and gas 9 6 290,876 30.14 292,111 34.32 Otber: ReligIOUS, charitable, etc ______ ------------ ------------ .----------- ------------ --- Grand total 71 27 965,157 100.00 851,254 100.00

IAs of latest dates figures are available

Includes no electric utility companies. Represents principally investment and holding companies

and gas pipeline companies and a few gas distributing companies.

TABLE 19.-Reorganization proceetZings in whiCh the Commission participated

during the fiscal year entZedJune 30, 1950

Petition Securities and Exchange

Debtor District court Commission

Filed Approved notice of appearanee filed

Aireon Manufacturing Corp D. Kans ________ Nov. 22, 1947 Nov. 22, 1947 Jan. 7,1948 American ACOUStiCS,Inc D. N. 1.________Mar. 21, 1947 May 5,1947 Apr. 21,1947 "American Fuel and Power Co, .• ________ E. D. Ky _______ Dec. 6,1935 Dec. 20,1935 May 1,1940 Buckeye Fuel Co ___________________ _____do .. _________ Nov. 28,1939 Nov. 28,1939 Do. Buckeye Gas Service Co _____do ___________ _____do __.. ____ _____do ________ Do. Carbreatb Gas Co .... .. .. do .. do .. do .. Do. Inland Gas DIstributing Co _____.. __ _____do ___________ _____do .. ______ .. ___do .. ______ Do. American Silver Corp .... ______.. ___... _ S. D. CaIlL ____ May 6,1948 May 7,1948 May 11,1948 Bankers Building, Inc ___________ .. _.. __ N. D. I1L. ______ Sept. 21, 1943 Oct. 5,1943 Oct. 19,1943 "Bellevue-Stratford Co _________________._ E. D. Pa .. ______ Oct. 31, 1936 Oct. 31,1936 Feb. 24,1939 Brand's Restaurant Control Corp ___.. __ S. D. N. Y______Aug. 2, 1939 Aug. 10,1939 Aug. 30,1939 Broadway Garage, Inc. _________________ S. D. Ohlo ______ Apr. 26, 1946 Apr. 26, 1946 June 24, 1946 Calumet & South Chicago Railway Co __ N. D. IIl ________ June 29,1944 Sept. 18, 1944 Oct. 20,1944 Central States Electric Corp, .. _________ E. D. Va .. ______ Feb. 26,1942 Feb. 27, 1942 Mar. 11,1942 Cenwest Corp .. S. D. N. Y______Mar. 17,1942 Apr. 3,1942 Mar. 21, 1942 Chicago City Railway Co .. ___.. ________ N. D. I1L. ______ Nov. 27,1939 Sept. 18, 1944 Oct. 20,1944 Chicago Railways Co . .. do, .. ________ Oct. 15,1938 _____do .. ______ Do. Ohleago &; West Towns Railways, Inc __ ___.. do ...... _____ June 30,1947 July 1,1947 July 24, 1947 Childs Co. S. D. N. Y .. ____Aug. 26, 1943 Aug. 27, 1943 Aug. 26,1943 Cosmo Records, Inc .. _________.. ________ E.D.N. Y _____ Jan. 27,1947 Jan. 27,1947 Jan. 30,1947 Cosmopolitan Records, Inc _______________do, .. _. ___.. _ _____do ________ ___.. do ________ Do. Automatic Industries, Ine., ______... ___.. do ____.• _____ __.• .do .. ___________do ________ Do. Dorbsnk Corp . .. do ________________do. .. _____ do .. Do. Diversey Hotel corp.. __________________ N. D. IIl ________ May 29,1947 June 13,1947 June 13,1947 Douglas Mill, Inc _______________. _______ N. D. Ga Sept. 7,1949 Sept. 7.1949 Oct. 12, 1949 Drake Stadium & Field House Corp __._ S. D. Iowa ______ Dec. 27,1947 Dec. 27,1947 Feb. 16,1948 80 John Street Corp .. ___________________ S. D. N. Y ______ Sept. 14, 1945 Sept. 14, 1945 Oct. 8,1945

Equitable Office Building Corp _____do ___________ Apr. 10,1941 Apr. 10, 1941 Apr. 14,1941 'Federal Facilities Realty TrusL ________ N. D. IIl ________ Dec. 26, 1934 Apr. 25,1935 Oct. 29,1940 Franklin Building Co ___________________ E. D. WIS .... ___ May 5, 1947 May 5,1947 Aug. 18,1947

General Public Utilities Corp. (formerly S. D. N. Y ______ Jan. 10, 1940 Jan. 10,1940 Jan. 15,1940

Associated Gas & Electric Co.). Associated Gas & Electric Corp do ________________do. ____________do ________ Do. Gramott Corp , .. ____________________________ do Mar. 1,1946 Mar. 4, 1946 Mar. 21, 1946 "Hotel Martin Co. of Uti08 N. D. N. Y _____ June 6, 1935 June 19,1935 June 24,1939

See footnote at end of table, p. 205.

_________________• _______

' ____

______•_________•• _••

•

•

__•_____• ____

____________•• __

__• _________

__• _________ _ ___

_____________ ___________•

__• _______________ ___

____________________• ______• __

_____• ______ _________ ___

________•

______ •• __

_______ •••• ___

_~ _____ w_~ __

___•____ _ _____ ____ __ _____ ______

___•• ______

___ • ___

__________•
SIXTEENTH ANNUAL REPORT 205

'I'ABLE 19.-Reorganization proceedings in which the Oommission participated

during the fiscal year endedJune SO,1950-Continued

Petition Securities and

Exchange Debtor DIStrict court Commission

Filed .Approved notice of appearance filed

.Hotels Majestic, Jnc ____________________E. D. Pa ________Oct. 30,1936 Oct. 31,1936 Feb. 26,1942 Industrial Office Building Corp _________D. N. L________ Oct. 3,1947 Oct. 3,1947 Oct. 10,1947 .Inland Gas Corp ________________________E. D. Ky _______ Oct. 14,1935 Nov. 1,1935 Mar. 28, 1939

International Mming & Milling Co. D. Nev ________ June 29,1939 June 29,1939 Aug. 7,1939 Mount Gaines Mining Co______________do ___do _____________do ________ Do.

International Power Securities Corp ____ D. N. L________ Feb. 24, 1941 Feb. 24,1941 Mar. 3,1941 International Railway Co_______________W. D. N. Y_____ July 28, 1947 July 28, 1947 Aug. 4,1947 Isham Garden Apartments ______________S. D. N. Y______ Apr. 7, 1943 Apr. 8, 1943 Apr. 13,1943 Keeshin Freight Lines, Inc ______________N. D. TIL_______ Jan. 31,1946 Jan. 31,1946 Apr. 25,1949 Keeshin Motor Express Co., Inc _________do________________do____________do________ Do. Seaboard Freight Lines, Inc ______________do ________________do____________do ________ Do. National Freight Lines, Inc ______________do________________do____________do________ Do. Kellett Aircraft Corp ____________________E. D. Pa ________Oct. 18,1946 Oct. 18,1946 Dec. 4,1946 .Kentuck~Fuel Gas C~ ______________E. D. Ky _______ Oct. 25,1935 Nov. 1,1935 Mar. 28,1939 Majestic adio & Tele on Corp ______ N. D. TIL ______ Mar. 31,1948 June 24,1948 Sept. 15,1948 Manufacturers Tmding Corp ___________N. D. Ohio _____ Oct. 15,1948 Oct. 15,1948 Oct. 25,1948 Manufacturers Discount Corp ___________do _______________do ____________do ______. Do . Midland United Company D. DeL ________June 9,1934 June 9,1934 Jan. 10,1940 .Midland Utilities Company ___. ________.do ______________.do ____________do _______ Do.

Momence Milk Cooperative AssoCIation. E. D. TIL ______ June 18,1949 June 18,1949 Sept. 12,1949 Moorhead Knitting Co_________________M. D. Pa _______ June 19,1941 June 24, 1941 Aug. 6,1941 "National Realty Trust. _________________N. D. TIl________ Dec. 26,1934 Apr. 25,1935 Oct. 29,1940 Neville Island Glass Co., Inc ____________W. D. Pa _______ Mar. 1,1948 Mar. 1,1948 Mar. 17,1948 New Union Bnilding Co________________E. D. Mich _____ May 5,1949 May 6,1949 June 20,1949 Northwest Carolina Utilities Co________. W. D. N. Car ___ July 8,1942 July 8,1942 Mar. 3,1943 Novo Engine Co________________________E. D. Mich _____ Mar. 14,1949 Mar. 14,1949 Apr. 25,1949 Norwalk Tire & Rubber Co_____________D. Conn ________May 20,1949 May 20,1949 June 8,1949 P. R. Holding Corp _____________________S. D. N. Y______ Apr. 24,1942 May 21,1942 May 21,1942 .Plttsburgh Railways 00 ________________W. D. Pa _______ May 10,1938 May 10,1938 Jan. 4, 1939 .Pittsburgh Motor Coach Co_____________do _______________do ____________do _______ Do. Pittsburgh Terminal Coal Corp ____.do ___________Dec. 4,1939 Jan. 2,1940 Jan. 6,1940 Portland Electric Power Co_____________D. Oreg________. Apr. 3,1939 Apr. 3,1939 Apr. 16,1939 Pratt's Fresh Frozen Foods, Inc D. N. L________ Apr. 13,1948 Apr. 13,1948 May 29,1948 Pratt's Distributors, Inc _________________do _________. May 17,1948 May 17,1948 Do.

Quaker City Cold Storage Company _____ E. D. Pa ________Dec. 17,1941 Feb. 13,1942 Jan. 28,1942 R .A. Security Holdings Inc E. D. N. Y _. ___ May 7,1942 July 31,1942 May 22,1942 Realty Associates Securities Corp ____________do __________ Sept. 28,1943 Sept. 28,1943 Oct. 4, 1943 Espade Realty Corp _____________________do _________. Mar. 17,1944 Mar. 20,1944 Apr. 19,1944 Silesian American Corp _________________S. D. N. Y ______July 29,1941 July 29,1941 Aug. 1,1941 Solar Manufacturing Corp ______________D. N. L________ Dec. 14,1948 Dec. 14,1948 Dec. 27,1948

Sonth Bay Consolidated Water 00., Ine, S. D. N Y ______ Apr. 26,1949 Apr. 26,1949 May 23,1949 ThIrd Avenue Transit Corp _________________do ______. ___ Oct. 25,1948 Oct. 25,1948 Jan. 3,1949 Surface TransportatIon Oorp., _________._do _______. __ June 21,1949 June 21,1949 July 7,1949 Westchester Street 'I'ransp, 00., Inc. _____do. ________. ____.do ______. _____do _______ Do.

Westchester Electric Railroad Co. ___. ____do ____. __________do ____________do _______ Do. Warontas Press, Inc ________________. ____do Sept. 8,1949 Sept. 8, 1949 Oct. 24,1949 Yonkers Railroad Co ____________________do __________June 21,1949 June 21,1949 July 7,1949 32 West Randolph Oorp , ; ______________N. D. TIl______._ Apr. 15,1946 Apr. 29,1946 May 20,1946 Thomascolor Inc.. ______________________S. D. Call!.. ___. June 20,1949 June 21,1949 Aug. 5,1949 Trinity Buildings Corp. ofNew York ____ S. D. N. Y_____. Jan. 18,1945 Jan. 18,1945 Feb. 19,1945 Union League Club of Chlcago __________N. D. TIl________Feb. 14,1950 Feb. 14,1950 Apr. 10,1950 U. S.

= & Improvement Co. _______S. D. N. Y_____. Feb. 1,1944 Feb. 1,1944 Feb. 7,1944 .Van R aer Estates, Inc __________________do __________July 12,1935 July 12,1935 July 12,1941 .Van Swerlngen Corp ____________________N. D. Ohio ____. Oct. 13,1936 Oct. 15,1936 Jan. 23,1940 .Cleveland Termfnal Bulldings Co__. ____do do do Do. Wade Park Manor Corp _____________________do __________June 28,1947 June 30,1947 July 28,1947 Warner Sugar Corp. ____________________S. D. N. Y ______June 7,1940 July 9,1940 July 9,1940 washi~n Gas &. Electric Co _____do __________ S~t. 29,1941 ~t. 29,1941 Oct. 14,1941

Wilkes arm Rallwap co~--.------.-- M. D. Pa _______J y 1,1943 J y 1,1943 July 15,1943 Wilkes Barre Railway 0________________do . do do Do.

Wilkes Barre Tmckless Trolley Co________do _______________do ____________do _______ Do. Wyoming Valley Autobus 00. ______. ____do _______________do ____________do _______ Do.

Wyoming Valley Puhlic Service Co__ ____.do ____.do ____________do _______ Do. WIndsor WDson Llqnidatlon Trost _____N. D. Ill ________Mar. 18,1941 May 28,1941 June 12,1941

Instituted under sec. 77-B.

• ______________

__•______

_______•

• ____________

_

____•__•__

•

_________•_

____•_____

_______•__ _____ ____________ _______

__•______ _____ ____________ _______

______•__
206 SECURITIES AND EXCHANGE COMMISSION

TABLE 20.-Summary of cases instituted in the courts by the Oommission under

the Securities Act of 1988, the Securities El1JchangeAct of 1984, the Public

Utility Holding Oompany Act of 1935, the Investment Oompany Act of 1940,

and the Investment Advisers Act ot 1940

Total Total Cases Cases Cases in- Total Cases cases in. cases pending pending stituted cases closed statuted closed pending

Types or cases up to end up to end at end at end dunng durIng during

ot 1950 of 1950 of 1950 of 1949 1950 1950 1950

fiscal fiscal fiscal fiscal fiscal flscal fiscal

year year year year year year year

----- --- --- --- --- --- --- ActIons~o enjoin violations of the above:acts_ .......... .•. 570 554 16 18 32 50 34 Actions to enforce subpenas under the secunttes Act and

the Securities Exchange Act.. 51 49 2 2 2 4 2 ctions to carry out voluntary

plans to comply with sect.on 11 (b) of the Holding Com. pany Act_ .... __.............. 83 71 12 10 12 22 10 iscellaneous actions __..•• _. _. 13 11 2 2 1 3 1

-------- ----------- -------- Total •... .............. _. 717 685 32 32 47 79 47

A

M

TABLE 21.-Summary ot cases instituted against the Oommission, cases in which

the Oommission participated as intervenor or "amicus curiae", and reorganization cases on appeal under chapter X in which the Oommission participated

penlling during the ttscalyear ended J1l1'le80, 1950

Types ot cases

Total

cases instituted

nptoend

of 1950

fiscal

year

Total

cases

closed

up to end

ot1950

fiscal

year

Cases

pending

at end

or 1950

flscal

year

Cases

pending

at end

of 1949

fiscal

year

Cases in.

statuted

during

1950

fiscal

year

Total

cases

pending

during

1950

flscal

year

Cases

closed

during

1950

fiscal

year

o

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7

46

30

o

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13

35

u

62

o

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6

27

11

10

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7

4

24

35

o

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4

5

7

16

8

64

452

149

131

100

8

64

468

153

136

107

Actions to enjoin enforcement

of Securities Act, Securities Exchange Act and Public

Utility Holding Company

Act with the exception of snbpenas issued by the Com- mission

Actions to enjoin enforcement of or compliance with sub- penas issued by the Com- mission _. .. _.

Petitions tor review of Commission's orders by circuit

courts of appeals under the

various acts administered by the Commisslon _._._ .

Miscallaneous actions against the Commission or officers

or the Commission and cases

in which the Commission

participated as intervenor or amicu8 curiae .......••. _•.... _ Appeal cases under chapter X

in which the Commission participated .. . _. . ...

--- -------- ------- -------- TotaL _._._

_

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__ __• __ _ _

•• ••• _•••• _
SIXTEENTH ANNUM, REPORT 207

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915841-51--15

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SIXTEENTH ANNUAiL REPORT 227

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228 SECURITIES AND EXCHANGE COMMISSIO:N

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SIXTE'E1I.1'H L~1I;tTAL REpORT 229

TAnu: 31.-ReOl-uanization cases under ch, X of Bankruptcy Act pending during

the fiscal year endinu June 30, 1950, in which the Oommission. participated when

appeals were taken from district court orders

Kame of case and United States Cireurt

Court of Appeals

Central States Electric Corp (Fourth). __

Childs co., debtor; Childs co., petitionerappellant (Second).

Equitable Office BUIlding Corp., debtor,

Aranow, Brodsky, Einhorn & Dann,

petfttoner-appellant (Second).

Eqmtable Office Building Corp., debtor; T. Roland Berner, petrttoner-appellent

(Second).

Franklin Building Co. (seventh)

Inland Gas Corp, debtor (sn.th)

International Mining & Milling Co.- Rosin v. Hart (nmth).

National Realty Trust, debtor-Sullivan,

Trustee et aI, appeUanls v. Mosser, suc- cesser trustee et al, appellees (seventh).

National Realty Trust-Darrow v. Mos- ser, GUIld v, Darrow (seventh).

New Uuion Buildmg Co., debtor. Leo

and Alfred Kuschinski, appcIlants

(sixth).

Pittsburgh Terminal Coal Corp, debtor,

Pittsburgh Terminal Rea1Jzation Corp,

appellant (third).

Nature and status of case

Consohdnted appeals from order of Apr 24, 1950, approving

plan of reorgamaation and order of May 24. 1950, authorrzmg

trustees of Central State. to proceed with hquidatron of American CIties, a subsid iary holdmg company of Central

States. On June 14, 1950, CA-4 grante-I stay of order of May

24,1950, but scheduled oral argument for July G, 1950 on both appeals. Pending,

Appeal from order of .\ug 5, 1949, thing final allowances for

services. Comrrussion filcd brief taking posuion that total

allowances were too high ann that oompensation should be whoIly denied to certain applicants On Apr 5, 19;;0, CA-2 reversed order of the district court m part and remanded cause for further proceedings. Petttron for recall of mandate

dated Apr 21,1950, filed by John F. X. Fmn, et al , pennon- ers-appellees. Pend mg. Appeal from Jan. 14, 1949, order which dented petitioner compensanon for services rendered m eonnecnon With the reorganization of the debtor under ch X of the Bankruptcy

Act. Comrmssion filed a brref takmg the position that the

district court properl y denied com pensutiou to petitioner

On July I, 1949, CA-2 affirmed order. Petition for rehearing

denied July 11, 1949. Closed. Appeal from Jan. 14, 1949, order which denied petitioner com- pensation for services rendered as attorney for 2 common stockholders m the eh, X bankruptcy reorgaruzatron of

debtor Commission filed hnef Apr 10, 1949, m support of

district court order. On June 9, 1949, CA-2 reversed order

and remanded case for reconsideratton of request for allowance ill hght of opmion. Petitioner applied for rehearing

Which was demed June 'n, 1949. Closed.

Appeals from orders of Dec 30, 1948, Dec. 31, 1948, and Jan. 4,

1949, relstmg to claims based on bonds of tne debtor. Commission filed hnef taking position that order Ilrnrung claim of

Lena Sunonsen to cost should be affirmed and that order

allowing in full the claims of Mollie Schroeder, June Kuptz, and Robert W. Schroeder should be reversed and partieipation On their claims limited to cost. Orders of distriot court

affirmed Dec. 8, 1949. Petition of Lena Simonsen for rehearing demed Jan. 16, 1950. Petitions of Lena Sunonsen and

John W. Emmerling for writs of certioraTl filed Apr. 10, 1950,

and Apr. 17, 1950, respectively. CertiOrari demed June 5,

1950. Closed.

Consolidated appeals from order of Oct. 1, 1949, approving plan

of reorganization Comnnssion filed brief m support of

appellants primarily With regard to the clauns of the Columbia Gas System, Inc. WhICh were subordinated under the plan

only to clauns or other creditors of Inland lind not to creditors of Inland's parent companies, American Fuel & Power Co.

and Kentucky Fuel Gas Corp. Pending.

Appeal from order of June 28, 1949, dlSallowmg attorney fees to

appellant, CommISSIOn filed brief Mar. 3, 1950, m support of

district court order. On May 29, 1950, CA-9 allirmed order

of distrret court. Petition for rehearing demed June 21, 1950. Pending.

Appeals from Dec. 10, 1948, and Feb 15, 1949, orders alleging

that the district court m nommating and appointmg successor

trustees committed substantial error in executing the mandate

ot CA-7. CommISSIOn filed a memorandum supporting motion to dismiss appeal or to affirm orders OnJuneI,I949,

CA-7affirmed orders or district court, With costs Closed.

Appeals from order of Apr. 12, 1949, approving the findmgs of

tact, oonelusions of law, and recommendations of the special

master on the account and report of Paul E. Darrow, trustee. Commission filed brief in support of dlstnct court order' Pendmg.

Appeal from order ofJuly 15,1949, denying motion of appellants

to dismiss petitron for reorganizatron, Oommission filed

brief Jan. 9, 1950, in support of district court order Appeal

dismissed Jan. 30, 1950, pursuant to stipulatron. Closed

Appeal from order of Dec. 9, 1949, preliminarily enjolmng, pending final hearing, proposed aenon of the Realizanon Corp at

a stockholders' meeting and authorizmg the trustee to conduct

an rnvestlgatlon of the business and affairs of tbe Realization Corp. Cornrnlssron filed brief in support of district court

order. Pending.

_

_
230 SECURITIES AND EXCHANGE COMMISSION

TABLE 31.-Reorganization cases under ch, X of Bankruptcy Act pending during

the fiscal year ending June 30, 1950, in which the Commission participated 1vhen

appeals were taken from district court orders-Continued

Name of case and United States Circuit

Court of Appeals

Silesian-American Corp., debtor (second);

Solar Manufacturing Corp. (third)

Third Avenue Transit Corp., debtor (second).

Nature and status of case

Appeal from order of May 29, 1950, approving the trustee's amended plan of reorganization. Motion for stay filed by boudholders committee. Memorandum m support of stay filed by Commission In which It took position that classiflcation for voting purposes was erroneous and communlcatmg

between security holders unduly restricted. Pending.

Appeal from order of July 19,1950, authorizing trustees to accept

offer of Sprague Electric Co. for assets of Solar Manufacturmg

Corp. Commission filed brief In support of appellants. OpinIon Aug. 24, 1949, revcrslng ordcr of distnet court and reo

mandlng case. Closed.

Appeal by debtor and 2 creditors from Mar. 16, 1949, order denymg motion for dismissal of the amended petition for

reorgarnzation. Closed.

TABLE 32.-A 17-year summary of criminal cases developed by the Commission1934 through 1950, by fiscal year

[See separate chart for classification of defendants as broker-dealers, etc.]

Number Number Number of such of these

Number of per- cases m Number defend. Number

of cases sons as whICh of Number Number ants as of these

referred to whom indict- defend- of these of these to whom defendFiscal year to De- prosecu- ments ants In- defend- defend- proceed- ants as

partment tlon was were dlcted In ants con- ants mgswere to whom

of Justice reeom- obtained such vieted acquitted dis- eases are

In each mended by missed by pendyear In each Umted cases I Umted Ing t

year States States attorneys attorneys

---- ---- -------------------- 1934 7 36 3 32 17 0 15 0 1935_________________ 29 177 14 149 84 5 60 0 1936 43 379 34 368 164 46 158 0 1937 ._ 42 128 30 144 78 32 34 0 1938. ________________ 40 113 33 134 75 13 44 :I 1939_. 52 245 47 292 199 33 59 1 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 48 15 1943 31 91 28 108 61 10 33 4 1944_ 27 69 24 79 47 6 19 7 1945 19 47 18 61 36 10 13 2 1946_________________ 16 44 14 40 13 8 3 16 1947_________________ 20 50 13 34 9 5 12 8 1948_________________ 16 32 15 29 19 3 5 2 1949 27 44 25 57 15 10 3 29 1950_________________ '18 28 11 19 5 1 2 11

-------- ---- -------------------- Total_. 550 1,951 '453 2,085 1,120 258 '610 97

I The number of defendants m a case Is sometimes Increased by the Department of Justice over the number

against whom proseoutlon was recommended by the Commission, For the purpose of this table, an mdividual named as a defendant in 2 or more mdlctments In the same case Is counted only as a single defendant.

, Sec separate chart for breakdown of pending cases.

14 of these references as to 7 proposed defendants were still being processed by the Department of Justice

as of the close of the fiscal year. « 422 of these cases have been completed as to 1 or more defendants Convictions have been obtained In

370 or 87.5 percent of such cases. Only 52 or 12.5 percent of such cases have resulted In acquittals or dis.

-nlssals as to all defendants.

'InclUdes 42 defendants who died after Indictment.

_

___________• _____

__• ___• __________ ___• ___________

________• ______

__• __• ___________

• _______________

__• _______• __• ___

___• _____________

_____• __
SIXTEENTH .A1I<'NUAiL REPORT 231

TABLE 33.-Summary of criminal cases developed by the Oommission which were

still pending at June 30, 1950-by fiscal year

Number Number of such defendants as to

Number of such whom cases are still pending and

of defendants reasons therefor

Cases defendants as to whom

msuch cases have Not yet cases been Awaitmg Awaiting

completed sppre- tnsl appeal hcnded I

Pending, referred to Department

of Justice in:' 1938___________________________ 1 2 0 2 0 0 1939___________________________ 1 1 0 1 0 0 1940___________________________ 0 0 0 0 0 0 1941. __________________________ 0 0 0 0 0 0 1942___________________________ 2 18 3 14 1 0 1943___________________________ 2 8 4 3 , 1 0 1944___________________________ 2 8 1 7 0 0 1945 . . . 2 4 2 1 1 0 1946_____. __________. _____. ____ 4 16 0 16 0 0 1947 . 3 9 1 8 0 0 1948_____________. _____________ 2 4 2 1 0 1 1949_____________________. _____ 10 32 3 15 14 0 1950. __________________________ 7 11 0 3 8 0

TotaL ______________________ , 36 '113 16 71 25 1

SUMMARY Total cases pending , .___________ 40

Total defendants' _.__ ________________________ _______ ___ __ __ ___ 120

Total defendants as to whom cases are pending , .___ 104

I Almost WIthout exception these defendants arc residents of Canada and cannot be extradited. , FIScal year ended June 30 of the year indicated.

, Except for 1950, indictments have been returned in all pending cases. Indictments have not yet been

returned as to 7 proposed defendants in 4 cases referred to the Department of Justice in 1950. These are

reflected only in the recapitulation of totals at the bottom of the table.

TABLE 34.-.1 17-year summary classifying all defendants in criminal ca8es

developed by the Oommission-1934 to July 1,1950

Registered broker-dealers I (including principals of such firms)

Employees of such registered broker. dealers

Persons in general securities business but

not as remstered broker-dealers (includes principals and employees) All others ,

Total . __. _

Number

mdicted

328

107

686

964

2,085

Number

convicted

203

55

349

513

1,120

Number

acquitted

23

15

55

165

258

Number as

to whom

cases were

dismissed

by Umted

States

attorneys

91

36

254

229

610

Number as

to whom

cases are

pending

11

1

I Includes persons registered at or prior to time of indictment.

I The persons referred to in this column, while not engaged In a general business in securities, were almost

without exception prosecuted for violations of law involving securities transactions.

__• _________ _______ _____

_____ ____• ________________

•

• _

• • _

_

_
-- 

-- 

232 	 BECWITIES AND EXCHANGE COMMISSION 


TABLE35.-A 	 l7year surnmavy of all hiurntion caaea instituted by the 

Comnbission 1994 to July 1.1950, by calendar gear 

~nmh~r~rc~~eslnstlt~~ted Number of csses in whlch ou the cammission and injunnlans wcre qmnted 

the number of dalead- and thenumberoldelendCalendar year ants involved. ants enjo1ned.l 

Cases I Dsf~ndsntr

I 

SUMM4RY I Oases I Delendantn 

~~ti6~.~in~tit~t,~d..,. ....................................................... 510 1,689
 rojnnetlrms obtained .................................................... 514 1,304 

Actions wnding 8 S 30 

Other dispositions C.~................................................... 48 355 


TOtd.....:............................................................ 5m 1,689 


I Tt.w rn1mm.o d.0~~llr.,oi~c:on01cat<$hp year of diip.,rir$?nanl clo not nvcagjarUg reEm rho Slaposnl-lor t~>..c&..siuwnxs i~~v~nn ken insrlrtj.. I in rhe .amp VPII.. I intl~ldss7 ms,~ 	 lie', w\.nn .n~xrltc1 lu !ha c,lli#~l ~LC(LLLI- ~nj~l,.eti~~i ~&~LOJL 
 d>deren! defendant,i3 d.csw.a.rrrar vrrr mhmbd indtn nrc yeei 
 I lnilnd~~drl,~~,iIantr:, I ;)yes I:, WI~~I~ 	 11,11 .tl..ns hare i. .i~nhta,ueiln 
to 1201kfanlant3 a Inrludrs la ~rtlrns ,!~rr(>:r+~d '* ro ?is pb~~drocj.:
 hi a<ci?nr%li?ror,rI:l'lad,aham?, rruswd, abxn. 

donhl.nr acr1.d ,a\ M 51 iclrnd,ntr irl nna:is In wl>i.:h I Iicrnenr m?cl+il;.d lhr M . l..l..~lnnr*,. Id)

~~tions in w~t~h.~~#ar,u war wgpl ~n st:l$ulrl!or. to is onflnuo m8srlr# lucl dlr.nel O9 lu 3 lle. 

fen lank).