~p..ND~ f~"G"xx~/p+~ SECURITIES AND ~

~ . ~ EXCHANGE COMMISSION ..(b#MISS\O~..

34!!l

Annual

Report

1968

For the Fiscal Year

Ended June 30th
II

SECURITIES AND EXCHANGE COMMISSION

Headquarters Office

500 North Capitol Street

Washington, D.C. 20549

COMMISSIONERS

MANUEL F. COHEN, Ohairman

HUGH F. OWENS

HAMER H. BunGE

FRANCIS M. WHEAT

RICHARD B. SMITH

ORVAL L. DuBoIS, Secretary

:Forsale by tbe Superintendent of Doeumenta, U.B. Government PrInting omee

Wasblniton. D.O. 20420. PrIee $1.00 (paper cover)
LEITER OF TRANSMITI'AL

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C., January 3, 1969

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

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

Commission covering the fiscal year July 1, 1967 to June 30, 1968, in

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

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

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

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

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

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

Respectfully,

MANUEL F. COHEN,

Ohairman.

THE PRESIDENT OF THE SENATE,

THE SPEAKER OF THE HOUSE OF REPRESENTATIVES,

Washington, D.O.

ill

TABLE OF CONTENTS

Page

Commissioners and principal staff officera., ___________________________ XI

Regional and branch officea.; _______ _________________________ XII

Biographies of Commisslonera.; __________________ _______________ XIII

Foreword_________________________________________________________ XVII

PART I

IMPORTANT RECENT DEVELOPMENTS_______________________ 1

Structure and level of commission rates__________________________ 1

Study of institutional investors__________________________________ 3

Mutual fund Iegislation., _ _ _________________ _______________ 4

The Texas Gulf Sulphur and Merrill Lynch decisiollS_______________ 6

The takeover bid bilL__________________________________________ 9

Expediting of registration statements____________________________ 11

Disclosure study _ _ _________________________________ 12

Additional financial disclosure by diversified companies_____________ 13

Broker-dealer financial reports., , _ _____ _______________________ 14

Automation of over-the-counter quotations., __ _ 15

"Back office" problema.; , ______________________________________ 16

PART II

FULL DISCLOSURE OF INFORMATION ABOUT THE ISSUERS

OF SECURlTIES__ _ _ _ _ 18

A. Disclosure in connection with public offerings___________________ 19

Type of information included in registration statement_________ 19

Adoption of short form for registration of securities of certain

issuers_________________________________________________ 20

Proposed guides for preparation and filing of registration statements__________________________________________________ 20

Amendments to rules relating to disclosure detrimental to na- tional defense____ ____ __________ __________ 21

Adoption of rules relating to industrial revenue bonds. 21

Joint release relating to real estate syndications______________ 22

Amendment of rule relating to contents of prospectus used after

nine months; _ _______ _____ _______ 23

Adoption of rule relating to registration by certain successor

issuers_________________________________________________ 23

Amendment of "no-sale" rule_______________________________ 23

Staff examination of registration statements___________________ 24

Time required to complete registration________________________ 24

Statistics regarding registration statements filed_ ______________ 25

Statistics regarding securities registered., _ _ ___________________ 27

Stop order proceedings_____________________________________ 30

Examinations and investigations_____ ___ __ 31

Exemption from registration of small issues___________________ 31

Exempt offerings under Regulation A______________________ 32

Reports of sales_____________________________________ 32

Suspension of exemption______________________________ 33

v
VI TABLE OF CONTENTS

FULL DISCLOSUREUOF INFORMATION ABOUT THE ISSUERS

OF SECURITIES-Continued

A. Disclosure in connection with public offerings-Continued Page

Exempt offerings under Regulation B______________________ 33

Reports of sales________ __ ___ _ 34

Exempt offerings under Regulation E______________________ 34

Exempt offerings under Regulation F 34

Proposed exemption for securities of District of Columbia

local development companies__________________________ 35

B. Continuing disclosure requirements____________________________ 35

Registration of securities on exchanges_______________________ 35

Registration of over-the-counter securities____________________ 36

Exemptions from registration___________________________ 37

Periodic reports , __ _ ___ ___ 38

Proxy sollcltatlona.; ___ ___ _ 39

Scope and nature of proxy regulation____________________ 39

Adoption of amendments to proxy and information rulesc , , 40

Statistics relating to proxy and information statements_____ 41

Stockholders' proposals_____ _ __ ___________ 42

Ratio of soliciting to nonsoliciting companies______________ 42

Proxy contests________________________________________ 42

Insiders' security holdings and transactions___________________ 43

Ownership reports., , __ ___ _____ 43

Amendment of rule relating to determination of 10 percent

ownership__________________________________________ 43

Recovery of short-swing trading profits__________________ 44

Changes in rules exempting transactions from short-swing

tradingpro~ons----------------------------------- 44

Investigations with respect to reporting and proxy provlslonev.,., 45

Proceedings to obtain compliance with Exchange Act registration or reporting requirements_____________________________ 45

Summary suspension of trading., ; ___ ______________ ___ 46

C. Accounting and auditing matters_____________________________ 48

The work of the Accounting Principles Board_________________ 49

Relations with the accounting profession and the public________ 50

Other current developments_________________________________ 51

Resignation of accountants from practice before the Cornmisslon , 53

D. Civil litigation involving disclosure matters____________________ 53

E. Criminal prosecutions involving disclosure violations____________ 54

F. Exemption for securities of international banks_________________ 56

International Bank for Reconstruction and Development_______ 56

Inter-American Development Bank__________________________ 58

Asian Development Bank___________________________________ 59

G. Trust Indenture Act of 1939_________________________________ 60

PART III

REGULATION OF SECURITIES MARKETS_____________________ 62

Regulation of exchanges_____ ______ ___ ___________ 62

Registration and exemption of exchanges_____________________ 62

Review of exchange rules and procedures_____________________ 63

Revisions in exchange member trading rules__________________ 63

Revisions in listing and delisting standards___________________ 64

Dellsting of securities from exchanges________________________ 65

Inspections of exchanges____________________________________ 67

_
TABLE OF CONTENTS vn

REGULATION OF SECURITIES MARKETS-Continued Pap

Statistics relating to securities traded on exchanges________________ 67

Number of issuers and securities_____________________________ 67

Market value of securities available for trading________________ 68

Volume of securities traded_________________________________ 69

Foreign stocks on exchanges 69

Comparative exchange statistics_____________________________ 70

Block distributions reported by exchanges____________________ 72

Unlisted trading privileges on exchanges______________________ 72

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

securities exchanges.L; _______ _______ _________ 74

Statistical studies_____ ____ ___ ____ _ ___ 75

Issues registered under the Securities Act of 1933______________ 75

New securities offerings; ___ __ __ ________ 75

Individualli' saving_________________________________________ 75

Private noninsured pension funds____________________________ 76

Stock transactions of financial institutions____________________ 76

FinancIal position of corporations____________________________ 76

Plant and equipment expenditures___________________________ 76

Directory ofregistered companies_________ ___________________ 76

Stock DlSrketdata_________________________________________ 77

Cost of flotation of securities issues__________________________ 77

PART IV

CONTROL OF IMPROPER PRACTICES IN SECURITIES MAR-

}(ETS_________________________________________________________ 79

Regulation of broker-dealers and investment advisers______________ 79

Registration, financial responsibility, record maintenance and

financial reporting requirements___________________________ 79

Registration__________________________________________ 79

Capital requirements with respect to broker-dealers________ 82

Financial reports of broker-dealers_______________________ 83

Regulation of broker-dea1ers who are not members of registered securities association____________________________ 83

Detection of improper practices_____________________________ 86

Public complainta, ____ _ _____ _____________ 86

Inspections___________________________________________ 86

Section of securities violations_______________________ 87

Use of computer for name searches______________________ 87

Investigations_____________________________________________ 87

Imposition of sanctions_____________________________________ 89

Administrative proceedings., 89

Civilproceedings______________________________________ 94

Criminal proseeutlon.;.; __ 95

Supervision of activities of National Association of Securities Dealers, Inn, __ __ __ __ 96

NASD disciplinary actions______________________________ 97

Commission review of NASD disciplinary action___________ 98

Commission review of NASD action on membership______ 99

Disciplinary action by exchanges____________________________ 99

Misrepresentations In the sale or purchase of securities_____________ 100

ManipuIauon_________________________________________________ 106

Improper use of inside information_______________________________ 108

Enforcement problems with respect to foreign securlties_____________ 109

- _____
VIII TABLE OF CONTENTS

128

129

129

129

130

PaKe

112

112

114

115

116

116

116

117

117

118

120

121

122

123

124

125

126

127

127

128

128

PART V

REGULATION OF INVESTMENT COMPANIES

Companies registered under the Act

Growth of investment company assets

Investment company filings reviewed

Revision of annual and quarterly report forms

Control of improper practices

Inspection and investigation program

Civil and administrative proceedings

Status cases

Transactions involving affiliated persons

Compensation of management

Meaning of "fundamental" policy

Applications for Commission action

Transactions involving affiliated persons

Offer ofexchange

"Scholarship" plans

Merger of two exchange funds into a mutual fund

Restructuring of certain SBIC's

Bank commingled accounts

Control determinations

Changes in rules relating to status of various investment companies __

Amendment of Rule 3c-2 to permit greater participation by investment companies in the securities of unregistered small

business investment companies

New Rule 6c-l to clarify status of foreign subsidiaries

Other Developments

New investment companies with unusual investment policies

Funds with multiple advisers

PART VI

REGULATION OF PUBLIC-UTILITY HOLDING COMPANIES___ 131

Composition of registered holding-company systems________________ 131

Section 11 matters in registered holding-company systems__________ 133

Proceedings with respect to acquisitions, sales and other mattera, _____ 136

Financing of active registered public-utility holding companies and

their subsidlariea, _ ______ ___ _ _________________ 139

Competitive bidding., , ___ _______ _ ________ ______ 140

Policy as to refundability of debt issues__________________________ 140

PART VII

PARTICIPATION IN CORPORATE REORGANIZATIONS________ 143

Summary of actlvitlea.; , _____________________ _______________ 144

Jurisdictional, procedural and administrative matters______________ 144

Trustee's investigation , ________________________________________ 152

Reports on plans of reorganization_______________________________ 152

Activities with regard to allowances______________________________ 156

Intervention in Chapter XI proceedings__________________________ 160

PART vrrr

SUPPORTING ACTIVITIES___ ___________________________________ 163

Public information servlees., ____________ ____________ ______ 163

Dissemination of information . 163

Publications____________________________________________ 164

Availability of information for public inspection_______________ 165

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TABLE OF CONTENTS IX

SUPPORTING ACTIVITIES-Continued Page

Electronic data proeesslng.L, _ ____________ 167

Extension of application of automation techniques, ____________ 167

Increase in EDP Capability________________________________ 168

Assistance to state administrators and others__________________ 168

Sharing of EDPfacilities___________________________________ 168

EDP training., ___ _______________ 169

Personnel and financial management_____________________________ 169

Organizauonalchanges_____________________________________ 169

Personnelprogram_________________________________________ 169

Personnel strength; financial managemen L _ __________________ 171

PART IX

APPENDIX~STATISTICAL TABLES

Table 1. A 34-year record of registrations effective under the Securities

Act of 193~fiscal years 1935-1968________________________ 175

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

year ended June 30, 1968_____ ___ __ ______ ________ 176

Part 1. Distribution by months_________________________________ 176

Part 2. Purpose of registration and type of security________________ 176

Part 3. Purpose of registration and industry of registranL______ 177

Part 4. Use of proceeds and industry of registrant_________________ 178

Table 3. Brokers and dealers registered under the Securities Exchange

Act of 1934-effective registrations as of June 30, 1968, classified by type of organization and by location of principal offlce.; , 179

Table 4. Number of security issues and issuers on exchanges____________ 180

Part 1. Unduplicated count as of June 30, 1968 of the number of stock

and bond issues admitted to trading on exchanges, and the

number of issuers involved______ __________ __ ____ 180

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

June 30, 1968, classified by trading status, and number of

issuers Involved; ______ __ ________ 180

Table 5. Value of stocks on exchanges_______________________________ 181

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

exchanges in the calendar year 1967 and the 6-month period

ended June 30, 1968________ __ _______________________ 182

Part 1. 12 months ended December 31,1967______________________ 182

Part 2. 6 months ended June 30, 1968 182

Table 7. Comparative share sales and dollar volumes on exchanges______ 183

Table 8. Block distributions of stocks reported by exchanges____________ 184

Table 9. Unlisted stocks on exchanges_______________________________ 185

Part 1. Number of stocks on the exchanges as of June 30, 1968_____ 185

Part 2. Unlisted share volume on the exchanges-calendar year 1967__ 185

Table 10. Summary of cases instituted in the courts by the Commission

under the Securities Act of 1933, the Securities Exchange Act

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

the Investment Company Act of 1940, and the Investment

Advisers Act of 1940____________________________________ 186

Table 11. A 35-year summary of all injunction cases instituted by the

Commission-1934 to June 30, 1968, by calendar year______ 187

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

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

Co~ionparticipated-------------------------------- 188

~----------------
x TABLE OF CONTENTS

Table 13. A 35-year summary of criminal cases developed by the Com- 1'a&8

mission-1934 through 1968 by fiscal year_________________ 189

Table 14. A 3S-year summary classifying all defendants in criminal cases

developed by the Commission-1934 to June 30, 1968_______ 190

Table 15. Summary of criminal cases developed by the Commission which

were pending at June 30,1968___________________________ 190
COMMISSIONERS AND PRINCIPAL STAFF OFFICERS

(As of November 30, 1968)

Commtssloners

MANUEL F. COHEN of Maryland, Chairman

HUGa F. OWENS of Oklahoma

HAMER H. BUDGE of Idaho

FRANCIS M. WHEAT of California

RICHARD B. SMITH of New York

Secretary: ORVAL L. DuBOIS

Executive Assistant to the Chairman: MEYER EISENBERG

Principal Staff Officers

CHARLES E. SHREVE, Director, Division of Corporation Finance.

ROBERT H. BAGLEY, Associate Director.

ALAN B. LEVENSON, Executive Assistant Director.

SOLOMONFREEDMAN, Director, Division of Corporate Regulation.

AARON LEVY, Associate Director.

ALAN S. MOSTOFF, Associate Director.

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

EUGENE H. R07BERG, Associate Director.

STANLEYSPORKIN, Associate Director.

PHILIP A. LoOMIS, JR., General Counsel.

DAVID FERBER, Solicitor.

WALTER P. NORTH, Associate General Counsel.

ANDREW BARR, Chief Accountant.

LINDSEY J. MILLARD, Associate Chief Accountant.

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

LEONARDHELFENSTEIN, Director, Office of Opinions and Review.

W. VICTOR RODIN, Associate Director.

ALFRED LETZLER, Associate Director.

WILLIAM E. BECKER, Chief Management Analyst.

FRANK J. DONATY, Comptroller.

ERNEST L. DESSECKER, Records and Service Officer.

HARRY POLLACK, Director of Personnel.

RALPH L. BELL, EDP Manager.

XI

Term

expire.

JuneS

1973

1970

1\;169

1971

1972

_

_

__• _

_

_
REGIONAL AND BRANCH OFFICES

Regional Offices and Regional Administrators

Region 1. New York, New Jersey.-Mahlon M. Frankhauser, 26 Federal

Plaza. New York, New York 10007

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

Building, Government Center, Boston, Mass. 02203

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

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

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

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

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

U.S. Courthouse and Federal OfficeBuilding, 219 South Dearborn Street,

Chicago, Illinois 60604

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

the Atchafalaya River, and Kansas (except Kansas City).-Gerald E.

Boltz, 503 U.S. Court House, 10th & Lamar Streets, Forth Worth, Texas

76102

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

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

Street, Denver, Colorado 80202

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

94102

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

900 Hoge Building, Seattle, Washington 98104

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

Washington, D.C. 20549

Branch Offices

Cleveland, Ohio 4419D.-Room 779, Federal Office Building, 1240 E. 9th

Street.

Detroit, Michigan 48226.-230 Federal Building.

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

515 Rusk Ave.

Los Angeles, California 90028.-Room 1403, U.S. Courthouse, 312 North

Spring Street.

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

Ave.

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

Broadway.

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

Street.

XlI
COMMISSIONERS

Manuel F. Cohen, Chairman

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

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

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

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

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

the District of Columbia and New York bars. In 1933-1934 he served

as research associate in the Twentieth Century Fund studies of the

securities markets. Chairman Cohen joined the Commission's staff

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

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

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

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

Director of the Division of Corporation Finance. He was awarded

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

and the processes of capital formation and of government and other

controls in the principal financial centers of Western Europe. In 1961,

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

the National Civil Service League. From 1958 to 1962 he was lecturer

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

journals. In 1962, he received an honorary LL.D. degree from Brooklyn Law School. He took office as a member of the Commission on

October 11, 1961, for the term expiring June 5, 1963, and was reappointed for the terms expiring June 5, 1968 and June 5, 1973. He

was designated Chairman of the Commission on August 20, 1964.

Hugh F. Owens

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

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

and received his A.B. degree from the University of Illinois in 1931.

In 1934, he received his LL.B. degree from the University of Oklahoma College of Law, and became associated with a Chicago law firm

specializing in securities law. He returned to Oklahoma City in JanXIII
XIV SECURITIES AND EXCHANGE CO:M:MISSION

uary 1936, to become associated with the firm of Rainey, Flynn,

Green and Anderson. From 1940 to 1941, he was vice president of the

United States Junior Chamber of Commerce. During World War II

he attained the rank of Lieutenant Commander, U.S.N.R., and served

as Executive Officer of a Pacific Fleet destroyer. In 1948, he became

a partner inthe firm of Hervey, May and Owens. From 1951 to 1953,

he served as counsel for the Superior Oil Company in Midland, Texas,

and thereafter returned to Oklahoma City, where he engaged in the

general practice of law under his own name. He also served as a parttime faculty member of the School of Law of Oklahoma City University. In October 1959, he was appointed Administrator of the then

newly enacted Oklahoma Securities Act and was active in the work

of the North American Securities Administrators, serving as vice

president and a member of the executive committee of that Association. He took office as a member of the Securities and Exchange

Commission on March 23, 1964, for the term expiring June 5, 1965,

and was reappointed for the term expiring June 5, 1910.

Hamer H. Budge

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

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

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

Idaho in Moscow, Idaho. He is admitted to practice before the Supreme Court of Idaho and the Supreme Court of the United States and

practiced law in the city of Boise, Idaho, from 1936 to 1951, except for

3% years in the United States Navy (1942-1945), with final discharge

as Lieutenant Commander. Elected to the Idaho State Legislature,

he served three sessions, two as assistant Republican floor leader and

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

1950, he represented Idaho's Second Congressional District in the

U.S. House of Representatives during the 82d, 83d, 84th, 85th, and

86th Congresses. In the House he was a member of the Rules Committee, Appropriations Committee, and Interior Committee. During the

period from 1961 until his appointment to the Commission he was

District Judge in Boise. He took office as a member of the Securities

and Exchange Commission on July 8, 1964, for the term of office expiring June 5, 1969.

Francis M. Wheat

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

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

the Harvard Law School. At the time of his appointment to the Commission, Commissioner Wheat was a member of the Los Angeles law

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

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

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

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

been active in bar association work, including service as Chairman

of the Committee on Corporations of the Los Angeles County Bar

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

of Securities, American Bar Association (Banking and Business Law

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

of the securities business and its regulation, both under Federal

and State law. He took office as a member of the Commission on October 2, 1964, for the term expiring June 5, 1966, and was reappointed

for the term expiring June 5, 1971.

Richard B. Smith

Commissioner Smith was born in Lancaster, Pennsylvania, on

July 9, 1928, and attended public schools there. He received a B.A.

degree from Yale University in 1949, where he held a scholarship,

and an LL.B. degree in 1953 from the University of Pennsylvania,

where he was an editor of the Law Review. Upon graduation he became associated with the New York City law firm of Reavis & McGrath (then Hodges, Reavis, McGrath, Pantaleoni & Downey). He

remained with that firm from 1953, except for a period with the legal

department of W.R. Grace & Co. in 1956-57, until his appointment

to the Commission, having become a partner of the firm in 1963. During this period he was engaged in the general practice of law, specializing in corporate finance and securities work. Commissioner

Smith was active inbar association work, having served as a member,

secretary and then Chairman (1963-66) of the Committee on Aeronautics of The Association of the Bar of the City of New York and

during 1962-64 as a member of the Committee on State Legislation

of the New York State Bar Association. He is also a member of the

American Bar Association. In 1961-62 he acted as counsel to a Commission of Inquiry into labor questions in the thoroughbred racing

industry, appointed by the Governor of the State of New York. He

was president of the University of Pennsylvania Law Alumni Association of New York City during 1965-67 and serves as a member of

the Board of Managers of the Alumni Society of the University of

Pennsylvania Law School. He took office as a member of the Commission on May 1,1967, for the term expiring June 5,1967, and was

reappointed to a 5-year term ending June 5, 1972.

FOREWORD

The Securities and Exchange Commission is a relatively small

agency which occupies a central role in a vital, delicate, and rapidly

changing aspect of the national economy-the financing of American

industry and the provision of necessary safeguards to the millions

of investors who, directly or indirectly, entrust their savings to the

securities markets.

Our securities markets are growing and changing at an unprecedented rate. There are now more than 24 million direct stockholders;

a substantial portion of the share volume in the trading markets is

the result of transactions by large financial institutions which manage

the pooled savings of mutual fund holders, pension fund beneficiaries

and life insurance policy holders. These indirect investors are estimated to number in excess of one hundred million. This growth of

institutional investment has created some strain on the securities markets and raises important policy questions which require resolution.

The combination of broad individual participation and increasing

institutional activity has brought about unprecedented volumes of

trading. The average daily dollar value of securities traded on all markets is over $825 million and the average daily exchange volume of

trading is over 22million shares. Thus the markets and the regulatorsFederal, State, and self regulators-are confronted not only with the

problems of adjusting to what has sometimes been described as the

"institutionalization of the markets"; they are also and at the same

time confronted with, and almost overwhelmed by, the sheer volume

of activity.

There are a number of aspects of institutionalization that deserve

comment.

First, institutionalization of investment, in our present economy,

contemplates that public savings will flow, in an accelerated fashion,

into pooled and professionally managed accounts with emphasis on

equity rather than debt holdings. Investment decisions, under such

circumstances, tend to become more homogenous, largely because they

reflect the decisions of a relatively few sophisticated managers. Such

a development would require sophisticated and new market techniques

to absorb potential investment imbalances in the equity markets.

Second, increased participation by institutions in the trading markets, both in absolute and relative terms, affects the allocation of public

savings as between the securities markets and other channels of investXVII

327-506--68----2
xvm FOREWORD

ment such as mortgages, other traditional forms of saving and land,

and in view of the increasing institutional interest in stocks, as between

the bond and equity markets.

Third, institutionalization contemplates that financial managers will

compete with the classic securities brokers in merchandising a financial product with potential for capital appreciation. Banks, insurance

companies and other companies have already begun to form financial

conglomerates for the purpose of offering traditional and novel vehicles for public participation in the equity markets. The distributing

and merchandising processes of enterprises with business techniques

developed outside the traditional securities brokerage business, can be

expected to lead to new merchandising methods in the distribution of

new equity oriented products to the public.

Fourth, institutional investors are staffed by professional investment managers. They avidly seek out and analyze all available information with respect to companies in which they may have or contemplate an investment interest. More intelligent investment decisions

may result, but it also becomes more difficult, particularly in view of

the financial power of these institutions, for the individual investor

to gain equivalent access to relevant information for his investment

decisions.

Fifth, in the past, the significant institutional investors-mutual

funds, bank trust departments, pension funds and others-tended to be,

on the whole, conservative, investing for the long term. The last few

years, however, have seen the emergence of what has sometimes been

called the "cult of performance" in which attention has been focused on

those who showed the greatest gains in the previous year or even the

previous 6 months, with the result that more and more of these institutions, and particularly certain mutual funds, have actively and avowedly become short-term traders who act not only with speed but in volume, again throwing a strain on the mechanisms of the market.

Sixth, institutionalization of markets reflects a growing concentration of economic and financial power.

The growth of institutional and individual participation in the

equities markets referred to is a reflection of an affluent society which

has seen tremendous economic growth. Itis also a result of an inflationary tendency in the postwar years. These have led the public to

seek greater participation in that growth and some protection from

inflation directly or indirectly through investment in equities rather

than concentrating on fixed-income securities and other forms of savings. In sum, the stock markets, both on the exchanges and in over-thecounter markets, have become a more important part of the national

economy than they ever have been before.

The Commission has made and is continuing to make major efforts
FOREWORD XIX

to cope with the increased responsibilities these developments have

thrown upon it.

Commencing in 1961 and ending in 1963, the Commission, pursuant

to Congressional direction, made what is known as the "Special Study

of the Securities Markets," the most exhaustive analysis of all phases

of these markets since the Congressional investigations of the Thirties

which led to the enactment of the securities laws. The explosive growth

of mutual funds received attention in The "Wharton School Study of

Mutual Funds, initiated by the Commission in 1958 and completed in

1962, and in the Commission's own report of the Public Policy Implications of Investment Company Growth, sent to Congress in 1966.

Many of the Special Study's recommendations have been implemented, most notably through the Securities Acts Amendments of

1964, which extended the significant investor protections of the Securities Exchange Act to major segments of the over-the-counter market and provided procedures, both for upgrading training methods and

requirements and raising standards of those engaged in the securities

business. It also provided a more effective disciplinary scheme.

The Commission is presently engaged in the first thorough inquiry it

has made into the rules, policies, practices and procedures of the exchanges respecting the commission rate structure. This inquiry is

bringing together the knowledge and experience of many individuals

and firms and will add substantially to the foundation provided by

prior studies made by the Commission and by industry. Automation

is on the threshold of revolutionizing the system of quotations for

unlisted securities.

The Commission's work has also been aided by the use of a computer

which makes possible the assembly and analysis of more comprehensive

data than was possible before. It will also provide far more data concerning the operations of investment companies. Within the relatively

near future much more will be known about the economics of the securities business. This information will be of great value not only for

the Commission and other regulatory and self-regulatory authorities,

but also for those actively engaged in the industry itself.

In many areas we have not passed beyond mere identification of

some of the changes in the markets, which both cause and result from

the developments mentioned. The Commission expects that the "insti.

tutional study," concerning which more will be said later in this report,

will provide the vehicle for development of the relevant facts and the

identification of trends and possible problem areas. Upon its completion, the Commission would submit a report to the Congress.

In summary, recent years have witnessed dramatic and significant

changes of the securities markets which will put additional strains

on the Commission and self-regulatory organizations in their efforts to
xx FOREWORD

fulfill the three principal mandates of the Congress: C full and fair

disclosure, maintenance of fair and orderly securities markets, and the

detection and prevention of fraud. With respect to the latter mandate

the securities markets have always been a fertile :field for the unscrupulous. Constant vigilance and vigorous enforcement is necessary

to rid the markets of those whose activities cast discredit upon all,

and provide a form of competition which is unfair to the great majority

who wish to conduct their business on the highest possible plane.

Despite these developments and emerging problems, the regulatory

scheme in the United States is considered to be one of the most effective

in the world. It is being studied and drawn upon in many foreign

countries, most notably and most recently in Canada and in France.

There remains, however, room for improvement. The Commission has

directed studies of certain areas of its operations to determine whether

improvements can be achieved. Thus, the disclosure requirements under

the Securities Exchange Act of 1934 are under intense study to determine the extent to which they can be made simpler, more effective and

more economical to administer. The task grows more difficult as technology advances, patterns of corporate growth and :financing become

increasingly more complex and the number of publicly held businesses

increases. These developments make more urgent the Commission's need

for sufficient manpower and other resources to fulfill adequately its

responsibilities under the statutes entrusted to its administration.
PART I

IMPORTANT RECENT DEVELOPMENTS

Structure and Level of Commission Rates

The setting of commission rates for exchange transactions is perhaps the most important area in which exchanges have been permitted

to establish rules of practice governing their membership. Under Section 19(b) of the Exchange Act, the Commission is responsible, however, for determining the reasonableness of commission rates set by

the exchanges, and it may after notice and opportunity for hearing

order an adjustment of such rates. In May 1968, the Commission, after

considerable study and discussion with various elements of the industry, for the first time took the initiative with respect to the adjustment of commission rates. In simultaneous actions, it directed the New

York Stock Exchange to adopt an interim rate structure incorporating

a volume discount or, in the alternative, to eliminate fixed rates of

commission for large transactions, and initiated public hearings to

consider fully what long-term changes are required in the rate structure and related matters.

Since formation of the New York Stock Exchange in 1792, the

commission rate schedule has been adjusted on several occasions, most

recently in 1959. Each change had been on the initiative of the Exchange and primarily involved an increase in the level of rates. These

increases were justified by the Exchange on the ground that increased

costs were not sufficiently offset by increases in trading volume. Since

the New York Stock Exchange commission schedule has served as the

model for all other exchanges, each increase or adjustment in level

and structure of the New York Stock Exchange's rates brought with it

a concurrent adjustment in the rates of the other exchanges.

Itshould be recalled that until the past several years, the exchanges

were essentially markets for the relatively small transactions of

thousands of individual investors and for smaller institutional transactions. As indicated in the Foreword, the mix of transactions on the

exchange markets has been changing so that now a substantial percentage of trading is that of institutions effecting large transactions.

Until the recent interim changes, rates of commission were computed exclusively on the amount of money involved in each round-lot

transaction, a round lot usually being 100 shares. There was no discount based on the size or volume of a transaction or on the amount

!I.
2 SECURITIES AND EXCHANGE COMMISSION

of business done by an institutional or other investor over a period of

time. Accordingly, the commission for a 10,000-share transaction was

100 times that for a 100-share transaction.'

Beginning in July 1968, the Commission conducted an extensive

public investigatory hearing to determine whether any changes should

be made in the rules, policies, practices and procedures of registered

national securities exchanges respecting commission rate schedules and

related matters. The hearing has been evidentiary in nature and constitutes a broad-range factual inquiry into such matters as: (1) commission rate levels for nonmembers and for members (including intramember rates); (2) the services for which commission rates pay and

the costs allocated thereto; (3) give-ups and reciprocal practices among

different categories of members and nonmembers; (4) membership

for financial institutions on exchanges; (5) economic access to exchange markets by nonmember broker-dealers; (6) competition among

exchanges and other markets; and (7) access of exchange members to

the third market. Interested persons were invited to come forward with

evidentiary facts for inclusion in the record and, in the discretion of

the hearing officer,to testify in the proceeding.

Pending the development of long-term solutions to the various problems under consideration in the public hearings, the Commission in

September 1968 accepted a proposal of the New York Stock Exchange

providing for an interim reduction in minimum commissions on larger

trades. Also under this proposal, the customer-directed "give-up"

would be prohibited and minimum intramember rates reduced. Estimates furnished the Commission indicate that these interim changes

will result in a total reduction of commission charges of $150 million

a year, or approximately 7 percent of last year's total charges. On a

daily basis, the reduced rate will result in savings of at least $600,000

of commissions each trading day," The American Stock Exchange approved similar interim changes, and the regional exchanges are

expected to make comparable rate adjustments.

1IDstorically there have been three ditrerent methods employed in computing

commission rates for exchange transactions. From 1792 to 1919, the base was a

fiat rate on par value; from 1919 to 1947 it was a sIlding scale per share charge

on share value; and since 1947 it has been a sliding scale based on round lot

value,

In 1966, the New York Stock Exchange (and subsequently the other exchanges), at the request of the Commission, had modified the so-called odd-lot

differential appllcable to purchases or sales of less than a round lot (generally

100 shares). The modification involved an increase in the "break point" at which

a higher ditrerential becomes payable. As a result of this change, estimated

savings of more than $6 million were provided to investors in calendar year 1967

with respect to transactions executed on the New York Stock Exchange.

•
THIRTY-FOURTH ANNUAL REPORT 3

Study of Institutional Investors

As noted previously, in recent years there has been accelerated

activity in all phases of the securities markets, the most noticeable

aspects of which are the surge in volume of securities traded and the

number of public investors, and the pervasive participation of institutional investors in the securities markets. The average daily volume of

securities traded on the New York Stock Exchange has increased, for

example, from less than 5 million shares in 1963 to over 12 million

shares through mid-1968. The value of stock traded on all registered

securities exchanges has increased from about $64 billion in 1963 to

$162 billion in 1967.Itis estimated that the number of individual stockholders in United States industry has grown from 17 million in 1962

to approximately 24 million at the present time, despite the fact that

during this period individuals were net sellers (and institutions net

buyers) of corporate securities.

Millions of investors now participate in equity securities holdings

through their interests in investment companies, pension funds, and

other institutions. From 1957 to 1967, the total value of stock held by

the major financial institutions rose from $29112 billion to more than

$1311!zbillion," All indications are that the accelerated flow of savings

into equity-oriented institutions will continue. Recent projections of

private pension fund assets, for example, point to a doubling in this

segment alone within the next 10 years.

In addition to the sharp growth of institutional shareholdings, there

has been a dramatic increase in trading by institutions in the securities

markets. Turnover rates of investment companies and pension funds--

perhaps the two most important institutional groups-are much higher

than they were only 10 years ago. Investment companies turned over on

the average almost 40 percent of their stock portfolios in 1967 compared with only a 14 percent rate in 1957. The average turnover rate

of private noninsured pension funds rose from less than 4 percent to

over 11 percent in the same period. Transactions by institutions have

been estimated to account for approximately 50 percent of present

nonmember volume on the NYSE.

The combination of rapid growth and increased trading by institutions has placed strains on the traditional market mechanisms which

were developed primarily to serve relatively small transactions by individual investors.

Another recent development is the increasingly active role which

institutional investors are assuming in relation to their portfolio comThese 1Ignres do not cover personal trust funds, common trust funds, foundations and college endowment funds as to which complete statistics are not

available.

•
4 SECURITIES AND EXCHANGE COMMISSION

panies. Historically most institutions, especially mutual funds, even

where they were the largest single shareholders, chose not to exercise

their power over the management of portfolio companies. If they became disenchanted with management they were likely to liquidate

their holdings rather than seek to effect changes. Recently, however, the

Commission has noted instances where institutions have taken a more

active part in the management of portfolio companies and have played

an active role in acquisitions, proxy fights, etc.

In view of the recent developments, a better understanding is urgently needed both of the impact of institutional investors on the

securities markets and portfolio companies and of the ability of the

securities markets to adapt to institutional needs. Under a resolution

of Congress signed into law on July 29, 1968,' the Commission has been

authorized to undertake a comprehensive study of these matters. In

November 1968, the Commission announced the designation of Professor Donald E. Farrar to direct the study.

Mutual Fund Legislation

The 33rd Annual Report 5 outlined the background and substance

of the amendments to the Investment Company Act of 1940 which

the Commission had proposed in May 1967. These proposals and the

studies which preceded them were made pursuant to Section 14(b)

of that Act which authorizes the Commission, if it believes that "any

substantial further increase in the size of investment companies

creates any problem involving the protection of investors or the public

interest," to make a study and investigation and to report the results

and its recommendations to the Congress. The Commission's legislative proposals were designed principally to reduce sales loads imposed on the acquisition of fund shares where these loads are excessive, to eliminate the so-called "front-end load," and to provide a

means to test the fairness of management fees. They also dealt, however, with a number of other areas as to which the Commission believed legislative action was required.

The Commission's proposals represented 10 years of effort by and

on behalf of the Commission. In December 1966, the Commission

had submitted its report, entitled "Public Policy Implications of

Investment Company Growth," to the Congress. Two other reports

which analyzed various problems associated with the investment

company industry and its growth-the Wharton Report, commenced

in 1958 and submitted to Congress in August 1962, and the Report of

the Special Study of Securities Markets, published in 1963-1964-had

preceded the Commission's Report.

Public Law 90-438.

See pp, 141.

•

•
TEURTY-FOURTH ANNUAL REPORT 5

Hearings were conducted before the Senate Committee on Banking

and Currency during July and August 1967 and before the Subcommittee on Commerce and Finance of the Committee on Interstate and

Foreign Commerce of the House of Representatives during October

1967 and March 1968. The Senate Committee reported a bill on

July 1, 1968, which was passed by the Senate on July 26, 1968.6However, on September 10, 1968, the Subcommittee on Commerce and

Finance of the House Committee on Interstate and Foreign Commerce

voted not to give further consideration to the bill.

In proposing mutual fund legislation, the Commission recognized

that most of the specific abuses aimed at in the Investment Company

Act of 1940have been substantially eliminated; however, the dramatic

growth of the industry and accompanying changes have created new

situations which were not anticipated in 1940. While many of the

changes proposed by the Commission were accepted or even welcomed

by the industry, the industry took exception to the principal recommendations of the Commission. The Senate Bill modified those recommendations as follows:

In the area of sales charges, the Commission proposed that a 5 percent

ceiling be placed on the charge for mutual fund sales subject to a

power in the Commission to approve appropriate higher ceilings. The

bill as passed by the Senate gave authority to the National Association

of Securities Dealers, Inc., a self-regulatory organization of brokers

and dealers, to fix reasonable sales charges, subject to Commission

oversight.

The Commission had recommended the abolition of the front-end

load in contractual plans, under which as much as 50 percent of the

payments made by the investor during the first year may be deducted

for sales charges, so as to require that the sales load be spread equally

over all payments during the life of the plan. The Senate, however,

arrived at a formula whereby the load would not exceed 20 percent

in anyone year nor average more than 16 percent over the first 4

years.

Finally, the Commission had recommended that the Act provide

expressly that compensation received by investment advisers shall be

"reasonable" and that there be opportunity for judicial enforcement of

this standard. The Commission was of the view that because of the

fiduciary relationship existing between an investment company and

its manager the compensation received by the manager should be

reasonable and that the Federal courts would provide an appropriate

forum in which the reasonableness of the management fee could be

tested.

• S. 3724, 90th Cong., 2d Sess. (1968).
6 SECURITIES AND EXCHANGE COMMISSION

The bill as passed by the Senate provided that a determination by

the directors with respect to compensation of or payments to certain

affiliated persons was to be given "substantial weight" and shareholder

approval was to be given such weight as was deemed appropriate in

the circumstances. The Senate version also provided that any compensation or payments received by the investment adviser shall be presumed reasonable if approved or ratified by a majority of the outstanding voting securities of the company and a majority of the directors who are not interested persons of the company. The presumption

could be rebutted by a preponderance of the evidence. The Senate

bill also included a provision permitting a shareholders' suit to enforce

the standard of reasonableness in the Federal courts if the Commission

refused or failed to bring such suit within 6 months after request by a

shareholder.

The Commission believes that its legislative proposals were responsive to the problems which it had found to exist, and it is hoped that

legislation along the lines of those proposals will in the near future

receive favorable consideration by the Congress.

The Texas Gulf Sulphur and Merrill Lynch Decisions

Shortly after the end of the fiscal year, a landmark decision relating

to the issues of insiders' securities transactions based on undisclosed

inside information and of corporate publicity was handed down by

the Court of Appeals for the Second Circuit, sitting en bane, in S.E.O.

v. Te3KUJ Gulf Sulphur 00/ The Commission had filed its complaint in

this case in 1965, charging violations of Section 10 (b) of the Securities

Exchange Act of 1934 and Rule 10b-5 under that Act through stock

purchases by insiders and through misleading corporate publicity.

Briefly, it was alleged that certain insiders had purchased shares of

Texas Gulf stock or calls thereon on the basis of material inside information concerning the results of exploratory drilling for base metals

by Texas Gulf near Timmins, Ontario; had passed this information to

others and advised them to purchase Texas Gulf stock or calls; and

had accepted stock options from Texas Gulf without disclosing material information to the board of directors. It was also alleged that

the company issued a deceptive press release. Previous annual reports 8

have discussed the institution of this action and the opinion of the

district court 9 dismissing the complaint against the corporation and

10 individual defendants but finding violations by 2 other individual

defendants. On August 13, 1968, the court of appeals handed down

its decision affirming unanimously the decision below insofar as it had

OCR Fed. Sec. L. Rep. '92,251 (C.A. 2, Aug. 13, 1968) .

See 31st Annual Report, pp. 122-123; 32nd Annual Report, pp. 114-115; 33rd

Annual Report, p. 101.

258 F. Supp. 262 (S.D. N.Y., 1966).

•

•

•
TEITRTY-FOURTH ANNUAL REPORT 7

been favorable to the Commission and reversing (7-2 on most issues)

that decision in every major respect in which it had been unfavorable to

the Commission.

The court unanimously held that a corporate insider in possession

of important inside information about his corporation may not trade

in the corporation's stock without disclosing that information, even

though his transactions are not face-to-face 'but on a national securities exchange. This duty was unanimously held to apply to employees

of the corporation, as well as to its top officers. The court also held

unanimously that insiders may not pass such inside information to

others for their use in securities transactions; the majority included

recommendations on the basis of important inside information within

this prohibition.

The court also held that there is a similar duty of disclosure to

those responsible for the granting of stock options to company officials

as additional compensation. If important information is not known

to the directors of the company who grant the options but is known

to the recipients, it must be disclosed to the directors. In this case the

majority required such disclosure before acceptance of the options

but suggested that disclosure before exercise of the options might

be sufficient in some situations. The Commission had conceded on appeal that the duty of disclosure is limited to members of top management in this context, and the majority therefore did not decide whether

any other corporate personnel were subject to a similar duty.

Since the duty of disclosure and the prohibition against tips apply

only to material inside information, it was necessary for the court to

define these two terms. In applying the traditional standard of materiality-whether a reasonable investor would attach importance to the

information in making his investment decision-the majority held

that the interests of all persons in the securities markets, speculative

investors and conservative investors alike, must be considered. When

the particular information consists of indications of a possible future

event, the court called for a balancing of the indicated probability

that the event would occur and its likely importance as measured

against all of the corporation's activities. On this issue the majority

held that a major facton indetermining the materiality of any particular information is the importance attached to it 'by those who knew

about it, as indicated by the pattern of their own securities transactions.

Inside information is that which is not already available to the

public. In determining what is necessary to make previously undisclosed information sufficiently available for insiders to trade, the court

unanimously held that the mere giving of the information to reporters

is not enough. Trading prior to the appearance of the information on

the Dow Jones broad tape was held to be a violation. The majority
8 SECURITIES AND EXCHANGE COMMISSION

stated that in some cases even this degree of disclosure might not be

sufficient, although it suggested that further clarification by Commission rule would be appropriate.

The court held that a corporate press release likely to affect the

market for its securities is subject to Section 10(b) and Rule 10b-5,

irrespective of the absence of any securities transactions by the corporation or its insiders and irrespective of the absence of any motive to

affect the market for their benefit. Those provisions are violated if

the release is materially deceptive in the light of the facts existing at

the time of the release, unless the corporation had exercised due diligence in ascertaining the facts and had accurately stated what it knew.

The majority held that in determining whether a corporate press release is deceptive the proper test is whether a reasonable investor exercising due care would have been misled by it.

The court remanded the case to the trial court for further findings

with respect to the press release in question and for a determination

of the remedies to which the Commission is entitled.

In a recent decision also dealing with the improper use of inside

information, the Commission, pursuant to an offer of settlement, imposed sanctions on the broker-dealer firm of Merrill Lynch, Pierce,

Fenner & Smith, Inc. and certain persons associated with it for violations of anti-fraud provisions of the securities laws or failure to

exercise proper supervision to avoid such violations. 10

The violations involved the disclosure in June 1966 to certain of the

firm's institutional and other large customers of nonpublic information reflecting a "significant deterioration" in the earnings of Douglas

Aircraft Co., Inc., and the resulting sales or short sales by such customers of more than 190,000 shares of Douglas stock prior to public

disclosure of the information and without any disclosure being made to

the purchasers. While this adverse information was being disclosed to

various large customers, the firm did not reveal it to other customers

for whom it effected purchases of Douglas stock during the period in

question. The respondents consented to the findings of violations and

to the imposition of sanctions, but without admitting the allegations

of the order for proceedings.

Citing the Commission's 1961 decision in Oady, Roberts &: 00.,11 and

the Teeas Gulf Suiphu» decision, the Commission observed that the

principles in those decisions "prohibited the disclosure [of the downturn in Douglas' earnings] by registrant to favored customers who

might sell their holdings or sell short before appropriate public disclosure and thereby take advantage of the current market price before

the expectable decline in such price upon public dissemination of the

10 Securities Exchange Act Release No. 8459 (November 25,1968).

u40 S.E.C. 907.
TEITRTY-FOURTH ANNUAL REPORT 9

information. And, aggravating the inherent unfairness of the disclosure to certain customers was the fact that, at the same time, registrant was effecting purchases of the stock for other customers to

whom the adverse information was not available."

According to the Commission's decision, "The information Douglas

entrusted to registrant was of such importance that it could be expected

to affect the judgment of investors whether to buy, sell, or hold Douglas

stock. If generaIIy known, such information could be expected to affect

materially the market price of the stock. The advance disclosure of

such information to a select group who could utilize it for their own

benefit, and to the detriment of public investors to whom the information was not known, constituted an act, practice, or course of business

which operated or would operate as a fraud or deceit upon such

investors. "

Upon the basis of these findings pursuant to the settlement offer,

the Commission ordered that Merrill Lynch's New York Institutional

Sales Office and its West Coast Underwriting Office be suspended for

21 and 15 days, respectively. Ten individual respondents were censured; in addition, one was dissociated from Merrill Lynch for 60 days

and six others for~1 days.

In determining to accept the offer of settlement, the Commission

considered the fact that none of the respondents had previously been

the subject of disciplinary action as well as Merrill Lynch's undertaking to adopt, implement and ensure compliance with, revised procedures to provide more effective protection against disclosure of confidential information, including but not limited to the procedures set

forth in a Statement of Policy which was incorporated in the offer of

settlement. The Commission stated that as a matter of policy, it did

not, "and indeed cannot, determine in advance that the Statement of

Policy will prove adequate in all circumstances that may arise," and it

stressed the need for "stringent measures" to avoid future violations.

The decision observed that "obviously the prompt public dissemination of material information would ,be an effective preventive," and

noted registrant's undertaking to use its best efforts to secure the public

release of any material information given to its Underwriting

Division.

The Takeover Bid am

On July 29, 1968, President Johnson signed the "Takeover Bid

BiII," 12 which is designed to close gaps in the full disclosure provisions

of the securities laws.

In recent years, acquiring control of publicly held corporations

through cash tender offers and purchases of blocks of securities, as op12 Public Law 90-439.
10 SECURITIES AND EXCHANGE COMMISSION

posed to proxy contests, has gained favor. When control is sought

through the proxy contest, the Exchange Act and its proxy rules require disclosure to be made to shareholders concerning the identity of

the participants in the contest, their associates, the shareholdings of

these persons, and other relevant information. This information is

subject to statutory sanctions and must also be filed with the Commission. Similarly, when control is sought through a stock-for-stock

exchange, the offering must be registered under the Securities Act of

1933, and shareholders must be given a prospectus setting forth all

material facts. Until July 1968, however, there were no comparable disclosure requirements which applied to a cash tender offer or stock

acquisitions which may cause a change in control.

The takeover bid bill was designed to put cash tender offers and

other block acquisitions on the same footing as proxy contests for

control. It was not intended either to encourage or discourage such

offers or acquisitions, nor was it intended to give an advantage either

to management or the outside group.

The bill, which amended Sections 13 and 14 of the Exchange Act,

grants the Commission rulemaking authority to require disclosure of

pertinent information concerning stock acquisitions or proposed

acquisitions in three contexts: (1) the making of a cash tender offer

which, if successful, would result in the person or group making the

offer owning more than 10 percent of any class of equity security registered pursuant to Section 12 of the Act or issued by a closed-end investment company registered under the Investment Company Act of

1940; (2) acquisitions by any person or group of any such class of

equity security which would result in the ownership by such person

or group of more than 10 percent of any such class of security; and

(3) the purchase by a corporation of its outstanding equity securities.

The bill also provides that if a majority of the directors are to be

replaced in connection with an acquisition or tender offer, shareholders

must be provided with information comparable to that required by the

proxy rules in connection with an election of directors.v The bill also

authorizes the Commission to adopt rules with respect to solicitations

or recommendations to accept or reject tender offers and provides for

certain protections for persons who have tendered shares.

On July 30, 1968, the day after the bill became law, the Commission

adopted temporary rules and regulations to make its provisions

operative," and on August 30, 1968, certain amendments to these rules

were adopted." These temporary rules represent an important step

in the development of regulations to accomplish the full purpose of

11 See Rule 14f-l under the Exchange Act adopted pursuant to this Section.

.4 Secnrities Exchange Act Release No. 8370.

II Securities Exchange Act Release No. 8392.
TEITRTY-FOURTH ANNUAL REPORT 11

the legislation. On August 30, 1968, the Commission also published

notice of the proposed adoption of a new rule 10b-13 and invited

comments thereon." New section 14(d) (7) of the Exchange Act

provides, in substance, that where the terms of a tender offer are varied

before its expiration by increasing the consideration offered to securityholders, all securities purchased pursuant to the tender offer must be

purchased at the higher price, whether or not they were tendered

before the increase was announced. Proposed Rule 10b-13 would

extend this principle of affording equal treatment to all securityholders who sell their securities to a person making a tender offer

during the period of such offer, whether or not the sales are made

pursuant to the tender offer.

When the Senate Banking and Currency Committee was considering the legislation, it referred to an abuse which had occurred in connection with tender offers, known as "short tendering," but expressed

the view that the Commission had adequate power to deal with the

problem under the anti-fraud provisions of the Exchange Act. "Short

tendering" grew out of the fact that in connection with a tender offer

or a request or invitation for tenders of a particular security, it is

customarily provided that the security need not be deposited if a bank

or a member firm of a national securities exchange guarantees delivery.

Abuses in this practice arose in situations in which tenders were to be

accepted on a pro rata basis. Itwas learned that some brokers tendered

a greater number of units than were owned by them or by the customers on whose behalf the tender was made, with the result that a

disproportionately large number of their securities was accepted. To

deal with this practice, the Commission in :May 1968 adopted Rule

10b-4 which, in substance, prohibits a person from tendering any

security for his own account unless he owns the security and from

tendering or guaranteeing tender of a security on behalf of another

person unless the security is in his possession or he has reason to believe

that the other person owns the tendered security."

Exp~tingofRe~kationS~temenb

The Commission recently adopted new procedures in an effort to

cope with the problems resulting from the enormous increase in the

number of registration statements filed under the Securities Act of

1933.Inthe 1968fiscal year, 2,473 registration statements were filed for

processing by the Commission's Division of Corporation Finance, as

compared to 1,543 in 1967. For the first quarter of fiscal 1969, 840

registration statements were filed as compared to 507 for the like

period in 1968. There has also been a substantial increase in the

number of registration statements filed by issuers which never before

1. Securities Exchange Act Release No. 839L

1f Securities Exchange Act Release No. 8321 (May 28, 1968).
12 SECURITIES AND EXCHANGE COMMISSION

have been subjected to the registration process. Further, the number

of definitive proxy statements filed with the Commission has increased

from 2,661 in fiscal year 1964 to 5,244 in fiscal 1968. The backlog of

registration statements to be processed by the staff of the Division

of Corporation Finance has reached unprecedented proportions

because of the enormous increase in the number of filings, accompanied

at the same time by a reduction of personnel in the Division due to

budgetary cuts.

Accordingly, in November 1968 the Commission adopted an

expedited review procedure that is designed to reduce the backlog

without sacrificing the statutory standards of disclosure. Under this

procedure, a Division officermakes a cursory review of every registration statement as it is filed. Based on this review he determines (1)

that the statement is so deficient that it does not warrant further

review; (2) that only a cursory review will be made and that, upon

receipt of certain supplemental information, the staff will recommend

clearance; or (3) that the filing should be subject to the regular review

process.

With respect to categories (1) and (2), counsel for the company is

advised that the statutory burden of full disclosure is on the issuer, its

affiliates, the underwriter and experts, that as a matter of law this

burden cannot be shifted to the staff, and that the current work load is

such that the staff cannot undertake additional review and comment.

Disclosure Study

Throughout its history, the Commission has reviewed its practices,

procedures, and forms in the disclosure field in an effort to improve

disclosures and, at the same time, eliminate unnecessary requirements

where possible.

Inlate 1967 the Commission decided to supplement its usual review

of special problems inthe disclosure field with a broad internal study

of the disclosure process." Among the factors which seemed to make

such a study appropriate were the following:

(1) the need for an overall review of the actual workings of the

disclosure provisions of the Securities Act of 1933;

(2) the substantial expansion in the number of issuers subject to

the continuing disclosure requirements of the Securities Exchange Aot

of 1934 as a result of the Securities Acts Amendments of 1964.Because

of this expanded coverage, the potential effectiveness of the Exchange

Act as a disclosure tool is far greater than it used to 'be;

(3) the dramatio increase in the number of investors, many of them

new to the securities markets;

(4) the marked trend toward a professionalization of security

analysis; and

a See Securities Act Release No. 4885 (Nov. 29, 1967).
THIRTY-FOURTH ANNUAL REPORT 13

(5) technological developments which make it possible to put the

information in the Commission's files into the hands of the financial

community more cheaply and more expeditiously than was previously

the case.

Since the end of 1967, a group drawn from the Commission's

operating divisions and directed by Commissioner Francis :M:. Wheat

has been delving into almost every aspect of disclosure under the

Federal securities statutes. The Study Group has met and worked

closely with many in the financial community, in industry, in the legal

and accounting professions, and in academic life who are interested in,

knowledgeable about, or affected by the disclosure provisions of the

securities laws.

After the Study Group completes its examination of the field, it will

report to the full Commission. The Commission will then evaluate

the report and take such administrative action as it considers advisable. The Commission and the members of the Study Group hope

that the work of the group and of those outside the Commission who

have collaborated with it will in due time make for noteworthy improvements in the disclosure process, in investor protection, and in the

efficiency of the capital markets,

Additional Financial Disclosure by Diversified Companies

The increase in business acquisitions and mergers in recent years

has caused the Commission to consider the need for more detailed

reporting on the disparate operations of registrants which are broadly diversified and to study the problems involved in any extension of

the requirements in this area of financial reporting. Staff surveys

have indicated that there has been an increase in voluntary disclosures

by diversified companies in recent annual reports to stockholders.

During the 1968 fiscal year important studies by professional organizations and by individuals on the topic of financial reporting by diversified companies were completed. The Commission had authorized the

Chief Accountant to serve on an Advisory Committee, representing

various sectors of the accounting, financial and industrial communities, in connection with the comprehensive study and survey conducted

under the sponsorship of the Financial Executives Institute.

The studies and surveys indicated that an extension of the Commission's requirements was feasible. As a result, the staff undertook

to develop amendments of the rules to elicit additional information

from all companies affected which will be meaningful to investors but

not unduly burdensome to the registrants. InSeptember 1968, a proposal to revise the disclosure requirements under three Securities Act

registration forms was issued for public comment,"

:uJ Securities Act Release Nos. 4922 (September 4, 1968) and 4927 (September

23,1968).

S27-ti06-68-S
14 SECURITIES AND EXCHANGE COMMISSION

Under the proposed revisions registrants would be required to

state, for each of the 5 fiscal years preceding the filing of a registration statement, the approximate amount or percentage of sales or operating revenues and contribution to net income attributable to each

class of related or similar products or services, which contributed 10

percent or more to total sales and operating revenues, or to income

before income taxes and extraordinary items of income or expense,

during either of the last 2 fiscal years. If the contribution to net income cannot practicably be stated, the contribution most closely approaching net income or loss is to be indicated. The approximate

amount of assets employed in each such segment of the business is

to be reported, to the extent practicable. Comparable data on revenues

and earnings received from foreign sources, other than Canada, and

from government procurement or any single customer are also to be

reported.

Broker-Dealer Financial Reports

The Commission's staff and industry representatives have had extensive discussions during the past 2 years as to the best way to obtain

improved financial information concerning the securities industry and,

at the same time, avoid unnecessary burdens on broker-dealers, On the

basis of these discussions and after careful review of comments received on a proposed rule, the Commission on June 28,1968, adopted

Rule 1'7a-1O under the Securities Exchange Act, which requires exchange members and broker-dealers to file annual income and expense reports with the Commission or with a registered self-regulatory

organization which will transmit the reports to the Commission,"

The rule will become effective on January 1, 1969, and the first reports, which will be due in 19'70, will cover the calendar year 1969.

The form accompanying the rule contains three major parts, each

requiring income and expense data and information on the firm's

capital funds and financial condition. Broker-dealers are required

to complete only that part of the form which is appropriate to the

size and type of their business. Part I is a summary form; Part IT

requires more complete information; and Part TIl requires detailed

information. Many broker-dealers, including firms whose gross securities income was less than $20,000 during the calendar year, will

not have to complete any part of the form but will file only the introductory page of the form, showing their gross securities income and

certain nonfinancial information about their business.

A. major purpose of requiring the information is to provide comprehensive financial data on a continuing basis so that current information will be available to the Commission and to the self-regulatory

.. Securities Exchange A.ct Release No. 8347 (;rune 28, 1968).
THIRTY-FOURTH ANNUAL REPORT 15

agencies to assist them in meeting their respective responsibilities. It

is anticipated that the Commission and the self-regulatory agencies

will publish this information from time to time on an aggregate basis.

As discussed above, the securities markets and the securities industry are presently experiencing a period of rapid change. The interests of the industry as well as the public interest require that governmental regulation and industry self-regulation adjust to the pace

of such change and be aware of the effects of this change on the various types of firms engaged in the securities business. Itis also necessary that the securities industry remain healthy and profitable and

continue to assist the growth of our national economy. To meet these

needs, continuing and informed analysis of the operations of the markets and of persons and organizations serving the markets is required.

In the past, occasional useful studies have been authorized, but of

necessity these studies have been limited and prone to obsolescence.

The present informational needs of the Commission and the selfregulatory agencies demand a continuing flow of reliable and current

data concerning the operations of and changes in the industry.

Automation of Over-the-Counter Quotations

In 1966 the Board of Governors of the National Association of

Securities Dealers, Inc. (NASD) appointed a special Automation

Committee to investigate the feasibility of automated quotations in

the over-the-counter market. During the 1968 fiscal year, an independent management consulting firm, under the direction of the Automation Committee, conducted a study of the economic feasibility of such

a system. The findings of the consultant and detailed specifications

concerning a proposed NASD automated quotations system known as

"NASDAQ" were submitted to several private firms. Following consideration of cost, design, and operation proposals received from these

firms, the Automation Committee selected the firm which, in its opinion,

could best supply and operate the physical equipment for the system

under the direction and supervision of the NASD.

NASDAQ involves the use of electronic data processing equipment in combination with communications facilities in a three-level

system designed to meet the quotations needs of registered representatives, customers, order desks, and professional traders in the overthe-counter markets. Level I would provide a current representative

interdealer bid and ask price for any security registered in the system

for the information of registered representatives and customers of

retail firms. Level II would be designed for use by firm trading departments and would supply upon request a list of marketmakers,

together with their respective current bid and ask prices for each security registered in the system. Level ill will also be for use by trad-
16 SECURITIES AND EXCHANGE COMMISSION

ing departments, but will differ from Level II chiefly by providing input facilities allowing authorized marketmakers to enter, change

or update bid and ask prices. It is contemplated that NASDAQ will

be operational in 1970.

"Back Office" Problems

During fiscal year 1968, the volume of transactions in the securities

markets increased to a rate virtually double that which had been

anticipated by the securities industry. This unforeseen level of volume

has placed tremendous strains on the back officesof broker-dealers and

related clearance and transfer facilities. The result in many cases has

been delays and errors in the execution and settlement of transactions.

The existence of substantial numbers of transactions which remain

unsettled over considerable periods of time presents financial risks to

brokerage firms and their customers.

The Commission has stressed the responsibility of individual firms

and the self-regulatory agencies to deal with these problems and has

encouraged them to take all necessary measures. Various steps have

been taken. Among other things, trading hours on the securities markets have been curtailed to give back office staffs more time to process

backlogs. Numerous rule changes have been adopted by the exchanges

and the NASD. In addition, the self-regulatory agencies have been

examining broker-dealer firms both to identify individual problems

and to evaluate industry-wide conditions and have placed restrictions

on the activities of a number of firms.

The Commission has also taken direct action in the enforcement and

regulatory areas. The Commission staff has inspected over 300 brokerdealer firms in order to ascertain the current status of their books and

records and back office operations. Where violations have been found,

appropriate enforcement action has been taken including the institution of proceedings and the imposition of restrictions,"

The Commission has also issued statements cautioning brokers and

dealers that they must comply with applicable requirements regarding maintenance of current books and records, financial responsibility

and prompt delivery of securities and settlement of transactions." In

this connection the Commission stated that a dealer who sells a security

to a customer or a broker who buys a security for a customer violates

the anti-fraud provisions of the securities laws if he has reason to

believe that he will not be able to deliver the security to the customer

promptly. The Commission also warned broker-dealers that it is a

21 See, e.g., L. D. Sherman & 00., Inc., Securities Exchange Act Release No.

8354 (July 12, 1968) and John 8ackville-Pickard, Securities Exchange Act Release No. 8433 (October 24, 1968).

.. Securities Exchange Act Release Nos. 8385 (June 17, 1968) and 8368 (July

29.1968).
TEURTY-FOURTH ANNUAL REPORT 17

violation of applicable anti-fraud provisions for a broker-dealer ,to

accept or execute any order for the purchase or sale of a security or to

induce or attempt to induce such purchase or sale, if he does not have

the personnel and facilities to enable him to promptly execute and

consummate all of his securities transactions. It cautioned brokerdealers with back office problems to limit their activities so as to eliminate these problems.

The Commission presently has two proposed rule changes under

consideration. The first would amend the Commission's net capital

rule by imposing a graduated percentage deduction from market value

of securities in the "failed to deliver" accounts of broker-dealers,"

This would provide an additional margin of safety for this category

of receivables. The second change would make it unlawful for an issuer with publicly traded securities to fail to provide appropriate

facilities for the prompt transfer of certificates."

The measures taken to date to cope with back office problems have

been essentially of an emergency and short-term character. Long-term

measures to improve the capacity of the industry to handle the increasing volume of transactions are being formulated by the selfregulatory agencies and the industry with the encouragement of the

Commission .

.. Securities Exchange Act Release No. 8405 (Se-ptember 13, 1968)

.. Securities Exchange Act Release No. 8413 (September 25, 1968).

•
PARTll

FULL DISCLOSURE OF INFORMATION ABOUT THE

ISSUERS OF SECURITIES

One basic purpose of the Federal securities laws administered by

the Commission, in particular the Securities Act of 1933 and the Securities Exchange Act of 1934, is to provide disclosure of financial and

other information about publicly held companies and those companies

seeking to raise capital through the public offering of their securities,

so as to enable public investors to evaluate the securities of these companies on an informed and realistic basis. To this end, the Securities

Act requires a company proposing to offer its securities to the public

to file a registration statement with the Commission disclosing prescribed categories of financial and other information and further requires that in the offer and sale of the securities investors be furnished

a prospectus containing the most significant information set forth in

the registration statement. The Securities Exchange Act, which deals

in large part with trading in securities already outstanding, requires

companies whose securities are listed on a national securities exchange

and other companies in whose securities, traded over-the-counter, there

is a substantial public interest to register those securities with the Commission and to file annual and other periodic reports which are designed to keep the information in the Exchange Act registration

statement current. That Act also requires disclosure of material information to holders of registered securities whose proxies are solicited for the election of directors or the approval of corporate action,

and requires "insiders" of companies whose equity securities are registered to report their holdings of and transactions in all equity securities of the company with which they are affiliated.

The scope of disclosure was further extended by the recently enacted

"take-over-bid" legislation 1 which, as implemented by Commission

rules, affords disclosure to investors in connection with purchases of

substantial blocks of stock of publicly held corporations either through

cash tender offers or private or open market purchases and in connection with repurchases by corporations of their own stock,"

1Public Law 90-439 (July 29,1968).

This legislation and the implementing rules adopted by the Commission are

discussed at pp. 9-11, 8upra.

18

•
THIRTY-FOURTH ANNUAL REPORT 19

A. DISCLOSURE IN CONNECTION WITH PUBLIC OFFERINGS

Disclosure under the Securities Act with respect to securities to be

offered for public sale, either by an issuing company or a person in a

control relationship to such company, is obtained through a two-step

process: (1) by requiring the issuer to file with the Commission a

registration statement containing certain required financial and other

information; and (2) by requiring that a prospectus which is a part

of the registration statement and contains the more significant data set

forth in that statement, be furnished to investors so as to enable them

to evaluate the securities and make an informed investment decision.

The registration statement is available for public inspection as soon

as it is filed. Although the securities may be offered for sale upon filing

of the statement under prescribed limitations, actual sales may not

be made until the statement has become effective. The Commission

has no authority to pass on the merits of the securities to be offered or

the fairness of the terms of distribution. In fact, the Act makes it

unlawful to represent to investors that the Commission has approved

or otherwise passed on the merits of registered securities.

Type of Information Included in Registration Statement

Generally speaking, a registration statement relating to securities

issued by a corporation or other private issuer must contain the information specified in Schedule A of the Act, while a statement relating

to securities issued by a foreign government must include the information specified in Schedule B. The Act empowers the Commission to classify issues, issuers and prospectuses, to prescribe appropriate forms, and to increase, or in certain instances vary or

diminish, the particular items of information required to be disclosed

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

protection of investors. To facilitate the registration of securities by

different types of issuing companies, the Commission has prepared

special registration forms which vary in their disclosure requirements

so as to provide maximum disclosure of the essential facts pertinent

in a given type of case while at the same time reducing the burden and

expense of compliance with the law.

In general, the registration statement of an issuer other than a

foreign government must disclose such matters as the names of persons who participate in the management or control of the issuer's

business; the security holdings and remuneration of such persons; the

general character of the business, its capital structure, past history and

earnings; underwriters' commissions; payments to promoters made

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

and principal stockholders in material transactions with the issuer;

pending legal proceedings; and the purposes to which the proceeds
20 SECURITIES AND EXCHANGE COMMISSION

of the offering are to be applied, and must include financial statements

certified by an independent accountant. The registration statement of a

foreign government must contain information concerning the purposes for which the proceeds of the offering are to be used, the natural

and industrial resources of the issuer, its revenues, obligations and

expenses, the underwriting and distribution of the securities being

registered, and other material matters, but need not contain certified

financial statements.

Adoption of Short Form lor Registration of Securities 01 Certain Issuers

Effective December 31, 1967, the Commission adopted a new short

form for registration, designated Form 8-7.3 The form is for the registration of securities to be offered for cash by issuers which meet the

following requirements, among others: they must have a class of securities either listed on an exchange or registered under Section 12(g)

of the Exchange Act, must have complied with the reporting and proxy

requirements of that Act for at least 5 years and must have long records

of earnings and stability of management and business. The form represents a closer integration of the requirements of the Securities Act and

the Securities Exchange Act. During the fiscal year, 81 registration

statements were filed on Form 8-7.

Form 8-7 is in the nature of an experiment. The Commission will

carefully watch and review its operation in conjunction with the reporting and proxy requirements to determine whether the omission of

information in the prospectus, particularly with respect to the identity,

remuneration and other perquisites received by management and their

interest in transactions with the issuer, carries out the statutory objectives of providing investors with sufficient information to enable them

to make an informed judgment about the securities offered. Should experience indicate that such action is necessary or desirable, the Commission may amend or rescind Form S-7, or change the conditions for

its use so as to limit or expand the types of issuers to which the form is

available.

The Commission also amended paragraph (a) of Rule 174 under

the Securities Act so that securities registered on Form 8-7 will be

exempt from the prospectus delivery requirements of the Act. Under

this amendment a dealer is not required to deliver a prospectus to his

customer if he is no longer acting as an underwriter of the offering or

is not engaged in a transaction involving his participation in the

offering.

Proposed Guides lor Preparation and Filing of Registration Statements

In1964, the Commission published certain guides for the preparation and filing of registration statements under the Securities Act.'

Securities Act Release No. 4886 (November 29,1967).

Securities Act Release No. 4666 (February 7, 1964).

•

•
THIRTY-FOURTH ANNUAL REPORT 21

During the 1968 fiscal year the Commission issued a release containing

the existing guides, suggested modifications of those guides and proposed additional guides, and requested interested parties to comment

thereon prior to publication of the guides in definitive form,"

The published guides and those proposed for publication represent

policies and practices presently followed by the Commission's Division

of Corporation Finance. They are not rules of the Commission and

were not published as bearing the Commission's official approval, although some may later be incorporated in rules or forms after appropriate publication and opportunity for comment. The guides do not

purport to furnish complete criteria for the preparation of registration statements.

The staff is in the process of preparing guides describing the practices and policies followed by the Commission's Division of Corporate

Regulation in the examination and processing of registration statements .filed by management investment companies on Form N8B-l

under the Investment Company Act. It is expected that these guides

will be published for comment in the near future and that they will

be the first in a series of guides which will ultimately include Forms

S-4, S-5 and S-6 under the 1933Act.

Amendments to Rules Relating to Disclosure Detrimental to National Defense

During the fiscal year, the Commission adopted certain amendments

to Rule 171 under the Securities Act, Rule 0-6 under the Securities

Exchange Act and Rule 105 under the Public Utility Holding Company Act of 1935 relating to the disclosure of documents or information detrimental to the national defense or foreign policy." The amendments bring those rules into harmony with the recently adopted Public

Information Act and specify the procedure to be followed by registrants with respect to classified material.

Adoption of Rules Relating to Industrial Revenue Bonds

During the fiscal year, the Commission invited public comments on a

proposed Rule 131 under the Securities Act and a proposed Rule 3b-5

under the Securities Exhange Act relating to industrial revenue

bonds,' and shortly after the close of the fiscal year, the rules were

adopted."

Industrial revenue bonds generally are instruments issued in the

name of a government or its instrumentality to finance the acquisition

of a revenue producing facility which is leased to a private company.

Usually the facility has been specially constructed for that company.

Securities Act Release No. 4890 (December 20, 1967). The staff is reviewing

tile many comments it has received on the proposed guides.

Securities Act Release No. 4906 (May 14, 1968).

, Securities Act Release No. 4896 (February 1, 1968.)

Securities Act Release No. 4921 (August 28, 1968.)

•

•

•
22 SECURITIES AND EXCHANGE COMMISSION

Principal and interest on the bonds are payable from the proceeds of

the lease, and the bonds are not backed by the taxing power and general

credit of the governmental body in whose name they are issued. Thus,

the typical industrial revenue bond financing plan represents a financing by a private company. Accordingly, investors should be given information concerning the business, prior experience, fiscal responsibilities and earnings of the company that has leased the facility, as well

as the terms and conditions of the lease arrangement, in order to assess

the worth of such investment. The municipality or other governmental

unit usually has no significant obligation under the bond, except to the

extent of applying lease payments received from the private company

to the payment of principal and interest. The investor cannot look to

the municipality for interest payments or repayment of the principal;

he can look only to the possibility of success or failure of the private

company. Inthese circumstances, the investor is offered an interest in

an obligation of the private company which is a "security" within the

meaning of the securities acts and should have the benefit of the disclosures required by the Securities Act and the Securities Exchange

Act when applicable.

Accordingly, the new rules identify the interest in the obligation

of the private company as a separate security issued by such company and, absent an exemption, such securities are subject to the

registration and prospectus delivery requirements of the Securities

Act and the various provisions of the Exchange Act. The rules do not

operate to terminate the exemption for governmental and municipal

bonds provided in the securities acts but only relate to that part of

the obligation of the bonds as to which the real obligor is a business

enterprise. The rules specifically exclude bonds isssued in connection

with a public project or facility owned and operated by or on behalf

of and under the control of a governmental unit.

The new rules apply to industrial revenue bonds sold after December 31, 1968.9

Joint Release Relating to Real Estate Syndications

During the fiscal year, the Commission and the securities authorities

of Maryland, Virginia and the District of Columbia issued a joint

release for the guidance of the industry and the bar respecting statutory requirements with respect to real estate syndioations.w This

action was responsive to the fact that newspaper advertisements by

various persons, corporations, partnerships, trusts and unincorporated

organizations had offered for sale interests in real estate syndications,

usually in the form of limited partnership interests or interests in

joint or profit sharing ventures, which had not been registered with

the appropriate regulatory bodies. Such offers and subsequent sales

• See Securities Act Release No. 4923 (September 16,1968) •

• 0 Securities Act Release No. 4877 (August 8,1967).
THIRTY-FOURTH ANNUAL REPORT 23

had been prevalent especially in the District of Columbia, Maryland

and Virginia. These transactions raised important questions under

the registration requirements and anti-fraud provisions of the Federal

securities laws and the laws of these States and of the District of

Columbia. The release emphasized that the interests in question were

securities under Federal law and under the laws of these three jurisdictions and it outlined the requirements of the relevant statutory

provisions.

Amendment of Rule Relating to Contents of Prospectus Used Mter Nine Months

Rule 427 under the Securities Act permits the omission from any

prospectus used more than 9 months after the effecti ve date of the

registration statement of any information previously required to be

contained in the prospectus insofar as later information covering the

same subjects, as of a date not more than 16 months prior to the use

of the prospectus, is contained therein. Where securities have been

registered on Form S-l but at the time of filing a prospectus as a

part of a post-effective amendment the registrant would be entitled

to register the securities on another form, such as Form S-8 or S-9,

the Commission has permitted the prospectus to be prepared in accordance with the requirements of such other form. In order to make

this practice generally known to all registrants and to make it applicable to forms, other than Forms S-8 and 8-9, which may be adopted

from time to time, Rule 427 was amended during the fiscal year to

incorporate such practice.v

Adoption of Rule Relating to Registration by Certain Snccessor Issuers

During the fiscal year the Commission adopted Rule 414 under the

Securities Act relating to registration of securities by certain successor issuers," The new rule provides a means whereby an offering of

registered securities by a predecessor company may be continued by its

successor without repeating the full process of registration where the

purpose of the succession is merely to change the state of incorporation

of the registrant. The rule provides that the registration statement

of the predecessor shall be deemed to be the registration statement of

the successor where certain conditions are met, including the filing of

an amendment to the registration statement by the successor expressly

adopting the statement as its own for all purposes of the Act and the

Securities Exchange Act.

Amendment of "No-Sale" Rule

Rule 133 under the Securities Act provides that, solely for the purpose of the registration requirements of Section 5 of the Act, the submission to stockholders of a corporation, under certain circumstances,

of a proposed merger, consolidation, reclassification of securities or

U Securities Act Release No. 4884 (November 9,1961)

.. Securities Act Release No. 4894 (January 24,1968).

•
24 SECURITIES AND EXCHANGE COMMISSION

transfer of assets does not constitute an offer to such stockholders of

the securities to be issued to them in the transaction. Where a transaction involves the transfer of assets to a corporation in consideration

of its own securities, the rule provides that the consideration may consist of any kind of securities, whether equity or debt securities. However, where the assets are to be transferred to a subsidiary of the issuer

of the securities involved in the transaction, the consideration previously could consist only of voting stock of such issuer. The rule was

amended during the year so that it will apply in cases where the assets

are to be transferred to a subsidiary of the issuer in consideration of

any securities of the issuer,"

Staff Examination of Registration Statements

Registration statements are examined by the Commission's staff for

compliance with the standards of adequate and accurate disclosure.

This examination is primarily the responsibility of the Division of

Corporation Finance. Statements filed by investment companies registered under the Investment Company Act of 1940 are examined by

the Division of Corporate Regulation. If it appears that a statement

does not conform in material respects with the applicable requirements, the issuing company is usually notified by a letter of comment

and is afforded an opportunity to file correcting or clarifying amendments. The Commission also has the power, after notice and opportunity for hearing, to issue a "stop-order" suspending the effectiveness of a registration statement if it finds that material representations are misleading, inaccurate or incomplete. In certain instances,

such as where the deficiencies in a registration statement appear to

stem from careless disregard of applicable requirements or from a

deliberate attempt to conceal or mislead, a letter of comment is not

sent and the Commission either conducts an investigation to determine whether "stop-order" proceedings should be instituted or immediately institutes such proceedings. The exercise of the "stop-order"

power during fiscal year 1968 is discussed on page 30. As to the new

procedures adopted in November 1968 to expedite the processing of

registration statements, see pages 11-12.

Time Required To Complete Registration

The Commission's staff endeavors to complete its examination of

registration statements in as short a time as possible. The Act provides

that a registration statement shall become effective on the 20th day

after it is filed (or on the 20th day after the filing of any amendment

thereto). Since most registration statements require one or more

amendments, they usually do not become effective until some time

after the original 20-day period. The period between filing and effective date is intended to afford investors an opportunity to become

.. Securities Act Release No. 4892 (January 9, 1968).
THIRTY-FOURTH ANNUAL REPORT 25

familiar with the proposed offering through the dissemination of the

preliminary form of prospectus. The Commission can accelerate the

effective date so as to shorten the 20-day waiting period, taking into account the adequacy of the information respecting the issuer theretofore available to the public, the facility with which the facts about the

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

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

common situations in which the Commission considers that the statute

generally requires it to deny acceleration.

The median number of calendar days which elapsed from the date

of the original filing to the effective date with respect to the 2,131

registration statements that became effective during the 1968 fiscal

year 14 was 44, compared with 36 days for 1,460 registration statements in fiscal year 1967 and 38 days for 1,280registration statements

in fiscal year 1966.

The following table shows by months during the 1968fiscal year the

number of registration statements which became effective, and the

number of calendar days elapsed during the registration process for

the median registration statement.

Time in registration under the Securities Act of 1933 by month« during the fisca:

year ended June 30,1968

NUMBER OF CALENDAR DAYS

Number of Total Number of Total registra- number registra- number

Months tlon state- of days Months tlon state- of days

ments in regis- ments In regis- effective. tratlon effective. trsnon

1967 1968

July ______________________ 153 35 January __________________ 172 49 August. __________________ 177 38 February _________________ 134 50 September ________________ 133 38 March ____________________ 161 50 October __________________ 170 37 AprIL ____________________ 229 43 November ________________ 152 40 May ______________________ 279 48 December ________________ 179 47 June ______________________ 192 50 FIscal 1968 for median effective registration

statement. _______ 2,131 44

See n. 14 to text,lUpTa.

Statistics Regarding Registration Statements Filed

During fiscal year 1968 the number of registration statements

filed as well as the dollar amounts of the offerings involved soared

to record levels. A total of 2,906 registration statements was filed for

offerings aggregating $54.0 billion. Compared with 1967 figures of

1,836 statements totalling $36.2 billion, this represented an increase

of 58.3 percent in the number of statements filed and 49.2 percent in

the dollar amount involved.

1< This figure excludes 285 amendments filed by investment companies pursuant

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

registration of additional securities through amendment to an effective registration statement rather than the filing of a new registration statement.

•
26 SECURITIES AND EXCHANGE COMMISSION

Of the 2,906 registration statements filed in the 1968 fiscal year,

893, or 30.7,percent, were filed by companies that had not previously

filed registration statements under the Securities Act. Comparable

figures for the 1967 and 1966 fiscal years were 440, or 24 percent, and

422, or 24.8 percent, respectively.

From the effective date of the Securities Act to June 30, 1968, a

cunntlative total of 31,861registration statements has been filed under

the Act by 13,398 different issuers covering proposed offerings of

securities aggregating over $399.1 billion.

Particulars regarding the disposition of all registration statements

filed under the Act to June 30, 1968,are summarized in the following

table:

Number and disposition of registration statements filed

I Prior to

I

1uly 1,1967 Total June

July 1,1967 to June 30, 30,1968

1968

Registration statements: Filed ___________________________________ 28,955 (a)2, 906 31,861

Disposition: Effective (net) ____________________________________________25,155 (b) 2,406 (c) 27,540 Under stop or refusal order _______________________________ Wlthdrewn 229 2 (d) 229 _______________________________________________ 3,120 148 3,268

~:~~~:~ ~~: gg; l~==:=:=:=:=:=:=:::=====:::=:======:

451 ._---_.-._---- -----------824 -------------- -------------- Total 28,955 __4 31,861

Aggregate dollar amount: As filed (In billions) ____________________________________ $345.1 $54. 0 $399.1 As effective (In bUilOUS)_____________________________________ $331.3 $54.0 $386.3

(a) Includes 290 registration statements covering proposed offerings totalling $12.6 b1llion filed by investment companies under Section 24(e)(1) of the Investment Company Act of 1940which permits regis. tration by amendment to a previously effective registration statement. (b) Excludes 10 registration statements that became effective during the year but were subsequently withdrawn; these statements are included In the 148statements withdrawn during the year. (c) Excludes 21 registration statements effective prior to July I, 1967which were withdrawn during the

year; these statements are reflected under "wtthdrawn."

(d) Excludes one registration statement effective during the year on which a stop order was placed and

lifted during the year and one registration statement withdrawn during the year on which a stop order was placed prior to July I, 1967and lifted during the year; these two statements are reflected under "effective"

and "withdrewn," respectively.

As reflected in the above table, 148 registration statements were

withdrawn during the 1968 fiscal year. The reasons assigned by the

various registrants for requesting withdrawal were as follows:

Number of Percent

Reason for registrant's withdrawal request statements of total

withdrawn withdrawn

1. Withdrawal requested after receipt of the staff's letter of comment, ________ 9 6.1

2. Registrant was advised that statement should be withdrawn or stop order

3. cg=~~~:: :l~~~==========:==:::=========::::::::::::::::

7 4.7 90 60.8 4. Change Inmarket condltlous _____________________________________________ 26 17.6

6. Registrant was unable to negotiate acceptable agreement with under- writer ___________________________________________________________________ 3 2.0 6. WllIfile on proper form_________________________________________________ 1 .7 7. Will file new registration statement , _____________________________________ 12 8.1

TotaL _________________________________________________________________148 100.0

--__________________

_________________ -_____________---___________-_____ ___________

-- ___
THIRTY-FOURTH ANNUAL REPORT 27

Statistics Regarding Securities Registered

During the fiscal year 1968, a total of 2,417 registrations of securities in the amount of $54.1 billion became effective under the Securities Act of 1933.16 The number of statements and the dollar amount

of registrations were the largest on record and reflected the general

expansion in the economy during the period and the increased need

for funds by business. The chart on page 28 shows the number and

dollar amounts of registrations from 1935 to 1968.

The figures for 1968 include all registrations which became effective

including secondary distributions and securities registered for other

than cash sale, such as issues exchanged for other securities and securities reserved for conversion. Of the dollar amount of securities registered in 1968, 69 percent was for the account of the issuer for cash sale,

25 percent for the account of the issuer for other than cash sale, and 6

percent for the account of others.

The following table compares the volume of securities registered

for the account of the issuer and for the account of others for the

past 3 fiscal years:

For account of Issuer for cash sale

For sooount of Issuer. other than cash sale For account of other than Issuer

TotaL

(Mlaion! of dollar!)

1968 I 1967 1966

37, 2691 27,950 2.:1,723

13,530 4, 576 2,422

3,137 1,692 1,964

53,9361 34,218 1 30,109 I

This flgare excludes lease obllgatloDB relating to Industrllll revenue bonds of $140 million which were

registered during the 1968 fIsoa1 year.

The amount of securities offered for cash for the account of the

issuer, approximately $37 billion, represented an increase of $9 billion

or 34 percent over the previous year. Registration of new common stock

issues aggregated $22.1 billion, an increase of $7 billion over the

previous year, $4.4 billion of which reflects an increase of registrations

of investment company issues which aggregated $13.8 billion during

fiscal 1968. Registration of new bonds, notes and debentures increased

by $1.7 billion over the previous year and amounted to $14 billion.

Preferred stock issues aggregated $1.1 billion, twice the amount for the

previous fiscal year, and the largest amount on record. Appendix Table

1 shows the number of statements which became effective and total

:Ill The figure of 2,417 excludes 4 registration statements which became effective during the year but before competitive bids were received, and as to which

amendments disclosing the accepted terms, including the offering price, were

not filed during the year or no bids were received. It includes 5 statements effective in fiscal year 1967, as to which such amendments were not filed until fiscal

yeat' 1968.

_

_

_

_ •

•
Dollars 811110ns

56

28

52

48

44

40

36

SECURITIES AND EXCHANGE COMMISSION

SECURITIES EFFECTIVELY REGISTERED WITH S.E.C.

1935-1968

32

28

24

20

16

12

8

4

o

20

NUMBER QF REGISTRATIONS

15

10

5

o

1935 40 45 50

(FlScol Yeors)

55 60 65

05-4737 18-681
THIRTY-FOURTH ANNUAL REPORT 29

amounts registered for each of the fiscal years 1935 through 1968, and

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

cash sale on behalf of the issuer during those years. More detailed information for 1968 is given in Appendix Table 2.

Corporate issues intended for immediate cash sale totaled $16.4

billion, an increase of $2.9 billion over the previous year. Manufacturing companies registered the highest volume of new issues of the corporate group, $6.4 billion, approximately $900 million more than in the

previous year. Issues of electric, gas and water companies were next

highest in volume, totaling $4.9 billion, $1.4 billion above the amount

for this group in 1967. Among the other industry groups, communication amounted to $1.7 billion, financial and real estate to $1.0 billion,

while extractive, transportation, and other miscellaneous issues

amounted to $2.4 billion. Registration of foreign government issues

scheduled for immediate sale totaled $1.2 billion as compared to $680

million in the preceding year.

The following table shows the distribution by industry of issues

registered during the last 3 fiscal years for the account of issuers to

be offered for cash sale:

nt

al

0.8

.5

1.8

.7

5.1

3.9

1.4

34.1

1.9

6.0

640

000

1968 In Percent 1967ln Percent 1966 In Perce

mtlllons of total mllllons of total mUllons of tot

--- --- --- --- Issues offered for Immediate sale: Cor- porate: Manufacturlng 6,387 17.1 5,490 196 2,787 1 Extractlve ____________________________ 416 1 1 203 .7 130 Electrto'J8S and water _______________ 4,868 13.1 3,421 12.2 3,028 1 Transpo atlon 362 1.0 1,252 4.5 174 Communlcatlon ______________________ 1,681 45 2,143 7.7 1,301 Financial and real estate ______________ 1,005 2.7 530 1.9 1,009 Commercral and other ________________ 1,644 44 403 1 6 350

Total _______________________________ --- --- --- --- --- 16,363 43.9 13,441 48.1 8,779 Foreign governmenL ___________________ 1,157 3.1 684 2.4 482

--- --- --- --- --- Total for immediate sale ____________ 17,520 47.0 14, 124 505 9,262 3 Issues offered over an extended period ____ 19,749 53.0 13,826 49.5 16,462

--- --- --- --- --- Total for cash sale for account of Issuer 37,269 100.0 27,950 100.0 25,723 1

Of the funds raised from the cash sale of corporate securities for

the account of issuers in 1968, 66 percent ($10.6 billion) was designated

for plant and equipment expenditures and 23 percent ($3.7 billion)

for working capital. The balance was to be used for retirement of

securities and for other purposes including purchase of securities and

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

Registration of issues to be offered over an extended period amounted

to $19.7 billion, an increase of approximately $6 billion over the

327-506-68--4

_________• ______________

________• ______________

• _____________________• ______
30 SECURITIES AND EXCHANGE COMMISSION

amount for 1967, and the largest amount on record. These issues are

classified below:

(fnmfll/Qm)

1968 1967 1966

Investment company Issues:

$11,851 $7,014 $9,254 ~:::~:::~~ro~~~d~::: ::::::::::::::::::::::::::::::: 119 498 105 Unit Investment trust ______________________________________ . ___ 1,562 1,768 2,8-35 Face-amount certiflcates ________________________________________ 213 158 241

Total Investment companies __________________________________13,804 9,438 12,434

Employee saving rclnncertIficates ___________________________________ 1,461 1,357 1,015 Securities ror emp oyees stock option plans __________________________ 3,361 2,609 2,326 Other, including stock for warrants and options _____________________ 1,122 422 686

Total . 19,749 13,826 16,462

Stop Order Proceedings

Section 8( d) of the Securities Act of 1933 gives the Commission the

power, after notice and opportunity for hearing, to issue a stop order

':suspending" the effectiveness of a registration statement which includes an untrue statement of a material fact or omits to state any

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

statements therein not misleading. The effect of a stop order, which

may be issued even after the sale of securities has begun, is to bar

distribution of the securities so long as the order remains in effect.

Although losses which may have been suffered by investors before

issuance of the order are not restored to them by a stop order, the

Commission's decision and the evidence on which it is based may serve

to put them on notice of their rights and aid in their own recovery

suits. As provided by the Act, a stop order is lifted when the registration statement has been amended to correct the deficiencies.

As of the beginning of the fiscal year, four stop-order proceedings

were pending. During the year these proceedings were terminated, two

of them through the issuance of stop orders 16 and two by permitting

withdrawal of the registration statement, subject to certain conditions,

pursuant to offers of settlement accepted by the Commission." One

of the stop orders was later lifted upon the filing of an amendment

to the registration statement. During the fiscal year one new stop order

proceeding was instituted.

1.Panacolor, Inc., Securities Act Release No. 4881 (September 20, 1967) and

No-rth American Petroleum. Corporation, Securities Act Release No. 4887 (December 5, 1967).

11 Haason Ohio Oil Management Co-mpanll, Securities Act Release No. 4872

(July 18, 1967) and Ventura Oil Co-mpanll, Securities Act Release No. 4874

(July 19, 19(7).

_______•________________________________________________
THIRTY-FOURTH ANNUAL REPORT 31

Examinations and Investigations

The Commission is authorized by Section 8(e) of the Act to make

an examination in order to determine whether a stop order proceeding

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

is empowered to examine witnesses and require the production of

pertinent documents. The Commission is also authorized by Section

20(a) of the Act to make an investigation to determine whether any

provision of the Act or any rule or regulation prescribed thereunder

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

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

to state any material fact. The following tabulation shows the number

of such examinations and investigations which were in progress during

the year:

Pending at beginning of fiscal year_________________________ 33

Initiated during fiscal year________________________________ 17

50

Closed during fiscal year_________________________________________ 22

Pending at close of fiscal year______________________________________ 28

EXEMPTION FRO~I REGISTRATION OF SMALL ISSUES

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

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

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

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

registration provisions of the Act with respect to such securities is not

necessary in the public interest and for the protection of investors by

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

public offering. The statute imposes a maximum limitation of $300,000

upon the size of the issues which may be exempted by the Commission

in the exercise of this power.

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

Rule 234 : Exemption of first lien notes.

Rule 235: Exemption of securities of cooperative housing corporations.

Rule 236: Exemption of shares offered in connection with certain

transactions.

Regulation .A: General exemption for U.S. and Canadian issues up to

$300,000.

Regulation B: Exemption for fractional nndivided interests in oil or gas

rights up to $100,000.

Regulation F: Exemption for assessments on assessable stock and for assessable stock offered or sold to realize the amount of asessment thereon.

Under Section 3 (c) of the Securities Act, which was added by

Section 307(a) of the Small Business Investment Act of 1958, the
32 SECURITIES AND EXCHANGE COMMISSION

Commission is authorized to adopt rules and regulations exempting

securities issued by a small business investment company under the

Small Business Investment Act. Acting pursuant to this authority,

the Commission has adopted Regulation E, which is described below.

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

does not carry any exemption from the provisions of the Act prohibiting fraudulent conduct in the offer or sale of securities and imposing

civil liability or criminal responsibilty for such conduct.

Exempt Offerings Under Regulation A

Regulation A permits a company to obtain needed capital not in

excess of $300,000 (including underwriting commissions) in anyone

year from a public offering of its securities without registration, provided specified conditions are met. These include the filing of a notification supplying basic information about the company with the

Regional Officeof the Commission in the region in which the company

has its principal place of business, and the filing and use in the offering

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

or used in connection with an offering not in excess of $50,000 by a

company with earnings in one of the last 2 years.

During the 1968fiscal year, 515notifications were filed under Regulation A, covering proposed offerings of $112,318,744,compared with 383

notifications covering proposed offerings of $74,761,963 in the 1967

fiscal year.

The following table sets forth various features of the Regulation A

offerings during the past 3 fiscal years:

Offerings under Regulation A

Fiscal year

1068 1967 1068

Size:$100,000 or less 102 101 128 Over $100,000 but not over $200,000 97 92 94 Over $200,000 but not over $300,000 316 100 188

TotaL_. --- 515 383 410

Underwriters: Used

Not 144 57 58 used 371 326 352

Offerors: Issuing companies. 486 360 386 Stockholders 22 17 13

Issuers and stockholders Jolntly 7 6 11

Reports of Sales.-Regulation A provides that within 30 days after

the end of each 6-month period following the date of the original

offering circular required by Rule 256, or the statement required by

Rule 257, the issuer or other person for whose account the securities

are offered must file a report of sales containing specified information.

--- ---

_________________• ______________________________________

____________________________________

____________________________________

--- ___________________________________• ________________________

---

---

--- --- _________________________________________________________________ ____________________________________• ________________________

--- --- --- ___________________________________________________ __• _______________________________________________________

_______________________________________
THIRTY-FOURTH ANNUAL REPORT 33

A final report must be filed upon completion or termination of the

offering.

During the fiscal year 1968, 724 reports of sales were filed reporting

aggregate sales of $40,366,326.

Suspensionof Exemption.- The Commmission may suspend an exemption under Regulation A. where, in general, the exemption is

sought for securities for which the regulation provides no exemption or

where the offering is not made in accordance with the terms and conditions of the regulation or with prescribed disclosure standards. Following the issuance of a temporary suspension order by the Commission, the respondents may request a hearing to determine whether the

temporary suspension should be vacated or made permanent. If no

hearing is requested within 30 days after the entry of the temporary

suspension order and none is ordered by the Commission on its own

motion, the temporary suspension order becomes permanent.

During the 1968 fiscal year, temporary suspension orders were issued

in five cases, which, added to the four cases pending at the beginning

of the fiscal year, resulted in a total of nine cases for disposition. Of

these, the temporary suspension order was vacated in one case and

became permanent in six cases: in three by lapse of time, in two by

withdrawal of the request for hearing, and in one on the basis of an

offer of settlement. Two cases were pending at the end of the fiscal

year.

Exempt Offerings Under Regulation B

During the fiscal year ended June 30, 1968,453 offering sheets and

451 amendments thereto were filed pursuant to Regulation B and were

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

Corporation Finance. During the 1967 and 1966 fiscal years, 353 and

235 offering sheets, respectively, were filed. The following table indicates the nature and number of Commission orders issued in connection

with such filings during the fiscal years 1966-68. The balance of the

offering sheets filed became effective without order.

Action taken on offering sheets filed under Regulation B

FIscal years

1968 1967 1966

--------------------1---------

Temporary suspenslon orders (under RuIe 340(a» Orders terminating proceeding after amendment

Orders terminating elIectiveness of olIerlng sheet

Orders fixing elIectlve date of amendment (no proceeding pending)

Orders consenting to withdrawal of otferlng sheet and terminating pro- ceeding

Orders consenting to withdrawal of otferlng sheet (no proceeding pending),

10

6

o 344

o

8

16

10

1

207

o

14

14

10

o 203

o

12

Total number of orders -;ggj-----;ag

_

_

_

_

_

• • ~
34 SECURITIES AND EXCHANGE COMMISSION

Reports of SaIes.-The Commission requires persons who make

offerings under Regulation B to file reports of the actual sales made

pursuant to that regulation. The purpose of these reports is to aid the

Commission in determining whether violations of laws have occurred

in the marketing of such securities. The following table shows the

number of sales reports filed under Regulation B during the past 3

fiscal years and the aggregate dollar amount of sales during each

of such fiscal years.

Reports of sales under Regulation B

1968 1967 1966

Number of sales reports filed__________________________________ 5,863 3,978 3,301 Aggregate dollar amount of sales reported _____________________$7,034, 723 $3,986,187 $2,998,583

Exempt Offerings Under Regulation E

Regulation E provides a conditional exemption from registration

under the Securities Act for securities of small business investment

companies registered under the Investment Company Act of 1940

which are licensed under the Small Business Investment Act of 1958

or which have received the preliminary approval of the Small Business Administration and have been notified by the Administration

that they may submit an application for such a license.

The regulation, which is substantially similar to the general exemption provided by Regulation A, requires the filing of a notification

with the Commission and, except in the case of offerings not in excess of

$50,000, the filing and use of an offering circular containing certain

specified information.

No notifica tions were filed under Regulation E during the 1968 fiscal

year.

Exempt Offerings Under Regulation F

Regulation F provides an exemption for assessments levied upon

assessable stock and for delinquent assessment sales in amounts not

exceeding $300,000 in anyone year. It requires the filing of a simple

notification giving brief information with respect to the issuer, its

management, principal security holders, recent and proposed assessments and other security issues. The regulation requires a company

to send to its stockholders, or otherwise publish, a statement of the purposes for which the proceeds of the assessment are proposed to be

used. Copies of any other sales literature used in connection with the

assessment must be filed. Like Regulation A, Regulation F provides

for the suspension of an exemption thereunder where the regulation

provides no exemption or where the offering is not made inaccordance

with the terms and conditions of the regulation or in accordance with

prescribed disclosure standards.
THIRTY-FOURTH ANNUAL REPORT 35

During the 1968 fiscal year, 20 notifications were filed under Regulation F, covering assessments of $835,274. These notifications were filed

in three of the nine regional offices of the Commission: Denver, San

Francisco and Seattle. Underwriters were not employed in any of the

Regulation F assessments. No Regulation F exemptions were suspended during the fiscal year.

Proposed Exemption for Securities of District of Columbia Local Development

Companies

The Commission has taken under consideration proposed Rule 237

under the Securities Act which if adopted would exempt securities

issued by local development companies incorporated by and doing

business in the District of Columbia from the registration requirements of the Act.IS The proposed rule defines the term "local development company" as a D.C. corporation with the authority to promote

and assist the growth and development of small business concerns

within the District. The purpose of the proposed rule is to allow local

development companies interested in urban renewal projects in the

District to offer securities in a manner which will encourage community

participation in such projects. The exemption would be limited to

offerings not exceeding $300,000, and would be available only for

securities of those companies which have received a loan commitment

under Section 502 of the Small Business Investment Act of 1958. The

exemption would not apply to securities offered pursuant to an underwriting agreement, under a contract in which a discount or commission is offered as compensation, or for which an employee of the local

development company is paid compensation in addition to his regular

salary. An offering circular containing specified information must be

used in the offering and must be filed with the Commission prior to its

use. The proceeds of the sale of the securities must be kept in escrow

until the Small Business Administration approves the disbursal of

funds under its loan commitment. The proposed rule would not exempt

any person who offers or sells the securities of a local development company from the anti-fraud provisions of the Act.

B. CONTINUING DISCLOSURE REQUIREMENTS

Registration of Securities on Exchanges

Unless a security is registered on a national securities exchange

under the Securities Exchange Act of 1934 or is exempt from registration, it is unlawful for a member of such exchange or any broker

or dealer to effect any transaction in the security on the exchange. In

general, the Act exempts from registration obligations issued or guaranteed by a State or the Federal Government or by certain subdivisions

or agencies thereof and authorizes the Commission to adopt rules and

11 Securities Act Release No. 4901 (April 15,1968).
36 SECURITIES AND EXCHANGE COMMISSION

regulations exempting such other securities as the Commission may

find necessary or appropriate to exempt in the public interest or for

the protection of investors. Under this authority the Commission has

exempted securities of certain banks, certain securities secured by

property or leasehold interests, certain warrants and, on a temporary

basis, certain securities issued in substitution for or in addition to

listed securities.

Pursuant to Section 12(b) of the Exchange Act, an issuer may register a class of securities on an exchange by filing with the Commission

and the exchange an application which discloses pertinent information concerning the issuer and its affairs. Information must be

furnished regarding the issuer's business, its capital structure, the

terms of its securities, the persons who manage or control its affairs,

the remuneration paid to its officers and directors, and the allotment

of options, bonuses and profit-sharing plans. Financial statements

certified by an independent accountant must be filed as part of the

application.

Form 10 is the form used for registration by most commercial and

industrial companies. There are specialized forms for certain types

of securities, such as voting trust certificates, certificates of deposit

and securities of foreign governments.

Statistics regarding securities traded on exchanges may be found

in Part III of this report, as well as in certain of the appendix tables,

Registration of Over-the-Counter Securities

Section 12(g) of the Exchange Act requires a company with total

assets exceeding one million dollars and a class of equity securities

held of record by 500 or more persons to register those securities with

the Commission, unless one of the exemptions set forth in that section

is available." Upon registration, the periodic reporting, proxy solicitation and insider reporting and trading provisions contained in Sections 13, 14 and 16 of the Act become applicable. During the fiscal year,

422 registration statements were filed under Section 12(g). This makes

a total, from the enactment of Section 12(g) in 1964, through June 30,

1968, of 3,168 registration statements filed. Eight of these statements

were withdrawn before they had become effective upon determination

that they were not required to be filed under the Act. A total of 95

registrations have been terminated pursuant to Section 12(g) (4) because the number of shareholders was reduced to less than 300. An

additional 195 issuers which had registered securities have gone out of

10 Section 12(g) contains various exemptive provisions with respect to certain

types of securities. Of partleular significance are the provisions relating to

securities issued by Insurance companies and securities of foreign issuers. See

dtseusslons In 32nd Annual Report, p. 13 and 33rd Annual Report, pp. 13-14,

respectively.
TEIRTY-FOURTH ~AL REPORT 37

existence as a result of mergers, consolidations and the like, with the

result that for practical purposes these registrations must also be considered to have been terminated.

Of the 422 registration statements filed under Section 12(g) in

fiscal year 1968, 235 were filed by issuers already subject to the reporting requirements of Sections 13 or 15(d) of the Act.20 The latter figure

includes 20 registration statements filed by issuers with another security registered on a national securities exchange, and 215 filed by

issuers subject to the reporting requirements of Section 15(d) because

they had registered securities under the Securities Act. These latter

companies, however, had not been subject to the proxy solicitation and

insider reporting and trading provisions of Sections 14 and 16 of the

Exchange Act. The remaining 187 issuers which filed registration

statements had not been subject to any of the disclosure or insider

trading provisions and became subject to them through registration.

Exemptions From Registration

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

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

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

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

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

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

During the fiscal year, 9 applications for complete or partial exemptions were filed and 12 applications filed during prior years were still

pending. Of these 21 applications, 1 was granted, 2 were withdrawn,

the proceeding with respect to 1 was concluded by acceptance of a

settlement agreement by the Commission and 17 were pending at the

end of the year. The one exemption was granted because the applicant

had merged into an issuer registered under Section 12 of the Act. The

settlement agreement provided for the filing of a registration statement within a specified period, thereby subjecting the applicant to the

reporting, proxy and stockholder information and insider trading

provisions of the Act. Under the agreement the applicant, which owns

a major league baseball club, would not be required to file semi-annual

reports of earnings unless the Commission so directs.

In a decision announced shortly after the end of the fiscal year, the

Commission denied an application by The National Dollar Stores,

Ltd. for a conditional exemption from registration, but granted

exemptions from the reporting requirements and from certain requirements as to the financial statements to be filed with a registration

.. Corresponding figures for the 3 prior fiscal years may be found in the 33rd

Annual Report at p.lO.
38 SECURITIES AND EXCHANGE COMMISSION

statement," National operates a chain of department stores. Its assets

in January 1967 exceeded $12 million and its 10,000shares of outstanding common stock, sold initially in 1928 and 1929 to members of the

Chinese community in the San Francisco area, were held by 599 shareholders, mostly in small amounts except for a 50 percent interest

owned by the founder's family. The shares have been traded infrequently and such transactions as have taken place have not involved

brokers. Under a practice in effect for many years, stockholders wishing to sell shares have contacted the company which has :found a buyer,

generally among company employees.

The Commission concluded that, while an exemption from the

registration requirements would not be appropriate, in view of the

limited trading interest in the stock it would not be inconsistent with

the public interest or the protection of investors to exempt National

from the periodic reporting requirements, subject to certain conditions.

Under this disposition, the company will be required to comply with

the requirements as to proxy solicitations and its insiders will be

subject to the insider reporting and trading provisions of the Act. The

conditions specified include requirements that National deliver its

most recent proxy statement and annual report to any prospective

purchaser of its stock when it acts as intermediary and that it inform

the Commission annually of all sales of its stock and advise it promptly

of any material change in the facts recited in the Commission's opinion. The Commission expressly reserved jurisdiction to reconsider the

exemption in the event of such a change or of a change in its rules

relating to disclosures by Section 12(g) companies.

Pel'iodic Reports

Section 13 of the Exchange Act requires issuers of securities registered pursuant to Section 12(b) or 12(g) to file periodic reports keeping current the information contained in the application for registration or registration statement. These periodic reports include annual,

semi-annual, and current reports. The principal annual report form

is Form 10-K, which is designed to give current information regarding the matters covered in the original filing. Semi-annual reports

required to be filed on Form 9-K are devoted chiefly to furnishing

mid-year financial data. Current reports on Form 8-K are required

to be filed for each month in which any of certain specified events of

immediate interest to investors has occurred. A report on this form

deals with matters such as changes in control of the registrant, important acquisitions or dispositions of assets, the institution or termination of important legal proceedings and important changes in the

issuer's securities. Section 15(d) of the Exchange Act, generally speakn Secnrities Exchange Act Release No. 8403 (September 11, 1968).
TEITRTY-FOURTH ~AL REPORT 39

ing, requires issuers which have registered securities under the Securities Act of 1933 and which have no securities registered under

Section 12 to file the reports described above.

The following table shows the number of reports filed during the

fiscal year pursuant to Sections 13 and 15 (d) of the Exchange Act.

As of June 30, 1968, there were 2,634 issuers having securities listed

on a national securities exchange and registered under Section 12 (b)

of the Act, 2,814 issuers having securities registered under Section

12 (g), and 1,285 additional issuers which were subject to the reporting

requirements of Section 15 (d) of the Act.

Number of annual and other periodic reports filed by issuers under the Securities

Exchange Act of 1934 during the fiscal year ended June 30,1968

Number of reports filed by

Listed Over-the-counter Type of reports Issuers Issuers filing

filing reports under Total

reports r';W;s under

Section Section Section 13 15(d) 13

~:J:S.r;:POrt8~=:::::::::::::::::::::::::::=:::::: 2,501 026 2,167 5,594

2,125 516 1,984 4,625 Current reports _____________________________. ____. _____ 5,568 1,030 3,272 9,870 Quarterly reports ___________________________. ___________ 41 60 118 219

Total reports filed ________________________________ 10,235 2,532 7,541 20,308

Proxy Solicitations

Scope and Nature of Proxy Regulation.-Regulation 14A under

the Exchange Act, implementing Section 14(a) of that Act, governs

the manner in which proxies or other authorizations may be solicited

from the holders of securities registered under Section 12 of that Act,

whether for the election of directors, approval of other corporate

action, or some other purpose." Itrequires that in any such SOlicitation,

whether by the management or minority groups, disclosure must be

made of all material facts concerning the matters on which such holders

are asked to vote, and they must be afforded an opportunity to vote

"yes" or "no" on each matter. The regulation also provides, among

other things, that where the management is soliciting proxies, any

security holder desiring to communicate with other security holders

for a proper purpose may require the management to furnish him with

a list of all security holders or to mail his communication to security

holders for him. A security holder may also, subject to certain limitations, require the management to include in its proxy material any

appropriate proposal which he wants to submit to a vote of security

holders. Any security holder or group of security holders may at any

.. This regulation also applies to security holders of registered public-utility

holding companies,their subsidiaries and rezlstered investment companies.
40 SECURITIES AND EXCHANGE CO:MMISSION

time make an independent proxy solicitation upon compliance with

the proxy rules, whether or not the management is making a solicitation. Certain additional provisions of the regulation apply where a

contest for control of the management of an issuer or representation

on the board is involved.

Copies of proposed proxy material must be filed with the Commission in preliminary form prior to the date of the proposed solicitation.

Where preliminary material fails to meet the prescribed disclosure

standards, the management or other group responsible for its preparation is notified informally and given an opportunity to correct the deficiencies in the preparation of the definitive proxy material to be

furnished to security holders.

Under Section 14(c) of the Act, issuers of securities registered under

Section 12must, in accordance with rules and regulations prescribed by

the Commission, transmit information comparable to proxy material

to security holders from whom proxies are not solicited with respect to

a stockholders' meeting. Regulation 14C implements this provision by

setting forth the requirements for "information statements."

Adoption of Amendments to Proxy and Information Rules

During the 1967 fiscal year, the Commission invited public comments with respect to proposed amendments to its proxy rules

(Regulation 14A) under Section 14(a) of the Exchange Act and its

information statement rules (Regulation 14C) under Section 14(c).

Certain of the proposed amendments were adopted during that year,

but at the request of persons who desired further time to study the

proposals, the Commission extended the period within which comments could be submitted." Following receipt and consideration of a

number of helpful comments, a series of other amendments were

adopted during fiscal year 1968.24

The principal changes include the following: Rule 14a-8, which

provides that any security holder may, subject to certain prescribed

limitations, require management to include in its proxy material any

appropriate proposal which he desires to submit to a vote of security

holders, was amended with respect to the minimum period preceding

the proxy solicitation within which a security holder must submit

his proposal to management to require its inclusion in the proxy

material. The rule was further amended to permit the omission from

such material of the proponent's name and address. Schedule 14A,

which specifies the information that must be set forth in proxy material, was amended so as to require, among other things, more complete

IS See 33rd Annual Report, pp. 38-39.

.. Securities Exchange Act Release Nos. 8206 (December 14, 1967) and 8206A

(February 2, 1968).
TEITRTY-FOURTH ANNUAL REPORT 41

disclosure concerning options to purchase securities from the issuer or

its subsidiaries held by officers and directors and disclosure of transactions between certain employee plans provided by the issuer, or its

parents or subsidiaries, and certain insiders, and to clarify the situations where information concerning the interest of certain insiders in

transactions with the issuer or a subsidiary may be omitted because it

is not material. 25

Schedule 14B, which specifies the information to be filed in connection with election contests, was amended to require more complete

disclosure by each participant in the contest of his transactions in the

issuer's securities during the preceding 2 years.

The remaining changes were intended to clarify the existing rules

and the items and instructions of Schedules 14A and 140 or to codify

existing administrative practice.

Statistics Relating to Proxy and Information Statements

During the 1968 fiscal year, 5,244 proxy statements in definitive

form were filed, 5,224 by management and 20 by nonmanagement

groups or individual stockholders. In addition, 110 information statements were filed. The proxy and information statements related to

4,705 companies, some 519 of which had a second solicitation during

the year, generally for a special meeting not involving the election of

directors.

There were 4,473 solicitations of proxies for the election of directors,

751 for special meetings not involving the election of directors, and

28 for assents and authorizations.

The votes of security holders were solicited with respect to the following types of matters, other than the election of directors:

Mergers, consolidations, acquisitions of businesses. purchases and sales

of property, and dissolution of companies~_______________________ 634

Authorizations of new or additional securities, modifications of existing securities, and recapitalization plans (other than mergers, con- solidations, etc.) 1,420

Employee pension and retirement plans (including amendments to

existing plans)_________________________________________________ 75

Bonus or profit-sharing and deferred compensation arrangements

(including amendments to existing plans and arrangements) 87

Stock option plans (Ineluding amendments to existing plans)______ 687

Stockholder approval of the selection by management of independent auditors 1,666

Miscellaneous amendments to charters and by-laws, and miscellaneous

other matters (excluding those listed above) 1, 790

The amendments to Schedule 14A are also applicable to Schedule 14C of

Regulation 14C. In addition, to maintain consistency between Regulations 14A

and 14C, the latter was amended to conform with the amendments to the proxy

rules.

""
42 SECURITIES AND EXCHANGE COMMISSION

Stockholders' Proposals.---During the 1968 fiscal year, 162 proposals submitted by 34 stockholders were included in the proxy statements of 115 companies under Rule 14a-8 of Regulation 14A.

Typical of such stockholder proposals submitted to a vote of security

holders were resolutions relating to amendments to charters or by-laws

to provide for cumulative voting for the election of directors, preemptive rights, limitations on the grant of stock options to and their

exercise by key employees and management groups, the sending of a

post-meeting report to all stockholders, and limitations on charitable

contributions.

A total of 92 additional proposals submitted by 34 stockholders was

omitted from the proxy statements of 38 companies in accordance with

Rule 14a-8. The principal reasons for such omissions and the number

of times each such reason was involved (counting only one reason for

omission for each proposal even though it may have been omitted under

more than one provision of Rule 14a-8) were as follows:

Reason tor Omission of Proposals

Number

Concerned a personal grievance against the company 33

VVithdravvnbyproponent______________________________________________ 18

Not a proper subject matter under State lavv___________________________ 11

Not tUnely submitted_________________________________________________ 11

Related to the ordinary conduct of the company's business________________ 10

Outside scope of rules_________________________________________________ 6

Converse of management's proposaL___________________________________ 3

Ratio of Soliciting to Non-Solielting Companies.-Of the 2,634

issuers that had securities listed and registered on national securities

exchanges as of June 30, 1968,2,424 had voting securities so listed and

registered. During fiscal year 1968, 2,208, or 91 percent, of the latter

group solicited proxies under the Commission's proxy rules for the

election of directors.

Proxy Contests.-During the 1968 fiscal year, 27 companies were

involved in proxy contests involving the election of directors. In 21

contests control of the board was at stake while the other 6 involved

representation on the board. Pursuant to the requirements of Rule

14a-ll, 536 persons, both management and nonmanagement, filed detailed statements as participants.

Management retained control in 11 of the 21 contests for control

of the board of directors, 4 were settled by negotiation, nonmanagement persons won 1 and 5 were pending as of June 30, 1968. Of

the six cases where representation on the board of directors was

involved, management retained all places on the board in two

contests, opposition candidates won places on the board in three

cases and one was pending as of June 30, 1968.
THIRTY-FOURTH ANNUAL REPORT 43

Insiders' Security Holdings and Transactions

Section 16 of the Securities Exchange Act and corresponding provisions in Section 17 of the Public Utility Holding Company Act of

1935 and Section 30(f) of the Investment Company Act of 1940 are

designed to provide other stockholders and investors generally with

information as to insiders' securities transactions and holdings, and to

prevent the unfair use of confidential information by insiders to profit

from short-term trading ina company's securities.

Ownership Reports.-Section 16(a) of the Exchange Act requires

every person who beneficially owns, directly or indirectly, more than

10 percent of any class of equity security which is registered under

Section 12(b) for exchange listing or under Section 12(g) for overthe-counter trading, or who is a director or an officer of the issuer of

any such security, to file statements with the Commission disclosing

the amount of all equity securities of the issuer of which he is the

beneficial owner and changes in such ownership. Copies of such

statements must also be filed with exchanges on which securities are

listed. Similar provisions applicable to insiders of registered public.

utility holding companies and registered closed-end investment companies are contained in Section 17(a) of the Public Utility Holding

Company Act and Section 30 (f) of the Investment Company Act.

During the fiscal year, 93,823 ownership reports (14,893 initial

statements of ownership on Form 3 and 78,930 statements of changes in

ownership on Form 4) were filed with the Commission. This is an increase of 8,540 over the 85,283 reports (13,494 initial statements and

71,789 statements of changes) filed during the 1967 fiscal year.

All ownership reports are made available for public inspection as

soon as they are filed at the Commission's office in Washington and at

the exchanges where copies are filed. In addition, the information contained in reports filed with the Commission is summarized and published in the monthly "Official Summary of Security Transactions and

Holdings," which is distributed by the Government Printing Office to

more than 24,000 subscribers.

Amendment of Rule Relating to Determination of 10 percent

Ownership.-Rule 16a-2 under the Exchange Act deals with the determination of when a person is the beneficial owner of more than 10

percent of a class of equity securities for purposes of the ownership

reporting requirements of Section 16(a). During the fiscal year, the

Commission amended the rule to provide that a person shall be deemed

to be the beneficial owner of securities which he has the right to acquire through the exercise of presently exercisable options, warrants

or rights or through the conversion of presently convertible securities.

Securities subject to such options, warrants, rights or conversion privileges held by such person are deemed outstanding for the purpose of
44 SECURITIES AND EXCHANGE COMMISSION

computing the percentage of the class owned by him but are not deemed

outstanding for the purpose of computing the percentage of the class

owned by any other person."

The amended rule does not purport to determine whether transactions in options, warrants, rights or convertible securities may give

rise to liabilities under Section 16(b) of the Act. That question is one

for determination by the courts independently of Rule 16a-2.

Recovery of Short-Swing Trading Profits.-In order to prevent

insiders from making unfair use of information which they may have

obtained by reason of their relationship with a company, Section 16(b)

of the Exchange Act, Section 17(b) of the Holding Company Act,

and Section 30(f) of the Investment Company Act provide for the

recovery by or on behalf of the issuer of any profit realized by insiders

(in the categories listed above) from certain purchases and sales, or

sales and purchases, of securities of the company within any period

of less than 6 months. The Commission at times participates as

amious curiae in actions to recover such profits when it deems it important to present its views regarding the interpretation of the statutory provisions or of the exemptive rules adopted by the Commission

thereunder.

Changes in Rules Exempting Transactions From Short-Swing

Trading Provisions.- The Commission is authorized to exempt from

the operation of Section 16(b) of the Exchange Act any transaction

not comprehended within the purpose of that Section. Rule 16b-7

exempts from the operation of Section 16(b) certain acquisitions and

dispositions of securities pursuant to mergers or consolidations. During the fiscal year Rule 16b-7 was amended to make explicit its intended scope." The rule provides that the exemption shall not be available to a person if he has made certain short-term purchases and sales

other than those involved in the merger or consolidation. The amendments specify that the exemption is not defeated by short ...term transactions which are exempted under any other rule adopted under Section 16(b) and that as to transactions not so exempted, the exemption

provided by Rule 16b-7 will be unavailable only to the extent of such

transactions,

The Commission also adopted Rule 16b-ll which exempts from the

operation of Section 16(b) the sale of certain short ...term subscription

rights distributed for no consideration by an issuer to a class of its

security holders pro rata in the course of an offering to such security

holders of additional securities of such issuer.28

.. Securities Exchange Act Release No. 8325 (June 6, 1968).

rt Securities Exchange Act Release No. 8177 (October 10, 1967) .

.. Securities Exchange Act Release No. 8229 (January 17,1968).
THIRTY-FOURTH AmTUAL REPORT 45

Investigations With Respect to Reporling and Proxy Provisions

Section 21(a) of the Exchange Act authorizes the Commission to

make such investigations as it deems necessary to determine whether

any person has violated or is about to violate any provision of the Act

or any rule or regulation thereunder. The Commission is authorized,

for this purpose, to administer oaths, subpoena witnesses, compel their

attendance, take evidence and require the production of records. The

following investigations were undertaken pursuant to Section 21(a)

in connection with the enforcement of the reporting provisions of

Sections 12, 13, 14 and 15(d) of the Act and the rules thereunder, particularly those provisions relating to the filing of annual and other

periodic reports and proxy material:

Investigations pending at beginning of fiscal ypar___________________ 33

Investigations initiated during fiscal ypar --- ];j

48

Investigations closed dnrtng fiscal year ];j

Investigations pending at close of fiscal year_______________________ 33

Proceedings to Obtain Compliance With Exchange Act Registration or Reporting Requirements

Section 15(c) (4) of the Exchange Act, which was a part of the 196-:1:

amendments of that Act, empowers the Commission to find, after

notice and opportunity for hearing, that any person subject to the

provisions of Section 12, 13, or 15(d) of the Act or the rules thereunder has failed to comply with these requirements in any material

respect. It authorizes the Commission to publish its findings and issue

an order requiring compliance on such terms and conditions and within

such time as it may specify. Section 15(c) (4) thus provides an administrative forum, comparable to that provided by Section 19(a) (2) for

proceedings to delist an exchange-traded security, for the resolution

of accounting and other technical questions arising from the disclosure

provisions of the Exchange Act and a means for apprising investors

of materially false or misleading filings.

In the most notable proceeding to date under Section 15(c) (4), involving Orescent Oorporatioa and Pakco Oompanies, Inc., whose securities were registered under Sections 12(b) and 12(g) of the Exchange

Act, respectively, the Commission found "repeated and flagrant violations" of the reporting requirements." In its conclusions, the Commission stated:

"The reports filed with us by Crescent and Pakco were marked by numerous,

serious and substantial deficiencies which ... reflected a studied pattern of

corporate indirection, camouflage and concealment, particularly relating to

transactions in which Colasurdo [the controlling person of the two companies]

.. Securities Exchange Act Release No, 8200 (December 4, ]967).

327--506-68-5
46 SECURITIES AND EXCHANGE COMMISSION

had a material interest. . . . Colasurdo and his associates, as corporate directors, officers and insiders, occupied positions of trust with fiduciary obligations

to the corporations and their security holders. They not only did not discharge

their fiduciary obligations but concealed their conflicts of interest from other

stockholders by the use of shell corporate entities and devious arrangements

and nondisclosures and misstatements in reports filed with us....

"Adequate reporting to stockholders is a matter of vital importance and is

a subject of major concern to this Commission. This case points up the significance of the reporting requirements. A company such as Crescent, whose

securities are listed on the New York Stock Exchange, not only has a statutory

obligation to file certain reports with us and the Exchange, but also has voluntarily assumed certain commitments to the Exchange to keep the Exchange and

the public informed of material events. Of particular significance to public

stockholders are changes in control and membership in the board of directors

and transactions in which persons in a position to exercise control or direction

of corporate affairs have an interest. Where, as here, a majority of directors

resigns within 11 days of a transfer of controlling blocks of stock, it is most

important to the public stockholders that they obtain at the least prompt

information with respect to the changes that have taken place. Indeed, to be

fully effective, detailed information as to such changes should be given to stockholders before they are actually consummated, so that stockholders will be

aware that a material alteration in the managerial structure of their company

is about to take place and they will be alerted to the possible impact of the

changes on their investment interests and be in a better position to take steps

to protect those interests. Such disclosure would among other things make

more difficult the concealment of transactions for the benefit of a controilling

person of the type that occurred in the present case." [Footnote omttted.l ..

Summary Suspension of Trading

Section 19(a) (4) of the Exchange Act authorizes the Commission

summarily to suspend trading in a security listed on a national securities exchange for up to 10 days if in its opinion the public interest

so requires. As a counterpart to this provision, Congress in 1964

enacted Section 15(c) (5) of the Exchange Act which authorizes the

Commission summarily to suspend over-the-counter trading in any

nonexempt security for up to 10 days if it believes that such action

is required in the public interest and :forthe protection of investors.

During the 1968 fiscal year, the Commission temporarily suspended

trading in 39 securities, compared to 22 in fiscal 1967 and 16 in fiscal

1966. In 7 instances exchange-listed securities were involved and the

Commission acted under both Section 19(a) (4) and Section 15(c)

.. Id. p. 12. Prior to issuance of its opinion, the Commission had accepted

offers of settlement submitted by the two companies providing for discontinuance

of the proceedings on the basis of the filing of corrective reports, the mailing

of corrective current report material to their stockholders and an undertaking

to mail copies of the Commission's opinion to such stockholders if deemed

appropriate by the Commission. Securities Exchange Act Release No. 8144

(August 14, 1967). In its opinion, the Commission concluded that copies thereof

should be sent to the stockholders.
THIRTY-FOURTH ANNUAL REPORT 47

(5) .31 In each of these cases, the exchange on which the securities were

listed had previously suspended trading.

In most instances the Commission ordered suspension of trading

because adequate information concerning the company was not available or the Commission learned of information not generally known

to the securities community and investors which indicated the existence

of substantial questions concerning the financial condition or business

operations of the companies involved or concerning the purchase or

sale of the securities of such companies. For example, suspensions

were ordered pending clarification and adequate public dissemination

of information concerning: undisclosed transactions in the stock of

the company by its officers, directors and controlling persons; 32 matters disclosed in preliminary proxy material filed with the Commission

which, under Commission rules, would not become public until examined by the Commission's staff and thereafter distributed by the company to its shareholders; 33 and the possibility of irregularities in an

offering which, among other things, raised questions as to whether a

claimed intrastate exemption from the registration provisions of the

Securities Act was in fad available. 34 In other instances, no current

information was available and there were substantial increases in the

market price of stocks which appeared to have no reasonable basis."

In two instances actions taken by state authorities formed the basis

for Commission uct.ion.P''

In five cases, the Commission instituted enforcement action subsequent to the trading suspensions where violations of law were uncovered." For example, in a case involving Fastline, Inc., the Commission

suspended over-the-counter trading in the company's common stock

as a result of information obtained in a staff investigation indicating

a lack of current, accurate information about Fastline's financial status

or operations. It appeared from the investigation that Fastline had

no offices,tangible assets, business operations, employees or any income

whatsoever, and that the only officerof the company was a "provisional

president." Although it appeared that Fastline had 1,207,324shares

outstanding, no books and records or accurate current stock transfer

records could be found. Upon complaint filed by the Commission in

31 Securities Exchange Act Release Nos. 8132 (July 26, 1967), 8137 (July 28,

1967),8143 (August 10, 1967), 8263 (February 23, 1968), 8291 (April 5, 1968),

8330 (June 10,1968), and 8346 (June26,1968) .

.. Securities Exchange Act Release No. 8130 (July 20, 1967).

.. Securities Exchange Act Release No. 8143 (August 10, 1967).

.. Securities Exchange Act Release No. 8144 (August 14, 1967).

.. Securities Exchange Act Release Nos. 8156 (September 11, 1967), 8203 (December 8,1967),8241 (January 25,1968),8329 (June 7, 1968).

.. Securities Exchange Act Release Nos. 8250 (February 2, 1968), 8167 (September 22, 1961).

37 Securities Exchange Act Release Nos. 8130 (July 20, 1967), 8143 (August 10,

1961), 8190 (November 9, 1967), 8230 (January 15, 1968),8235 (January 19,

1968).
48 SECURITIES AND EXCHA..~GE COMMISSION

the U.S. District Court for the Southern District of Florida, Fastline

and certain individuals were enjoined from further offers and sales of

Fastlins's common stock in violation of the registration provisions of

the Securities Act of 1933.The suspension of trading was then terminated by the Commission.

In another case, involving North American Research and Development Corporation, the Commission suspended trading in the company's common stock when it appeared that there was a complete

lack of financial and other information with respect to the company,

and that control persons and insiders had failed to disclose their trading in the stock. Subsequently, the Commission filed a complaint in the

U.S. District Court for the Southern District of New York seeking

to enjoin 43 defendants, including 6 broker-dealers, an investment

adviser, and other corporations and individuals in addition to North

American and its control persons and insiders, from further violations of the registration and anti-fraud provisions of the securities

laws.38 Upon issuance of an order of preliminary injunction against

the company and 13 other defendants," the Commission terminated

the trading suspension. The appeals of some of the defendants are

presently pending. TIm Commission has instituted administrative

enforcement action against other defendants involved in the case.

C. ACCOUNTING AND AUDITING MATIERS

The several Acts administered by the Commission reflect a recognition by Congress that dependable financial statements of a company

are indispensable to an informed investment decision regarding its

securities. The value of such statements is directly dependent on the

soundness of the judgment exercised in applying accounting principles and practices in their preparation, and on the adequacy and

reliability of the work done by public accountants who certify the

statements. A major objective of the Commission has been to improve

accounting and auditing standards and to assist in the establishment

and maintenance of high standards of professional conduct by certifying accountants. The primary responsibility for this program rests

with the Chief Accountant of the Commission.

Pursuant to the Commission's broad rulemaking power regarding

the preparation and presentation of financial information, it has

adopted a basic accounting regulation (Regulation S-X) which,

tog-ether with opinions on accounting principles published as "Ac-

.. Litig-ation Release ;\0. 3R13 (f'\pptpmher 26.1007).

3. Litigation Release ;\0. 3934 (F'ebruary 2!J. 19(8).
THIRTY-FOURTH ANNUAL REPORT 49

counting Series Releases," governs the form and content of financial

statements filed under the statutes administered by the Commission,

The Commission has also formulated TIlleswith respect to accounting

for and auditing of brokers and dealers and has prescribed uniform

systems of accounts for companies subject to the Public Utility Holding Company Act of 1935. The accounting rules and the opinions of

the Commission and its decisions in particular cases have contributed

to clarification and wider acceptance of the accounting principles and

practices and auditing standards developed by the profession and

generally followed in the preparation of financial statements.

In the large area of financial reporting not covered by its rules,

the Commission's principal means of protecting investors from inadequate or improper financial reporting is by requiring a certificate of

an independent public accountant, based on an audit performed in

accordance with generally accepted auditing standards, which expresses an opinion as to whether the financial statements are presented

fairly in conformity with accounting principles and practices which

are recognized as sound and which have attained general acceptance.

The requirement of the opinion of an independent accountant is designed to secure for the benefit of public investors the detached objectivity of a knowledgeable person not connected with the management.

In order to keep abreast of changes and new developments in financial and economic conditions and in recognition of the need for a

continuous exchange of views and information between the Commission's staff and outside accountants regarding appropriate accounting and auditing policies, procedures and practices for the protection of

investors, the staff maintains continuing contact with individual accountants, other government agencies, and various professional organizations. These include the American Accounting Association, the

American Institute of Certified Public Accountants, the American

Petroleum Institute, the Financial Analysts Federation, the Financial

Executives Institute, and the National Association of Railroad and

Utilities Commissioners.

The Work of the Accounting Principles Board

In furtherance of the policy of cooperation between professional

organizations and the Commission, the Accounting Principles Board

of the American Institute of Certified Public Accountants met with

the Commission during the year to discuss its program for the improvement of accounting standards and practices through the issuance of

accounting opinions. The Board sponsors research studies of problem

areas in accounting to provide background information and factual

data which may be used in the formulation of its opinions. Drafts of
50 SECURITIES AND EXCHANGE COMMISSION

these studies and opinions are referred to the Commission's accounting

staff for review and comment prior to publication. A major opinion

issued during the year, entitled "Accounting for Income Taxes," provides for a more uniform application of tax allocation than has prevailed in the past. The Board also issued a statement on "Disclosure of

Supplemental Financial Information By Diversified Companies" in

which such companies were urged to disclose this type of information

voluntarily. (For the Commission's recent proposals in this area, see

pp. 13-14, 8ulyra.)

The Board has indicated that many major problem areas in accounting are under study with a view to the issuance of opinions in the

future. Among these are convertible debt and warrants, earnings per

share, intercorporate investments, materiality, research and development costs, price-level changes, goodwill and business combinations,

equity accounting, regulated industries, extractive industries, and

diversified companies.

Relations With the Accounting Profession and the Public

As part of the Commission's effort to maintain a continuing exchange of views with the accounting profession, the Chairman, other

Commissioners, the Chief Accountant and other members of the accounting staff accept speaking engagements and participate in panel

discussions at professional society meetings. In this way the Commission can indicate problem areas in accounting as to which it believes

the profession can aid in developing solutions. As an example, the

Chairman has spoken extensively on the need for more detailed reporting by diversified companies and for a study of the problems

involved. He has also urged companies to effect improvements on a voluntary basis. More recently he has urged the profession to restudy the

accounting principles applicable to business acquisitions or combinations in order to prevent abuses arising from inadequate restrictions

on the choice between the alternatives of purchase or pooling-of-interests accounting to be accorded such transactions. The Chief Accountant also accepts engagements to explain the work of the Commission

at colleges and universities throughout the country.

Because of its many foreign registrants and the vast and increasing foreign operations of American companies, the Commission has an

interest in the improvement of accounting and auditing principles and

procedures on an international basis. To promote such improvement the

Chief Accountant corresponds with foreign accountants, interviews

many who visit this country, and, on occasion, participates in international accounting conferences. In September 1967, he presented a report before the Ninth International Congress of Accountants in Paris,

France, on the topic "The International Harmonization of Accounting Principles." En route to this conference he participated in an
THIRTY-FOURTH ANNUAL REPORT 51

International Congress on Accounting Education in London, England.

In October 1967 he participated in a panel discussion on the "conglomerate" problem at the 36th International Conference of the Financial Executives Institute in Montreal, Canada.

Other Current Developments

The Chief Accountant's Officeis currently engaged in revising the

accounting rules in Regulation S-X, the first general revision since

1950, in order to make changes, additions or eliminations that have

become necessary as a result of changing conditions over the years.

The revisions will be published for public comment in accordance with

established procedures.

During the fiscal year the Chief Accountant's Office considered a

question pertaining to the independence of accountants under Rule

2-01 (b) of Regulation S-X which has occurred frequently in recent

years as a result of the increasing international and multi-country

operations of United States corporations. The question arises in a

situation where a parent company requires auditing services for divisions or subsidiaries in countries where its independent accountants do

not practice and another accounting firm may be engaged to examine

the financial statements for such operations, which would be deemed

to be a nonmaterial segment of the international business. Heretofore

Rule 2-01 (b) has been construed to preclude all the partners of such

other accounting firm or of its affiliates from owning any securities of

the parent company or the subsidiary under audit if that accounting

firm is to be considered independent as to the parent company or such

subsidiary. In an interpretative release issued after the end of the

fiscal year,40 the Commission stated that, insofar as ownership of

securities by partners is concerned, the accounting firm performing

the audit of the subsidiary in these circumstances would be held to be

not independent only if securities of the parent company or the subsidiary are owned by any of the partners of that accounting firm or of

its affiliated firms who are located in the officewhich makes the examination or who are otherwise engaged in such examination.

The adoption by the Commission on October 3, 1967, of a revision

of Form X-17A-5 41 (the annual report of financial condition required

to be filed by brokers and dealers) reflects recognition of changing

conditions and practices in the securities industry and emphasizes the

importance of the independent accountant's review of both the financial statement and the effectiveness of the accounting system and procedures for safeguarding securities.

Rule ITa-l0 under the Exchange Act, which was adopted on June

.. Accounting Series Release No. 112 (August 12, 1968).

.. Securities Exchange Act Release No. 8172.
52 SECURITIES AND EXCHANGE COMMISSION

28, 1968,42 requires that broker-dealers file comprehensive annual

financial reports reflecting their financial condition as of the end of the

year and the results of operations for the period. The background

and nature of this new rule are discussed elsewhere in this report.t"

The Chief Accountant and his staff cooperated with the Corrunission's Division of Trading and Markets in the preparation of a proposal for a rule prohibiting an issuer whose stock is publicly offered

or traded from misrepresenting the results of its operations by distributing stock dividends or their equivalent to shareholders unless the

issuer has earned surplus sufficientto cover the fair value of the shares

distributed.v The rule would not affect traditional stock splits involving the distribution of at least an additional share for each share

outstanding.

Pro rata stock distributions to stockholders in amounts which are

relatively small in relation to the number of shares outstanding are

a means of conveying the impression that a distribution is being made

out of the earned surplus of the company without the drain on current

assets that would result from the distribution of a cash dividend. Instances have recently come to the attention of the Commission in which

such distributions were utilized by companies having little or no earned

surplus, thus creating a misleading impression concerning the results

of operations of the company.

The proposed rule would prohibit any pro rata stock distribution

to stockholders which is designated as a stock dividend or is made in

amounts of less than 25 percent of the number of shares of the same

class outstanding prior to the distribution, unless the issuer has earned

surplus in an amount at least equal to the fair value of the shares so

distributed and has transferred such amount from earned surplus to

permanent capitalization. In the case of a pro rata distribution in

amounts ranging between 25 percent and 100 percent of the number

of shares outstanding, the requirement with respect to the existence

and transfer of the requisite amount of earned surplus would be applicable if the distribution is part of a recurring program.

These provisions would in substance codify long-standing views of

the American Institute of Certified Public Accountants, as well as the

stan dards of the New York and American Stock Exchanges.

The proposed rule provides that the Corrunission may exempt any

activity otherwise prohibited by the rule, if it finds that the proposed

activity would not constitute a manipulative or deceptive device or

contrivance within the purposes of the rule. It is contemplated that

., Recnrities Exchange Act Release No. 8347.

sa Pages 14-lii, 8l1pra

.. Proposal to adopt Rnle 10b-12 under the Securities Exchange Act of 1!l34.

Securities Exchauge Act Release No, 8268 (March 7,19(8).

•
TF.URTY-FOURTHA~~UAL REPORT 53

this exemptive provision will be narrowly construed and will be applied

by the Commission only in cases involving unusual circumstances.

Uesignation of Accountunts From Practice Before the Commission

On the basis of information furnished to the Commission during

the fiscal year, the Commission had reason to believe that in connection

with the preparation and submission of broker-dealers' financial statements pursuant to Rule 17a-5 under the Exchange ~\.cttwo accountants may have failed to adhere to generally accepted auditing standards and the Commission's minimum audit requirements and that one

of them was in fact not independent.

The accountants tendered their resignations in which they agreed

not to appear or practice before the Commission in the future. The

Commission determined that in view of the resignations no proceedings pursuant to Rule 2(e) of the Commission's Rules of Practice were

necessary and entered orders accepting the resignations."

D. CIVIL LITIGATION INVOLVING DISCLOSUUE MATTEUS

Summarized below are two significant civil court cases pending during the fiscal year which relate to disclosure matters. In one of these

cases the Commission participated as amicus curiae j the other case, in

which the Commission did not participate, is included because of its

significant impact upon the effectiveness of the statutory disclosure

provisions administered by the Commission. Civil court cases which

relate to other phases of the Commission's work, and in which the Commission participated either as a party or as amicus curiae during the

fiscal year, are discussed in Parts IV-VII of this report."

Escott v, BarOhris Oonstructioti Corp:" was an action brought

under Section 11 of the Securities Act of 1933by purchasers of BarChris securities who alleged that the company's registration statement

with respect to the securities was false and misleading. The defendants,

in addition to the corporation, included the company's directors and

officers who had signed the registration statement, the underwriters

and the auditors.

Each of the defendants, except the corporation itself, asserted as an

affirmative defense his due diligence in attempting to ascertain the

truth about the company. All of these defenses were rejected on

various grounds. With respect to two principal officers and directors

of the company, the court found that their limited education and

lack of financial expertise did not excuse their signing of a false

.. Accounting Series Release 1\""0. 109 (September 25, 1967) and Accountlnq

Series Release No. 110 (January 18,1968) .

.. For statistical data regarding the Commission's civil litigation activities, see

Appendix tables 10-12.

<7283 F. Supp. 643 (S.D.N.Y., 19(8).
54 SECURITIES AND EXCHANGE COMMISSION

registration statement. The court found that one "outside" director,

who had only recently joined the board and had no actual knowledge

of the company's nffuirs, had a duty to make further inquiry before

he signed a registration statement since a prudent man would not

perform such an important act on the basis of sketchy information.

The court criticized the work of one director who was also counsel to

the issuer and did a "scissors and paste-pot job" in preparing the registration statement; the court stated that "as the director most directly

concerned with writing the registration statement and assuring its

accuracy, more was required of him in the way of reasonable investigation than could fairly be expected of a director who had no connection with this work," and added that an attorney is required to check

statements of his client which are easily verifiable. Similar negligence

was found on the part of the managing underwriter and its counsel,

who made some inquiry but relied in large part on statements by the

issuer. The other members of the underwriting group who made no

independent inquiry but relied on the manager were also found liable.

Finally, the court found that the accountants failed to meet their

obligation to make a reasonable investigation and did not even comply

with their own auditing standards.

In Sttnray DX Oil 00. v. Helmerioh di Payne, Inc./8 decided shortly

after the close of the fiscal year, the Court of Appeals for the Tenth

Circuit agreed with the position taken by the Commission as amicus

curiae that it is improper to set forth in proxy soliciting material

numerical estimates of unproved oil reserves. The court quoted with

approval the view expressed by the Commission that

"It is altogether probable that investors unfamiliar with the technical aspects of the oil and gas business ... would ignore or misconstrue the technical but extremely significant difference between

'proved' and 'probable' oil reserves ... and would attribute to any

numerical estimates of probable reserves a degree of certainty

which is not warranted."

E. CRIMINAL PROSECUTIONS INVOLVING DISCLOSURE VIOLATIONS

During the year convictions were obtained or indictments returned

in several cases referred by the Commission to the Department of

-Iustioe for criminal prosecution which involved noncompliance with

the Securities Act registration provisions, or the responsibility of

accountants who audit the financial statements of public corporations.

Information of a general nature regarding the Commission's criminal

reference activities and summaries of other significant cases may be

found in Part IV of this report.w

.. 398 F. 2d 447 (C.A. 10, 1968.)

.. For statistical dam regarding criminal eases developed by the Commission,

see Appendix tables 13-15.
THIRTY-FOURTH ANNUAL REPORT 55

In a significant case litigated during the fiscal year, a well-known

financier, Louis Wolfson, and his business associate, Elkin B. Gerbert,

were convicted of conspiracy to violate and substantive violations of

the registration provisions of Section 5 of the Securities Act.50 The

indictment alleged that the defendants conspired to sell and sold to

the public without registration a substantial block of stock owned by

the defendants and members of the .Wolfson family in Continental

Enterprises, Inc., a company controlled by 1Volfson which had accumulated a deficit of some $900,000 in its 8 years of existence. Wolfson was sentenced to 1 year imprisonment and fined $100,000, Gerbert

to 6 months imprisonment and fined $50,000. The convictions have

been appealed to the Court of Appeals for the Second Circuit.

Wolfson and Gerbert were again convicted during the year in an

unrelated case involving a Commission investigation into purchases

and sales of stock of Merritt, Chapman & Scott Corporation. In this

case, Wolfson (chairman of the board of directors and chief executive officer of Merritt, Chapman), Gerbert (a director of the corporation), Marshall G. Staub (president of Merritt, Chapman) and

Joseph Kosow (a Boston financier) were convicted on charges, among

others, of conspiring to obstruct justice in the investigation of Merritt,

Chapman.": Wolfson and Gerbert were also found guilty of committing perjury during the investigation, and 1Volfson and Staub

were convicted of issuing and filing with the Commission false annual

reports for Merritt, Chapman. A fifth defendant in the case,Alexander

Rittmaster, who had been a close financial consultant to Wolfson for

many years, pleaded guilty to the conspiracy count and testified as a

key government witness at the trial. In essence, the case involved the

execution and concealment from public shareholders of a scheme

whereby Kosow had entered into a clandestine agreement to buy

up a substantial block of Merritt, Chapman shares in nominee names

in the open market, from 1961 to 1964, with the assurance that the

corporation would thereafter repurchase the shares at a substantial

profit to him.

Another significant development during the fiscal year was the conviction of Lowell M. Birrell, who had been a fugitive from justice in

Brazil for several years until he returned to this country to face trial

in one of several pending cases in which indictments were outstanding against him. Birrell was found guilty in the Southern District of

New York on charges of conspiring to sell unregistered stock of American Leduc Petroleum, Ltd., a defunct oil corporation, and to defraud

the purchasers of these securities as well as on substantive charges of

violating Section 5 of the Securities Act.52

6066 Cr. 720 (S.D.N.Y.) 6166 Cr. 820 (S.D.N.Y.)

.. 62 Cr. 692 (S.D.N. Y.)
56 SECURITIES AND EXCHAL~GE COMMISSION

Several criminal prosecutions during the past fiscal year involved

the question of the criminal responsibility of certified public accountants who audit the financial statements of public corporations. For

instance, two partners and an audit manager of a large firm of certified public accountants were convicted of conspiring to prepare and

disseminate a false and misleading annual report to stockholders of

Continental Vending Machine Corporation and to file a false 10-I\:

report for that company with the Commission and the American Stock

Exchange, for the year ended September 30, 1962, and of mail fraud

by participating in a scheme to prepare a false and misleading annual

report to stockholders." The convictions are being appealed. The president and chairman of the board of Continental Vending had been

indicted on similar charges, but he pleaded guilty prior to trial and

testified as a government witness. The case centered around a scheme

whereby substantial sums were transferred over a period of years from

Continental Vending to another company also controlled by the president and board chairman and thence to the latter. At September 30,

1962, approximately $3.5 million had not been repaid to Continental.

The accountants certified the financial statements as of that date which

did not disclose the nature of the transfer of these funds or the fact

that they could not be repaid.

Another certified public accountant was named in an indictment

which is presently awaiting trial,54 in which it is charged that the

president of VTR, Incorporated, a company whose stock is listed on

the American Stock Exchange, his brother (a former director of

VTR and presently a director of three Florida financial institutions)

and their brother-in-law (a former employee of VTR and presently

president of one of the Florida financial institutions) had misappropriated approximately $1 million from VTR and had concealed the

misappropriations by making sham repayments to VTR at the end of

each year through check kites perpetrated through two financial institutions controlled by the defendants. The ostensible repayments were

immediately withdrawn from VTR in early January of each year.

The misappropriations and sham repayments were not disclosed in

VTR's financial statements, certified by the defendant accountant, and

filed with the Commission and the American Stock Exchange as part

of VTR's annual reports and proxy materials.

F. EXEMPTION FOR SECURITIES OF INTERNATIONAL BANKS

International Bank for Reconstruction and Development

Section 15 of the Bretton 'Voods Agreements Act, as amended, exempts from registration under both the Securities Act of 1933and the

53 United States v. Simon, S.E.C. Litigation Release No. 4053 (June 28, 1968).

54 68 Cr. 369 (S.D.N.Y.)
THIRTY-FOURTH ANNUAL REPORT 57

Securities Exchange Act of 1934 securities issued, or guaranteed as to

both principal and interest, by the International Bank for Reconstruction and Development. The Bank is required to file with the

Commission such annual and other reports with respect to such securiies as the Commission determines to be appropriate in view of the

special character of the Bank and its operations, and necessary in the

public interest or for the protection of investors. Pursuant to this

authority, the Commission has adopted rules requiring the Bank to

file quarterly reports and also to file copies of each annual report of the

Bank to its board of governors. The Bank is also required to file reports with the Commission in advance of any distribution in the

United States of its primary obligations. The Commission, acting in

consultation with the National Advisory Council on International

Monetary and Financial Problems, is authorized to suspend the exemption at any time as to any or all securities issued or guaranteed by the

Bank during the period of such suspension. The following summary

of the Bank's activities reflects information obtained from the Bank.

The Bank reported a net income of $169.1 million for the fiscal year

ending J nne 30, 1968, before providing for a loss of $23.2 million

arising from currency devaluation during the year. This compared

with net earnings of $170 million in the fiscalyear 1967.

The Executive Directors have allocated $75 million from the year's

net income as a grant to the Bank's affiliate, the International Development Association. The remaining portion of the year's earnings,

$94.1million, will be transferred to the Bank's Supplemental Reserve.

After allowance for devaluation losses, this Reserve will amount to

$963 million. Total reserves, including the Special Reserve, will

amount to $1,254 million.

During the year, the Bank made 44 loans in 31 countries totaling

$847 million, compared with a total of $877 million last year (which

included a $100 million line of credit to the International Finance

Corporation). The loans were made in Argentina (2 loans), Brazil

(2), Ceylon, Republic of China (3), Colombia (3), Costa Rica, El

Salvador, Ethiopia, Gabon, Greece, Guatemala, Honduras, India,

Iran (2), Israel, Ivory Coast, Korea, Malagasy Republic, Malaysia,

Mexico (3), Nicaragua (2), Pakistan, Papua and New Guinea, Peru,

Singapore (2), Spain, Sudan, Tanzania, Thailand (2), Tunisia and

Yugoslavia (2). This brought the total number of loans to 552 (including IFC) in 85 countries and territories and raised the gross total

of commitments to $11,518 million. By June 30, as a result of cancellations, exchange adjustments, repayments and sales of loans, the portion

of loans signed still retained by the Bank had been reduced to $7,57G

million.

During the year the Bank sold or agreed to sell $107 million principal amounts of loans, compared with sales of $69 million last year.
58 SECURITIES AND EXCHANGE COMMISSION

On June 30, the total of such sales was $2,143million, of which all except $69million had been made without the Bank's guarantee.

On June 30, the outstanding funded debt of the Bank was $3,289.6

million, reflecting a net increase of $214.3 million in the past year.

During the year the funded debt was increased through the public sale

of Can$15 million (US$13.9 million) of Canadian dollar bonds,

$300 million of US dollar bonds of which $159.4 million were sold

under delayed delivery arrangements, SwF75 million (US$17.5 million) of Swiss franc bonds, DM120 million (US$30 million) of

Deutsche mark bonds, f40 million (US$l1 million) of Netherlands

guilder bonds, and SKr75 million (US$14.5 million) of Swedish

kronor bonds, the private placements of bonds and notes of $290.4million, DM183.5 million (US$45.9 million) and SwF50 million (US$-

11.6million), and the issuance of $158.7million of bonds under delayed.

delivery arrangements. The debt was decreased through the retirement

of bonds and notes of $406.4 million, DM159.5 million (US$39.9

million) and SwF50 million (US$11.6 million), by purchase and

sinking fund transactions amounting to $55.9 million, and by $6

million as a result of the revaluation of outstanding pounds sterling

stock.

During the year The Gambia became a member of the Bank and the

following four countries increased their subscriptions to the Bank's

capital: Korea, Peru, Philippines and Viet-Nam. Thus on June 30,

1968, there were 107 member countries and the subscribed capital of

the Bank amounted to $22,941.9million.

Inter-American Development Bank

The Inter-American Development Bank Act, which authorizes the

United States to participate in the Inter-American Development Bank,

provides an exemption for certain securities which may be issued or

guaranteed by the Bank similar to that provided for securities of the

International Bank for Reconstruction and Development. Acting pursuant to this authority, the Commission adopted Regulation IA, which

requires the Bank to file with the Commission substantially the same

information, documents and reports as are required from the International Bank for Reconstruotion and Development. The Bank is also

required to file a report with the Commission prior to the sale of any

of its primary obligations to the public in the United States. The following summary of the Bank's activities reflectsinformation submitted

by the Bank to the Commission.

During the year ended June 30, 1968, the Bank made 17 loans

totaling the equivalent of $113,450,000 from its ordinary capital resources, bringing the net total of loan commitments outstanding, after

cancellations, to 157, aggregating $923,999,000. During the year, the

Bank sold or agreed to sell $8,913,059in participations in the afore-
THIRTY-FOURTH ANNUAL REPORT 59

said loans, all of such participations being without the guarantee of

the Bank. The loans from the Bank's ordinary capital resources were

made in Argentina, Brazil, Chile, Colombia, Mexico, Paraguay, Peru,

Uruguay and Venezuela. One regional loan was extended.

During the year the Bank also made 35 loans totaling the equivalent

of $291,285,000from its Fund for Special Operations, bringing the

gross total of loan commitments outstanding to 177, aggregating $1,-

045,551,000.The Bank made no loans during the year from the Social

Progress Trust Fund, which it administers under an Agreement with

the United States, leaving the gross total of loan commitments outstanding from that Fund at 117, aggregating $500,987,000.

On June 30, 1968,the outstanding funded debt of the ordinary capital resources of the Bank was the equivalent of $507,429,000,reflecting

a net increase in the past year of the equivalent of $64,535,000.During

the year the funded debt was increased through a public bond issue in

Belgium in the amount of BF300,000,000 (US$6 million), a public

offering in the United States of $60 million of bonds, the private

placement in Latin America of an issue of $43 million of short-term

dollar bonds, and the drawing under a loan agreement with the Export-Import Bank of Japan of the equivalent of $6,735,000in Japanese yen. The funded debt was decreased through the retirement of

$45 million of short-term dollar bonds, adjustment by $1,200,000in

US$ equivalent of English Sterling Stock through Pound Sterling

devaluation and US$5 million through Sinking Fund purchases.

The subscribed ordinary capital of the Bank on June 30, H)68,was

the equivalent of $1,778,830,000of which $1,395,180,000represented

callable capital.

Asian Development Bank

The Asian Development Bank Act adopted in March 1966authorizes

United States participation in the Asian Development Bank and

provides an exemption for certain securities which may be issued or

guaranteed by the Bank similar to the exemption accorded the International Bank for Reconstruction and Development and the InterAmerican Development Bank. Acting pursuant to this authority, the

Commission, during the fiscal year, adopted Regulation AD which

requires the Bank to file with the Commission substantially the same

information, documents and reports as are required from the International Bank for Reconstruction and Development and the InterAmerican Development Bank." The Bank is also required to file a

report with the Commission prior to the sale of any of its primary

obligations to the public in the United States.

As of June 30, 1968,the Bank had 32 members which had subscribed

to $970 million of capital stock, $615 million by 1D regional members

IIIAsian Development Bank Act Release No.1 (December 18,1967).
60 SECURITIES AND EXCHANGE COMMISSION

and $355 million by 13 nonregional members, including $200 million

by the United States. One-half of each member's subscription is

paid-in capital, and the other half is callable capital to provide backing for future borrowings by the Bank. As of June 30, 1968,the Bank

had not made any offering of bonds.

The Bank made its first loan from ordinary capital in January

1968, the equivalent of $5 million to the Industrial Finance Corporation of Thailand to finance foreign exchange components of the Corporation's loans in the private sector. The Bank loaned $2 million

equivalent to Ceylon in July 1968 for tea factory modernization; $6.8

million equivalent to Korea in September 1968 for the Seoul-Inchon

Expressway Project; and $7.2 million equivalent to Malaysia in September 1968 for the Penang Water Supply Project. During the year

ending June 30, 1968,the Bank extended technical assistance to Indonesia in the field of food production and distribution, to the Korean

Agriculture and Fishery Development Corporation, to the Philippines

in the field of water management, and to Viet-Nam in the field of

development finance.

G. TRUST INDENTURE ACT OF 1939

This Act requires that bonds, debentures, notes, and similar debt

securities offered for public sale, except as specifically exempted, be

issued under an indenture which meets the requirements of the Act and

has been duly qualified with the Commission.

The provisions of the Act are closely integrated with the requirements of the Securities Act. Registration pursuant to the Securities

Act of securities to be issued under a trust indenture subject to the

Trust Indenture Act is not permitted to become effective unless the

indenture conforms to the requirements of the latter Act designed to

safeguard the rights and interests of the purchasers. Moreover, specified information about the trustee and the indenture must be included

in the registration statement.

The Act was passed after studies by the Commission had revealed

the frequency with which trust indentures failed to provide minimum

protections for security holders and absolved so-called trustees from

minimum obligations in the discharge of their trusts. Itrequires that

the indenture trustee be free of conflicting interests which might interfere with the faithful exercise of its duties in behalf of the purchasers

of the securities. Itrequires also that the trustee be a corporation with

minimum combined capital and surplus; imposes high standards of

conduct and responsibility on the trustee; precludes preferential collection of certain claims owing to the trustee by the issuer in the event

of default; provides for the issuer's supplying evidence to the trustee

of compliance with indenture terms and conditions such as those re-
THIRTY-FOURTH ANNUAL REPORT 61

lating to the release or substitution of mortgaged property, issuance

of new securities or satisfaction of the indenture; and provides for

reports and notices by the trustee to security holders. Other provisions

of the Act prohibit impairment of the security holders' right to sue

individually for principal and interest except under certain circumstances, and require the maintenance of a list of security holders which

may be used by them to communicate with each other regarding their

rights.

Number of indentures filed under the Trust Indenture Act of 1939

Number Aggregate

filed amount

~~~:~~~: gf~d1d~!r:::n~S~II:~~::::::::::::::::::: :::::::::::::::::: ::: 73 $2, 362, 970, 830 491 15, 120, 231, 263

Total for disposal, ___________________________________________________ 564 17,483,202,093

Disposition during fiseal year: Indentures qualified _______________________________________________. _____ 479 14,525,081,293 Indentures deleted by amendment or withdrawn. _______________________ 12 747,089,700 Indentures pending June 30,1968 ________________________________________ 73 2,211,031,100

TotaL _________________________________________________. _. __________. 564 17,483,202,093

.3~7-506--68---41
PART m

REGULATION OF SECURITIES MARKETS

In addition to the disclosure provisions discussed in Part II of

this report, the Securities Exchange Act of 1934 gives the Commission important responsibilities over the securities markets and persons engaged in the securities business. Among other things, it requires

securities exchanges to register with the Commission, vests them with

important self-regulatory responsibilities subject to Commission

supervision, and authorizes the Commission to change or supplement

the rules of the exchanges where required in the public interest. The

Act requires the registration and regulation of brokers and dealers

doing business in the over-the-counter markets, provides for the registration of associations of brokers or dealers and supervised selfregulation by such associations, and contains provisions designed to

prevent fraudulent, deceptive and manipulative acts and practices on

the exchanges and in the over-the-counter markets.

Developments and actions during the Ul68 fiscal year in these areas,

as well as statistical information concerning the securities markets,

are discussed in this and the next part of the report. Certain developments of particular significance, however, including those rela:ting

to the structure and level of commission rates on the exchanges, are

discussed in Part I.

REGULATION OF EXCHANGES

Registration and Exemption of Exchanges

The Securities Exchange Act requires an exchange to be registered

with the Commission as a national securities exchange unless the

Commission exempts it from registration because of the limited volume of transactions effected. As of June 30, 1968, the following 13

stock exchanges were registered:

American Stock Exchange New York Stock Exchange

Boston Stock Exchange Pacific Coast Stock Exchange

Chicago Board of Trade Philadelphia-Baltimore-Washington

Cincinnati Stock Exchange Stock Exchange

Detroit Stock Exchange Pittsburgh Stock Exchange

Midwest Stock Exchange Salt Lake Stock Exchange

National Stock Exchange Spokane Stock Exchange

During fiscal year 1968, an order of the Commission terminating

the registration of the San Francisco Mining Exchange became

effective.'

1See 33rd Annual Report, pp, 91-92.

62
THIRTY-FOURTH ANNUAL REPORT 63

Richmond Stock Exchange

The following three exchanges have been exempted from registration:

International Stock Exchange 2

Honolulu Stock Exchange

Review of Exchange Rules and Procedures

Rule 17a-8 under the Exchange Act provides that each national

securities exchange must file with the Commission a report of any

proposed amendment to or other change in its rules and practices not

less than 3 weeks (or such shorter period as the Commission may

authorize) before taking any action to effectuate the change. These

proposals are submitted for review and comment to the Commission's

Branch of Regulation and Inspections of the Division of Trading and

Markets. The Division also reviews, on a continuing basis, the existing

rules, regulations, procedures, forms and practices of all national

securities exchanges in order to ascertain the effectiveness of the application and enforcement by the exchanges of their own rules; to

determine the adequacy of the rules of the exchanges, and of related

statutory provisions and rules administered by the Commission, in

light of changing market conditions; and to anticipate and define

problem areas so that members of the Commission's staff can meet with

representatives of the exchanges to work out salutary procedures

within the framework of cooperative regulation,"

Revisions in Exchange Member Trading Rules

In December 1967,the New York Stock Exchange upon the recommendation of the Commission adopted new provisions in its Floor

Trading Plan in order to clarify certain aspects of on-floor and offfloor trading, and to further restrict registered traders. Two of these

measures are designed to prevent an off-floormember from taking advantage of any news which he may receive prior to its dissemination

to the public. They deal with the manner in which members trading

from off the floor must transmit their orders to the floor, and provide

for a two-minute waiting period before off-floor members may trade

in a stock in which a block transaction has occurred. The New York

Stock Exchange Revised Rules also provide that a member who is not

a registered trader and who initiates off-floor orders after having been

on the floor that day must file a report of all such off-floortransactions.

The floor trading rules were amended further to restrict congregating

by registered traders when they are liquidating positions. The rule formerly applied only when registered traders were establishing or increasing positions.

Formerly Colorado Springs Stock Exchange.

An earlier section of this report discusses in some detail the highly significant

developments during fiscal 1968 and subsequent months in the area of exchange

rules relating to the level and structure of commission rates. See pp. 1-3.

•

•
64 SECURITIES A~D EXCHANGE COl\1MISSION

Acting on recommendations of the Commission, the American Stock

Exchange, in February 1968,published. a "Commentary" to its existing

rule on excessive dealing to restrict off-floor trading by members for

their own account. This "Commentary" stated that "The Exchange

expects that all trading by members and member organizations will

have a constructive effect on the market by adding to its orderliness

and liquidity." In addition, it outlined in specific terms what types of

off-floor activity would be viewed as excessive.

In January 1968, the American Stock Exchange Floor Trading

Plan was amended to correct an oversight in the original plan which

had exempted. registered traders and other members from the floor

trading rules in any transactions made by them to assist in difficult

market situations upon the request or approval of a floor official.This

exemption was revised to apply only to members who are not registered

traders, which was the intent when the Commission approved the

original Floor Trading Plan.

Revisions in Listing and DeIisling Standards

The various exchanges have rules and practices, generally referred

to as listing and delisting standards, governing admissions to and removals from their lists. During the past year both the New York and

American Stock Exchanges adopted more stringent standards. The

New York Stock Exchange raised its minimum standards for listing

as follows: net tangible assets from $10 million to $14 million; net

income before Federal income tax in the latest year from $2 million to

$2.5 million; number of stockholders of round lots from 1,700to 1,800;

number of shares publicly held from 700,000 to 800,000; and market

value of publicly held shares from $12 million to $14 million. The

criteria for continued listing were raised as follows: total number of

stockholders from 800 to 1,000; number of stockholders of round lots

from 700 to 900; number of shares publicly held from 300,000 to

400,000; market value of publicly held shares from $2.5million to $4.0

million; net tangible assets from $5 million to $7 million; and average

net earnings for the last 3 years from $400,000to $600,000.4,

The American Stock Exchange raised its listing criteria as follows:

net tangible assets from $1 million to $3 million; earnings from

$150,000 for the last year ($100,000 average for last 3 years) to

$300,000 ($500,000before taxes), plus a reasonable prospect of sustaining this level of earnings; number of shares publicly held from 250,000

to 300,000; market value of shares publicly held from $1,250,000 to

$2 million; total number of stockholders from 750 to 900; and total

number of stockholders of round lots from 500to 600.

Net earnings are part of a combined criterion with either market value of

outstanding shares or net tangible assets of less than $7 million.

•
THIRTY-FOURTH ANNUAL REPORT 65

The delisting standards of the American Stock Exchange were also

raised. One new standard provides that a company which has sustained

losses in each of the 2 most recent years must have net tangible assets

of at least $1million and a company which has sustained losses in three

of the 4: most recent years must have net tangible assets of $3 million.

The previous requirement was that a company must have earnings in

at least one of the last 3 years. In addition, the number of shares

which must be publicly held was raised from 100,000 to 150,000; market

value of shares publicly held from $500,000 to $750,000; total number

of shareholders from 300 to 4:50; and number of round lot shareholders from 200 to 300. Under a new provision, the Exchange will

consider removing from its list a stock which has been selling for a

substantial period of time at a low price (generally below $5 per

share) if the issuer does not effect a reverse split of such shares within

a reasonable time after being notified by the Exchange that it deems

such action appropriate.

Dclisting of Securities From Exchanges

Under Section 12(d) of the Securities Exchange Act and the Commission's Rule 12d2-2 thereunder, securities may be withdrawn or

stricken from listing and registration, upon application by an issuer

or an exchange, in accordance with the rules of the exchange and upon

such terms as the Commission may impose for the protection of investors. During the fiscal year ended .June 30, 1968, the Commission

granted applications by exchanges and issuers to remove 56 stock

issues, representing 53 issuers, and 4: bond issues from listing and registration. Since three stocks were each delisted by two exchanges, the

total of stock removals was 59, as follows:

Application filed by:

American Stock Exchange

Detroit Stock Exchange

Midwest Stock Exchange

New York Stock Exchange

Pacific Coast Stock Exchange

Pittsburgh Stock Exchange

San Francisco Mining Exchange

Salt Lake Stock Exchange

Issuer

St ock s

17

2

8

22

4

1

1

1

3

1

1

Total 39 4

The three applications by issuers which were granted during the

year resulted in the removal of one security each from the American,

Detroit and Pacific Coast Stock Exchanges.

The applications by exchanges are generally based upon one or more

of the following grounds: the number of shares of the issue in public

hands or the number of shareholders is insufficient; the market value

_

_

_

_

_

_

_

_

_
66 SECURITIES AND EXCHANGE COMMISSION

of outstanding shares or the trading volume on the exchange is too

low; the issuer has failed to meet the exchange's requirements as to

earnings or financial condition; the issuer has failed to file required

reports with the exchange; or the issuer has ceased operations or is in

the process of liquidation.

Infiscal year 1968,the Commission issued several decisions granting

delisting applications by exchanges which were opposed by the issuers

of the securities. A particularly significant decision was rendered in

the case of American. Eleotronics, Inc.5 This case involved a delisting

policy of the American Stock Exchange that securities will be considered for delisting where the issuer's financial condition and/or operating results do not appear to warrant continued listing, and a specific

criterion adopted in furtherance of that general policy that delisting

will be considered if the issuer has not operated at a net profit in at

least one of the last 3 fiscal years. American Electronics had sustained

losses in 6 of its last 7 years but had a small net profit in one of the 3

years immediately prior to the delisting application. Itcontended that

the more specific delisting "criteria" rather than the more general

"policies" should govern, and that a contrary position would permit

the Exchange to act arbitrarily and would raise antitrust questions.

The Commission rejected these arguments. Itheld that the exchange

may proceed on the basis of its stated policy to consider delisting

where an issuer's financial condition and/or operating results do not

warrant continued listing, and is not precluded from doing so because

of its adoption of more specific criteria in furtherance of the stated

policy. The Commission also stated:

"We cannot agree with the issuer's claim that rejection of its position would

permit the Exchange to delist in a discriminatory and unfair manner and

would render the Exchange's rules deficient under the Act and its actions

questionable under the antitrust laws. Such a rejection does not imply that the

Exchange has an unfettered discretion. The dellsting policies and procedures

of an exchange must be reasonably designed to carry out the purposes of the

Act and fairly administered, and particular delisting actions must be reasonably within the framework of the published policies. Indeed, exchange delisting

programs meeting these standards are, in our opinion, 'necessary to make the

Securities Exchange Act work.' The right of review of delisting applications by

us and, on appeal, by the courts affords an adequate safeguard against any

arbitrary or otherwise improper action. We believe the Exchange has complied

with the applicable standards in this case." [Footnotes omitted.]

Securities Exchange Act Release No. 8244 (January 25, 1968). The other

decisions were Acme Missiles d; Oonetruction. Corporation, Securities Exchange

Act Release No. 8161 (September 19,1967) ; Magic Marker Oorporation, Securities

Exchange Act Release No. 8163 (September 20, 1967); General Oontracting

Corporation, Securities Exchange Act Release No. 8210 (December 13, 1967) ;

and F. L. Jacobs 00., Securities Exchange Act Release No. 8314 (May 10,1968).

The last case is discussed at pp. 151-152, infra.

•
TEITRTY-FOURTH ANNUAL REPORT 67

The Commission further held that the issuer's stated expectations

of profitable operation in the current year and projected improvement

of its capital and working capital positions did not warrant postponement of delisting and it denied the issuer's requests for rehearing by

the exchange or a hearing by the Commission.

Inspections of Exchanges

Pursuant to the regulatory scheme of the Exchange Act, the Commission actively oversees the discharge by the national securities exchanges of their self-regulatory responsibilities. As part of the program, the Branch of Regulation and Inspections in the Division of

Trading and Markets conducts regular inspections of various phases

of exchange activity. During the past fiscal year, the Branch conducted

inspections of the New York, Midwest, Boston, Philadelphia-Baltimore-Washington, Pittsburgh and National Stock Exchanges. This

inspection program provides a means of ensuring exchange compliance

with regulatory responsibilities and enables the Commission to recommend improvements and refinements designed to increase the effectiveness of self-regulation.

In cases where it appears that revisions in internal policies are desirable in order to improve an exchange's performance, the Commission's staff communicates its views to the particular exchange and discusses the matters with exchange personnel to arrive at appropriate

sohrtions,

STATISTICS RELATING TO SECURITIES TRADED ON EXCHANGES

Number of Issuers and Securities

As of June 30, 1968, 4,831 stock and bond issues, representing 2,773

issuers, were admitted to trading on securities exchanges in the United

States. Of these, 4,628 securities issues (3,094 stock issues and 1,534

bond issues), representing 2,634 issuers, were listed and registered on

national securities exchanges, the balance consisting primarily of securities admitted to unlisted trading privileges and securities listed on

exempted exchanges. The listed and registered issues included 1,747

stock issues and 1,369 bond issues, representing 1,486 issuers, listed

and registered on the New York Stock Exchange. Thus, with reference

to listed and registered securities, 56.4 percent of the issuers, 56.5 percent of the stock issues and 89.2 percent of the bond issues were on the

New York Stock Exchange. Table 4 in the Appendix to this report

contains comprehensive statistics as to the number of securities issues

admitted to exchange trading and the number of issuers involved.

During the 1968 fiscal year, 241 issuers listed and registered securities on a national securities exchange for the first time, while the registration of all securities of 213 issuers was terminated. A total of 650

applications for registration of securities on exchanges was filed.
68 SECURITIES AND EXCHANGE COMMISSION

Markel Value of Securities Available for Trading

As of December 31, 1967,the market value of stocks and bonds admitted to trading on U.S. stock exchanges was approximately $780

billion. The tables below show various components of this figure.

'With reference to the tables, it should be noted that issues traded on

either the New York or American Stock Exchange are not traded 011

the other of those exchanges. Many of these issues are also traded on

the so-called regional exchanges. The figures below for "other exchanges," however, show only the number of issues traded solely on

the regional exchanges. The figures in the tables exclude issues suspended from trading and a few inactively traded issues for which

quotations were not available.

Number of Market value Issues Dec. 31, 1967 (mIllions)

Stocks:

New York Stock Exchange ______________________________________________ 1,700 605,817 Amencan Stock Exchange _______________________________________________ 1,061 42,965 Exclusively on other exchanges __________________________________________ 363 3,897

Total stocks _____________________________________________________ 3,124 52,679

Bonds: New York Stock Exchange ______________________________________________ 1,388 125,159 American Stock Exchange _______________________________________________ 138 980 Exclusively au other exchanges __________________________________________ 33 979

Total bonds 1,559 127,118

Total stocks and bonds __________________________________________ 4,683 779,797

The number and market value as of December 31, 1967of preferred

and common stocks separately were as follows:

Preferred stocks Common stocks

Market Murket Number value Number value (millions) (nnllions)

New York Stock Exchange ____________________________ 445 14, 879 1,255 590,938 American Stock Exchange _____________________________ 93 1,403 968 41,562 Exclusively on other exchanges. ________. _______________ 101 610 262 3,287

Total ._ 639 16,892 2,485 635,787

The 3,124 common and preferred stock issues represented over 13.5

billion shares.

The New York Stock Exchange has reported aggregate market

values of all stocks listed thereon monthly since December 31, 1924,

when the figure was $27.1 billion. The American Stock Exchange has

reported totals as of December 31 annually since 1936.Aggregates for

stocks exclusively on the remaining exchanges have been compiled as

of December 31 annually by the Commission since 1948.The available

data since 1936 appear in Table 5 in the Appendix of this Annual

_____________________- _______________________________

________________•• ____• ____• ________•• ____
THIRTY-FOURTH ANNUAL REPORT 69

Report. Itshould be noted that changes in aggregwte market value oyer

the years reflect not only changes in prices of stocks but also such factors as new listings, mergers into listed companies, removals from listing and issuance of additional shares of a listed security.

Volume of Securities Traded

The total volume of securities traded on all exchanges in calendar

year 1967 was 4.6 billion shares, including stocks, warrants and rights,

and $5.'1: billion principal amount of bonds. The 1967 total dollar

volume of all issues traded was $168.3 billion. Trading in stocks increased 4.0percent in share volume and 31 percent in dollar volume ovcr

1966. Volume continued to increase substantially in the first 6 months

of 1968.

The figures below show the volume and value of securities traded on

all stock exchanges (registered and exempted) during the calendar

year 1967,and the first 6 months of 1968.Tables 6 and 7 in the appendix

of this Annual Report contain more comprehensive statistics on volume,

by exchanges.

Volume and value of trading on all exchanges

[Amounts m thousands]

Calendar FIrst 6

year 1967 months 1968

Volume: Stocks (shares)____________________________________________________________ 4,505,229 2,704,869 Rights and Warrants (units) ______________________________________________ 141,296 46,042 Bonds (pnncipal amount m dollars) G______________________________________ 5,393,612 2,777,915

Market Value (dollars): Stoeks_____________________________________________________________________ 161,764,969 98,474,214 Rights and Warrants______________________________________________________ 424,242 230,789 Bonds G ___________________________________________________________________ 6,087,473 2,908,558

Total. _. __________________________________________________________ --- 168, 276, 684 101,613,561

I

Does not include U.S. Government Bonds.

Foreign Stocks on Exchanges

The estimated market value on December 31,1967 of all shares and

certificates representing foreign stocks on U.S. stock exchanges was

$20.9 billion, of which $17 billion represented Canadian and $3.6

billion represented other foreign stocks.

Foreign stocks on exchanges

Canadian Other foreign Total

Dec. 31, 1967

Issues Value Issues Value Issues I Value

Exchange: New York________________ 15 $7, 914, 462, 000 11 $2,472,366,000 26 $10,386,828,000 Amerlcan..________________ 62 9, 346, 435, 233 37 I, 101,855,433 99 10, 448, 290, 666 Others only 0 3 35,535,544 3 35,535,544

TotaL __________________ 77 )17,260,897,233 51 $3, 609, 756, 977 128 $20,870,654,210

•

_______________ ----------------
70 SECURITIES AND EXCHANGE COMMISSION

Consistent with the trend of recent years, the total number of foreign stocks on the exchanges declined during calendar year 1967 from

130to 128.Trading in foreign stocks on the American Stock Exchange

fell from 17.1 percent of aggregate share volume in 1966to 11.59percent in 1967.Similarly, on the New York Stock Exchange, trading in

foreign stocks declined from 3.6 percent in 1966to 2.6 percent in 1967.

Comparative Exchange Statistics

During fiscal year 1968, there was a moderate increase in the total

number of stocks listed on exchanges. Consistent with the trend of

recent years, the number of stocks listed on the New York and American Stock Exchanges increased, while the number of stocks listed

exclusively on the other exchanges declined slightly.

Net number of stocks on exchanges

I

New York Amenean Exclusively Total stocks June 30 Stock Stock on other on Exchange Exchange exchanges exchanges

I

t~::::::::::::::::::::::::::::::::::::::::::::1 1,242 1,079 1,289 3,6101,293 895 951 3,139 1950____._ ................. _........... _........ 1,484 779 775 3,038 1955__..... _._ .... _...... _... _._ ........ _.. _. __. 1,M3 815 686 3,0« 1900.. .... _._._ ...... _._ .... _._ ................ 1,532 931 555 3,018 1961. __.. _............... _._ ........ __... _...... 1,546 977 519 3,042

1962._._._ .......... .... _._ .................... 1,565 1,033 {93 3,091 1953___.... _.... _. __._ .......... _...... _........ 1,579 1,025 '76 3,080 1964__... _............. _._ ...... _._._. __........ 1,613 1,023 {63 3,099

1965._ ......... _..... _._ ........... _............ , 1,627 1,0« «0 3,111 1966__._ ........ __._ ... _...... _.. _._._ .......... 1,656 1,054 429 3,139

t~::::::::::::::::::::::::::::::::::::::::::::i 1,693 1,072 '15 3,1801,764 1,097 405 3,266

The aggregate value of shares listed on the New York Stock Exchange relative to the total share values on all exchanges eased during

1967, marking the first relative decline since 1961.The percentage of

the total share value accounted for by American Stock Exchange

stocks, on the other hand, rose for the first time since 1961 as prices

of stocks on that exchange experienced a relatively larger gain during the year than did New York Stock Exchange listed issues. The

percentage for stocks traded exclusively on other exchanges continued

to decline.

Value of shares listed on exchanges, in percentages

New York American Exclusively Dec. 31 Stock Stock on other Exchange Exchange exchanges

1950______................. _.............. ____.•...... _______.. 84.50 12.52 2.98 1955_______.... _......... __............. _____. __....... _______. 86.98 11.35 1.67 1960__._ ......... _____... _._ .. _...... ___._._._ ....... ____._._ .. 91. 56 7.22 1.22 1961__........... ____.. __.................... 91.02 7.74 I.U

f5~~~~ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~2~~2:~:j 92 41 6.52 1.07 93.12 5.91 0.97 93 59 5.56 0.85 93.77 5.41 0.82

mL::::::::::::::::::::::::::::::::::::::::::::::::::::::::1 93 81 5.41 0.77 92.82 6.58 0.60

_

_

1
TEURTY-FOURTH ~~UAL REPORT 71

The figures below show the annual volume of shares traded, including rights and warrants, on all exchanges during selected years since

1940. In 1967, both share and dollar volume continued their steady

climb of the preceding four years and reached new peaks. Trading

was particularly active on the American Stock Exchange with share

and dollar volume on that Exchange increasing 75 and 60 percent,

respectively, over the previous year. Volume on all exchanges continued at record rates during the first 6 months of 1968.

Share and dollar volume on exchanges

New York

I

American

I

All others I Calendar year Stock Stock exchanges Total

Exchange Exchange

Share tIOlume (lhomafilU)

1940____________________________________________ 285,059 49,882 42,957 377,898 1945____________________________________________ 506,564 163,860 98,595 769,019 1950____________________________________________ 681,806 120,908 90,606 893,320 1955____________________________________________ 909,785 253,531 158,084 1,321,401 1960____________________________________________ 986,878 320,906 133,263 1,441,048 1961. ___________________________________________ 1,392,573 548,161 201,790 2,142,523 1962____________________________________________ 1,220,854 344,347 146,744 1,711,945 1963____________________________________________ 1,371,808 354,305 154,686 1,880,798 1964____________________________________________ 1,542,373 411,450 172,551 2,126,374 1965____________________________________________ 1,867,223 601,844 201,944 2,671,012 1966____________________________________________. 2,297,884 756,942 257,558 3,312,383 1967____________________________________________ 2,992,805 1,320,462 333,258 4,646,525 1968 (first 6 months) ____________________________ 1,690,465 839,197 221,249 2,750,911

Dollar IXJlume(thousands)

1940____________________________________________ 7,170,572 616,146 603,065 8,419,783 1945____________________________________________ 13,474,271 1,759,899 1,020,382 16,254,552 1950____________________________________________ 18,734,723 1,493,706 1,579,855 21,808,284 1955____________________________________________ 32,830,838 2,657,016 2,551,253 38,039,107 1960____________________________________________ 37,972,433 4,235,686 3,098,484 45,306,603 1961. ___________________________________________ 52,820,306 6,863,110 4,388,207 64,071,623 1962____________________________________________ 47,353,334 3,736,619 3,765,911 54,855,894 1963____________________________________________ 54,897,096 4,844,912 4,696,065 64,438,073 1964____________________________________________ 60,501,229 6,127,236 5,833,285 72,461,750 1965____________________________________________ 73,234,393 &,874,875 7,439,825 89.549,093 1966____________________________________________ 98,653,005 14,617,166 10,366,272 123,666,443 1967____________________________________________ 125, 362, 700 :J3, 191, 312 13,335,199 162,189,211 1968 (first 6 months) ____________________________ 72,701,696 18,038,845 7,964,461 98,705,003

The ratio of share volume on the New York Stock Exchange to the

total on all exchanges showed a sharp drop in 1967, while the American Stock Exchange ratio rose to 28 percent, from 23 percent in 1966.

The American Stock Exchange percentage of share and dollar volume

has risen steadily since 1963, while the percentage of the New York

Stock Exchange has decreased. The regional exchange percentage of

both share and dollar volume declined slightly in 1967. In the first 6

months of 1968, the New York Stock Exchange share volume ratio

declined slightly further but its dollar volume ratio experienced a

steeper decline, as the American Stock Exchange dollar volume ratio

increased to 18 percent from 14 percent in 1967. Stocks, rights and

warrants are included in the following presentation. Annual data in

more detail are shown in Appendix Table 7 in this Annual Report.

-
72 SECURITIES AND EXCHANGE CO:MMISSION

Annual sales of stock on exchanges, in percentages

7.\5

644

724

671

6.84

6.85

6.87

7.29

8.05

8.31

838

822

807

Calendar year

Pel cent o[ share volume I Percent o[ dollar volume

New YOrk! American~~:-I New York I American I All other

I I

1940___________________________ 75 44 13 20 : 11 36 85 17 I 7 68 1.145___________________________ 05 87 21 31 1282 82 75 10 81 I

IV50___________________________ 76_3~ 13.54 10.14 85 91 685 liJ55___________________________ l8.85 1q 19 11 96 86.31 6.98 HloO___________________________ 68 48 2~ 27 9 25 83 81 'l 35 HI61___________________________ 64 49 ~5 58 943 82.44 10 il

IH6~___________________________ 71 32 20.12 856 86.32 681

lq63___________________________ 72 V4 11; 84 822 85 IV 752

1964___________________________ 7254 19.35 811 83.49 846

1965___________________________ eq q\ 2253 7.56 81. 78 991

1966___________________________ 611.37 2285 778 79.78 11 84

1967.._________________________ 64 41 28 42 7.17 77 30 14 48

IV68 (first 6 months) 61 45 30.51 8 04 73 65 18 28

I

Block Distributions Reported By Exchanges

The usual method of distributing blocks of listed securities considered too large for the auction market on the floor of an exchange is

to resort to "secondary distributions" over the counter after the close of

exchange trading. There were 143secondary distributions in 1967 COll1-

pared to 126 the preceding year. Nevertheless, the dollar value of the

shares sold in this manner declined 24 percent to $1,154.5million. During the first 6 months of 1968, there were 74 secondary distributions

with a total value of $712.4million.

Special Offering Plans were adopted by many of the exchanges in

194:2,and Exchange Distribution Plans in 1953,in an effort to keep as

much trading as possible on their floors. Since 1962 there have been no

special offerings. Exchange distributions continued to decline from

the record of 72 in 19G3to 51 in 1967. However, the value of the 1967

exchange distributions was $125.4 million compared to $107.5million

in 1963.

Block distributions of stocks reported by exchanges

Number I Shares III I Shares sold offN

Value

(dollars)

II! month» ended Dec. 91, 1967

Special offerings

Exchange distrlbunons Secondary distrtbutlons 51o I 4,349, 3nl0 ! 3,452,856 0 I 125,403,727 0

143 29,919,674 30,783,604 1,154,479,370

1-------''-

6 months ended June 90, 1968

Special offerings

Exchange distnbuuons Secondary distrrbutrons ~II °1

2,306,881

15,950,192 01 2,044,53816,494,785

o 66,336,125

712,412,631

Details o[ these dtstrtbutions appear in the Commission's monthly Statistrcal Bulletins. Data [or prior

years are shown In AppendIX Table 8 In this Annual Report

Unlisted Trading Privileges on Exchanges

The number of stocks with unlisted trading privileges which are not

also listed and registered on other exchanges further declined during

------------- i

'

II

•

_

_

_

_

_

_

•
TF.URTY-FOURTH~~AL REPORT 73

the fiscal year, from 10i3 to 97. The American Stock Exchange accounted for the entire decline except for one stock on the Honolulu

Stock Exchange. During the calendar year 1967,the reported volume

of trading on the exchanges in stocks with only unlisted trading privileges increased to about 38,065,577shares, or about 0.85 percent of

the total share volume on all exchanges, from about 23,985,000shares,

or about 0.75 percent of share volume during calendar year 1966.

About 96 percent of the 1967 volume was on the American Stock

Exchange, while three other exchanges contributed the remaining 4

percent. The share volume in these stocks on the American Stock

Exchange represented 2.8 percent of the total share volume on that

exchange.

Unlisted trading privileges on exchanges in stocks listed and registered on other exchanges numbered 1,892 as of June 30, 1968. The

volume of trading in these stocks for the calendar year 1967 was

reported at about 148,841,743shares. About 86.4percent of this volume

was on regional exchanges in stocks listed on the New York or American Stock Exchanges. The remaining 13.6 percent was in stocks listed

on regional exchanges with the primary market on the American Stock

Exchange which had the unlisted trading. While the 148,841,743

shares amounted to only 9.8 percent of the total share volume on all

exchanges, they constituted major portions of the share volume of most

regional exchanges, as reflected in the following approximate percentages: Cincinnati 75.7 percent; Boston 92.5 percent; Detroit 73.4 percent; Philadelplua-Baltimore-Washington 81.6 percent; Pittsburgh

65.7 percent; Midwest 28.9 percent; and Pacific Coast 27.7 percent,"

Applications by exchanges for unlisted trading privileges in stocks

listed on other exchanges, filed pursuant to Rule 12f-1 under Section

12(f) (1) (B) of the Securities Exchange Act, were granted by the

Commission during the fiscal year ended June 30,1968, as follows:

Rtock exchanges:

Number

of Stocks Boston 48

Cincinnati 12

I>etroit 33

~!idvvest 27

Pacific Coast_____________________________________________________ 16

Philadelphia-Baltimore-Washington 6n

Pittsburgh R

Total 213

The distribution of unlisted stocks among the exchanges and share volume

therein are shown in Appendix Table n.

•
74 SECURITIES AND EXCHANGE COMMISSION

OVER-TIlE-COUNTER TRADING IN COMMON STOCKS TRADED ON

NATIONAL SECURITIES EXCHANGES

In accordance with Rule 17a-9, since January 1965 brokers and

dealers who make markets in common stocks traded on national

securities exchanges (sometimes referred to as the ''third market")

have been reporting their trading over the counter and on exchanges

in the common stocks in which they make markets. They also report

certain off-board trading in other common stocks traded on exchanges.

Broker-dealers who are not market makers report their large third

market transactions. The reporting system is designed to reflect all

sales to persons other than broker-dealers, i.e., to individuals and

institutions. Since the beginning of 1967, reports have been required

only for common stocks listed on the New York Stock Exchange.

About 98 percent of over-the-counter volume in listed common stocks

is in New York Stock Exchange issues.

During the calendar year 1967, total over-the-counter sales of common stocks listed on the New York Stock Exchange amounted to

85.1 million shares valued at $4,152million. This latter figure was the

equivalent of 3.3 percent of the dollar volume on the New York Stock

Exchange in common and preferred stocks. Third market volume in

1967 increased about 45 percent over the preceding year, an increase

which was proportionately larger than the increase in Exchange

volume,

In the first half of 1968,third market volume continued to increase

at a greater rate than Exchange volume. As a result, over-the-counter

dollar volume in New York Stock Exchange common stocks rose to

3.7 percent of the dollar volume in common and preferred issues on the

Exchange.

Over-the-counter volume in common stocks listed on the New York

Stock Exchange

Over-the-counter

Over-the-counter New York Stock sales as percent salesofcommon Exchange of New York

stocks volume Stock Exchange volume

t=:::::::::::::::::::::::::::::::::::::::::::::::1 1967

1968(First 6months)

Share volume (thomand.)

48,361

58,198

85,081

55,330

Dollar volume (thomand.)

2.7

2.6

2.9

3.3

2,500,416

2,872,660

4,151,917

2,689,322

73,199,997

98,565,294

125,329, 106 72,694,981

3.4

2.9

3.3

3.7

_

_
TEITRTY-FOURTH ~AL REPORT 75

STATISTICAL STUDIES

The regular statistical activities of the Commission and its participation in the overall Government statistical program under the direction of the Office of Statistical Standards, Bureau of the Budget,

were continued during fiscal year 1968 in the Commission's Office of

Policy Research. The statistical series described below are published

in the Commission's monthly Statistical Bulletin. In addition, current figures and analyses of the data are published quarterly on new

securities offerings, individuals' saving, stock transactions of financial

institutions, financial position of corporations, and plant and equipment expenditures.

Issues Registered Under the Securities Act of 1933

Monthly statistics are compiled on the number and volume of registered securities, classified by industry of issuer, type of security, and

use of proceeds. Summary statistics for the years 1935-68 are given in

Appendix Table 1 and detailed statistics for the fiscal year 1968 appear in Appendix Table 2.

New Securities Offerings

Monthly and quarterly data are compiled covering all new corporate and noncorporate issues offered for cash sale in the United

States. The series includes not only issues publicly offered but also

issues privately placed, as well as other issues exempt from registration under the Securities Act, such as intrastate offerings and offerings

of railroad securities. The offerings series includes only securities actually offered for cash sale, and only issued offered for the account of

Issuers.

Estimates of the net cash flow through securities transactions are

prepared quarterly and are derived by deducting, from the amount of

estimated gross proceeds received by corporations through the sale of

securities, the amount of estimated gross payments by corporations to

investors for securities retired. Data on gross issues, retirements and

net change in securities outstanding are presented for all corporations

and for the principal industry groups.

Individuals' Saving

The Commission compiles quarterly estimates of the volume and

composition of individuals' saving in the United States. The series

represents net increases in individuals' financial assets less net increases in debt. The study shows the aggregate amount of savings

and the form in which they occurred, such as investment in securities,

expansion of bank deposits, increases in insurance and pension reserves, etc. A reconciliation of the Commission's estimates with the

personal saving estimates of the Department of Commerce, derived

in connection with its national income series, is published annually by
76 SECURITIES AND EXCHANGE COMMISSION

the Department of Commerce as well as in the Securities and Exchange Commission Statistical Bulletin.

Private Noninsured Pension Funds

An annual survey is published of private pension funds other than

those administered by insurance companies, showing the flow of money

into these funds, the types of assets in which the funds are invested

and the principal items of income and expenditures. Quarterly data

on assets of these funds are published in the Statistical Bulletin.

Stock Transactions of Financial Institutions

A statistical series containing data on stock trading of four principal

types of financial institutions is published quarterly. Information on

purchases and sales of common stock by private noninsured pension

funds and nonlife insurance companies has been collected on a quarterly basis by the Commission since 1964; these data are combined with

similar statistics prepared for mutual funds by the Investment Company Institute and for life insurance companies by the Institute of

Life Insurance.

Financial Position of Corporations

The series on the working capital position of all U.S. corporations,

excluding banks, insurance companies, investment companies and

savings and loan associations, shows the principal components of current assets and liabilities, and also contains an abbreviated analysis

of the sources and uses of corporate funds.

The Commission, jointly with the Federal Trade Commission, compiles a quarterly financial report of all U.S. manufacturing concerns.

This report gives complete balance sheet data and an abbreviated income account, data being classified by industry and size of company.

Plant and Equipment Expenditures

The Commission, together with the Department of Commerce, conducts quarterly and annual surveys of actual and anticipated plant and

equipment expenditures of all U.S. business, exclusive of agriculture.

After the close of each quarter, data are released on actual capital expenditures of that quarter and anticipated expenditures for the next

two quarters. In addition, a survey is made at the beginning of each

year of the plans for business expansion during that year.

Directory of Registered Companies

The Commission annually publishes a list of companies required to

file annual reports under the Securities Exchange Act of 1934.In addition to an alphabetical listing, there is a listing of companies by industry group classified according to The Standard Industrial Classification Manual.
TEITRTY-FOURTH ANNUAL REPORT 77

Stock Market Data

The Commission regularly compiles statistics on the market value and

volume of sales on registered and exempted securities exchanges, roundlot stock transactions on the New York and American Stock Exchanges

for account of members and nonmembers, odd-lot stock transactions on

the New York and American Stock Exchanges, odd-lot transactions

in 100 selected stocks on the New York Stock Exchange and block distributions of exchange stocks. Since January 1965,the Commission has

been compiling statistics on volume of over-the-counter trading in

common stocks listed on national securities exchanges (the so-called

"third market") based on reports filed under Rule 17a-9 of the Securities Exchange Act.

Data on round-lot and odd-lot trading on the New York and American Stock Exchanges are released weekly. The other stock market

data mentioned above, as well as these weekly series, are published

regularly in the Commission's Statistical Bulletin.

Cost of Flotation of Security Issues

In calendar year 1967 the Commission began a study of the cost

of flotation of registered equity issues offered by issuing corporations

as well as selling shareholders for the years 1963-65.

Costs of flotation measure the initial costs of marketing securities,

i.e., the costs entailed in transmitting funds from the investor to the

issuing corporation. These costs are measured asthe difference between

the price paid by the investor (gross proceeds) and the net amount

available to the issuer. They include compensation paid to underwriters, securities dealers, finders or agents, fees for lawyers and accountants, printing and engraving costs, Federal and State fees and other

expenses connected with the issuance of securities. The current study

covers initial costs of flotation only and does not attempt to measure

or compare the net cost of raising capital. Consequently, insofar as

possible, costs riot pertinent to the initial flotation, such as advertising

charges for redemption notices or trustees' charges for continuing

services, are excluded from the study. Moreover, this study only

attempts to cover cash compensation; noncash compensation such as

options-an important cost in the distribution of some smaller, more

speculative securities-is omitted because of problems of valuation.

Costs of flotation studies have been prepared by the Commission at

various times with the last study covering the years 1951, 1953 and

1955. The current study, however, will be broader in coverage and

more comprehensive in its analysis. For example, the study will cover

all types of securities which represent ownership interests in a business or which are convertible into or represent a call on such securities.

Costs will be analyzed for each type of equity securities to show

327-506--68----7
78 SECURITIES AND EXCHANGE COMMISSION

differences or similarities between limited partnership interests and

common stock as well as for preferred stocks and convertible bonds.

Moreover, the study will cover issues offered through securities

dealers-either as an offering to the general public or to stockholders-as well as those sold directly by the issuer. Also, the current

study incorporates into the analyses factors influencing costs not

covered in past studies. Among these factors are the market place for

outstanding securities of the issuer and the offering price of the issues

in the case of common stocks.
PART IV

CONTROL OF IMPROPER PRACI'ICES IN

SECURITIES MARKETS

REGULATION OF BROKER.DEALERS AND INVESTMENT ADVISERS

Registration, Financial Responsibility, Record Maintenance and Financial

Reporting Requirements

Registration.-8ubject to limited exemptions, the Securities Exchange Act of 1934 requires all brokers and dealers who use the mails

or instrumentalities of interstate commerce in the conduct of an

over-the-counter securities business to register with the Commission.

Similarly, the Investment Advisers Act of 1940, which establishes a

pattern of regulation comparable to that established by the Exchange

Act with respect to brokers and dealers, requires the registration of

investment advisers, with certain exceptions.

As of June 30,1968,4,397 broker-dealers and 2,007 investment advisers were registered. Both these figures reflect substantial increases

during the year. The increase of 275 in investment adviser registrations is particularly striking.

The following tabulation reflects various data with respect to registrations of brokers and dealers and investment advisers during the

1968 fiscal year:

Broker- Dealers

Effective registrations at close of preceding year 4,175

Applications pending at close of preceding year 88

Applications filed during year 626

Total 4,884

Applications denied____________________________ __ 1

Appltea tions withdra wn___________________ __ 5

Registrations withdra wn___________________________________ 341

Registrations cancelled____________________________________ 29

Registrations revoked____________________________________________ 19

Registrations effective at end of year 4, 397

Applications pending at end of year_______________________________ 42

Total 4,884

79
80 SECURITIES AND EXCHANGE COl\IM:ISSION

Investment Aaciscre

Effective registrations at close of preceding year I, 732

Applications pending at close of preceding year______________________ 27

Applications filed during year 460

Total 2,219

Registrations cancelled or withdrawn______________________________ 167

Registrations denied or revoked__________________________________ 2

Applications withdra wn____ ____ ___ _ _ __ G

Registrations effective at end of yen r 2,007

Applications pending at end of yeaL______________________________ 37

Total 2,219

During the fiscal year, the Commission amended both Form BD

(broker-dealer application for registration) and Form ADV (investment adviser application for registration) and Rules 15b3-1 under

the Exchange Act and 204-1 under the Advisers Act,' effective September 1, 1968.The amendments were designed, among other things,

to provide additional information to assist the Commission in performing its regulatory functions. In this connection, the revised forms

will elicit detailed information concerning the direct or indirect control by the applicant or registrant of any other organization engaged

in the securities or investment advisory business, the nature of any

other business conducted by it and financing to be provided by persons

other than the named principals. The additional information required

will assist not only the Commission and State regulatory authorities,

but also members of the public who examine the forms. Additionally,

the amendments were designed to achieve substantial uniformity between Forms BD and ADV and the forms used by many of the State

regulatory authorities for registration of brokers and dealers and investment advisers. State regulatory bodies of 32 States have either

adopted or are considering the adoption of forms which would result

in the acceptance of applications and amendments on revised Forms

BD and ADV as meeting State requirements if supplemented by any

additional information required by State law or regulation. A third'

purpose of the amendments was to modernize procedures to conform

with technological advances in the maintenance of records and retrieval of information. Broker-dealers and investment advisers who

are already registered will have to file a complete revised form, no

later than December 31, 1968.

The Commission also amended Rule 203-2 under the Investment

Advisers Act and adopted a new form, Form ADV W, to be used by

investment advisers seeking to withdraw from registration with the

1Securities Exchange Act Release Xo, 8317, Investment Advisers Act Release

Xo.221 (May 21,1(68).

-
TEITRTY-FOURTH ANNUAL REPORT 81

Commission." Form ADV-W requires specified information concerning, among other things, the arrangements made with respect to winding up the affairs of the business, including arrangements made for

paying or delivering any funds or securities owed to clients and refunds on uncompleted investment advisory contracts. The information furnished will enable the Commission to determine whether the

business is being terminated in compliance with applicable requirements and whether an investigation or administrative proceedings are

necessary. The amended rule provides for a 60-day waiting period

between the filing of Form ADV-vV and the effective date of the

registrant's withdrawal, unless acceleration is granted or proceedings

are instituted by the Commission. The 30-day period previously provided by the rule was too short to permit the necessary determinations

to be made.

The Commission participated during the fiscal year as amicus curiae

in Eastside Ohurch of Ohrist v, National Plan, Inc.,3 a case dealing

with the broker-dealer registration requirements of the Securities Exchange Act. The decision of the Court of Appeals for the Fifth Circuit

in this case was generally in accord with the views expressed in the

Commission's amicus brief. The court held that a company which was

engaged in the business of directing bond sales programs for churches,

and which purchased many church bonds for its own account as a part

of its regular business and sold some of them, was both a broker and a

dealer within the meaning of the Act. The court further held that

transactions in which this company purchased bonds from certain

churches in violation of the statutory provision which prohibits an

unregistered broker-dealer from effecting securities transactions could

be voided by the selling churches. In rejecting the company's contention that the churches must establish that any harm which they suffered

was caused by the company's failure to register, the court stated that

"it is sufficient to show merely that the prohibited transactions occurred and that [the sellers] were in" the "class of persons whose interest the Act was designed to protect." The court added:

"The requirement that brokers and dealers register is of the utmost importance in effecting the purposes of the Act, It is through the registration

requirement that some discipline may be exercised over those who may

engage in the securities business and by which necessary standards may be

established with respect to training, experience, and records."

The court held that the churches could recover from the company

with respect to transactions in which the company purchased bonds

from a certain individual who was acting as the churches' agent in

'Investment Advisers .Act Release No. 213 (November 13, 1967).

3391 F. 2d 357 (CA. 5, 1968), certiorari denied, 37 U.S. L.W. 3151 (U.S. Oct. 21,

1968).
82 SECURITIES AND EXCHANGE COMMISSION

effecting the transactions. Recovery was not permitted, however, with

respect to bonds which that individual purchased outright from the

churches and then resold to the company. In denying recovery in the

latter situation, the court stated: "This is on the theory that the church

would be a stranger to the transaction."

Capital Requirements with Respect to Broker-Dealers.c-Rule

15c3-1 under the Exchange Act, commonly known as the net capital

rule, imposes minimum net capital requirements on brokers and

dealers. In addition, it limits the amount of indebtedness which may

be incurred by a broker-dealer in relation to its capital, by providing

that the "aggregrate indebtedness" of a broker-dealer may not exceed

20 times the amount of its "net capital" as computed under the rule.

During the fiscal year, the Commission amended the net capital rule

with regard to the prescribed deduction to be made from the market

value of convertible debt securities in the computation of the "net

capital" of a broker or dealer subject to the rule.'

Inthe Report of the Special Study of the Securities Markets, it was

pointed out with respect to convertible debt securities that, when "the

price of the underlying stock is below the conversion price, it is probable that there is a greater tendency for the bonds to sell as debt securities," and, conversely, that when the market value of the securities

exceeds their face value, they tend to be treated in the market as stock,"

Itis also common knowledge that, at certain market levels, convertible

debt securities attain a hybrid quality and are treated in the market as

part stock and part debt.

Despite these characteristics, prior to the recent amendment the

deduction of 30 percent of market value, which is applied to common

stock in computing net capital, was also applied to convertible debt

securities. By contrast, the deductions applicable to straight debt securities are computed on a sliding scale from 5 percent to 30 percent

of market value, the applicable percentage depending on the difference between face value and market value when the market price is

between 70 and 100. If the market price is 70 or below, the deduction

is a straight 30 percent.

Under the amendment, a convertible debt security which is not in

default and which has a fixed maturity date and rate of interest is

given the same deduction as a straight debt security when its market

value is below 90 percent of face value. Ifthe market price is between

90 and 115,the convertible debt security is treated as a hybrid security

to which a 30 percent deduction is applied with the proviso that the

value of the security for net capital computation purposes shall in no

event be less than 80 percent of the face value. At a market price of

Securities Exchange Act Release No. 8337 (June 19, 1968).

Report of Special Study of Securities Markets, part 4, p. 24 (1963).

•

•
TF.URTY-FOURTH ANNUAL REPORT 83

115 and above, the percentage deduction for such a security becomes

a straight 30 percent, the same deduction as applies under the rule

to common stock.

Financial Reports of Broker-Dealers-s-Rule l'7a-5 under the Exchange Act requires registered broker-dealers to file annual reports

of financial condition with the Commission. These reports must be

certified by a certified public accountant or public accountant who is

in fact independent, with certain limited exemptions applicable to

situations where certification does not appear necessary for customer

protection. During the fiscal year 4,039 reports were filed with the

Commission.

These reports enable the Commission and the public to determine

the financial position of broker-dealers. They provide one means by

which the staff of the Commission can determine whether a brokerdealer is in compliance with the net capital rule. Failure to file required reports may result in the institution of administrative proceedings to determine whether the public interest requires remedial

action against the registrant.

During the fiscal year, the Commission adopted a general revision

of Form X-17A-5, the annual report of financial condition," The

revisions of the form and related audit requirements reflect changing

conditions and practices in the securities industry and are based on

the experience gained from examination of reports filed with the

Commission over the years. Among other things, the audit requirements were expanded to require the independent accountant to comment on any material inadequacies in the broker-dealer's accounting

system, internal account control or procedures for the safekeeping

of securities and to report any corrective action taken or proposed.

Rule 17a-5 was amended to provide that the accountant's comments,

if bound separately, would be deemed confidential.

The adoption of new Rule 17a-l0, providing for annual brokerdealer reports of income and expenses, is discussed in a prior section

of this report.'

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

Association

During the fiscal year, the Commission continued to be active in its

regulatory activities with respect to "nonmember" brokers and dealers

(i.e., those who are not members of the National Association of Securities Dealers, Inc. (NASD) ) which are designed to provide regulation

comparable to that imposed by the NASD on its membership. This

regulatory program is known as the SECO program. During the year

the number of nonmember broker-dealers increased from 462 to 495,

Securities Exchange Act Release No. 8172 (October 3,1967).

See pp.14-15, supra.

•

•
84 SECURITIES AND EXCHANGE COMMISSION

although the number of associated persons decreased from about

22,000to about 20,000.

The following table categorizes the nonmember broker-dealers by

type of business and region:

Number of nonmember broker-dealers by principal type of business and by regwnal

office as of June 30, 1968

Regional 0 ffice

Principal type 01business I At- nos- Chi. Den. Fort New San Se- Wash- Forianta ton cago ver Worth York Fran. attle Ington eign Total

cisco

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

Exchange member pnmarily I

engaged in floor actrvrties __ 0 01 1 0 0 .36 1 0 3 1 42

Exchange member pnmanly

engaged in exchange comnnSSIon business. ______ 0 1 1 0 0 '13 3 2 2 4 26

Other broker or dealer in

general secnritles business , 3 7 18 2 2 26 7 9 2 15 91

Mutual fund underwnter and distributor 6 1 19 3 0 2 4 3 3 1 42

Broker or dealer selling

variable annuities , ........ 17 14 42 6 12 5 15 8 18 0 c 137

Bohcitor of savmgs and loan accounts __ . ___. ____. ______ I 1 5 0 1 9 5 0 0 0 22

Real estate syndicator and

mortgage broker and banker ___...... ___. _______ 0 1 1 0 0 3 & 0 5 0 13

Broker or dealer selling 011 and gas interests. _________ 0 0 0 0 4 2 0 0 3 0 9

Put and call broker or dealer or option writei , __._ 2 1 2 0 0 20 1 0 0 1 27

Broker or dealer sellmg

secunties of only one

issuer or associated lSSUCl s. 3 1 1 4 2 3 2 1 0 2 21

Broker or dealer selllng church secuntles ___________ 3 0 1 3 12 0 0 0 0 0 16 Government bond dealer ____ 2 01 1 0 0 2 0 0 0 0 Ii

Broker or dealer in other securltres business d 1 1 2 0 1 11 3 2 3 4 28

Inactive IIIsecuntles

business, ______. ___. _...... 1 0 1 0 1 7 2 0 3 1 16

---- 9515-- -- -- ----- 291

TotaL. _____•......... 39 28 25 139 46 25 44 495 I

Includes 20 New York Stock Exchange members and 16 American Stock Exchange members .

Includes eight New York Stock Exchange members and five American Stock Exchange members.

e Includes 93 selling for P ALrC and 19 sellmg lor VALrC.

d Includes, among others, finders m mergers and acquisitrons, sellers of theatrical participations, a private

banker, and appraisers of estates.

One of the requirements applicable to nonmember broker-dealers is

that each associated person engaged in specified securities activities

pass a general securities examination prescribed by the Commission or

an examination deemed by the Commision to be a satisfactory alternative. Such alternative examinations include, thus far, those given by

certain of the national securities exchanges, the NASD, the NAIC

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

fiscal year, 1,644 associated persons qualified by passing the Commission's examination, and approximately 4,356 others qualified by passing an alternative examination.

During the year, the Commission amended Rule 15b9-1 and adopted

Rule 15b9-2 to provide a permanent fee structure for nonmember

hroker-deulers." Prior to its amendment Rule 15b9-1 covered both

initial and annual fees. Now, 15b9-1 deals with initial fees while

8 Securities Exchange A.ct Release No. 8308 (May 8, 1968).

___•________

_ •• _ •••

1

•

•
TFURTY-FOURTH A~AL REPORT 85

15b9-2 deals with annual fees which include a base fee applicable to

all broker-dealers, a fee for associated persons and a fee for each office

maintained by the broker-dealer. For purposes of simplification, the

new rules prescribe the fee structure and the actual fees will be set

each year in the applicable forms required to be filed.

Under the inspection program for nonmember broker-dealers 98 inspections were conducted during the year. In addition to matters

normally covered in broker-dealer inspections, these inspections were

designed to determine compliance "with SECO rules and to obtain

information which will prove helpful in the further development of

the SECO program.

During the fiscal year, continuing efforts were made to cooperate

with State authorities in coordinating regulatory activities involving

nonmember broker-dealers. Certain State examinations were reviewed

and determined to be satisfactory alternatives to the Commission's

general securities examination. Other cooperative efforts included the

initial preparation of a new form which would combine Form SECO-2

and a uniform State form for applications of associated persons. The

new form is expected to be recommended for adoption in the next

fiscal year.

Also during the year, the Commission improved the processing and

utilization of applications by associated persons with the adoption of

a system for placing the information contained in Forms SECO-2

on the Commission's computer.

On July 27, 1967, Rules 15bl0-l through 15bl0-7 under Section

15(b) (10) were adopted by the Commission, effective October 2,

1967.9 The new rules, discussed in detail in the previous annual reo

port," established standards of general business conduct, suitability

of recommendations and supervision of associated persons, regulate

discretionary accounts and impose record keeping requirements. At the

present time, the Commission's staff is engaged in drafting additional

rules under Section 15(b) (10) concerning advertising and sales literature of nonmember broker-dealers.

During the fiscal year the Commission issued its first decision concerning a violation of the rules covering nonmember broker-dealers.

The case, Associated Securities, Inc.,ll resulted in the revocation of

the registration of the broker-dealer. In addition to violations of the

anti-fraud provisions of the Securities Act and the Exchange Act, the

Commission found that the registrant, aided and abetted by its officers, had willfully violated Sections 15(b) (8) and 15(b) (9) of the

Exchange Act and Rules 15b8-1, 15b8-2 and 15b9-1 thereunder by

permitting associated persons to engage in securities activities when

Securities Exchange Act Release No. 8315 (July 27,1967).

,. Thirty-third Annual Report, pp. 16-18.

U Securities Exchange Act Release No. 8316 (May 17, 1968).

•
86 SECURITIES AND EXCHANGE COMMISSION

Forms SECO-2 had not been filed with respect to them and the required filing fees had not been paid, and by filing a false and misleading Form SECO-4-67 which understated the number of persons associated with the registrant and the fees to be paid with respect to

them.

Detection of Improper Practices

Public Complaints.- The Commission has various sources of information concerning possible violations of the Federal securities laws.

A primary source is complaints by members of the general public

concerning the activities of certain persons in securities transactions.

During fiscal 1968 the Commission received some 3,400 complaints

from investors and others relating to broker-dealers and investment

advisers. The Commission's staff gives careful consideration to such

complaints and, if violations are indicated, an investigation may be

commenced. Other outside sources of information include the stock

exchanges, the National Association of Securities Dealers, Inc., brokerage firms, State and Canadian securities authorities, better business

bureaus, and various law enforcement agencies.

Inspections.- The program of surprise inspections of brokerdealers and investment advisers by the Commission's staff is another

important device for the detection of improper practices. During fiscal 1968, 514 broker-dealer inspections and 165 investment adviser

inspections were carried out. These inspections produced indications

of various types of infractions, as shown below:

Broker-Dealers

Type Financial difficulties 52

Improper hypothecation 8

Unreasonable prices in securities purchases and sales_______________ 15

Noncompliance with Regulation T________________________________ 38

"Secret profits" 6

Noncompliance with confirmation and bookkeeping rules____________ 268

Other 193

Total indicated violations______________________________________ 580

Investment Advisers

Type

Books and records deficient_______________________________________ 33

Registration application inaccurate_______________________________ 39

False, misleading, or otherwise prohibited advertising______________ 17

Improper "hedge clause"* 16

Failure to provide for nonassignabllity in investment advisory

contract_______________________________________________________ 13

Others 11

Total indicated violations______________________________________ 129

."Hedge clauses" used in literature distributed by Investment advisers generally state

in substance that the information furnished Is obtained from sources believed to be reliable,

but that no assurance can be given as to its accuracy. A clause of this nature may be

improper where the recipient may be led to believe that he has waived any right of action

against the Investment adviser.
TEaRTY-FOURTH ANNUAL REPORT 87

Section of Securities Violations.-A Section of Securities Violations is maintained by the Commission as a part of its enforcement

program to provide a further means of detecting and preventing fraud

in securities transactions. This Section maintains files which contain

information concerning persons who have been charged with, or found

in violation of, various Federal and State securities statutes, as well

as considerable information concerning Canadian violators. These files

play a valuable role in the Commission's enforcement program and

provide a clearinghouse for other enforcement agencies. The information in the files is kept current through the cooperation of various governmental and nongovernmental agencies.

During the fiscal year, the Section received 3,366 "securities violations" letters either providing or requesting information and dispatched 1,899 communications to cooperating agencies. Among other

matters, information was received from several States and Canada

respecting 106 criminal actions, 39 injunctive actions, 142 actions in

the nature of cease and desist orders and 140 other administrative

orders, such as denials, suspensions and revocations of registrations of

issuers, broker-dealers and salesmen. Information with respect to 4,574

persons or firms was added to the files, including information regarding 1,847 persons and .firms not previously identified. As of the end of

the 1968 fiscal year, the files contained information concerning 77,323

persons and firms.

Use of Computer for Name Searches.- The use of the Commission's

computer for "name searches" in the enforcement program has resulted

in a substantial increase in the amount of information available and

the speed with which it can be obtained. The names of suspected securities law violators are checked against the more than 1 million entries

presently stored in the computer. Upon request, the Commission also

performs "name searches" on prospective securities salesmen and

others whose names are submitted by the exchanges, the NASD and the

State securities commissions. If the subject checked has been named

in formal filings with the Commission, has been a party to a proceeding, or has been involved in an investigation, such information, together with pertinent dates, relationships and cross references, is available immediately on a printout. Formerly a time-consuming manual

search of indices and files was required.

Investigations

Each of the Acts administered by the Commission specifically authorizes it to conduct investigations to determine whether violations

of the Federal securities laws have occurred.
88 SECURITIES A.."N"DEXCHANGE COl'.iM!SSION

The nine regional officesof the Commission are chiefly responsible

for the conduct of investigations. In addition, the Officeof Enforcement of the Division of Trading and Markets at the Commission's

headquarters office conducts investigations dealing with matters of

particular interest or urgency, either independently or with the assistance of the regional offices.The Office of Enforcement also exercises

general supervision over and coordinates the investigative activities

of the regional offices and recommends appropriate action to the

Commission.

It is the Commission's general policy to conduct its investigations

on a confidential basis. Such a policy is necessary to effective law enforcement and to protect persons against whom unfounded or unconfirmed charges might be made. The Commission investigates many

complaints where no violation is ultimately found to have occurred.

To conduct such investigations publicly would ordinarily result in

hardship or embarrassment to many interested persons and might

affect the market for the securities involved, resulting in injury to

investors with no countervailing public benefits. Moreover, members

of the public would tend to be reluctant to furnish information concerning violations if they thought their personal affairs would be made

public. Another advantage of confidential investigations is that persons suspected of violations are not made aware that their activities

are under surveillance, since such awareness might result in frustration or obstruction of the investigation. Accordingly, the Commission

does not generally divulge the results of a nonpublic investigation

unless it is made a matter of public record in proceedings brought

before the Commission or in the courts.

When it appears that a serious violation of the Federal securities

laws has occurred or is occurring, a full investigation is conducted.

Under certain circumstances it becomes necessary for the Commission

to issue a formal order of investigation which designates members of

its staff as officersto issue subpoenas, take testimony under oath and

require the production of documents. During the fiscal year ended

June 30, 1968,the Commission issued 166 such formal orders.

The following table reflects in summarized form the investigative

activities of the Commission during fiscal 1968:

Inucstioations of p088ible violotions of the ACt8 administered by the Commission

Pending June 30, 1967____________________________________________ 789

~ew Cases_______________________________________________________ 357

Total 1,146

Closed 328

Pending June 30, 1968 .______________ 818
TEaRTY-FOURTH ~~AL REPORT 89

Imposition of Sanctions

Where enforcement action appears appropriate, the Commission

may proceed in one of several ways, although the use of one procedure

may not necessarily preclude the use of another with respect to the

same conduct. The Commission may: (1) institute administrative

proceedings, (2) institute civil proceedings in the appropriate U.S.

district court to enjoin further violations of law, or (3) refer the case

to the Department of Justice or appropriate local enforcement authorities for criminal prosecution.

Administrative Proceedings.-Under the Securities Exchange Act,

as amended in 1964,the Commission has available to it a wide range of

administrative sanctions which it may impose against brokers and

dealers and persons associated with them. The Commission may deny

a broker-dealer's application for registration. 'With respect to a brokerdealer already registered, it may impose sanctions ranging from censure through suspension of registration to revocation of registration.

It may also suspend or terminate a broker-dealer's membership in a

stock exchange or registered securities association. Associated persons

of broker-dealers may be censured, or suspended or barred from association with any broker-dealer. Under the Investment Advisers Act,

the Commission may impose comparable sanctions against investment

advisers, but has no authority to take direct disciplinary action against

persons associated with investment advisers.

The Commission may impose a sanction only if, after notice and

opportunity for hearing, it finds that (1) the respondents committed

willful violations of the securities acts or are subject to certain disqualifications, such as convictions or injunctions relating to specified

types of misconduct, and (2) a particular sanction is in the public

interest.

Set forth below are statistics regarding administrative proceedings

pending during fiscal 1968 with respect to brokers and dealers and

investment advisers.

Broker-Dealers

Proceedings pending at beginning of fiscal year:

Against broker-dealer registrants .. 57

Against broker-dealer applicants____________________________________ 3

Against nonregistered broker-dealer_________________________________ 1

Against individuals only 2

Total 63
90 SECURITIES AND EXCHANGE CO:MMISSION

Proceedings instituted during fiscal year:

Against broker-dealer registrants____________________________________ 22

Against individuals only 10

Total 32

Total proceedings current during fiscal year________________________ 95

Disposition of proceedings: llegistrationrevoked- 15

Regtstration revoked and firm expelled from National Association of

Securities Dealers, Inc. (NASD) 5

Reglstratlon suspended for period of time___________________________ 6

Suspended for period of time from NASD___________________________ 1

Individual respondents barred from association with brokers or dealers; 3

Indlvidual respondents suspended for periods of time from association

with brokers or dealers___________________________________________ 2

llegistrant censured________________________________________________ 2

Broker-dealer registration suspended and registrant suspended from

NAS]) and stock exchange________________________________________ 1

Over-the-counter trading suspended for period of time________________ 4

llegistration denied_________________________________________________ 1

Dismissed on withdrawal of registratioIL____________________________ 3

Dismissed and registration continued in effecL_______________________ 3

Total 46

Proceedings pending at end of fiscal year:

Against broker-dealer registrants____________________________________ 41

Against nonregistered broker-dealer__________________________________ 1

Against individuals only____________________________________________ 7

Total proceedings pending at end of year__________________________ 49

Total proceedings accounted for___________________________________ 95

In addition, action was taken against 81 individuals associated with

the firms included above or with firms previously sanctioned which

disqualified such individuals from engaging in the securities business

without the subsequent approval of the Commission or for a specified

period of time.

Investment Advisers

Proceedings pending at beginning of fiscal year:

Against investment adviser registrants_____________________________ 6

Proceedings instituted during fiscal year:

Against investment adviser registrants____________________________ 4

Total proceedings current during fiscal year_____________________ 10
THIRTY-FOURTH AJ\TNUALREPORT 91

Disposition of proceedings:

Registration revoked_____________________________________________ 2

Proceedings discontinued and registration continued in efl'ecL_______ 1

Dismissed on withdrawal of registration____________________________ 1

All advertising and solicitation for new subscribers suspended for

period of tune_________________________________________________ 1

Registration withdrawn and principal of firm barred________________ 1

~otal 6

Proceedings pending at end of fiscal year:

.Against investment adviser registrants_____________________________ 4

~otal proceedings accounted for_________________________________ 10

Formal administrative proceedings under the statutes administered

by the Commission generally culminate in the issuance of an opinion

and order. Where hearings are held, the hearing officer who presides

normally makes an initial decision following the hearings, unless such

decision is waived by the parties. Under an amended procedure which

went into effect in April 1966, the initial decision includes an appropriate order. If Commission review is not sought, and if the case is not

called up for review on the Commission's own initiative, the initial

decision becomes the final decision of the Commission.

Inthose instances where it prepares its own decision upon review

or waiver of an initial decision, the Commission or the individual

Commissioner to whom a case may be assigned for the preparation of

an opinion is generally assisted by the Office of Opinions and Review.

This Office is directly responsible to the Commission and is completely

independent of the operating divisions of the Commission, consistent

with the principle of separation of functions embodied in the Administrative Procedure Act. Where the parties to a proceeding waive their

right to such separation, the operating division which participated

in the proceeding may assist in the drafting of the Commission's

decision.

The Commission's opinions are publicly released and are distributed

to the press and to persons on the Commission's mailing list. In addition, they are printed and published periodically by the Government

Printing Office in bound volumes entitled "Securities and Exchange

Commission Decisions and Reports."

A few of the more significant decisions of the Commission in administrative proceedings with respect to broker-dealers and investment

advisers are summarized in the following paragraphs: 12

In Walston &: 00., bW.,13 involving the sale by the respondent brokerdealer of tax-exempt bonds of a special assessment district, the Commission found, on the basis of offers of settlement accompanied by a

11 Other broker-dealer decisions are summarized below under "Manipulation."

11 Securities Exchange.Act Release No. 8165 (September 22,1967).
92 SECURITIES AND EXCHANGE COMMISSION

stipulation of facts, that the respondent failed to disclose to customers that the district was formed for the benefit of a promoter of a

speculative real estate development and consisted of one tract of undeveloped land owned by the promoter, that the promoter had no prior

experience in selling real estate and had no financial ability to service

the bonds, and that the service of the bonds depended entirely on the

sale of lots, In finding that the firm and the manager of a division of

its municipal bond department had willfully violated the anti-fraud

provisions of the securities laws, the Commission stated that" [i]t is incumbent on firms participating in an offering and on dealers recommending municipal bonds to their customers as 'good municipal

bonds' to make diligent inquiry, investigation and disclosure as to

material facts relating to the issuer of the securities and bearing upon

the ability of the issuer to service such bonds." In view of the facts,

among others, that the firm had been active in efforts to salvage the

rights of bondholders, repurchased bonds from customers and instituted procedures to provide greater control over the handling of bond

offerings, the Commission accepted offers of settlement providing for

censure of the firm and the manager, suspension of the activities of

the firm's municipal bond department for 30 days, and suspension of

the manager from association with a broker or dealer for 6 months.

The Commission reemphasized the importance of a broker's fiduciary

obligation to secure the best price for its customers in Thomson. & M 0-

Kinnon,14 a decision involving "interpositioning," i.e., the interposing

of a second broker-dealer between the customer and the best available

market. On the basis of facts stipulated in connection with an offer

of settlement, the Commission found that the firm engaged in a systematic practice over a prolonged period of interposing several other

broker-dealers between itself and the market makers in certain over-thecounter securities. The firm engaged in this practice primarily to reciprocate for listed business referred to it by the interposed brokerdealers and to reward them for furnishing certain services. The Commission also found that the firm and the partner in charge of the overthe-counter stock department failed to exercise reasonable supervision

to prevent the violations. In view of certain mitigating factors, including the fact that the NASD had sanctioned the respondents for

part of the same misconduct and that improved internal procedures

had been adopted, the Commission accepted the offer of settlement and

ordered the suspension of the firm's over-the-counter stock department

for 7 days and suspended the partner from association with any

broker-dealer for 35 days.

In Riohard RJ'U(Je& 00., Inc.15, the Commission found, among other

11 Sl'enrities Exchange Act Release No. 8310 (May 8, 1968).

15 Securlt les I<JxchangeAct Release No. 8303 (April 30, 1968).
TF.URTY-FOURTH ANNUAL REPORT 93

things, that the firm had authorized, if not encouraged, the solicitation of orders for a speculative stock on the basis of unconfirmed and

extravagant reports or rumors, and had instructed sales personnel

to transmit such reports to persons who in the salesmen's judgment

could afford to lose money or would not complain if they did, in a

situation where losses were or could reasonably be anticipated. The

Commission stated:

"Since broker-dealers and their associated persons hold themselves out as

professionals in the securities business, a report disseminated by them in connection with recommending a security, notwithstanding the fact that customers

are advised that the report is unconfirmed, gains in authority and credibility.

Under these circumstances, the use of such reports as part of a sales pitch was

contrary to the basic obligation of a broker-dealer to deal fairly with the

investing public." [Footnotes omitted.]

As in the past, a number of cases decided during the year dealt

with campaigns by broker-dealers to sell highly speculative securities

by means of a concerted high pressure sales effort including the use

of false and misleading representations and predictions, and without

regard to the financial needs and objectives of their customers. Among

these cases were Oent'wry Securities Oompany 16 and Billings Associates, Inc;" In each case the Commission revoked the broker-dealer

registrations of the firms and barred various individuals who, as

principals or salesmen, participated in the fraudulent schemes, from

being associated with a broker or dealer.

Among court decisions affirming Commission orders in broker-dealer

and investment adviser proceedings were the following:

In Hansen v, S.E.0.,18 the Court of Appeals for the District of

Columbia Circuit held that in a proceeding to determine whether an

application for registration as a securities broker should be denied, the

Commission did not commit error in admitting into evidence the record

of a prior administrative proceeding involving the same transactions.

In the prior proceeding Hansen had declined an opportunity to participate as a party; and in the later proceeding he was given an opportunity to, and did, cross-examine the witnesses whose testimony

was contained in the record of the prior proceeding.

In De "AIa1n7n08 v. S.E.0.,19 the Court of Appeals for the Second Circuit affirmed from the bench an order of the Commission 20 barring

n. securities salesman from association with any broker or dealer. One

.. securities Exchange Act Release No. 8123 (JUly 14, 1967), appeal pending

(C.A. 9).

17 Securities Exchange Act Release No. 8217 (December 28, 1967).

18 396 F. 2d 694 (C.A.D.C., 1968), certiorari denied, 37 U.S.L.W. 3134 (U.S.

Oct. 14, 1968).

,. C.A. 2, Docket No. 31469,October 13,1967.

2<1 Securities Exchange Act Release No. 8090 (June 2, 1967).

327-506--68-----8
94 SECURITIES AND EXCHANGE COMMISSION

of the issues argued in the court of appeals was whether the proper

standard of proof in an administrative broker-dealer proceeding is

the preponderance of the evidence, as the Commission had held, rather

than the more rigorous standards used in criminal and certain types

of civil cases. Although the court issued no opinion, its affirmance of

the Commission's order necessarily decided this issue in favor of the

preponderance standard applied by the Commission.

In Lawrence v. S.E.O.r decided shortly after the close of the fiscal

year, the Court of Appeals for the First Circuit, in affirming a Commission order based upon a finding of violation of the anti-fraud provisions of the Securities Act and the Securities Exchange Act, held

that the use of interstate facilities to clear a check used as payment in

a fraudulent transaction was sufficient to establish Federal jurisdiction even though all meetings and negotiations regarding that transaction took place within a single State. The court also ruled that a

written commitment to deliver securities in the :future is itself a security within the meaning of both Acts.

In M arketlinee, Inc. v. S.E.O.,22 the Court of Appeals for the Second

Circuit affirmed an order of the Commission revoking Marketlines'

registration as an investment adviser. The Commission's order had been

based in part upon Marketlines' publication and distribution of false

and misleading advertisements of its market letters. The court stated

that "the Commission could properly conclude that the entire content

and tone of the advertisements was designed to whet the appetite of the

unsophisticated." In rejecting Marketlines' contention that the Commission had erred in evaluating the advertisements in terms of their

impact on unsophisticated investors, the court stated that "the Commission's duty to protect the gullible is apparent" and that "it is not

improper to judge advertisements by their impact on the segment

of the public at which they are aimed."

Civil Proceedings.- Each of the several statutes administered by

the Commission authorizes the Commission to seek injunctions in the

Federal district courts against continuing or threatened violations of

those statutes or the Commission's rules thereunder. Injunctive actions

frequently are directed against broker-dealers and persons associated

with them, and in such casesthe complaint may allege noncompliance

with various regulatory provisions such as the net capital and books

and records requirements, as well as violations which may be committed by any person such as securities sales or purchases in violation

of the anti-fraud or registration provisions of the securities acts.23

21 398 F. 2d 276 (C A. 1, 1968) .

22384 F. 2d 264 (C.A. 2, 1967), certiorari denied, 390 U.S. 947 (1968) .

.. Statistics regarding the Commission's civil litigation activities are contained

in Appendix tables 10-12.
TFURTY-FOURTH ~AL REPORT 95

CriminalProsecution.- The statutes administered by the Commission provide that the Commission may transmit evidence of violations

of any provisions of these statutes to the Attorney General, who in turn

may institute criminal proceedings. Where an investigation by the

Commission's staff indicates that criminal prosecution is warranted, a

detailed report is prepared. After careful review the Office of Criminal Reference and Special Proceedings and the General Counsel's

Office,the report and the General Counsel's recommendations are considered by the Commission, and if the Commission believes criminal

proceedings are warranted the case is referred to the Attorney General and to the appropriate U.S. Attorney. Commission employees

familiar with the case generally assist the U.S. Attorney in the presentation of the facts to the grand jury, the preparation of legal memoranda for use in the trial, the conduct of the trial, and the preparation

of briefs on appeal. .

During the past fiscal year 40 cases were referred to the Department

of Justice for prosecution. As a result of these and prior referrals, 42

indictments were returned against 123 defendants, including 24

broker-dealers and broker-dealer principals and 15 broker-dealer

employees. Convictions were obtained against 84 defendants in 34

cases, including 6 broker-dealers and broker-dealer principals and

15 broker-dealer employees. Convictions were affirmed in 5 cases, and

appeals were still pending in 9 other criminal cases at the close of the

period.w

Among the many important criminal prosecutions initiated during

the year were the following: an indictment of four persons for violating the short sale provisions of Section 10(a) and Rule 10a-1 of the

Exchange Act in connection with alleged illegal short sales of GeorgiaPacific Corporation stock over the New York Stock Exchange; 25 an

indictment of a registered representative and two back-officeemployees

in Texas branch officesof a New York Stock Exchange member firm,

charging the misappropriation of customers' funds and securities and

the unauthorized execution of securities and commodities transactions

for the purpose of obtaining funds to finance their personal speculative

securities and commodities trading accounts; 26 an indictment of a

broker-dealer charging, for what is believed the second time in the

history of the Federal securities laws, criminal violations of Regulation T of the Federal Reserve Board, relating to the extension and

maintenance of credit by brokers and dealers; 27 ~nd an indictment of

Other statistics regarding criminal cases developed by the Commission are

contained in Appendix tables 13-15.

:IS 68 Cr. 502-505 (S.D. N.Y.) .

.. See S.E.C. Litigation Release No. 4031 (May 31,1968).

See S.E.C. Litigation Release No. 3798 (August 29, 1967).

'"

'"
96 SECURITIES AND EXCHANGE CO:MMISSION

a Florida attorney for wilfully evading compliance with a Commission

investigatory subpoena;"

In United States v. Ligld/9 the Court of Appeals for the Second

Circuit affirmed the convictions of several defendants of conspiracy

to violate the anti-fraud provisions of the Securities Act of 1933 and

the mail fraud and wire fraud statutes in the sale of securities of two

companies through two brokers. One ground of appeal was that the

trial court erred in denying the defense motion to suppress certain

books and records of a broker which had been voluntarily turned over

to the Commission during a civil injunction proceeding and were later

delivered by the Commission's staff to the U.S. Attorney. In rejecting

the contention that use of the books and records in the criminal proceeding was illegal because there was no consent to their delivery to

the prosecution, the court noted that the documents seized were "public

records" required by law to be kept and made available to the Commission and stated that

,,* * * once records have been voluntarily turned over to a government

agent, the government is not guilty of fraud or deceit in failing to apprise

the subject of a change in the character of the investigation, for he is made

aware of the risks attendant upon a voluntary disclosure by the warning

inherent in the request."

The court further observed that even assuming, arguendo, that the

Commission violated its agreement to return the documents and not

make them available to anyone else, the Fourth Amendment would not

bar their admission into evidence in the absence of a showing that

they were originally obtained through fraud and deceit.

Supervision of Activities of National Association of Securities Dealers, Inc.

Section 15A of the Exchange Act provides for registration with

the Commission of national securities associations and establishes

standards and requirements for such associations. The National Association of Securities Dealers, Inc. (NASD) is the only association

registered under the Act. The Act contemplates that such associations

will serve as a medium for self-regulation by over-the-counter brokers

and dealers, subject to general supervision by the Commission. Their

rules must be designed to protect investors and the public interest, to

promote just and equitable principles of trade, and to meet other

statutory rquirements. The Commission is authorized to review disciplinary actions takQllby them, to disapprove changes in their rules,

and to alter or supplement their rules relating to specified matters.

In adopting legislation permitting the formation and registration

of national securities associations, Congress provided an incentive to

membership by permitting such associations to adopt rules which

es 68 Cr. 655 (S.D. N.Y.).

'" 394 F. 2d 908 (a.A. 2, 1968).
TEITRTY-FOURTH ANNUAL REPORT 97

preclude a member from dealing with a nonmember broker or dealer

except on the same terms and conditions as the member affords the

general public. The NASD has adopted such rules. As a result, membership is necessary to profitable participation in underwritings since

members may grant price concessions, discounts and similar allowances

only to other members.

During the fiscal year, the NASD's membership increased by 111

to a total of 3,770 members by the end of the year. This increase was

the net result of 344 admissions to and 233 terminations of membership. At the same time, the number of branch officesincreased by 662

to a total of 5,945 as a result of the opening of 1,169 new officesand

the closing of 507 others. During the year the number of registered

representatives and principals, categories which together include all

partners, officers, traders, salesmen and other persons employed by

or affiliated with member firms in capacities which involve doing business directly with the public, increased by 18,358 to an all-time high

of 108,883 as of June 30, 1968. This increase, which was the net

result of 26,268 initial registrations, 13,466 re-registrations and 21,376

terminations of registrations, was attributable in part to an increase

in the number of insurance companies entering the securities business

for the purpose of offering shares of mutual funds and/or interests

in variable annuities to the investing public, and in part to the increase in activity in the securities markets generally.

During this period the NASD administered 64,457 qualification

examinations of which approximately 38,880 were for NASD qualification and the balance for other agencies, including major exchanges,

the Commission 80 and various States.

NASD Disciplinary Actions.- The Commission receives from the

NASD copies of its decisions in all disciplinary actions against members and registered representatives. In general, such actions are based

on allegations that the respondents violated specified provisions of

the NASD's Rules of Fair Practice. Where violations are found the

NASD may impose one or more sanctions upon a member, including

expulsion, suspension, fine or censure. Ifthe violator is an individual

associated with a member, his registration as a representative may be

suspended or revoked, he may be suspended or barred from being

associated with any member, and he may be fined and/or censured.

Under Section 15A(b) (4) of the Exchange Act and the NASD's bylaws, no broker-dealer may be admitted to or continued in NASD

membership without Commission approval if he has been suspended

or expelled from membership in the NASD or a national securities

exchange; he is barred or suspended from association with a broker

30 See pp. 83-86, supra, for a discussion of the regulation of broker-dealers who

are not members of a registered securities association.
98 SECURITIES AND EXCHANGE COMMISSION

or dealer or with members of the NASD or an exchange; his registration as a broker-dealer has been denied, suspended, or revoked; he has

been found to be a cause of certain sanctions imposed upon a brokerdealer by the Commission, the NASD or an exchange; or he has

associated with him any person subject to one of the above disqualifications.

During the past fiscal year the NASD reported to the Commission

its final disposition of disciplinary complaints against 80 member firms

and 82 individuals associated with them. With respect to 15 members

and 12 associated persons, complaints were dismissed because the alleged violations had not been established," In the remaining cases,

violations were found and penalties were imposed on 65 members and

70 registered representatives or other individuals. The maximum penalty of expulsion from membership was imposed against 9 members,

and 5 members were suspended from membership for periods ranging

from 5 days to 1 year. In many of these cases, substantial fines were also

imposed. In another 47 cases, members were fined amounts ranging

from $100 to $5,000. In 4 cases, the only sanction imposed was censure,

although censure was usually a secondary penalty where a more severe

penalty was also imposed.

Various penalties were also imposed on associated individuals found

in violation of NASD rules. The registrations of 27 registered representatives were revoked, and 9 representatives had their registrations

suspended for periods ranging from 5 days to 1 year. Fines in various

amounts were also imposed against many revoked or suspended representatives. In addition, 33 other representatives were censured and/or

fined amounts ranging from $250 to $4,000. One individual was barred

from association with any NASD member.

Commission Review of NASD Disciplinary Action.-Section 15A

(g) of the Exchange Aot provides that disciplinary actions by the

NASD are subject to review by the Commission on its own motion or

on the timely application of any aggrieved person. This section also

provides that upon application for or institution of review by the

Commission the effectiveness of any penalty imposed by the NASD is

automatically stayed pending Commission review, unless the Commission otherwise orders after notice and opportunity for hearing. Section

15A (h) of the Act defines the scope of the Commission's review. Ifthe

:nThe majority of the cases where allegations against members were dismissed

involved misuse of customers' and/or firm securities or funds by a representative

under such circumstances that, according to the NASD, the member could not

have known of or prevented the impropriety. The Securities Acts Amendments of

1964 authorized registered securities associations to take disciplinary action directly against individuals associated with members. The NASD has amended its

rules to provide for such action. In the fiscal year there were 16 cases in which the

sole respondents were individuals associated with members.
TEaRTY-FOURTH ~AL REPORT 99

Commission finds that the disciplined party committed tlJ.eacts found

by the NASD and thereby violated the rules specified in the determination, and that such conduct was inconsistent with just and equitable

principles of trade, the Commission must sustain the NASD's action

unless it finds that the penalties imposed are excessive or oppressive, in

which case it must cancel or reduce them.

At the start of the fiscal year, seven NASD disciplinary decisions

were pending before the Commission on review. During the year six

additional cases were brought up for review. Six cases were disposed

of by the Commission. In two of these, the Commission sustained in

full the disciplinary action taken by the NASD. Itdismissed the review

proceedings in one case as moot, and permitted the withdrawal of one

application for review. With respect to the two remaining cases, in one

the Commission denied the application for review as being untimely

filed, and in the remaining case the NASD and the applicants filed a

stipulation discontinuing the review proceedings. Seven cases were

pending as of the end of the year.

Commission Review of NASD Action on Memhership.-As previously noted, Section 15A(b) (4) of the Act and the by-laws of the

NASD provide that, except where the Commission finds it appropriate

in the public interest to approve or direct to the contrary, no broker or

dealer may be admitted to or continued in membership if he, or any

person associated with him, is under any of the several disabilities

specified in the statute or the NASD by-laws. A Commission order

approving or directing admission to or continuance in Association

membership, notwithstanding a disqualification under Section 15A(b)

(4) of the Act or under an effective Association rule adopted under

that Section or Section 15A(b) (3), is generally entered only after the

matter has been submitted initially to the Association by the member

or applicant for membership. The Association in its discretion may

then file an application with the Commission on behalf of the petitioner. If the Association refuses to sponsor such an application the

broker or dealer may apply directly to the Commission for an order

directing the Association to admit or continue him in membership.

At the beginning of the fiscal year, three applications for approval of

admission to or continuance in membership were pending. During

the year, 10 additional applications were filed, 8 applications were

approved, and 5were pending at the year's end.

DisciplinaI7' Action by Exchanges

Although the Exchange Act does not provide for Commission review of disciplinary action taken by exchanges, each national securities exchange reports to the Commission actions taken against members and member firms and their associated persons for violation of

any rule of the exchange or of the Exchange Act or any rule or regu-
100 SECURITIES AND EXCHA...1IWECOMMISSION

Iation thereunder. During the fiscal year, eight exchanges reported

approximately 100 separate actions, including impositions of fines in

33 cases ranging from $50 to $10,000, with total fines aggregating

$44,800; the suspension from membership of 11 individuals; and the

censure of 3 member firms. These exchanges also reported the imposition of various sanctions against 63 registered representatives and

employees of member firms. In addition, the American Stock Exchange

reported a large number of informal staff actions of a cautionary

nature.

MISREPRESENTATIONS IN THE SALE OR PURCHASE OF SECURITIES

Among the improper practices which constantly concern the Commission and its staff and which are the subject of frequent enforcement

action is the use of false or misleading representations in connection

with the sale or purchase of securities." The comments in the preceding

section regarding detection methods, investigations and sanctions are

in general equally applicable to this type of conduct. The Commission

also frequently participates as amicus curiae in litigation between private parties under the anti-fraud provisions of the securities laws,

where it considers it important to present its views regarding the interpretation of those provisions. For the most part, this participation is

in the appellate courts.

During the course of the fiscal year, the Commission participated

either as a party or as amicus curiae in a number of cases involving

important issues under the anti-fraud provisions.

In the Supreme Court's first decision involving the scope of the term

"security" as defined in the Securities Exchange Act of 1934,the Court

in Tcherepnin v. [{night 33 reversed the decision of the court of

appeals 34 and held, in accordance with the views expressed by the

Commission as amicus curiae, that withdrawable capital shares issued

by a State-chartered savings and loan association are securities and,

consequently, that the district court had jurisdiction of an action

brought by holders of such shares based upon alleged violations of

the anti-fraud provisions in Section 10(b) of the Act and Rule 10b-5

thereunder. While recognizing that the legal form of withdrawable

shares is determined under State law, Federal law was held to "govern whether shares having such legal form constitute securities under

the Securities Exchange Act." The Court applied to its interpretation

of the Securities Exchange Act principles long established in cases

32 Misrepresentations are, of course, an integral part of "boiler-room" or similar

high-pressure fraudulent operations by broker-dealers. To the extent misrepresentations are employed in that context, they are discussed in the section on improper broker-dealer practices .

., 389 U.S. 332 (1967).

"371 F. 2d 374 (C.A. 7, 1967); see 33d Annual Report, pp. 96-97.
TEURTY-FOURTH ~AL REPORT 101

decided under the Securities Act and found the legislative history

of the Securities Act pertinent as well. Both statutes were said to

reflect an "expansive concept of security" which "embodies a flexible

rather than a static principle." As under the Securities Act, the Court

held that "instruments may be included within any of ... [the Securities Exchange Act's] definitions, as a matter of law, if on their face

they answer to the name or description." Thus, the withdrawable capital shares were found to have the "essential attributes of investment

contracts" and were alternatively held to be "stock," "transferable

share[s]" and "certificate[s] of interest or participation in any profit

sharing agreement." The Court expressly rejected the view of the court

of appeals that the words "an instrument commonly known as a 'security'" are a limitation on the other descriptive tenus contained in the

statutory definition of security. Italso observed that the characteristics

of savings and loan shares-i-such as their issuance in unlimited

amounts, their nonnegotiable character and their lack of preemptive

rights, as well as the lack of a shareholder's right to inspect the corporate books and records-"serve only to distinguish among different

types of securities. They do not, standing alone, govern whether a

particular instrument is a security under the Federal securities laws."

Also rejected was the suggestion that fluctuation in value and trading

in securities markets are essential attributes of securities under the

Securities Exchange Act.

In another case involving the definition of security, Oontinental

Marketing Oorp. v, S.E.O.,35 the Court of Appeals for the Tenth Circuit held that the combined activities of the various defendants in

selling live beaver in conjunction with contracts for the care, management, replacement and resale of the beaver constituted an investment

contract within the meaning of the Securities Act and the Securities

Exchange Act, even though the performance of the service contracts

was to be carried out by persons other than the person initially selling

the beaver. The defendants in this case had, at one time, carried out

through a single business entity their various selling and service activities, which were designed to build a "domestic beaver industry."

Subsequently, however, they had fragmented their activities and placed

them under numerous separate business entities so that some were

devoted exclusively to the selling activities while others provided the

various management services, including the ranching of the beaver. The

various entities acted together in conducting the overall business, and

only by acting together could the business continue.

The court of appeals, rejecting the defense contention that an investment contract can be found only where the management services

35387 F. 2d 466 (C.A. 10, 1967), certiorari denied, 391 U.S. 005 (1968). Earlipr

stages of the litigation in this case are dtscussed in the 33d Annual Report, p. 47.
102 SECURITIES AND EXCHANGE COMMISSION

are performed by the seller or by parties actually owned or controlled

by the seller, stated:

"The more critical factor is the nature of the investor's participation in

the enterprise. If it is one of providing capital with the hopes of a favorable

return then it begins to take on the appearance of an investment contract ....

The court noted, in this regard, that in this case the "economic inducement" held out to the prospective investor was "the faith or hope

in the success of ... the domestic beaver industry ... as a whole, and

not the value of the animals alone."

Last year's annual report 36 discussed the amicus curiae brief filed

by the Commission in Pappas v. M088,37 a case in which a claim was

asserted under Section 10(b) of the Exchange Act and Rule 10b-.5.

This case involved the sale of authorized but unissued shares of

common stock of a corporation to certain outsiders and to the defendant directors. These shares were issued at an allegedly inadequate

price. All of the directors, who approved the transaction with themselves, were fully aware of the facts; and shareholder approval was

not required under State law. Nevertheless, shareholder approval was

sought so that the stock could be listed on the American Stock Exchange, and allegedly false statements were made to the shareholders

in the process. The defendant directors owned a majority of the

shares of the corporation and voted them in favor of the transaction.

The Court of Appeals for the Third Circuit, in accordance with

the views of the Commission, held that the corporation may have been

the victim of a violation of Rule 10b-5 even though all of the directors

knew the true facts. In rejecting the defendants' argument that there

could be no deception and consequently no violation of Rule 10b-5

because of the directors' knowledge, the court stated that if deception

is required,

"it is fairly found by viewing this fraud as though the 'independent' stockholders were standing in the place of the defrauded corporate entity at the

time the original resolution authorizing the stock sales was passed ....

Certainly the deception of the independent stockholders is no less real

because, 'formalistically,' the corporate entity was the victim of the fraud.

The same is true of the fact that the fraud may go unredressed because

those in a position to sue lack actual knowledge of the fraud."

In H eit v. Weitzen and two related cases 38 the Commission filed a

brief, amicus c-uriae, in the Court of Appeals for the Second Circuit

taking the position that the language "in connection with the purchase or sale of any security" in Section 10(b) of the Exchange Act

.. 33d Annual Report, p. 95.

87 393 F.2d 865 (C.A. 3, 1968) .

.. CCB Fed. Sec. L. Rep. ~92,279 (a.A. 2, Oct. 3, 196R).

"
TEURTY-FOURTH ~~AL REPORT 103

and Rule 10b-5 is broad enough to be applicable to statements made

by a corporation whose securities are publicly held whenever those

statements are likely to affect the market for those securities, irrespective of whether the corporation or those responsible for the dissemination of the statement engage in securities transactions and

irrespective of the absence of any motive to affect the market. After

the close of the fiscal year a panel of that court decided this issue in

accordance with the Commission's position and the previous decision

of the court, sitting en bane, in S.E.O. v. Texas Gulf Sulphur 00.39

The court also agreed with the Commission that, if such a public statement by a corporation violates Rule 10b-5, a private right of action

for damages may be implied on behalf of injured investors; and it

quoted from the Commission's brief to the effect that this latter holding raised important questions of policy as to the extent of the monetary liabilities that could result, but that such questions could best

be decided after the trial of the case in the context of a complete

record rather than on a motion for summary judgment."

The Commission also participated as amicus curiae in several other

cases involving questions with respect to private remedies under the

Federal securities laws. One of these cases was Jordan Building Oorp,

v. Doyle, O'Oonnor &1 00.,41 decided by the Court of Appeals for the

Seventh Circuit after the close of the fiscal year. The court held, in

accordance with the views of the Commission, that an implied private

right of action in favor of a defrauded purchaser exists under Section

10(b) of the Exchange Act and Rule 10b-5, even though the conduct

complained of may also have given rise to an action based upon the

express remedy available to purchosers under Section 12(2) of the

Securities Act. The court similarly adopted the Commission's position that an action can be maintained against a broker-dealer under

Section 10(b) and Rule 10b-5, even though the conduct complained of

may also have violated Section 15(c) (1) of the Exchange Act and

Rule 15cl-2, which expressly apply to broker-dealers.

The Commission, as amicus curiae in Hohmann v. Packard Instrument 00.,42 decided shortly after the close of the fiscal year, and in

Dolg.ow v. Ander80n,43 advocated a broad remedial construction of the

class-action provisions of Federal Rule of Civil Procedure 23, as

amended effective July 1, 1966,to permit private actions arising under

.. The Texas GUlf Sulplutr case is summarized in Part I of this report at pp. 6-8 .

.. In this connection it should be noted that in the Texa8 Gulf Sulphur case

certain of the judges indicated that there might be no cause of action on behalf

of private investors if the false or misleading statement resulted from negligence

rather than an intent to deceive. 41400 F. 2d 47 (C.A. 7, 1968) .

.. 399 F. 2d 711 (C.A. 7, 1968) .

.. ~ F.R.D. 472 (E.D. N.Y., 1968).
104 SECURITIES AND EXCHANGE COMMISSION

the Federal securities laws to be maintained on behalf of classes of

investors to the fullest possible extent. In both cases the Commission

noted that the practicality of private litigation under these statutesand its consequent effectiveness as an important supplement to the

Commission's enforcement efforts-often depends upon the ability of

a litigant with a small individual claim to seek and obtain relief on

behalf of a class of similarly-situated persons. The decision in each

case was consistent with the views expressed by the Commission.

The final case in this group relating to private remedies, Paul H.

Aschka» &: 00. v. Kamen. &: 00., involved the question of the liability

of a broker-dealer firm to persons injured by violations of the antifraud provisions of the Federal securities laws committed by employees

of the firm acting within the scope of their employment. Following

the decision of the Court of Appeals for the Ninth Circuit in this

case, construing the "controlling-persons" provisions in Section 15 of

the Securities Act and Section 20(a) of the Exchange Act as precluding a broker-dealer firm's liability for the frauds of its employees

unless the principals of the firm are personally at fault,44 a petition

for a writ of certiorari was filed in the Supreme Court. The Commission submitted a memorandum at the invitation of the Court, urging

that the writ be granted; and after it was granted," the Commission

filed a brief, amicus curiae, urging reversal of the court of appeals'

decision.

The Commission took the position that the "controlling-persons"

provisions were not designed to deal with customary employer-employee relationships and hence that those provisions, including the

requirements as to personal fault, do not govern or restrict the civil

liability of a broker-dealer firm for violations of the anti-fraud provisions committed by employees of the firm acting within the scope

of their employment. The Commission further urged that such civil

liability should not be governed by State law either; that instead it

should be determined as a matter of uniform Federal law in accordance with the underlying statutory purposes; and that the objectives

of the securities laws would best be advanced by holding broker-dealer

firms liable in damages as a matter of course to persons defrauded by

the firms' employees acting within the scope of their employment. Following the close of the fiscal year, the parties stipulated to a settlement

of the case, and the writ of certiorari was dismissed."

.. 382 F. 2d 689 (C.A. 9,19(7) .

.. 390 U.S. 942 (1968) .

.. A recent district court decision, citing the amicus curiae brief filed by the

Commission in Asclikar, held that Congress did not intend the "controlling-persons" provisions to serve as a limitation on liability of a broker-dealer. Johns

Hopkins Univ. v. Hutton, CCH Fed. Sec. L. Rep. ~92,268, at p, 97,285, n. 27 (D. Md.,

Aug. 15, 1968).
THIRTY-FOURTH Al\'NUAL REPORT 105

In S.E.O. v. National Securities, lne.,47 the Court of Appeals for

the Ninth Circuit held that the M:cCarran-Ferguson Act 48 precluded

the application of the anti-fraud provisions of the Exchange Act to

false and misleading statements made in soliciting stockholder consents to a merger of insurance companies approved by a state insurance commissioner." A petition by the Commission for a writ of

certiorari was granted by the Supreme Court on April 22, 1968. It

is the Commission's position that the McCarran-Ferguson Act, the

purpose of which was to re-establish the power of the States to regulate and tax the "business of insurance," did not diminish or impair

the established applicability of the Federal securities laws to transactions in insurance company securities. The Commission contends

that such transactions are not part of the "business of insurance."

In W. J. Abbott &: 00. V. S.E.0.,50 the court held that a commodity

broker regulated under the Commodity Exchange Act by the Department of Agriculture must make its books and records, relating to

managed accounts in commodities and commodities futures, available

for inspection by the Commission pursuant to a subpoena duces tecum

issued in a Commission investigation into possible violations of the

Federal securities laws. The court concluded that the Commodity

Exchange Act and the regulations providing for inspection of the

books and records of commodity brokers by the Department of Agriculture do "not exclude any other agency, in this instance the S.E.C.,

from exercising investigative powers granted to it by Congress in

areas and activities specifically designated to such other agency by

statutory authority." Accordingly, a motion to quash the Commission's subpoena was denied and an application by the Commission

for enforcement of the subpoena was granted. On petition for

reconsideration the court also held that the Commission need not

produce evidence of possible violations before it is entitled to enforcement of an investigative subpoena.

S.E.O. v, Garcia,51 another case dealing with investigative subpoenas, involved a somewhat unusual situation. At the hearing in the

district court in this subpoena enforcement proceeding, the various respondents denied that they had possession of the subpoenaed corporate records or knowledge of their whereabouts, or they gave

no information as to their whereabouts. The respondents were the

corporation whose records were being sought, present and former

officials of the company, partners of the accounting firm which had

47 887 F. 2d 25 (C.A. 9, 1967), certiorari granted, 890 U.S. 1028 (1968).

"15 U.S.C. 1011-1015 .

.. See 83d Annual Report, p. 93.

so 276 F. Supp. 502 (W.D. Pa., 1967).

151 M.D. Fla., No. 68-71-Civ. T.
106 SECURITIES AND EXCHANGE COMMISSION

certified the company's financial statements and counsel to the company. Notwithstanding the denials, the court ordered all of the

respondents to produce the requested documents by a certain date or

appear before the court thereafter at a designated time to testify as

to why they had failed to produce them. After the entry of this order,

one of the respondents disclosed that subpoenaed documents had been

burned and buried on the property of another respondent. A search

warrant was then obtained from a United States commissioner, and

the burned and charred remains of certain of the documents were

unearthed. Thereafter the court heard testimony concerning the documents and directed that the record in the proceeding be referred to

the United States attorney to consider whether there was evidence of

criminal violations.

MANIPULATION

The Exchange Act and Commission rules under the Act prohibit

various kinds of manipulative activities. Inorder to enable the Commission to meet its responsibilities for the surveillance of the securities

markets, the market surveillance staff has devised a number of procedures to identify possible manipulative activities. A program has

been adopted with respect to surveillance over listed securities, in

which the staff's activities are closely coordinated with the stock

watching operations of the New York and American Stock Exchanges.

Within this framework, the staff reviews the daily and periodic stock

watch reports prepared by these exchanges and on the basis of its

analysis of the information developed by the exchanges and other

sources, determines matters of interest, possible violations of applicable law, and the appropriate action to be taken.

In addition, the market surveillance staff maintains a continuous

ticker tape watch of transactions on the New York and American

Stock Exchanges and the sales and quotations sheets of regional exchanges to observe any unusual or unexplained price variations or

market activity. The financial news ticker, leading newspapers and

various financial publications and statistical services are also closely

followed.

If any of these sources reveals possible violations, the market surveillance staff conducts a preliminary inquiry into the matter. These

inquiries, some of which are conducted with the cooperation of the

exchange concerned, generally begin with the identification of the

brokerage firms which were active in the security. The staff may communicate with partners, officers or registered representatives of the

firms, with customers, or with officials of the company in question to

determine the reasons for the activity or price change in the securities

involved and whether violations may have occurred.
TF.URTY-FOURTH ANNUAL REPORT 107

The Commission has also developed an automated over-the-counter

surveillance program to provide more efficient and comprehensive

surveillance. The automated equipment is programmed to identify,

among other things, unlisted securities whose price movement or dealer

interest varies beyond specified limits in a pre-established time

period. When a security is so identified, the automated system prints

out current and historic market information concerning it. This data,

combined with other available information, is collated and analyzed to

select those securities whose activity indicates the need for further

inquiry or referral to the Commission's enforcement staff.

In addition to the Commission's market surveillance activities, the

other detection methods previously discussed are also useful tools in

the detection of manipulation. Prior comments of a general nature

regarding investigations and the nature of sanctions available are

equally pertinent to manipulations.

Among Commission decisions during the year dealing with manipulative activities, the following are of particular interest:

In Atlantic Equities Oompany,52 the registrations of several brokerdealers were revoked, the application for registration of another was

denied and 15 individuals were found to be causes of the sanctions

against their respective firms. Despite staff warnings to the underwriter of a Regulation A. offering that a possible "hot issue" was involved and that the market might be manipulated, the underwriter and

the other respondents engaged in a scheme which insured that the

offering would be a "hot issue," involving the withholding of blocks of

stock and their subsequent distribution at artificially inflated prices

through misrepresentations.

In Oharles E. Salik,53 the Commission found, on the basis of a stipulation of facts entered into in connection with an offer of settlement,

that the portfolio manager for a registered investment adviser to a

mutual fund, in anticipation of selling certain of the fund's portfolio

securities, purchased the same securities for the fund in the open market immediately prior to the close of business. The following day,

these and the portfolio securities were sold at prices reflecting the

inflationary effect of the purchases. The Commission held that the

purchases constituted a manipulation and a fraud on those persons

who purchased at prices affected by the immediately preceding purchases. The president of the investment adviser who, like the portfolio

manager, was a member of the fund's investment committee, was found

to have failed to exercise reasonable supervision to prevent the violaGO Securities Exchange Act Release No. 8118 (July 11. 1967), afJ'd as to Howard

J. Hansen, 396 F. 2d 694 (C.A. D.C. 1968), certiorari denied, 37 U.S.L.W. 3134

(Dec. 15, 1968) .

.. Securities Exchange Act Release No. 8323 (May 28, 1968).
108 SECURITIES AND EXCHANGE COMMISSION

tions. On the basis of the offers of settlement, the Commission barred

both individuals from association with any broker-dealer, investment

adviser or investment company, subject to certain exceptions and conditions.

In a criminal case growing out of the financial collapse of the Westec

Corporation, a conglomerate enterprise, four indictments were returned against the two principal officersof Westec and several of their

relatives and business associates." The cases involved charges that

from 1963 until late 1966, when Westec was forced into bankruptcy,

the defendants manipulated the price of Westec stock on the American

Stock Exchange through massive open-market purchases, the dissemination of false and misleading statements and rumors, and the filing

and publication of false financial statements. It was charged that as

part of the scheme control was secretly obtained over a large block of

Westec stock, most of 'which was later sold by the two principal officers in unregistered distributions in order to finance acquisitions by

Westec.

One of the principal officerspleaded guilty to charges of conspiracy

to violate the registration and anti-fraud provisions of the Securities

Act, and the anti-manipulative and annual report filing provisions of

the Exchange Act, and then testified as a key government witness

against the other, who was convicted of conspiracy to file false financial statements with the Commission and the American Stock Exchange, and of 12 counts of mail fraud. Another defendant pleaded

guilty to violations of the anti-manipulative provisions of the Exchange Act.

IMPROPER USE OF INSIDE INFORMATION

Corporate insiders by virtue of their position may have knowledge

oi material facts which are unavailable to the general public and may

be able to use such knowledge to their advantage in transactions in the

company's securities. Section 16 of the Securities Exchange Act was

designed to curb the misuse of inside formation. As previously noted,

that Section requires insiders to report their security holdings and

transactions and provides for the recovery by or on behalf of the

issuer of Short-swing trading profits realized by insiders. The Commission is not a party in suits under Section 16,but frequently participates as amicus curiae in those instances where significant interpretive

issues are involved.

In Blau v, Rayette-Faberge, Inc.,55 the Court of Appeals for the

Second Circuit held that counsel fees may be awarded to a stockholder's attorney solely for discovering and informing a corporation of a

.. 67-H-233 (S.D. Tex.) .

.. 389 F. 2d 469 (0 A. 2, 1968).
THIRTY-FOURTH ANNUAL REPORT 109

claim for the recovery of short-swing profits under Section 16(b) or

the Exchange Act which the corporation then successfully pursues at

the stockholder's request. The court stated, however, that a fee should

not be awarded solely for such discovery and information unless "the

corporation has done nothing for a substantial period of time after the

suspect transactions and its inaction is likely to continue." The court

specifically noted that its decision was in accord with the position previously urged by the Commission as amicus curiae in Gilson v. Ohoctc

Full O'Nuts 00rp.56

The short-swing recovery provisions of Section 16(b) operate without regard to whether the insider in fact made use of inside information in the transactions involved. Under the anti-fraud provisions of

the securities laws, however, those who actually make improper use of

inside information in the purchase or sale of securities may be liable

for damages or subject to injunctive action, either at the instance of

injured private litigants or the Commission itself, or subject to disciplinary action in administrative proceedings instituted by the Commission. Two important recent decisions under the anti-fraud provisions dealing with improper use of inside information were those of

the Court of Appeals for the Second Circuit, sitting en bane, in S.E.O.

v. Twas Gulf Sulphur 00. and of the Commission in the Merrill

Lynch case. Those decisions are summarized in Part I of this report

at pp. 6-9.

ENFORCEMENT PROBLEMS WITH RESPECT TO FOREIGN SECURITIES

The unlawful offer and sale of Canadian securities in the United

States increased significantly during 1968. It would appear that this

increase is due at least in part to the intensified interest of unsophisticated investors in highly speculative securities. The Commission has

worked with the securities commissions of the Canadian provinces,

the Royal Canadian Mounted Police and such quasi-official bodies as

the Toronto and Montreal Stock Exchanges and the Broker-Dealers'

Association of Ontario in efforts to curb these violations.

The Commission has provided assistance to the Canadian Govern.

ment, when requested, in connection with steps being taken to create a

Federal securities agency in Canada. It has also continued to work

closely with the Ontario Royal Commission on Atlantic Acceptance

Corporation Limited in its investigation into the circumstances surrounding the collapse, in June 1965, of Atlantic Acceptance, a large

Canadian finance company."

Offers and sales to American residents of unregistered securities in

the form of certificates of deposit issued by Bahamian banks have

GO 331 F. 2d 101 (O.A. 2, 1964).

G1 See 33rd Annual Report, p. 103.

327--1106-68---9
110 SECURITIES AND EXCHANGE CO:MMISSION

practically ceased, largely as a result of vigorous enforcement action

by the Commission, and the enactment in late 1965of Bahamian legislation regulating the banking business in the Bahamas. There has been

a considerable increase, however, in the offer and sale to American

residents of unregistered securities of various Panamanian companies.

The Commission has been working with the Department of State and

other State and Federal agencies in an attempt to halt these activities. 58 The Commission is also continuing to assist the Internal Revenue

Service in investigations of evasions of the Interest Equalization Tax

on purchases by Americans of foreign securities from foreign sellers.

There have been increasing problems involving violation of the

Investment Advisers Act of 1940 by foreign investment advisers. To

date, the Commission has instituted one formal enforcement action in

this area; in this case it obtained an injunction against an unregistered

Canadian investment adviser." Further investigations are in progress

with a view to determining other appropriate enforcement action.

Since September 30, 1967, the names of six Canadian and one Bahamian companies have been deleted from the Commission's Foreign

Restricted List 60 in accordance with established procedures, while

the names of nine Canadian companies were added to the list. The

current list and supplements to it are issued to and published by the

press, and copies are mailed to all registered broker-dealers.

As of August 1, 1968,there were 33 companies on the list, including

3 Bahamian, 1 British Honduran, 22 Canadian and 7 Panamanian

companies, as follows:

Bahamian

American International Mining

Compressed Air Corporation Limited

Durman, Ltd., formerly known as Bankers International Investment Corporation

British Honduran

Caribbean Empire Company, Ltd.

liS The Commission recently instituted an injunctive action in an attempt to halt

the sale through fraudulent means of unregistered securities of 13 Panamanian

and Bahamian companies. S.E.C. v, De Veers Ooneotulated. Mining Corporation,

B.A., et at., U.S. District Court, Southern District of Illinois, Northern Division

(1968 Civil Action No. P-3016).

GO S.E.C. v.Myers, 285 F. Supp. 743 (D.C. Md., 19(8).

The Foreign Restricted List consists of foreign companies whose securities

the Commission has reason to believe are being, or recently have been, distributed

in the United States in violation of the registration requirements of the Securities

Act of 1933.

'"
THIRTY-FOURTH A~TNUAL REPORT

Ououuiian

111

Allegheny Mining and Exploration Company, Ltd.

Amalgamated Rare Earth Mines, Ltd.

Antoine Silver Mines, Ltd.

Briar Court Mines, Ltd.

Claw Lake Molybdenum Mines, Ltd.

Crest Ventures, Limited

Ethel Copper Mines, Limited

Ironco Mining & Smelting Company,

Ltd.

Keele Industrial Developments, Ltd.

Kenilworth Mines, Ltd.

Kokanee l\foly Mines, Ltd.

Lynbar Mining Oorp., Ltd.

Norart Minerals Limited

Obseo Corporation, Ltd.

Pacific Xorthwest Developments, Ltd.

Paracanusa Coffee Growers, Ltd.

Pascal' Oils. Ltd.

Pyrotex ~lining and Exploration Company. Limited

St. Lawrence Industrial Development

Corporation

'I'rlhope Resources Limited

Yictoria Algoma Mineral Company, Ltd.

'Yee Gee Uranium Mines, Ltd.

Panamanian

British Overseas Mutual Fund Corporation

Cerro Azul Coffee Plantation

Darien Exploration Company, S.A.

De Veers Consolidated Mining Corporation, S.A.

Euroforeign Banking Corporation, Ltd.

Panumerican Bank & 'I'rust Company

Vlctoria Oriente, Inc.
PART V

REGULATION OF INVESTMENT COMPANIES

In broad terms, an investment company is any arrangement by which

a group of persons invests funds in an entity that is itself engaged in

investing in securities, Investment companies are an important vehicle

for public participation in the securities markets. They enable small, as

well as large, investors to participate in a professionally managed and

diversified portfolio of securities.

The Investment Company Act of 1940 sets forth the Commission's

responsibilities in protecting persons who invest in investment companies. It provides a comprehensive framework of regulation which,

among other things, prohibits changes in the nature of an investment

company's business or its investment policies without shareholder approval, protects against loss or outright stealing or abuse of trust and

provides specific controls to eliminate or to mitigate inequitable capital

structures. The Act also requires that an investment company disclose

its financial condition and investment policies; requires management

contracts to be submitted to shareholders for approval; prohibits underwriters, investment bankers, or brokers from constituting more than

a minority of the investment company's board of directors; regulates

the means of custody of its assets; and provides specific controls designed to protect against investment companies entering into unfair

transactions with their affiliates.

In addition to the requirements of the Investment Company Act, an

investment company must comply with the Securities Aot of 1933 when

it makes an offering of its securities and i,t is subject to the applicable

provisions of the Securities Exchange Am of 1934, including those

relating to proxy and tender offer solicitations and insider trading and

reporting rules.

COMPANIES REGISTERED UNDER THE ACf

As of June 30, 1968, there were 967 investment companies registered

under the Act. Of this total 862 were "active" 1companies whose assets

had an aggregate market value of approximately $69.7 billion. Compared with corresponding totals at June 30, 1967, these figures represent an over-all increase of approximately $11.5 billion, or almost 20

1"Active" companies are those which are not in the process of being liquidated

or merged, have not filed an application pursuant to Section 8(f) of the Act for

deregistration, and have not otherwise ceased to exist.

112
THIRTY-FOURTH ANNUAL REPORT 113

percent, in the market value of assets and an increase of 119, or almost

15 percent, in the number of active registered companies. The increase

in assets was the largest recorded by investment companies in any

single fiscal year since the passage of the Act and exceeds the total increase ininvestment company assets during the 15 years after its enactment. This increase is due partly to appreciation inassets of previously

registered companies and partly to the large increase in the number of

registered companies. The impact of this unprecedented growth on the

securities market is discussed at pages XVII-LX and 3-4 of this

report.

The following table shows the numbers and categories of acti ve registered companies and the approximate market value of the assets in each

category as of June 30, 1968.

Companies registered under the Investment Company Act of 1940 as of June 30, 1968

Number oC registered companies Approximate

market value

value of of assets

of active Activo Inactive. Total co~anies

( ous)

Management open-end ("MutUal Funds") 529 29 558 $53,480

Funds having no load or premium not exceed- ing 3 percent oCnet asset value 113 _. _. ------------_. 3,728 Variable annuity-c-Beparate accounts 22 -----.-- .. --.-----.----- 13 Oapltal leverage company 1 ----.--------- -----.--.---_. 42 All other load funds 393 49,697

Management closed-end 174 45 219 8,925

Small business Investment companies 53 -----_.------- ------._------ 339 Oapltal leverage companIes 8 -------_._---- 409 All other elosed-end cornpanles 113 ------._------ 8,177

Unlt Investment trusts 152 29 181 6,169

Variable annuity-Separate accounts 4 .----_.- .._._-- -----~--_._ .. 1 All other unit investment trusts 148 -_.-.--------- .-.--~.. .. 6,168

Face-amount certificate companies 7 2 9 1,158

Total. 862 105 967 69,732

- "Inactive" refers to registered companies which as ofJune 30,1968, were in the process of being IIqnldated

or merged, Or have filed an application pursuant to Section 8(0 of the Act for dereglstration, or which have

otherwise gone out of existence and remain registered only until such time as the Commission issues orders under Section 8(0 terminating their registration,

The approximately $6.2 billion of assets of the "active" registered

unit investment trusts includes approximately $5 billion of assets of

unit investment trusts which invest in securities of other registered

investment companies, substantially all of them mutual funds.

A total of 167 companies registered under the Investment Company

Act during the fiscal year, a greater number than registered in any

year since the adoption of the Act. The following table shows the various categories of companies registered during the fiscal year and those

which terminated their registration.

______

_____________

_________ ____________________ __________________________

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

-------------- -------------- ________________________

________ ___________________

_______________ --------------

-------------- _________________________

_________ ______________ _ - -- -

_____________

___________• _______________________

•
114 SECURITIES Al~D EXCHA.....l\WECO:MMISSION

Registered Regtsti anon during the terminated

fisc-il ) car during the

fiscal year

Management open-cnd ("Mutual Funds") I Funds having no load or premium not exceeding 3 pel cent of net asset value , 21 1 VarIable aunurty-e-Separate accounts ___________________ . __________________ 14 U

All other load Iunds _______________________________________________________ 82 20

Sub-total, _____________________________________________________________ 117 21

Management closed-end Small business Investment cornpamcs _____________________________________ 3 6 All other closed-end funds _________________________________________________ 32 9

Sub-total, _____________________________________________________________35 15

Unit Investment Trusts

I Variable aunurty-s-Separate accounts ______________________________________ 3 0 All other unit investment trusts ___________________________________________ 11 6

Sub-tutal , _____________________________________________________________ 14 6

Face-amount certificate compames __________________________________________ 1 0

'I'etal , _________________________________________________________________167 42

As the table shows, 17, or approximately 10 percent, of the newly

registered companies were variable annuity separate accounts of

insurance companies," Including these companies, there were 26 active

variable annuity separate accounts registered at June 30, 1968, consisting of 4 unit investment trusts and 22 management open-end investment companies. A significant part of the Commission's regulatory

effort with respect to variable annuities has been the dove-tailing of the

requirements of the Investment Company Act with the patterns and

procedures which have grown up in the insurance industry.

In the 33rd Annual Report of the Commission, at pages 107-108, we

discussed the capital leveraged investment companies in which half

of the capital is supplied by income shareholders and half by capital

shareholders. At present there are 9 active capital leveraged companies

in operation, including 1 open-end company. As of June 30,1968, they

had total assets of over $450million. The shares of seven of these companies are traded on the New York Stock Exchange or the American

Stock Exchange and at J nne 28, 1968,their capital shares were selling

at discounts ranging from 17.8percent to 26.6percent of net asset value.

GROWTH OF INVESTMENT COMPANY ASSETS

The following table illustrates the striking growth of assets of investment companies over the years since the enactment of the investment Company Act:

The applicability of the requirements of the Investment Company Act to variable annuity contracts was discussed in prior annual reports. Typically, a variable

annuity contract provides payments for life commencing on a selected annuity date

with the amounts of the annuity payments varying with the investment performance of equity securities which are set apart by the insurance company in a

separate account which is registered with the Commission as an investment

company. The separate accounts now registered are either open-end management

companies or unit investment trusts.

•
THIRTY-FOURTH ANNUAL REPORT 115

Number of investment companies registered under the Investment Company Act

and their estimated aggregate assets, in round amounts, at the end of each fiscal

year, 1941 through 1968

Number of companies Estimated

aggregate

Ftseal year ended June 30

I

market value

Registered Registered Registration Registered of assets at at begmmng during year termmated at end of end of year

of year during year year (m millions)

1941_____________________________ 0 450 I 14 436 $2,500 1942_____________________________ 436 17 46 407 2,400 1943_____________________________ 407 14 31 390 2,300 1944_____________________________ 390 8 27 371 2,200 1945_____________________________ 371 14 19 366 3,250 1946_____________________________ 366 13 18 361 3,750 1947_____________________________ 361 12 21 352 3,600 1948_____________________________ 352 18 11 359 3,825 1949_____________________________ 359 12 13 358 3,700 1950_____________________________ 358 26 18 366 4,700 1951. ____________________________ 366 12 10 368 5,600 1952_____________________________ 368 13 14 367 6,800 1953_____________________________ 367 17 15 369 7,000 1954_____________________________ 369 20 5 384 8,700 1955_____________________________ 384 37 34 387 12,000 1956_____________________________ 387 46 34 399 14,000 1957_____________________________ 399 49 16 432 15,000 1958_____________________________ 432 42 21 453 17,000 1959_____________________________ 453 70 11 512 20,000 1960_____________________________ 512 67 9 570 23,500 1961____________________________. 570 118 25 663 29,000 1962_____________________________ 663 97 33 727 27,300 1963_____________________________ 727 48 48 727 36,000 1964_____________________________ 727 52 48 731 41,600 1965_____________________________ 731 50 54 727 44,600 1966_____________________________ 727 78 30 775 49,800 1967_____________________________ 775 108 41 842 58,197 1968___________________________ 842 167 42 967 69,732

The increase III aggregate assets reflects the sale of new secuntles as well as eapftal appreciation.

INVESTMENT COMPANY FILINGS REVIEWED

As previously noted, investment companies offering their shares for

sale to the public must register them under the Securities Act of 1933.

The registration statements filed by such companies are reviewed for

compliance with that Act as well as the Investment Company Act.

Periodic and other reports must also be filed. Proxy soliciting material filed by investment companies is reviewed for compliance with the

Commission's proxy rules. The following table sets forth the nature and

volume of filings processed during the past fiscal year:

I

Pending

I I

Pending

Type of Matenal June 30, Filed Processed June 30, 1~67 1968

Registration statements and post-effective amendments under the Seeurtties Act of 1933______________________ 100 1,058 993 165 Registration statements under tho Investment Com- pany Act of HJ40_____________________________________ 58 142 /" 88 112 Proxy sohcitmg matenal.. ______________________________ 78 532 525 85 Annual reports _________________________________________ 602 557 802 357 Qnarterly reports. _____________________________________ 51 1,059 922 188 Penodic reports to shareholders coutammg financial statements ____________________________________________ 266 1,585 1,679 172 COPies of sales literature ________________________________ 354 2,799 2,992 161

Form N-1Q wluch went into efTect Jauuary I, 1968 requires that portfolio changes be reported on a

quarterly basis. Tins accounts for the largo increase m the period.

•

•

•
116 SECURITIES AND EXCHANGE COMMISSION

Revision or Annual and Quarterly Report Forms

During fiscal year 1968, the Commission adopted a revised annual

report, Form N-1R, and a revised quarterly report, captioned Form

N-1Q, for management investment companies. These forms are effective for fiscal years and for calendar quarters, respectively, ending

on and after December;31,1967.

The revision of Form N-1R prescribes attachments to the annual

reports to be used by registrants to supply data to the Commission in

It form readily adaptable for electronic data processing purposes. The

attachments will enable the Commission to retrieve and analyze pertinent financial data more efficiently by use of its computers. The

processing will also enable the Commission to screen on a continuing

basis the information furnished in the annual reports to ascertain the

areas and the companies in which problems exist.

The revised Form N-1Q includes a new item which requires management investment companies to report on a calendar quarterly basis

the number of shares (or other unit) or principal amount of securities

acquired for, or divested from, their portfolios during the reporting

quarter. These reports provide the public and the Commission with

valuable information about securities transactions of management investment companies, and they will materially aid the Commission

and others in conducting studies of these transactions and their impact

in the market place.

CONTROL OF IMPROPER PRACTICES

Inspection and Investigation Program

During the fiscal year, the Commission's staff conducted 102 investment company inspections pursuant to Section 31(b) of the Investment

Company Act. Many of these inspections disclosed violations not only

of the Investment Company Act but also of other statutes administered by the Commission. 'While many of the violations uncovered during these examinations appear to have resulted from a lack of familiarity with the Investment Company Act and were soon corrected

when brought to management's attention, a number of the violations

were serious in nature. These included improper pricing practices, inadequate disclosure concerning the activities of the investment company and failure to observe established procedures for safekeeping

company assets or to maintain adequate fidelity bond coverage for

persons dealing with company assets. Inspections also uncovered a

number of instances in which self-dealing transactions had been effected by affiliated persons in violation of Section 17 of the Act.

The tremendous influx of money into the mutual fund industry and

the proliferation of new funds have resulted in serious accounting and

bookkeeping problems. In some cases funds have priced. shares inac-
TEITRTY-FOURTH ~AL REPORT 117

curately because their books were not in condition to enable them to

compute accurately their net asset value. A sudden avalanche of money

into a fund may cause a breakdown of the bookkeeping system and

result in small investors either paying too much when they buy shares

or receiving too little when they redeem shares. In a recent inspection

the staff found that a new fund was so flooded with orders that its

books and records had become chaotic. As a result, no one was able to

determine the fund's assets, much less their value. The fund therefore suspended sales and hired a large staff of auditors to reconstruct

its accounts from inception.

Largely as an outgrowth of information obtained during inspections, 8 private investigations were commenced during the fiscal year

to develop facts concerning what appeared to be serious violations of

the statutes administered by the Commission.

Civil and Administrative Proceedings

During the 1968 fiscal year, the Commission instituted three civil

actions and one administrative proceeding involving investment companies. Two of the civil actions involved charges that companies were

operating as investment companies without having registered under

the Investment Company Act. Other proceedings previously instituted

were concluded or progressed toward conclusion.

Status Cases.-In S.E.O. v. Fifth Avenue Coach.Lines, Ino., 3 the

Commission, alleging violations of the anti-fraud provisions of the

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

certain provisions of the Investment Company Act, charged that Fifth

Avenue had operated illegally as an unregistered investment company

and that certain affiliated persons had misappropriated almost $5 million of the company's assets. The Commission sought an injunction

against further violations of the Federal securities laws, the appointment of a trustee or receiver for the company, and certain other equitable relief.

Shortly after the close of the fiscal year, following a 6-week trial,

the court found that Fifth Avenue had operated as an unregistered

investment company since June 30, 1967, and should have registered

as such. Itenjoined three of the individual defendants, Victor Muscat,

Edward Krock and Roy M. Colm, from committing violations of the

securities laws, and appointed a trustee-receiver to conduct the company's affairs, register Fifth Avenue as an investment company, prosecute suits for monetary damages against certain individuals and

investigate and ascertain whether other actions can be maintained. In

so doing, the court found that the defendants Muscat, Krock and Cohn

had "conspired to use Fifth for their own purposes," that they had

• 289 F. Snpp. 3 (S.D.N.Y., 1968).
118 SECURITIES AND EXCHANGE COMMISSION

evidenced a "marked propensity" to engage in "the sort of self-dealing

and dealing with affiliated companies which the . . . [Investment

Company Act] was designed to prevent" and that, while most of the

transactions charged did not involve fraud in the purchase or sale of

securities, they involved "overreaching" and "flagrant violations of

fiduciary duty." The opinion makes clear that the substantive provisions of the Investment Company Act, which by their terms only apply

in the case of a "registered" investment company, can be violated by

an affiliated person of an unregistered investment company which

should have been registered.

Similarly, in S.E.O. v.Tnsurance Investors Trust 00./ the company

was preliminarily enjoined from operating as an unregistered investment company and was placed in temporary receivership.

The 32nd Annual Report 5 discussed earlier stages of the litigation

in S.E.O. v. S <£ P National Oorporation, an injunctive action in which

the Commission alleged that S & P and its wholly-owned subsidiaries

were doing business as unregistered investment companies in violation of the Investment Company Act and that reports filed by S & P

pursuant to the Securities Exchange Act of 1934 were false and misleading. During the current fiscal year the defendants consented to

the entry of final judgments enjoining future violations and appointing a permanent trustee-receiver of the companies to succeed a temporary trustee-receiver whose appointment had earlier been affirmed by

the court of appeals," These judgments were part of a Plan of Settlement and Reorganization approved by the court 7 which also provided

that the insider interests in S & P would be subordinated to the interests of outside public stockholders. In that connection the Plan

contained provisions for an offer which had been made by S & P to its

public stockholders to purchase their S & P shares at prices above the

market prices of the shares in recent years," The trustee-receiver was

discharged, and after return of the companies to the control of their

directors a Plan of Complete Liquidation and Dissolution was adopted

by the companies and with modifications was approved by the court,"

Transactions Involving Affiliated Persons.-In S.E.O. v. Talley

Industries, Inc.,10 following administrative proceedings in which the

Commission had determined that purchases of the stock of General

W.D. Ky., Civil Action No. 5753.

Pp.101, 117-118.

"360 F. 2d 741 (C.A.2,1966).

273 F. Supp. 863 (S.D. N.Y., 1967).

At the trustee-receiver's request and in view of this disparity in prices the

Commission suspended trading in S & P stock during the final stages of the

settlement negotiations. See 33d Annual Report, p. 20.

285 F. Supp. 415 (S.D. N.Y.,1968).

'°286 F. Supp. 50 (S.D. N.Y., 1968), ,'ev'd. 388 F. 2d 396 (C.A. 2, 1968).

•

•

•

•

•
THIRTY-FOUR'l'H ANNUAL REPORT 119

Time Corporation ("General Time") by American Investors Fund,

Inc. ("Fund"), a registered open-end investment company, and Talley

Industries, Inc. ("Talley"), an "affiliated person" of the Fund," constituted a "joint arrangement" which violated Section 17(d) of the

Investment Company Act and Rule 17d-l thereunder," the Commission instituted suit in the District Court for the Southern District of

New York to prevent Talley and the Fund from benefiting from their

unlawful stock purchases and to enjoin them and the Fund's investment adviser from further violations.

Talley had begun buying stock of General Time in December 1967

with a view towards a merger of General Time with Talley. Three

days after its first purchase, the president of Talley asked the president of the Fund if he would consider purchasing General Time stock

for the Fund's investment portfolio. 'Within a few days, the Fund

began, through Talley's principal broker, to buy General Time stock

and, over a period of 1~ months, accumulated almost 10 percent of

General Time's outstanding shares. There was evidence that Talley

curtailed its acquisitions of General Time stock until the Fund had

concluded its purchases. Ultimately Talley acquired approximately

12percent of General Time's outstanding stock.

The district court dismissed the Commission's complaint on the

ground that Talley and the Fund were not joint participants in a

transaction because each had acquired its stock in separate purchases

and had no interest in the shares held by the other. Shortly after the

end of the fiscal year the Court of Appeals for the Second Circuit,

noting the need for a liberal construction of Section 17(d), reversed

and remanded the case to the district court. Itheld that when a registered investment company and an affiliated person engage in a plan to

achieve together a substantial stock position in another company they

can have effected a "transaction in which such registered company ...

is a joint or a joint and several participant" with the affiliate even

though there is no legally binding agreement between them. The court

also held that the Commission, in seeking to implement Section 17(d)

by the general requirement of advance application for approval found

in Rule 17d-J, had not exceeded the authority granted to it by

Congress.

The court of appeals noted that, although the case was not before it

on a petition to review the Commission's order and therefore the pro11 Since the Fund owned approximately 9 percent of the outstanding stock of

Talley, the two companies were affiliated persons within the meaning of Section

2 (a) (3) of the Investment Company Act.

1JI The Commission denied an application by Talley and the Fund for retroactive

approval of the transactions. Investment Company Act Release No. 5358 (April

19,1968).
120 SECURITIES AND EXCHANGE COMMISSION

vision of Section 43(a) of the Act making the Commission's findings

conclusive if supported by substantial evidence was not applicable by

its terms, the principle of that rule "applies none the less." The court

found that there was substantial evidence here to support those

findings.

On remand, the district court issued a final judgment of permanent

injunction enjoining Talley and the Fund from effecting any transactions with respect to the securities of General Time which would violate Section 17(d) and Rule 17d-l without having first obtained an

appropriate order from the Commission. The judgment, however,

among other things, permitted Talley and the Fund to vote their General Time shares (so long as they did not consult with regard thereto)

and contained provisions enjoining Talley from disposing of General

Time shares except on certain conditions designed to provide protection for the Fund. The judgment also provided that, if Talley should

decide to dispose of General Time shares in a manner other than particularized in the judgment, prior approval of the Commission and

thereafter of the court would have to be obtained. General Time appealed from this judgment; and the Court of Appeals for the Second

Circuit held that General Time had no standing to do so, ruling- that

the section and rule were not intended to protect a portfolio company

of an investment company." General Time has petitioned the Supreme

Court for a writ of certiorari.

The 33rd Annual Report discussed the district court's holding in

the case of SE.O. v. Sterling Precision Uorporation.": On appeal by

the Commission, the district court's grant of summary judgment in

favor of Sterling was affirmed on the ground that an issuer's redemption of securities owned by a registered investment company is not

a "purchase" within the meaning of the prohibition against transactions with affiliated persons contained in Section 17(a) (2) of the

Investment Company Act.15 Although it has been decided not to ask

the Supreme Court to review this decision, the Commission has announced that it still believes such transactions may be subject to Section 17(a) under appropriate circumstances and that it may raise the

issue again if such action appears necessary,"

Compensation of Management.-An administrative action involving Insurance Securities Incorporated ("lSI"), investment adviser to

Insurance Securities Trust Fund ("Trust Fund"), was settled during

the yearY For several years lSI had been billing the Trust Fund for

13 CCB Fed. Sec. L. Rep, ~92, 303 (C.A 2. Nov. 19. 19(8). 14276 F. Supp. 772 (S.D.N.Y., 1967). See 33d Annual Report, p. 111. 115393 F. 2d 214 (C.A. 2, 1l)68) (Including opinion on denial of rehearing).

II Litigation ReI. No. 4100 (Sept. 3, 1968).

IT Investment Company Act Release No. 5233 (January 11, 1968.)
THIRTY-FOURTH ANNUAL REPORT 121

the performance of what it called "brokerage services." The Commission's staff took the position that many of these services should have

been performed under the advisory contract between lSI and the Trust

Fund and were covered by the compensation paid lSI as adviser. The

Commission accepted an offer of settlement providing that lSI would

only charge the Trust Fund actual costs of a:cting as broker. The settlement was retroactive to July 1, 1967, and also provided that lSI

would be billed no more than $350,000 per year for 1968, 1969 and

1970. For the year ended June 30, 1967, lSI had billed the fund over

$1.3 million and had made a profit of over $1 million.

While the Commission's formal investigation of lSI was in progress

but before the administrative proceeding described above had actually

been instituted, a representative and derivative shareholders' suit was

filed attacking the same "brokerage services" and also charging that

the management fees and sales loads charged were illegal and excessive.18 The district court requested the Commission's views on the fairness of a settlement that had been submitted to it by the parties subsequent to the termination of the administrative proceeding. Shortly

after the close of the fiscal year the court accepted the Commissions

views and disapproved the settlement of this private action on the

ground that it did not confer any significant benefit not already obtained by the Commission in the administrative proceeding. Appeals

have been taken from this decision.

Meaning of "Fundamental" Poliey.-In Green v. Brown,t9 which

involved certain requirements of the Investment Company Act relating to investment policies, the Commission filed a brief as amicus curiae

in the Court of Appeals for the Second Circuit. Section 13(a) (3) of

the Act prohibits an investment company, in the absence of shareholder authorization, from deviating 'from any "fundamental" investment policy recited in its registration statement filed under the Act.

In this case an investment company had recited in its registration

statement that it would not invest more than 20 percent of its combined

capital and surplus in the securities of anyone issuer and that this 20

percent policy could not be changed without shareholder approval. The

plaintiff, a shareholder of the company, asserted that in two instances

the company's directors violated Section 13(a) (3) by causing the company, without prior shareholder approval, to make investments which

were in excess of the 20 percent limitation. After the institution of suit,

the company's shareholders ratified the challenged investments.

The district court held that Section 13(a) (3) had not been violated

because the company's registration statement had not used the word

"fundamental" in describing the 20 percent policy. The court also

II Norman v. McKee, 290 F. Supp. 29 (N.D. Oal., 1968) .

1lI276F. Supp.753 (S.D. N.Y., 1967), remanded, 398 F. 2d 1006 (C.A. 2, 19(8).
122 SECURITIES AND EXCHANGE COMMISSION

stated that the ratification by the shareholders was a valid defense to

the suit.

The Commission, disagreeing with the decision of the district court,

urged on appeal that when an investment company declares in its

registration statement filed under the Act that a particular investment

policy may not be changed without shareholder approval, that policy

is a "fundamental" policy within the meaning of Section 13(a) (3) .

The Commission also urged that the challenged investments, both

of which consisted of loans, violated Section 21(a) of the Act which

prohibits a management investment company from making loans that

are not permitted by the investment policies recited in the company's

registration statement (Section 21(a) had not been considered by the

district court). In addition, the Commission took the position that

shareholder ratification cannot immunize investment company directors from liability resulting from their prior violations of the Act.

Shortly after the close of the fiscal year the court of appeals, without

deciding any of these questions, remanded the case to the district court

for further consideration in light of, among other things, the issues

raised by the Commission. In so doing, the court stated that the district court had construed the Act "in a way that is at least questionable, without the benefit of the Commission's views," and that certain

considerations urged by the Commission were "weighty."

APPLICATIONS FOR COMMISSION ACTION

Under Section 6(c) of the Act, the Commission, by rules and regulations, upon its own motion or by order upon application, may exempt

any person, security, or transaction from any provision of the Act if

and to the extent such exemption is necessary or appropriate in the

public interest and consistent with the protection of investors and the

purposes fairly intended by the policy and provisions of the Act. Other

sections, such as 6(d), 9(b), 10(f), 17(b), ned), and 23(c), contain

specific provisions and standards pursuant to which the Commission

may grant exemptions from particular sections of the Act or may

approve certain types of transactions. Also, under certain provisions

of Sections 2, 3, and 8, the Commission may determine the status of

persons and companies under the Act. One of the principal activities

of the Commission in its regulation of investment companies is the

consideration of applications for orders under the above sections.

During the fiscal year, 257 applications were filed under these and

other sections of the Act, and 261 applications were disposed of. As

of the end of the year, 151 applications were pending. The following

table presents a breakdown, by sections involved, of the number of

applications filed and disposed of during the year and the number

pending at the beginning and closeof the year.
THIRTY-FOURTH ANNUAL REPORT 123 

,4pplicationsjiled with or acted upon by the Commissian under the Investment Company 

Act during the $seal gear ended June $0,I988 

Status and asemptton.~............................. 
 Re~istrationat investment wmpanis ............... 
 T-~B~~O~ 01re istration~....................... ae atbn or &anon ot aiieotars, officers, em- nf%e5. 

... in~wtmentadvisers. undarwnters, and

others ............................................ 
 R~euiationof functions snd activities of investment I 

Some of the more significant matters in which applications wem 

considered are summarized below : 

Transactions Involving A5liated Persons.-An exemption from 

Section 17(a) was requested by Berkshire Industries, Inc. to permit 

the merger into it of its 91 percent owned subsidiary, AmericanHawaiian Steamship Company, a registered investment company. The 

merger plan as originally submitted provided that the public stockholders of American-Hawaiian would receive $275 cash in exch'angs 

for each share of American-Hawaiian. Extensive testimony was taken 

over a 5-month period as to the value of American-Hawaiian's assets 

and stock to determine principally whether the price of $275 mas reasonable and fair. The merger plan was amended twice during the 

progmss of the hearings to increase the price per share to be paid to 

the minority stockholders to $375 and then to $575. 

American-Hawaiian's principal asset consists,of an 11,600 acre tract 

in Southern California being developed into a planned community or 

new city to be known as Westlake which is projected to have over 

70,000 residents. American-Hawaiian's assets also include a 1/2 interest 

in t~vo large New York City office buildings, a manufacturing subsidiaqr and portfolio securities. 

One of the crucial issues at the hearings involved the proper 

appraisal techniques to be used in valuing Westlake. The appraisals 

of four qualified real estate experts ranged from approximately 43 

nlillion dollars to a maximum of 130 million dollars. The parties 

waived an initial decision by the hearing examiner and briefs were 

submitted to the Commission. 

A merger of two of the largest closed-end inv-est~nent companies, 

Electric Bond and Share Company and American and Foreigm Power 
124 SECURITIES AND EXCHANGE COMMISSION

C-ompany Inc., discussed in last year's annual report," was approved

by the Commission during the 1968fiscal year.21 The Commission found

the terms to be reasonable and fair and not to involve overreaching

on the part of any person concerned. Among the matters dealt with

in the Commission's opinion were the reliability of the market price

of a security as an indicator of the investment value of that security

when there have been substantial yearly purchases and sales of that

security by an affiliated person; the impact on the market price of a

security of a dividend that is a return of capital to shareholders of that

security; the treatment of recurring capital gains as an income stream;

factors affecting the quality of earnings and assets; the valuation of

operating companies; the valuation of the dollar obligations of several

Latin American countries; and the issuance of certificates of contingent interest.

Offer of Exchange.--8ections 11(a) and (c) of the Act require

prior Commission approval, irrespective of the basis of exchange, when

an offer of exchange of a security issued by an open-end company is

made for a security issued by a registered unit investment trust. In an

opinion issued after the close of the fiscal year, the Commission denied

approval to a proposed exchange offer under the principal terms of

which certificate holders of a "fixed trust" could have redeemed their

interests and had the proceeds applied to the acquisition of shares of

an affiliated open-end management investment company ("fund") at

net asset value without payment of a sales load." The portfolio of the

fixed trust was limited by the terms of the trust indenture to the shares

of 28 named companies without management discretion to vary its

composition, while the portfolio of the fund was flexible.

A trust certificate holder who accepted the proposed offer would have

incurred redemption charges and possible capital gains taxes, and his

fund interest, unlike his interest in the trust, would have been subject

to an annual advisory fee of approximately % of 1 percent of its value.

The fund and the sponsor of the trust argued that the proposed exchange would nevertheless be beneficial because the fund's portfolio

management could be obtained without payment of another sales load

and because of asserted disadvantages of continued investment in the

trust, arising out of the various "archaic, uneconomic and wasteful"

provisions contained in the trust indenture which, they claimed, together with the trust's assertedly inferior investment performance

made it unattractive to many of its investors.

The Commission, denying the application, cited testimony by the

fund's president that, although the trust had performed "relatively

.. See pp. 116--117.

:t Investment Company Act Release No. 5215 (December 28, 1967).

22 Investment Company Act Release No. 5509 (October 11,1968).
THIRTY-FOURTH ANNUAL REPORT 125

poorly" in the last few years, investors in it had made money and were

basically pleased, and noted that, despite the fact that the trust indenture contained provisions permitting its amendment, no attempt had

been made to eliminate archaic features except as part of efforts to

convert the trust into a management company.

The Commission concluded that the submission of the proposed

offer to certificate holders of the trust would be inequitable since it

would require them to choose between retaining their interests in the

trust as presently constituted, without modifications of the trust indenture which applicants themselves had recognized to be desirable,

or transferring to a new investment vehicle with attendant costs and

continuing management fees. It indicated that if appropriate efforts

were first made to achieve curative changes and all or some of them

were effected, a trust investor then offered an exchange into fund shares

would be able to make an evaluation different from that entailed in

the present offer under which he would likely be influenced by

the presence of the archaic features of the trust. Ittherefore denied

approval of the offer but stated that such denial would not preclude

the submission to it of a new proposal which would overcome the

deficienciesit had found.

"Scholarship" Plam.-Issuers of "Scholarship" plans registered

under the Investment Company Act requested exemptions to permit

such plans to be offered to investors. After the end of the fiscal year,

the Commission granted certain exemptions to The Trust Fund Sponsored by The Scholarship Club, Inc.23 In general, under the plan each

investor becomes a member of the Scholarship Club, agrees to open

a savings account in his own name in a Federally insured bank or

savings and loan association and to pay into it either a lump sum or

monthly deposits, and designates a child under 9 years old as the beneficiary of his plan. The investor further agrees that all earnings accruing to the account will vest in and be transferred to the fund

sponsored by the Scholarship Club to be invested by it and ultimately

distributed for the benefit of the student beneficiaries designated by

investors. The account's principal may be withdrawn by the investor

at any time; but such withdrawal will terminate his plan and result

in forfeiture by him of earnings on the account theretofore transferred

to the fund as well as the elimination of the investor's designated

beneficiary from any participation in the assets of the fund. Amounts

forfeited by investors are to be added to the distributions to be applied against the 2nd, 3rd and 4th year college expenses of those beneficiaries who meet the plan's qualifications. The staff opposed the

application for exemptions.

"Investment Company Act Release No. 5424 (October 25,1968).

327-506--68----10
126 SECURITIES AND EXCHANGE COMMISSION

The exemption order issued by the Commission permits the fund to

operate with investors having one vote per plan owned and electing

a majority of the directors: permits the issuance of periodic payment

plans which will not be fully redeemable; permits a deduction of

amounts of sales load to be made oyer a 3-:rear period although amounts

deducted in the 3rd year differ proportionally from amounts deducted

in the first 2 years; and permits sales notwithstanding that by the

nature of the plans their net asset value may not be specifically determined. In granting these exemptions, the Commission stated that

it was not undertaking to determine whether the plan's proposed

operation is a good way for parents to provide for the college education of their children and it also made clear that it considered full,

adequate and informative disclosure in the plan's prospectus and

sales literature to be a critical requirement.

Merger of Two Exchange Funds into a Mutual Fund.-Two "exchange funds," one of which was the first such fund to register under

the Investment Company Act, were permitted to be merged into an

existing open-end fund whose shares are continuously offered to the

public." "Exchange funds" are open-end investment companies which

obtain their initial portfolio of securities in a tax-free exchange in

which investors transfer securities, usually with a substantial unrealized appreciation, for shares of stock of the fund."

Upon completion of their initial public offerings the cost-to-market

value of the portfolios of both exchange funds involved inthis merger

was less than 15 percent. The Commission was concerned that any

subsequent investors who paid cash to acquire the shares of either fund

might be subjected to a large indirect tax liability. Thus it required,

as it did with all subsequently formed exchange funds, that they not

offer any of their shares to the public after the initial deposit of portfolio securities without prior Commission approval.

A merger into a fund which continuously offers its shares to the

public falls within this prohibition. Therefore, the funds filed applications for (1) exemptions pursuant to Section 6(c) to permit the

mutual fund to continue to sell its shares to the public and (2) for

orders pursuant to Sections 17 (b) and (d) and Rule 17d-1 to permit

the merger since the transaction involved affiliated persons. At the

time of the merger both exchange funds had eliminated most of the

appreciated securities from their portfolios through gradual turnover of securities and thus all three companies had about the same

amount of unrealized appreciation. The Commission, finding that

.. Investment Company Act Release No. 5407 (June 19, 1968).

2G An amendment of Sectio~ 351 of the Internal Revenue Code makes further

formation of exchange funds impractical since the exchange is no longer tax

free.
THIRTY-FOURTH ANN1JAL REPORT 127

none of the investment companies would be treated less advantageously than any other and that the transaction was fair and reasonable

and involved no overreaching on the part of any person concerned,

approved the merger.

Restructuring of Certain SBIC's.-Under Section 12(e) of the Investment Company Act, a registered investment company may utilize

up to 5 percent of the value of its assets to purchase or otherwise acquire

any securities issued by another investment company engaged in the

business, among others, of financing promotional enterprises or purchasing securities of issuers for which no ready market is in existence

provided that certain other conditions are met.

In order to provide a framework in which investment companies

can retain and operate a portion of their assets under the Small Business Administration program and at the same time free the major

portion of their assets to enable them to take advantage of investment

opportunities not contemplated under that program, the Commission

granted conditional exemptions so as to permit the restructuring of

two publicly owned small business investment companies." The companies, with the concurrence of the Small Business Administration,

created wholly owned subsidiaries to which they transferred their SBA

licenses and certain of their assets. The exemptions permit the parent

to invest in its SBIC subsidiary if the aggregate value of its existing

investment plus the cost of any additional investment does not exceed

25 percent of the value of the parent's total assets on a corporate basis.

The parent remains a registered closed-end investment company and

will be free to invest the major portion of its assets in investments of

a type ineligible under the Small Business Investment Company Act.

Its subsidiary SBIC which will also be registered as a closed-end investment company will invest in assets of a type eligible under the

SBIC Act and will retain the preferred tax treatment available to

SBIC's and the ability to borrow from the SBA.

Bank Commingled Accounts.- The 32nd Annual Report discussed the Commission's order granting certain exemptions with respect to the Commingled Investment Account to be operated by the

First National City Bank of New York as a collective investment

fund under regulations of the Comptroller of the Currency." The National Association of Securities Dealers, Inc. ("NASD") filed a petition to review this order in the Court of Appeals for the District of

Columbia Circuit," In November 1967, following oral argument, a

2.Investment Company Act Release Nos. 5353 (April 22,1968) and 5423 (July

1,1968).

See pp.l04-5. First National aUy Bank, Investment Company Act Release ::\'0.

4538 (March 9, 1966).

es NASD v. SEa, C.A.D.C.,No. 20,164.

'"
128 SECURITIES AND EXCHANGE CQMMISSION

panel of the court dismissed the petition on the ground that the NASD

had no standing to seek review of the Commission's order. A petition

for rehearing by the court en bane was granted, but the court subsequently vacated both the order granting rehearing and the judgment and opinions of November 1967 "in order to permit reconsideration by the assigned division." The case is awaiting decision. In another proceeding involving the same Commingled Account, Investment Oompany Institute v. Oamp,29in which the Commission has not

participated, the District Court for the District of Columbia has held

that the Banking Act of 1933precludes banks from commingling managing agency accounts. First National City Bank is appealing that

decision.

Control Determinations.- The 32nd Annual Report 30 discussed the

Commission's opinion and order denying an application filed pursuant

to Section 2 (a) (9) of the Investment Company Act by a stockholder of

four investment companies for which Investors Diversified Services,

Inc. ("IDS") serves as investment adviser and principal underwriter.

The application had sought a Commission determination that certain

persons were in control of IDS and of a company which controlled

IDS. On petition for review of the Commission's order, the Court of

Appeals for the Second Circuit held 31 that it had jurisdiction, pursuant to the judicial renew provisions of the Act, to review a Commission determination under Section 2(a) (9) with respect to control.

Finding that the Commission's decision was supported by substantial

evidence, the court affirmed the Commission's order.

CHANGES IN RULES RELATING TO STATUS OF VARIOUS INVESTMENT

COMPANIES

Amendment of Rule 3c-2 To Permit Greater Participation by Investment Companies in the Securities of Unregistered Small Business Investment Companies

After the close of the fiscal year the Commission adopted an amendment to Rule 3c-2 to permit registered investment companies to own

more than 10 percent of any unregistered SBIC without requiring the

SBIC to register under the Act.32 Section 3(c) (1) excludes from the

definition of an investment company an issuer with less than 100 beneficial owners of securities if certain other criteria are satisfied. However, under that Section the stockholders of a company which owns

more than 10 percent of the issuer's securities would be included as

beneficial owners of the issuer's securities. Rule 3e-2 previously permitted companies with more than 100 shareholders, other than registered investment companies, to invest up to 5 percent of their assets

"274 F. SUPP. 624 (D.D.C .• 1967) .

.. See pp. 106-107.

m 388 F. 2d 964 (1968).

so Investment Company Act Release No. 5452 (August 5, 1968).
THIRTY-FOURTH .ANNUAL REPORT 129

in unregistered SBIC's without requiring the registration of the

SBIC's. The amendment extends the exclusion provided by Rule 30-2

to ownership of more than 10 percent of an SBIC's securities by a registered investment company if, and so long as, the value of all securities of SBIC's owned by the registered investment company does not

exceed 5 percent of the value of its assets.

New Rule 6e-1 To Clarify Status of Foreign Subsidiaries

Rule 60-1 adopted by the Commission 33 provides an exemption from

the Investment Company Act for certain "finance" subsidiaries of United Stares corporations organized primarily for the purpose of financing the foreign operations of their parent companies through the sale

of debt securities to foreign investors. The finance subsidiaries were

designed, consistent with the requirements of the programs instituted

by the President in February 1965 and January 1968, to raise capital

abroad for the foreign operations of United States corporations in a

manner which would not adversely affect the balance of payments

position of the United States.

In order to clarify the status of a finance subsidiary under the Investment Company Act, it was necessary in the past for the company

and its parent to file a request for exemption from the Act in each case.

The result was that 50 such companies had filed applications and received exemptive orders from the Commission. The adoption of Rule

6c-1 provides an automatic exemption for companies which meet the

qualifications of the rule. So long as the terms of any underwriting

agreement prohibit offers and sales to members of the public who are

United States nationals or residents, transactions among United States

underwriters and dealers participating in an initial distribution will

not disqualify a subsidiary.

OTHER DEVELOPMENTS

New Investment Companies With Unusual Investment Policies

During the fiscal year two "venture capital companies" registered

under the Investment Company Act. These closed-end companies intend to focus their investments in the securities of unseasoned or newly

organized corporations in technological and scientific fields. In this

manner they expect to offer an additional source of financing for companies offering innovative products and services and also to provide

the public with an opportunity to participate in these investments. The

venture capital companies hope to perform relatively independently

from the securities markets in general. A third company, which registered as an open-end company, will invest between 10 to 15 percent of

its assets in industries of developing countries that are related directly

.. Investment Company Act Release No. 5330 (March 25, 1968).
130 SECURITIES AND EXCHANGE COMMISSION

to world food and population problems. Typical of such investments

would be securities of firms processing food, manufacturing fertilizer,

farm machinery and irrigation equipment, and firms engaged in land

development. The balance of the company's portfolio will be invested

in securities of domestic companies and will not be so limited.

Funds with Multiple Advisers

During the fiscal year two open-end funds with multiple advisers

filed registration statements under the Act. At year's end, only one

such fund was offering its shares to the public; the registration statement of the other had not yet become effective. The assets of the fund

are allocated by the principal manager among a number of independent portfolio managers, each of "hom manages a segment. New

money received from the continuous offering of the fund's shares will

be allocated, on the basis of respective investment performances, among

those portfolio managers who have outperformed the Dow-Jones Industrial Average during the preceding four quarters. The fund manager may, subject to the approval of the fund's board of directors,

replace a portfolio manager whose performance is unsatisfactory.

The fees payable to each portfolio manager will range from % to

of 1 percent of the average value of the net assets of that portion of

the fund managed by such manager. Such fee rates are lower than the

present fee rates of other funds which are managed exclusively by the

portfolio managers. However, the total management :fee rate of the

multiple adviser fund may be higher than the customary rates paid

by more conventional funds because of the overriding management fee,

ranging from

*to % of 1 percent of the average net asset value of

the fund, which the fund pays its principal manager.

~
PART VI

REGULATION OF PUBLIC.UTILITY HOLDING COMPANIES

Under the Public Utility Holding Company Act of 1935,the Commission regulates interstate public-utility holding-company systems

engaged in the electric utility business and/or in the retail distribution

of gas. The Commission's jurisdiction also extends to natural gas pipeline companies and other nonutility companies which are subsidiary

companies of registered holding companies. There are three principal

areas of regulation under the Act. The first includes those provisions

of the Act which require the physical integration of public-utility

companies and functionally related properties of holding-company

systems and the simplification of intercorporate relationships and

financial structures of such systems. The second covers the financing

operations of registered holding companies and their subsidiaries, the

acquisition and disposition of securities and properties, and certain

accounting practices, servicing arrangements, and intercompany transactions. The third area of regulation includes the exemptive provisions

of the Act, provisions relating to the status under the Act of persons

and companies, and provisions regulating the right of persons affiliated

with a public-utility company to become affiliated with a second such

company through the acquisition of securities.

COMPOSITION OF REGISTERED HOLDING-COMPANY SYSTEMS

At the close of the 1968 fiscal year, there were 25 holding companies

registered under the Act. Of these, 21 are included in the 17 "active"

registered holding-company systems, 4 of the 21 being subholding

utility operating companies in these systems.' The remaining 4 registered holding companies, which are relatively small, are not considered

part of "active" systems," In the 17 active sytems, there are 89 electric

and/or gas utility subsidiaries, 47 nonutility subsidiaries, and 15 in1The four subholding companies are Louisiana Power & Light Company, a

public-utility subsidiary of Middle South Utilities, Inc.; The Potomac Edison

Company and Monogahela Power Company, public-utility subsidiaries of Allegheny Power System, Inc.; and Southwestern Electric Power Company. a public

utility subsidiary of Central and South West Corporation.

These holding companies are British American Utilities Corporation; Kinzua

Oil & Gas Corporation and its subholding company. Northwestern Pennsylvania

Gas Corporation; and American Gas Company and Standard Gas & Electric

Company. which are in the process of dissolution.

131

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132 SECURITIES AND EXCHANGE COMMISSION

active companies, or a total, including the parent holding companies

and the subholding companies, of 172 system companies. The following

table shows the number of active holding companies and the number

of subsidiaries (classified as utility, nonutility, and inactive) in each

of the acti ve systems as of June 30, 1968, and the aggregate assets of

these systems, less valuation reserves, as of December 31,1967.

Classification of assets as of June 30, 1968

Bleetnc Aggregate Solely Regis- System

Registered holding regis- tered and/or Non- Assets,

company systems tared holding gas utilIty Inactive Total Less

holding operat- utihty subsid- com- com- Valuation

Name eom- mg subsid- iaries panies panl(\S Reserves,

parnes com- iarles at Dec. 31,

panies 1967.

(thousands)

--- --- ------- I. Allegheuy Power System, Inc _______________________ I 2 9 5 1 18 $838, 692

2. American Electric Power Company, Inc ____________ 1 0 13 10 1 25 2, 155,753

3. American Natural Gas

4. c~~J:~-S~iithWest---- 1 0 3 4 0 8 1,312,781

Corporation ______________ I 1 4 1 1 8 953,438 5. Columbia Gas System,

6. C~ll~~~d-N-,;_tUi8iG8S-- 1 0 11 9 0 21 1,632, 948

Company ________________ 1 0 4 2 0 7 1,037,798 7. Delmarva Power & Light Company ________________ 0 1 2 0 0 3 280,429 8. Eastern Utilities Assoetetes, 1 0 4 0 2 7 121,178

9. General Public Utilities Oorporatron 1 0 5 4 0 10 1,509,594 10. MIddle South Utrltties ______ 1 1 6 1 3 12 1,365,039

11. National Fuel Gas Company ________________ 1 0 3 2 0 6 300,549 12. New England Electric System ___________________ 1 0 13 1 0 15 870,126 13. Northeast Utllities _________ 1 0 8 7 6 22 521,152 14. OhIOEdison Company _____ 0 1 3 0 0 4 811,552 15. Philadelphia Electnc Power Company _________ 0 1 1 0 1 3 58,837 16. Southern Company, The ___ 1 0 5 2 0 8 2,297,060 17. Utah Power & Light Company ________________ 0 1 1 0 0 2 361,978

Subtotals ________________--- --- -------- 13 8 95 48 15 179 16,428,907

A.dJustments (a) to eliminate

duplication In company count and (b) to add the net assets of seven Jointly owned

companies not Included above 0 0 -6 -1 0 -7 356,369

--- --------------- Total companies and assets in active systems _______________ 13 8 89 47 15 172 16,785,276

Represents the consolidated assets,less valuation reserves, of each system as reported to the Commiss:lon on Form USBfor the year 1967.

These seven companies are Beechbottom Power Company, Inc. and Windsor Power House Coal Company, which ere indirect subsidiaries of American Electric Power Company, Inc. and A.llegheny Power

System, Inc; Ohio Valley Electnc Corporation and its subsidiary, Indiana-Kentucky Electric Corpora- tion, which ere owned 37.8 percent by American Electric Power Company, Ine., 16.5 percent by Ohio

Edison Company. 12.5 percent by Allegheny Power System, Ine., and 33.2 percent by other companies; The A.rklahoma Corporation, which is owned 32 percent by the Central and South West Corporation system, 34 percent by the Middle South Utilities, Inc. system, and 34 percent by an electric utility company not assooiated with a registered system; Yankee Atomic Electric Power Company and Connecticut Yankee

Atomic Power Company, statutory ut1l1ty subsidiaries of Northeast Ut1l111esand New England Electric

System.

_________•____

•______________________

'

•

•
THIRTY-FOURTH ANNUAL REPORT 133

SECTION II MATfERS IN REGISTERED HOLDING-COMPANYSYSTEMS

In S.E.O. v. New England Electric System ("NEES"),3 the Supreme Court reversed the previously reported 4 decision of the Court

of Appeals for the First Circuit 5 and directed affirmance of the Commission's order requiring NEES to divest itself of its gas properties

and, thus, to limit its operations to a single integrated utility system

as required by Section 11(b). The Commission had rejected NEES'

assertion that the gas properties could not be independently operated

"without the loss of substantial economies" 6 and that it was therefore entitled to retain the additional system under Clause (A) of

Section l1(b) (1), but the court of appeals had found the Commission's analysis deficient.

In finding adequate basis in the record to support the Commission's

conclusions, the Supreme Court noted that the Commission had

"weighed NEES' estimated $1,100,000 losses in relative rather than

absolute terms, calculating the losses as a percentage of NEES' 1958

revenues, expenses, and income," and had then compared the estimated

loss ratios to those which had been shown in prior divestment cases.

The Court held: "It was well within the range of the Commission's

administrative discretion to use the loss ratios, as it did, 'as a guide

in adjudicating the pending case.' ... The Commission in its expert

judgment may so employ evaluative factors it considers relevant."

(Footnotes omitted.)

Similarly, the Court upheld both the Commission's consideration of

data concerning the operations of other gas companies in the same

geographic area and its determination, in light of such data, that

NEES had failed in its attempt "to sustain its burden of showing that

the separated gas system would wither into critical health .... " The

Court stated: "It cannot be a basis for finding error that the Commission found the attempt [by NEES] unpersuasive, given the gas system's size, and the prognosis of efficiencies comparable to those

achieved by the independents." (Footnotes omitted.)

The court also found support for the Commission's findings "that

the projected $1,100,000 loss of economies did not in fact take into

account any offsetting benefits" which might be expected to result from

'390 U.S. 207 (1968).

33d Annual Report, p. 121.

376F. 2d 107 (1967).

In an earlier opinion the court of appeals had disagreed with the Commission's interpretation of the phrase "loss of substantial economies" and had reversed the Commission's divestment order, see 346 F.2d 399 (1965), but the

Commission's view was sustained by the Supreme Court which at that time

remanded the case to the court of appeals for further consideration, 384 U.S. 176

(1966). See 32d Annual Report, p. 77; 31st Annual Report, pp. 8~7.

•

"

•
134 SECURITIES AND EXCHANGE COMMISSION

competition between gas and electric companies serving the same areas

now under common holding-company management,'

As reported previously," on November 3, 1966,Penns oil Oompany,

a registered holding company, and United Gas Corporation; its gas

utility subsidiary, jointly filed a plan with the Commission pursuant

to Section 11(e) of the Act, which superseded an earlier plan. The

plan provided for the consolidation of Pennzoil and United to form

a single corporation through an exchange of common stock of Pennzoil and United for securities of the consolidated company. The proceedings on the plan were consolidated with proceedings instituted

by the Commission under Sections 11(b) (1) and 11(b) (2). On February 7, 1968, the Commission issued its Findings and Opinion disapproving the plan," It held that the proposed exchange was not fair

to the common stockholders of United and the plan did not satisfy the

requirements of Section 11(b) (1). Pursuant to Section 11(b) (1), the

Commission ordered Pennzoil to dispose of United's retail gas distribution facilities, holding that "the elimination of Pennzoil as a holding company upon effectuation of the plan would merely alter the

form of common control and ownership under these circumstances.

Neither in law nor as a matter of statutory discretion can we regard

such modal rearrangements as a permissible technique for avoiding the

provisions of Section 11(b) (1)."

Pennzoil and United amended the Section 11(e) plan, agreeing to

the disposition of the gas distribution properties by the consolidated

company and revising the terms of the exchange with respect to the

common stock of United, and, as thus amended, the plan was approved,

subject to a reservation of jurisdiction with respect to certain matters,"

The consolidation of Pennzoil and United became effective on April

1, 1968,and the Commission issued an order under Section 5(d) of the

Act terminating the registration of Pennzoil as a holding company

and reserving jurisdiction in respect of the disposition of the gas

distribution properties and the refinancing of the $214,975,000of

7 For the status of similar Section l1(b) (1) problems of other registered

holding companies which have not been disposed of, see 31st Annual Report,

p, 87; 27th Annual Report, p. 104.

B See 33rd Annual Report, p. 121; 32nd Annual Report, pp. 77-78.

Pennzoil Company, Holding Company Act Release No. 15963.

10 Penn zoil Com punu, Holding Company Act Release No. 16014 (l\Iarch 21,

19G8).Penneoil Company, Holding Company Act Release No. 15980 (February 21.

1968). The Commission's order was approved and enforced by the U.S. District

Court for the District of Delaware. In re Pennzoil Company, 68 Civ. 3485

(Mareh 22, 1968).

•
THIRTY-FOURTH ANNUAL REPORT 135

Pennzoil debt, maturing in June and July 1968,which the consolidated

company assumed.>

In Northeast Utilities, the Commission, on August 7,1967, approved

a Section 11(e) plan proposing the elimination of the publicly-held

minority interests in The Connecticut Light and Power Company and

The Hartford Electric Light Company, two subsidiary companies of

Northeast Utilities." The Commission presently has under consideration another Section 11(e) plan filed by Northeast Utilities proposing

the elimination of the publicly-held minority interest in Holyoke

IV-ateI'Power Company, also a subsidiary company of Northeast."

In American Ga.'!Company, the Commission approved Part II of

the plan of liquidation and dissolution pursuant to Section 11(e) of

the Act.14 The Commission found, among other things, in accordance

with established precedents, that no redemption premium was payable

for prepayment of American's bonds and that payment of principal

and accrued interest thereon was fair and equitable." Upon consummation of Part II, the Commission entered an order terminating the

registration of American as a holding company."

After the acquisition of more than 97 percent of the common stock

of Michigan Gas and Electric Company ("MGE") by Americaai Electric Power Company, as permitted by the Commission's order dated

July 24, 1967,17American and MGE filed a Section 11(e) plan for the

elimination of the outstanding minority interest held by the public in

the MGE stock through the payment therefor of $115 for each seven

shares held, the same price approved as reasonable in the Commission's

earlier order. After the end of the fiscal year, the Commission issued

11 On June 11, 1968, the Commission issued an order authorizing Pennzoil

United, Inc. to issue and sell certain debentures and notes to banks aggregating

$280 million which was applied, in part, to the payment in full of the $214,-

975,000 principal amount of indebtedness and jurisdiction in this respect was

released. Pennzoil COlnlJany, Holding Company Act Release No. 16089 (June 11,

1968); Pennzoil United, Inc., Holding Company Act Release No. 16122 (July

19,1(68).

12 Northeast Utilities, Holding Company Act Release No. 15808. The U.S. District Court for the District of Connecticut entered an order on November 20,

1967, approving and enforcing the Commission's Order. In re Northeast Utili tics,

Civil Action No. 12168.

13 Northeast Utilities, Holding Company Act Release No. 15978 (February 20.

19(8).

"American Gas Company, Holding Company Act Release No. 15938 (January 4,

1968). The U.S. District Court for the District of Nebraska entered an order on

February 1, 1968, approving and enforcing Part II of the plan. In re American

Gas Company, Civil Action No. 02622,

15 American Gas Company, Holding Company Act Release No. 15921 (December 15, 1967), p. 10.

16 American Gas Company, Holding Company Act Release No. 16100 (June 26,

1968) .

17 American Btectrio Pourer Company, Holding Company Act Release No. 15800.
136 SECURITIES AND EXCHANGE COMMISSION

an order approving the plan (Holding Company Act Release No.

16224 (Dec. 3, 1968».

PROCEEDINGS WITH RESPECT TO ACQUISmONS, SALES AND OTHER

MATTERS

As previously reported," V ermont Yankee N uclear Power Oorporation and '7 of its 10 sponsor-companies filed an application relating to

the initial financing by Vermont Yankee of its proposed nuclear-powered electric generating plant through the issuance of common stock to

the sponsor-companies. As also noted, a substantially identical proposal was filed by Maine Yankee Atomic Power Oompany and 9 of its

11 sponsor-companies. Applications for intervention and requests for

hearing by various municipalities and cooperatives were filed in these

proceedings. By separate Findings, Opinion and Order, the Commission approved the applications and denied the requests for hearing

and for the imposition of certain conditions." Applicants for intervention in these proceedings filed petitions for review, now pending, in

the U.S. Court of Appeals for the District of Columbia Circuit."

The proceedings with respect to Peoples Gas and Light 007n/fJany

("Peoples")21 involved a proposal by Peoples, an exempt holding company, to organize a new company, Peoples Gas Company, which,

pursuit to an invitation for tenders, would acquire the outstanding

common stock of Peoples on a share-for-share basis. The Commission

noted that generally the Act "does not favor the superimposing of a

18 See 33rd Annual Report, pp. 123-24.

l' Vermont Yankee Nuclear Power Oorporation, Holding Company Act Release

No. 15958 (February 6, 1968). Maine Yankee Atomic Power Oompany, Holding

Company Act Release No. 16006 (March 15,1968).

20 MunicipaZ Blectrio Association of Massachusetts v. 8.E.O., Nos. 21707 and

21822; Eastern Maine Electric Ooop., Inc., v. 8.E.O., No. 21927.

On May 1, 1968, the Commission issued a Memorandum Opinion and Order

(Holding Company Act Release No. 16053) authorizing the issue and sale of an

additional $10 million of Vermont Yankee common stock and the acquisition

thereof by its sponsor-companies. As in the prior case, applications for intervention and requests for hearing were filed, and the Commission denied such requests

on the basis of its prior opinions. A petition to review filed by the applicants for

intervention is pending in the U.S. Court of Appeals for the District of Columbia

Circuit (MttnioipaZ Blectrio Association of Massachusetts v. 8.E.O., No. 22078).

On May 6, 1968, the Commission authorized the issue and sale of 9O-day promissory notes of Vermont Yankee to banks (Holding Company Act Release No.

16056) and on the same day authorized the issue and sale of 12-month promissory

notes of Maine Yankee to a bank (Holding Company Act Release No. 16507), and

denied in each case applications for intervention and requests for hearings.

Petitions to review both of these orders have been filed by the applicants for

intervention in the U.S. Court of Appeals for the District of Columbia Circuit

and are presently pending (MunicipaZ Electric Associatwn 01 Massachusett8 v.

8.E.O., Nos. 22079 and 22080).

:n The Peoples Gas Light and Ooke Oompany, Holding Company Act Release No.

14929 (December 22, 1967).
THIRTY-FOURTH ANNUAL REPORT 137

holding company upon an existing and functioning holding-company

system" but approved the proposed acquisition "only because of the

unusual and exceptional circumstances" therein indicated. The approval contained the condition that, promptly after the consummation

of the exchange, steps be taken to have the only gas utility subsidiary

company of Peoples merged into Peoples Gas or become its direct subsidiary company. The Commission also granted Peoples Gas an exemption under Section 3(a) (1) of the Act but required that it register

as a holding company in order to retire any unexchanged minority

stock of Peoples and thus comply with Section l1(b) (2) of the Act.22

In Brockton Taunton Gas Oompany v. S.E.O.,23 the Court of Appeals for the First Circuit affirmed the previously reported 24 order

of the Commission granting an application by Eastern Gas and Fuel

Associates for permission to exercise an option to acquire 4.2 percent

of the outstanding common stock of Brockton Taunton Gas Company

and also to acquire additional shares by means of a cash tender offer.

At the time Eastern filed its application with the Commission it owned

4.9 percent of Brockton's common stock. Under Section 9(a) (2) of the

Holding Company Act, prior Commission approval was required before Eastern could acquire directly or indirectly 5 percent or more

of Brockton's voting securities. The option held by Eastern was to

purchase Brockton shares then owned by the so-called "Brocktaun

Trust." It had been alleged that the trust was merely a "straw trust"

created as an accommodation for Eastern and that Eastern had thereby

acquired more than 5 percent of Brockton's stock in violation of Section 9. The Commission, in its findings and opinion, assumed but did

not find that the Brocktaun trust arrangement constituted a violation

of Section 9(a) (2). The Commission concluded that the acquisition

would serve the public interest and tend towards the economical and

efficient development of an integrated public-utility system. The court

held that the Commission was entitled to give its approval in the

public interest despite the assumed violations.

Illinois Power Oompany, both an electric utility company and gas

utility company and also an exempt holding company, filed an application regarding a proposed offer to exchange 0.65 share of its common

stock for each outstanding share of common stock of Central Illinois

Public Service Company, a nonassociate electric utility company and

gas utility company and also an exempt holding company. A hearing

on the proposal was ordered by the Commission and \VUS in process

.. Peoples Gas Company registered as a holding company under the Act on

February 16, 1968, and filed a plan pursuant to Section 11(e) of the Act to eliminate the unexchanged minority stock. The plan was enforced by order of the

District Court for the Northern District of Illinois, dated September 19. 1968,

No. 68 C 1252.

""S96F.2d717 (1968).

Of See 33rd Annual Report, p. 123.
138 SECURITIES AND EXCHANGE COMMISSION

at the close of the fiscal year." Certain preferred stockholders have

intervened in the proceeding.

American Electric Power Oornpany, Inc., a registered holding company, filed an application relating to a proposed offer by American to

exchange, through an invitation for tenders, shares of common stock

to be issued by it for the outstanding shares of common stock of Columbus and Southern Ohio Electric Company, a nonassociate electric

utility company," A hearing on American's application was in progress at the end of the fiscal year.

Shortly after the end of the fiscal year, there was filed, and the Commission noticed for hearing, a proposal by two registered holding companies, New England Electric System and E astern. Utilities Associates,

and a nonaffiliated electric utility company, Boston Edison Oompany,

to form a new holding-company system to be named Eastern Electric

Energy System which would register as a holding company. Boston

Edison Company and the present subsidiary companies of New England Electric System and Eastern Utilities Associates would be publicutility subsidiary companies of the system while the two latter companies would, in effect, be merged into the new holding company.

During the year, a hearing was held on an application filed by

Kaneb Pipe Line Oompany, a products pipeline carrier, pursuant to

Section 2(a) (7) of the Act, requesting the Commission to declare it

not to be a holding company notwithstanding its ownership of 19.48

percent of the voting securities of Kansas- Nebraska Natural Gas Company' Inc., a natural gas public-utility company." The management

of Kansas- Nebraska appeared in opposition and contended that the

security ownership and activities of Kaneb required, among other

things, a finding that Kaneb exercised such a controlling influence

over Kansas-Nebraska as to require Kaneb's registration under the

Act, Oral argument was held shortly after the end of the fiscal year,

and the matter awaits Commission determination.

Effective July 15, 1968, the Commission adopted a new rule under

the Act (Rule 51) 28 which makes clear what advnnce steps a person

may take in making acquisitions which require prior Commission

approval pursuant to Section 9(a) of the Act. 'Where acquisitions are

proposed to be made subject to later Commission approval, the new

rule, in general, permits only such preliminaries as will not substantially affect the public interest or the interest of investors or consumers

in the event the Commission should later find that a proposed transaction does not conform to the applicable statutory standards. The

,. See Illinois Power Com patut, Holding Company Act Release No. 16072 (Mas

16,1(68) .

.. American Electric Power Oompanu, Inc., Holding Company Act Release No.

16021 (March 29, 1968).

27 See Kaneb Pipe Line Company, Holding Company Act Release No. 15927

(December 21,1967).

28 Holding Company Act Release No. 16081 (June 7, 1968).
TEURTY-FOURTH ~ruAL REPORT 139

rule also takes into account the possibility that an application for

approval of an acquisition, particularly a contested one, may take a

substantial period of time for disposition and contemplates the possible

issuance of certificates of deposit.

The rule provides certain procedures, including a hearing on application, under which certificates of deposit may be authorized by the

Commission prior to approval of the proposed acquisition.

FINANCING OF ACTIVE REGISTERED PUBLIC-UTILITY HOLDING

COMPANIES AND THEIR SUBSIDIARIES

During the fiscal year 1968, 13 active registered holding-company

systems issued and sold for cash 44 issues of long-term debt and capital

stock, aggregating $926 million.> pursuant to authorizations granted

by the Commission under Sections 6 and 7 of the Act.30 All of these

issues were sold for the purpose of raising new capital.

The following table shows the amounts and types of securities issued

and sold by registered holding companies and their subsidiaries during fiscal 1968:

Securities issued and sold for cash to the public and financuil institutums by active

registered holding companses and their subsidiaries-fiscal year 1968.

(In millions)

Holding company systems

I Bonds Deben- Preferred Common turcs stock stock

Allegheny Power System, Inc.: Monongahela Power Co 0$35 . 0$10 _._-----~ .. Potomac EdIson Co., The _________________________ West 25 .----------- 5 ._--------.- Penn Power Co _______________________________ G 77 .---.------- 020 ------------ American Electric Power Co., Inc.:

Indiana & Michigan Electric Co ____________________

Olno 35 $15 ------------ --._.-.----- Power Co ____________________________________ 0 110 20 ------------ ---_.-._--.- Central and Sonth West Corp.: Central Power and LIght Co _______________________ 28 .----------- ----.------- ----------.- Sonthwestern Electric Power Co 20 Columbia Gas System, Inc, The ______________________ -------~-75- -------.--.- ---------_.- ----------.- Consolidated Natural Gas Co ---------25- 30 Delmarva Power & LIght Co ----.-.----- General Public Utihties Corp.:

Jersey Central Power & LIght Co __________________ 30 ------------ ------------ ----.-.----- Metropohtan Edison Co ___________________________ ------------ 20 ------------ --._--._---- Pennsylvama Electric Co __________________________ --------.--- 10 ----.-.----- -._--------- MIddle South Utrlittes, Ine.: Arkansas Power & LIght Co _______________________ 15 ------------ ----------8- ._---------- LOUISIana Power & LIght Co _______________________ 053 ------------ -._._------- National Fnel Gas Co __________________________________------------ 18 --------_ ..- _._._------- New England Electrie System. Massachusetts Electnc Co _________________________ 15 ------------ --.---.----- ..-.._------ Narragansett Electric Co __________________________ 7 _._-----_._- ..-.-.----- ----_._----- New England Power Co ___________________________ 15 ------------ 10 .._._------- Northeast Utilities: Oonneetieut LIght & Power Co., The 20 15 .... _----- .. Hartford Electrrc Light Co., The ___________________ 10 --.---- ..-.- 10 --------._-- Western Massachusetts Electric Co _________________ 10 .._._---_._- --.--------- --- ..._._._- Southern Co.: Alabama Power Co ________________________________ 28 _._--------- ---------i2- .._._---.-.- Georgia Power Co _________________________________

MISSISSIppi 50 .----------- .---_ ..._--- Power Co ______________________________ 10 --.-_._._--- ------------ --.- .... _--- Utah Power & LIght Co _______________________________ 20 --------_._- 10 ----.---.---

TotaL ___________________________________________ 638 188 100 --_._._._._-

Two issues.

...Debt securities are computed at their principal amount, preferred stock at

the offering price, and common stock at offering or subscription price.

30 The active systems which did not sell stock or long-term debt securities to

the public are: American Natural Gas Company; Eastern Utilities Associates;

Ohio Edison Oompany ; and Philadelphia Electric Power Company.

____________________________ ----------- ~

___________________ ------------ ------------

__________________________ ------------ ------------ ___________________________ ------------ ------------

_

______________ ------------

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140 SECURITIES AND EXCHANGE COMMISSION

The table does not include securities issued and sold by subsidiaries

to their parent holding companies, short-term notes sold to banks, portfolio sales by any of the system companies, or securities issued for stock

or assets of nonaffiliated companies. Transactions of this nature also

require authorization by the Commission except, under Section 6 (b)

of the Act, the issuance of notes having a maturity of 9 months or less

where the aggregate amount does not exceed 5 percent of the principal

amount and par value of the other securities then outstanding. The

table also does not include the issuance and sale of $65 million principal

amount of debentures by Pennzoil United, Inc. which ceased to be a

registered holding company on April 1, 1968, subject to reservations

of jurisdiction over certain financing and other matters,"

Competitive Bidding

All of the 44 issues of securities sold for cash in fiscal 1968, as shown

in the preceding table, and the Pennzoil United debenture issue were

offered for competitive bidding pursuant to the requirement of Rule 50

under the Act.

During the period from May 7, 1941, the effective date of Rule 50,

to June 30,1968, a total of 1,014 issues of securities with an aggregate

value of $15,921 million were sold at competitive bidding under the

rule. These totals compare with 238 issues of securities with an aggregate value of $2,636 million which have been sold pursuant to orders

granting exceptions under paragraph (a) (5). Of the total amount of

securities sold pursuant to such orders, 133 issues with a total value of

$2,153 million were sold by the issuers and the balance of 105 issues aggregating $483 million were portfolio sales. Of the 133 issues sold by

the issuers, 71 were in amounts of from $1 to $5 million each, 3 debt

issues were in excess of $100 million each;" 2 stock issues totaling $36

million were issued in fiscal 1966 to holders of convertible debentures

and employee stock options, and the remaining 57 issues were III

amounts ranging between $5 million and $100 million.

POLICY AS TO REFUNDABILITY OF DEBT ISSUES

In accordance with its long-standing policy under the Act, the

Commission has continued to require that all debt securities and preferred stocks sold by registered holding companies and their subsidiaries be fully refundable at the option of the issuer upon reasonable notice and that any redemption premium be reasonable in amount.

Exceptions from this policy have been permitted only where clearly

warranted by the circumstances of a particular case. One such excep11 See pp. 134-135, supra.

a Ohio Valley Electric Corporation, a $360 million bond issue; United .Gas

Corporation, a $116 million bond issue; and Pennzoil Company, a $135 million

note issue maturing in 18 months sold to underwriters.
THIRTY-FOURTH ANNUAL REPORT 141

tion during fiscal 1968 was the issue and sale by Pennzoil United,

Inc. of $65 million principal amount of its present debentures due

1988 at competitive bidding on June 18, 1968. These debentures carry

a 5-year restriction against refunding at a lower interest cost.

The 33rd Annual Report, pages 126-27, contains a summary of the

results of an examination by the Commission's staff of all electric and

gas utility bond issues (including debentures) sold at competitive bidding between May 14, 1957, and June 30, 1967, by companies subject

to the Act as well as those not subject. This study was extended to include fiscal year 1968. During this period, 762 electric and gas utility

debt issues, aggregating $19,047.4 million principal amount, were offered at competitive bidding. These included 507 refundable issues

totaling $10,380 million, and 255 nonrefundable issues totaling $8,-

667.4 million. The latter issues were all nonrefundable for 5 years except two. Of the two exceptions, one was nonrefundable for 7 years

and the other for 10 years. The refundable issues thus represented

66.5 percent of the total number of issues and 54.5 percent of principal

amount.

During fiscal year 1968, 96 debt issues were offered, aggregating

$3,042 million principal amount. They consisted of 36 refundable issues totaling $882.5 million and 60 nonrefundable issues totaling $2,-

159.5 million, The number of refundable issues thus represented 37.5

percent of the number of issues and 29 percent of principal amount.

The weighted average number of bids for fiscal 1968 was 4.42 on

the refundable issues and 4.12 on the nonrefundable issues, while the

median number of bids was 4.5 on the refund ables and 4 on the nonrefundables," With respect to the success of the marketing of the debt

issues, an issue was considered to have been successfully marketed if

at least 95 percent of the issue was sold at the syndicate price prior to

termination of the syndicate. On this basis, during fiscal 1968, 44 percent of the refundable issues were successful, as against 58 percent of

the nonrefundable issues." In terms of principal amount for fiscal

1968, 44.5 percent of the refundable issues were successful as compared to 53.9 percent of the nonrefundable issues." Extension of the

comparison to include the aggregate principal amount of all issues

which were sold at the applicable syndicate prices up to the termina-

.. The weighted average number of bids received during the period from May

14, 1957, to June 30,1968, was 4.75 on the refundable issues and 4.24 on the nonrefundable issues. The median number of bids was 5 on the refundables and 4

on the nonrefundables .

.. For the period from May 14, 1957, to June 30, 1968, 61.5 percent of the refundable issues and 58.4 percent of the nonrefundable issues were successful

as For the period from May 14, 1957, to June 30, 1968, 58.2 percent of the aggregate principal amount of the refundable issues were successful, as against 54.5

percent for the nonrefundable ones.

327-506--68----11
142 SECURITIES AND EXCHANGE COMMISSION

tion of the respective syndicates, regardless of whether a particular

issue met the definition of a successful marketing, indicates that during fiscal year 1968, 76 percent of the combined principal amount of

all the refundable issues were sold at syndicate price, as compared with

80 percent of the nonrefundable issues,"

36 For the period from May 14, 1957, to June 30, 1968, the applicable percentages

were 80 percent for both refundable and nonrefundable.
PART vn

PARTICIPATION IN CORPORATE REORGANIZATIONS

The Commission's role under Chapter X of the Bankruptcy Act,

which provides a procedure for reorganizing corporations in the U.S.

district courts, differs from that under the various other statutes which

it administers. The Commission does not initiate Chapter X proceedings or hold its own hearings, and it has no authority to determine

any of the issues in such proceedings. The Commission participates in

proceedings under Chapter X in order to provide independent, expert

assistance to the courts, the participants, and investors in a highly

complex area of corporate law and finance. It pays special attention

to the interests of public security holders who may not otherwise be

represented effectively.

Where the scheduled indebtedness of a debtor corporation exceeds

$3million, Section 172of Chapter X requires the judge, before approving any plan of reorganization, to submit it to the Commission for

its examination and report. If the indebtedness does not exceed $3

million, the judge may, if he deems it advisable to do so, submit the

plan to the Commission before deciding whether to approve it. 'When

the Commission files a report, copies or a summary must be sent to

all security holders and creditors when they are asked to vote on the

plan. The Commission has no authority to veto or to require the adoption of a plan of reorganization.

The Commission has not considered it necessary or appropriate to

participate in every Chapter X case. Apart from the excessive administrative burden, many of the cases involve only trade or bank creditors and few public investors. The Commission seeks to participate

principally in those proceedings in which a substantial public investor

interest is involved. However, the Commission may also participate

because an unfair plan has been or is about to be proposed, public

security holders are not represented adequately, the reorganization

proceedings are being conducted in violation of important provisions

of the Act, the facts indicate that the Commission can perform a useful

service, or the judge requests the Commission's participation.

For purposes of carrying out its functions under Chapter X, the

Commission has divided the country into five geographic areas. The

New York, Chicago, San Francisco and Seattle regional officesof the

Commission each have responsibility for one of these areas. Each of

143
144 SECURITIES AND EXCHANGE COMMISSION

these officeshas lawyers, accountants and financial analysts who are

engaged actively in Chapter X cases in which the Commission has

field its appearance. Supervision and review of the regional offices'

Chapter X work is the responsibility of the Division of Corporate

Regulation of the Commission, which, through its Branch of Reorganization, also serves as a field office for the fifth area.

SUMMARY OF ACTIVITIES

In the fiscal year 1968,the Commission continued to maintain a high

level of activity under Chapter X. It entered its appearance in 22 new

proceedings involving companies with aggregate stated assets of approximately $140 million and aggregate indebtedness of approximately $120 million. These proceedings involved the rehabilitation of

corporations engaged in various businesses, including, among others,

hotel management, real estate development, gas and oil development,

residential construction, commercial and real estate financing, heavy

industrial machining, and a race track.

Including the new proceedings, the Commission was a party in a

total of 109 reorganization proceedings during the year. The stated

assets of the companies involved in these proceedings totalled approximately $860 million and their indebtedness totalled approximately

$730 million. The proceedings were scattered among district courts in

35 states and the District of Columbia as follows: 11 each in California and New York; 8 in Florida; 7 in Arizona; 6 in New Jersey;

5 each in Pennsylvania and ,:Vashington ; 4 each in Indiana, Michigan,

and Texas; 3 each in Illinois, Louisiana, Minnesota and North Carolina; 2 each in Alabama, Colorado, District of Columbia, Hawaii,

Kansas, Montana, Nevada, Ohio, South Dakota, and West Virginia;

and 1 each in Arkansas, Connecticut, Delaware, Indiana, Kentucky,

Maryland, Massachusetts, Missouri, Oklahoma, North Dakota, Tennessee, and Utah.

During the year, 17 proceedings were closed. As of the end of the

fiscal year the Commission was a party in 92 reorganization proceedings.

JURISDICTIONAL, PROCEDURAL AND ADMINISTRATIVE MATTERS

In Chapter X proceedings in which it participates, the Commission

seeks to have the courts apply the procedural and substantive safeguards to which all parties are entitled. The Commission also attempts

to secure judicial uniformity in the construction of Chapter X and

the procedures thereunder.

In Arnericam. National Trust 1 and Republic National Trust.: which

were consolidated for administration purposes, a receiver was ap1S. D. Ind .•No, IP 68-B-447.

2 S. D. Ind., No. IP-6S-B-609.
TEITRTY-FOURTH ~AL REPORT 145

pointed pending approval or dismissal of involuntary Chapter X

petitions filed by creditors. The order of appointment granted the

receiver, in effect, the full powers and duties of a Chapter X trustee,

including the power to investigate the acts and conduct of prior management. The Commission sought to have the authority of the receiver narrowed to include only duties normally vested in a temporary

receiver. The question became moot upon approval of the Chapter

X petitions and appointment of the receiver as the Chapter X trustee.

In Wac, Inc.,3 the Commission objected to the retention in office of

the Chapter X trustee, who had been the supervising partner in

charge of an audit of the debtor's books shortly before the filing of the

Chapter X petition. The accounting firm was a creditor of the estate

since its bill was unpaid, and accordingly the Commission considered

the partner disqualified as trustee under Section 158(1). In addition,

since Chapter X requires an independent investigation of the debtor,

the Commission felt that the trustee may have compromised his independence by reason of the pre-Chapter X audit of the debtor and

hence was not "disinterested" under Section 158(4). The issues became moot when the trustee resigned.

In Oowmonwealth Financial Oorp.,'" the Commission moved to

vacate the order appointing co-counsel for the Chapter X trustees on

the ground that he was not "disinterested" under Section 158(4). The

co-counsel was an aetorney who had represented a major creditor of the

debtor in other matters, and his father was Chairman of the Board of

Directors of that creditor and Chairman of a creditors' committee, The

motion of the Commission was denied, but within a few days co-counsel

resigned and the judge accepted his resignation.

InFederal Shoppi;ng Way, Inc., 5 the involuntary Chapter X petition

alleged, as an act of bankruptcy, the prior appointment of a receiver in

a civil suit filed by the Commission against the debtor involving alleged

fraud in the sale of securities under the Securities Act of 1933. The

Commission supported the position that this allegation satisfied Section

131(2).6 The matter was pending at the close of the fiscal year.

InParkwood, Inc.; 7 the court held," as urged by the Commission, that

the Chapter X petitions had been filed in good faith in that it was not

unreasonable to expect that a plan of reorganization could be effected.

The court noted that the announced position of creditors holding first

D. Minn., No. 6-68-279.

E.D. Pa., No. 30108.

w.n. Wash., No. 61609.

Section 131(2) specifies as an act of bankruptcy that "a receiver or trustee has

been appointed for or has taken charge of all or the greater portion of the property of the corporation in a pending equity proceeding."

7 D. D.C., No. 89-66.

8 March 5, 1968.

•

•

•

•
146 SECURITIES AND EXCHANGE COMMISSION

deeds of trust thllit they would not acquiesce in a plan of reorganization which did not make them current on all obligations thus secured

had no bearing on the question of good faith," The court pointed out

that the alternatives to reorganization-foreclosure or forced sale--

might substantially diminish an indicated equity in excess of $4 million above the claims of the holders of the first deeds of trust.

In Gladstone Mountain Mining Oompany,10 a dormant mining company with book assets of $3,200 and total liabilities of $1,000 consisting of accounting and legal fees filed a voluntary petition under Chapter X. The company sought to increase its capital stock from 1.5million

to 5 million shares so that it could use the additional stock to acquire

speculative assets. The company's stock is listed on the Spokane Stock

Exchange and it has several hundred shareholders, but it had had

no income from operations for the past several years. The Commission

moved to dismiss the petition for lack of "good faith" under Section

146(3) because it appeared that the proceeding was instituted principally to capitalize a new speculation rather than to rehabilitate a

going-concern enterprise.

In Tower Oredit Oorporation,l1 as previously reported,'> the Commission supported, on appeal," the order of the district judge approving the Chapter X petition as having been filed in "good faith" under

Section 146(4), urging that the Chapter X proceeding would better

subserve the interests of creditors and stockholders than would the

pending State court receivership. The Commission pointed out the

many advantages of the Chapter X proceeding over a State court

receivership, such as the trustee's investigation into past management's

abuses; the greater ability of the Federal reorganization court to deal

exclusively with the assets of a multi-state business operation; the

reorganization standards to measure the feasibility of a reorganization

plan and its fairness to affected persons; and the requirement that the

judge be satisfied as to the qualifications of the persons who are to

constitute the new management of the reorganized company. After the

close of the fiscal year, the appeal was dismissed pursuant to a stipulation of the parties.

In re Bankers T1'U8t,I4the Commission supported, on appeal," the

In Riker Delaware Corporation, D. N.J. No. B-597--67, the court agreed with

the Commission and rejected a similar contention. Accord: Carr v, Flora Sun

Oorp.; 317 F. 2d 708 (C..!.. 5, 1963) ; York v, Florida Southern Oorp., 310 F. 2d

109 (C..!.. 5, 1962).

ao E.D. Wash., No. B--68-N-47.

11 M.D. Fla., No. 66-171-Bk-T.

,. 33rd Annual Report, p, 130.

13 Tower Credit Corporation v, South Atlantic Life Insurance Company, C.A.

5, No. 24572.

1< S.D. Ind., No. IP-66-B-2375.

15 In re Bankers Trust, (C.A. 7, October 31,1968).

•
THIRTY-FOURTH ~AL REPORT 147

district court's denial of a motion made by a creditor and trust certificate holder to dismiss the Chapter X petition asto one of the five trusts

being reorganized in a consolidated proceeding on the ground, among

others, that venue was improper in the Federal court in Indiana. The

district judge had determined that, while the venue requirements of

Sections 128 and 129 of Chapter X had in fact not been met, he nevertheless had discretion under Section 32 of the Bankruptcy Act (authorizing the judge to transfer the proceeding if venue is improper) to

retain jurisdiction. On appeal, the Commission urged that the district

court (1) had no power to dismiss the Chapter X petition for improper

venue and (2) acted within its discretion and properly refused to

transfer the Chapter X proceeding to another district court. After the

close of the fiscal year, the court of appeals agreed with the Commission that, notwithstanding the district court's determination that venue

was improper, the district court lacked authority to dismiss the proceeding and did not abuse its discretion in refusing to transfer the

proceeding.

In Vinco Oorp.,IGthe court denied a motion to vacate the order which

3 years previously had approved the involuntary Chapter X petition.

The motion to vacate was based primarily on the ground that the

debtor had not been served with the subpoena and copy of the involuntary petition. In denying the motion, the court pointed out that

the debtor's attorney and the board chairman's personal attorney each

had been served with a copy of the petition, that the debtor had been

represented by an attorney at the hearing to consider its approval,

and that the debtor had participated in the Chapter X proceeding and

filed a proposed plan of reorganization. On appeal by the debtor to

the Court of Appeals for the Sixth Circuit," the Commission urged

that the motion to vacate was barred under Section 149 of Chapter X,

which provides that once the order approving a Chapter X petition has

become final it "shall be a conclusive determination of the jurisdiction

of the court."

In Tower Oredit Oorporation,t8 the referee in bankruptcy did not

permit Commission counsel to participate in cross-examination in a

hearing on the petition of the Chapter X trustee seeking to require

certain holders of large blocks of Tower stock to return their stock to

the estate. The district judge denied the Commission's motion for an

order directing the referee to permit the Commission to participate

fully in the hearing. The court of appeals granted the Commission's

petition for a writ of mandamus," directing the district judge (1) to

,. E.D. Mich., No. 63---192.

11 Fogel v. Porritt C.A.. 6, No. 18,688.

M.D. Fla .. No. 66-171-Bk-T.

,. S.E.C. v. Krentzman, 379 F. 2d 35 (C.A. 5, 1968).

"
148 SECURITIES AND EXCHANGE COMMISSION

set aside his order denying the motion and (2) to enter an order directing the referee that in any continued or adjourned session of the

hearings, the Commission must be allowed to propound questions to

witnesses on cross-examination and to offer evidence. The court of

appeals noted that, under Section 208 of Chapter X, the Commission

is ":1 party in interest, with the right to be heard on all matters arising

in such proceeding" and that a limitation such as the district court

sought to impose would hamper the Commission severely in its tasks

as advisor to the court and protector of the public interest.

In General United Oorporation, Inc.,20 the Commission, as reported

previously," moved to classify stockholders into position as creditors

because they had been defrauded in violation of Section 10(b) of the

Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The

district judge confirmed the holding of the referee in bankruptcy that

the Commission lacked standing to bring such a motion on behalf of

the stockholders, although the court's order acknowledged that a

charge of fraud seemed justified by the record, and that a class action

would be appropriate. The court interpreted Section 208 of Chapter X,

which defines the Commission's status as "a party in interest" in the

proceeding, as limiting the Commission to the role of an amicus curiae.

The Commission has filed a petition for a writ of mandamus with the

court of appeals," urging that the Commission has the requisite standing to file the motion and that the ruling of the court seriously impairs

the role of the Commission as a party to the Chapter X proceeding in

the interest of public security holders.

In Los Angeles Land and Investments, Ltd.,23 the court, in its

opinion classifying creditors pursuant to Section 197,24 found, as urged

by the Commission, that each person who had purchased from the

debtor an undivided interest in land, sold in violation of the real

estate laws of Hawaii and California and of the Securities Act of 1933,

should be classified as a general unsecured creditor to the extent of

the payments made plus interest for the purpose of participating in

a plan of reorganization,"

In Riker Delaware Oorporation." the Court of Appeals for the

Third Circuit held that the power to enter a "turnover order" under

Section 257 of Chapter X could be exercised only by the judge and not

.. D. Kans., No. 3763-B-l.

21 33rd Annual Report, p. 132.

.. S.E.a. v. Templar, C.A. 10, No. 10114.

23 D. Hawaii, No. Bk-67-352.

24 In re Los Angeles Land and Investment, Ltd., 282 F. Supp.448 (1968) .

.. The debtor had been previously enjoined from violating the registration provisions of the 1933 Act. S.E.a. v. Los Angeles Land and Inoestments, Ltd., et al.,

D. Hawaii, Civil Action No. 2486.

.. D.N.J., No. B-597-67.
THIRTY-FOURTH ~AL REPORT 149

by the referee." The referee, at the request of the trustee, had issued

an order requiring the secured creditor in possession of the properties

under his mortgage to turn over the properties to the trustee." The

court of appeals ordered, as urged by the Commission, that the matter

should be remanded to the district judge and that the turnover order,

as previously modified by the court of appeals, should stay in effect

pending the judge's consideration.

In Yale Eeprese System, In(;.,29 as previously reported," the court

of appeals had remanded the case to the district court to determine

whether, under equitable principles, a creditor secured by a substantial

number of truck trailers and bodies was entitled to reclamation, or,

in the alternative, to rental payments for the use of the trucks and

trailers during reorganization." On remand, the district court held

that reorganization of the debtor was a "reasonable possibility" and

that the secured creditor should not be permitted to reclaim its trailers

or receive rental payments because this would make successful reorganization impossible." The Commission concurred with the court's

ruling and supported its position in a second appeal taken by the

secured creditor.

In affirming the district court, the court of appeals 33 held that, in

view of the reasonable possibility of a successful reorganization

and "the fundamental purpose of reorganization proceedings to enable

the debtor to continue operations as well as to protect the rights of

creditors ... ," the lower court had not abused its discretion in denying claims for reclamation. Moreover, since equal treatment would

have to be afforded all secured creditors, the granting of rental payments could "nullify the reorganization as effectively as granting the

petition for reclamation." In response to the secured creditor's contention that equitable considerations compelled a favorable ruling in its

behalf because the vehicles in which it claimed a security interest were

depreciating, the court noted that ". . . . to such extent as Fruehauf

has been damaged by the use of its property pending the reorganization, it is entitled to equitable consideration in the reorganization

plan." The court of appeals further noted that the trustee had offered

to fix the value of the security interest claimed by the secured creditor

21385 F. 2d 124 (1967) .

.. Section 257, which gives the trustee "the right to immediate possession of

all property of the debtor in the possession of ... mortgagee under a mortgage,"

is silent as to the judicial officer having the power to enter an order thereunder .

.. S.D.N.Y., No. 65-B-404.

.. 33rd Annual Report, p, 133.

It Fruehauf Oorporation v. Yale Empress System, 370 F. 2d 433 (C.A. 2, 1966) .

.. S.D.N.Y., No. 65 B 404 (April 20, 1967) .

.. Fruehauf Oorporation v. Yale Empress System, 384 F. 2d 990 (C.A. 2, 1967).
150 SECURITIES AND EXCHANGE COMMISSION

so that its position in any reorganization would be unaffected by

possible depreciation."

In Webb ill Knapp, hW.,35 as previously reported," the Chapter X

trustee instituted an action against the indenture trustee, based on the

latter's alleged misconduct or gross negligence, to recover on behalf of

the debenture holders the entire principal amount of debentures outstanding ($4,298,000). This action, which was supported by the Commission, was dismissed by the district court on motion of the indenture

trustee." The district court ruled that the claims involved were personal to the debenture holders and that the Chapter X trustee had no

standing to assert the claims on their behalf." The trustee and the

Commission had argued before the district court, among other things,

that where public creditors are widely dispersed and may be without

effective representation, the Chapter X trustee should be permitted to

represent their interest, consistent with the aims of the Bankruptcy

Act. The Chapter X trustee has appealed the dismissal of his action."

In Westeo 0orporation,40 Chemetron Corporation filed a claim in

the reorganizwtion proceeding seeking rescission of its sale to the debtor

prior to the Chapter X proceeding of Pan Goo Atlas Corporation

and requested leave to file suit against the debtor and others in connection with this transaction. Shortly thereafter, the trustee filed

objections to Chemetron's claims and to its motion for leave to file

suit and counterclaimed against Chemetron for $10 million. Both

Chemetron's claim and the trustee's counterclaim are based on fraud.

M The court of appeals cited in re New York, New Haven« Hartford R. Oo., 147

F. 2d 40, 48 (C.A. 2, 1945), certiorari denied, 325 U.S. 884 (1945), where the

court of appeals held that fair and equitable treatment required that the damage

caused to secured lenders, whose security had become worthless while they had

been enjoined from foreclosing upon it, should be made good to them by their

classification in the reorganization plan as secured creditors to the extent to which

they could have realized on their collateral had they not been restrained from

selling, and as unsecured creditors for the amount by which the debts owing them

exceeded such realizable value of the collateral.

.. S.D.N.Y., No. 65-B-365 .

.. 33rd Annual Report, p. 1M.

.7The Chapter X trustee had also sought <to assert, by way of a counterclaim

or accounting within the Chapter X proceeding itself, that the indenture trustee

was liable to the debenture holders. These efforts were also rejected by the district

court for reasons similar to those set forth above.

38 The court, in making its ruling, relied upon Clark v. Chase NationaZ Bank,

137 F. 2d 797 (C.A. 2, 1943), which held that, while a Chapter X trustee had

standing to sue an indenture trustee where self-dealing and preferential transfers

are alleged, the Chapter X trustee could not institute a legal action for alleged

breach of negative covenants of the indenture because the trustee was not the

real party in interest .

.. C.A. 2, No. 32586 .

.. S.D. Texas, No. 66-H-62.
TFURTY-FOURTH ~AL REPORT 151

Chemetron objected to the jurisdiction of the bankruptcy court to

hear the counterclaim and its claim in the same summary proceeding.

The Commission urged that the reorganization court had summary

jurisdiction to hear both a creditor's claim and the trustee's counterclaim upon which affirmative relief could be granted where, as in the

instant case, the counterclaim arose out of the same transaction as

the creditor's claim. Thereafter, the trustee and Chemetron proposed

a compromise of the claim and counterclaim, conditioned upon the

approval of a proposed plan of reorganization. The Commission recommended to the court that the compromise be considered only at the

time of the hearing on a plan of reorganization. The court adopted

the Commission's view, and, after the close of the fiscal year, a proposed plan was filed and hearings were conducted by the court.

In F. L. Jacobs 00./1 previously reported," after the plan was

consummated the trustees filed a petition in the reorganization court

to restrain the New York Stock Exchange and the Commission from

delisting the debtor's common stock and to order the restoration of

trading of the stock on the Exchange." The court agreed with the

Commission that the court had no jurisdiction to enjoin an administrative proceeding for delisting and that the Commission had exclusive jurisdiction over such matters, subject to statutory review by

the court of appeals.

The Exchange had suspended trading in the debtor's stock in 1958,

and in 1959 had filed an application with the Commission, pursuant

to Section 12(d) of the Securities Exchange Act of 1934,to strike the

debtor's common stock from listing and registration, but action thereon

was deferred during the reorganization proceedings. After a plan of

reorganization was consummated and after the debtor's unsuccessful

efforts to enjoin the administrative proceeding, the Exchange pressed

its delisting application, referring to the debtor's failure to meet delisting criteria as to assets and earnings for several years during the

reorganization proceeding and noting that the debtor did not meet,

by a substantial amount, certain original listing standards. Under the

Exchange delisting standards, a company which falls below those

standards may be required to bring itself up to the stricter original

listing standards as a condition to continued listing. In opposition,

the debtor noted that it was not presently below the de1isting standards

and pointed to the success of the reorganization and to the fact that

it had been operating at a profit for some years and was expanding.

The Commission held that under the circumstances here involved, including the fact that the Jacobs stock would have been delisted in

U E.D. Mich., No. 42235 .

, 33rd Annual Report, pp. 132-3.

., E.D. Mich., No. 42235.

•
152 SECURITIES AND EXCHANGE COMMISSION

1959 absent intercession of the Chapter X proceeding, "it seems clearly

appropriate for the Exchange to require Jacobs to satisfy original

listing standards as a condition to the resumption of trading."

TRUSTEE'S INVESTIGATION

A complete accounting for the stewardship of corporate affairs by

the prior management is a requisite under Chapter X. One of the primary duties of the trustee is to make a thorough study of the debtor to

assure the discovery and collection of all assets of the estate, including

claims against officers, directors, or controlling persons who may have

mismanaged the debtor's affairs. The staff of the Commission often

aids the trustee in his investigation.

In We8tee Oorporatiorc" the trustee conducted an extensive investigation into the affairs of the debtor, in which the Commission's staff

participated. Shortly after the close of the fiscal year, the trustee instituted suit against 93 individuals and firms, including 18 brokerage

houses and the debtor's accounting firm, charging fraud and mismanagement leading to the company's financial collapse.

In Oommonwealth Financial Oorporatiotu" the former president of

the debtor moved for a protective order staying any attempts by the

trustees to take his deposition in the course of the trustees' Section 167

investigation. He alleged that the Commission apparently had been

conducting a separate and independent investigation of the affairs of

the debtor including his activities,

The court denied the motion, finding that the Commission was authorized to participate in the trustees' investigation and ruling that the

former president was free to assert his Fifth Amendment right against

self-incrimination at any time and that this constitutional safeguard

was sufficient protection."

After the close of the fiscal year, the former president appealed to the

court of appeals." The oourt denied his motion for a stay pending the

appeal and ordered the trustees' motion to quash the appeal continued

until the argument of the appeal on the merits.

REPORTS ON PLANS OF REORGANIZATION

Generally, the Commission files a formal advisory report only in a

case involving a substantial public investor interest and presenting

significant problems. When no such formal report is filed, the Com-

.. Securities Exchange .Act Release No. 8314 (May 10, 1968.)

S.D. Texas, No. 66-H-62 .

.. E.D. Pa., No. 30108.

<7 The court relied upon U.S. v. Simon (reported previously, 33rd .Annual Report,

p, 134), 373 F. 2d 649 (C..!.. 2, 1967), certiorari granted 8ub nom. Simon et al. v.

Wharton, 386 U.S. 1030 (1967), dismissed as moot, 387 U.S. 425 (1968) .

.. C..A. 3, No. 17, 455.

~

'"
THIRTY-FOURTH ANNUAL REPORT 153

mission may state its view briefly by letter, or authorize its counsel to

make an oral or written presentation to amplify the Commission's

views. During this fiscal year the Commission did not publish any

formal advisory reports; its views on 10 plans involved in 5 proceedings were transmitted to the court by written memoranda or presented

orally at the hearings on approval of the plans."

In TNT Trailer Ferry, lne.,50 the Supreme Court reversed 51 the

decision of the court of appeals 52 which had affirmed an order of the

district court confirming a plan of reorganization for the debtor. The

district court had. excluded stockholders from participation in the

reorganized company because of its finding that the debt-or was insolvent. The Supreme Court held, as urged by the Commission and

the stockholders' protective committee, that the going-concern value

of TMT had been improperly established in that the district court

had referred solely to the operating experience of TMT while under

trusteeship and failed to consider the foreseeable prospects of the

company once it was out of the reorganization proceeding. The court

also ruled that the district court erred in allowing almost in full

two substantial disputed claims aggregating about $2 million, on the

basis of alleged compromises, without hearings on the merits of the

claims and the objections to them. The court did not reach other contentions of the Commission and committee: (1) that a Chapter X

trustee, as a matter of law, could not succeed himself as president of

the reorganized company; and (2) that stockholders who had purchased stock sold to them in violation of the Federal securities laws

had. claims against the debtor as to which they could participate as

creditors in a plan of reorganization, regardless of the insolvency of

the debtor.

In Yale Express System, lne.,53 a plan for the reorganization of

Republic Carloading & Distributing Company, a major subsidiary

of Yale, proposed, in effect, the complete separation of Republic and

six of its subsidiaries from the Yale system and the surrender of

Yale's 96.8 percent stock ownership in Republic in return for the

cancellation of approximately $16 million of senior and prior debt

owed by Yale to certain institutional creditors and $3 million owed

.. In re Arizona Lutheran Hospital, D. Ariz., No. B-11137-Phx; In re Oa1Umd.aigua Enterpri8e8 Oorporation, W.D. N.Y., No. Bk 63-1954 (six plans) ; In re

Oommonwealth Investment Oorp., D. S.D. No. 65-635; In re Polycast Oorporation,

D. Conn., No. 33718; In re Yale Er.cprcssSystem, Inc., S.D. N.Y., No. 65-B-404.

.. S.D. Fla., No. 3659-M-Bk.

G1 Protective Oommittee, etc: v. Anderson, 390 U.S. 414 (1968) .

.. 364 F. 2d 936 (C.A. 5, 1966). See previous annual reports: 33rd Annual

Report, p. 135; 32nd Annual Report, PP. 92-93; 31st Annual Report, p. 100; 30th

Annual Report, p. 105 ; and 29th Annual Report, pp.91-92 .

.. S.D. N.Y., No. 65-B-404.
154 SECURITIES AND EXCHANGE COMMISSION

by Yale to Republic. The Commission took the position, witn which

the court agreed, that, among other things, the plan provided adequate consideration for Yale's relinquishment of its interest in Republic and that implementation of the plan would leave the balance

of Yale's creditors, including its subordinated public debenture holders, in a substantially better posture than that possible under any

consolidated plan of reorganization.

In Oonamdaiqua Enterprises Uorporationr" reported previously,"

the Commission filed four separate memoranda on six different proposed plans of reorganization, and on an amendment of one of the

plans, finding fair and equitable only the two plans which provided

for the auction sale of the debtor's assets at a minimum upset price

of $4 million, and the distribution to creditors of all proceeds and

cash on hand according to their respective priorities. It was estimated

that these plans would provide at least a 50 percent payment of the

unsecured claims, including those of public debenture holders. The

plans were also found to be feasible, with the reservation that the

court Should be satisfied of a firm offer to purchase the assets and the

ability of the offeror to perform. The court has ruled on five of the

plans and in its decision has, in effect, adopted the recommendations

of the Commission. However, only the trustee's plan was approved

because "no advantage to the unsecured creditors would result from

the approval of two practically identical plans."

The three other plans of reorganization were not approved by the

court, which referred to "the reasons set forth" in the Commission's

memoranda. The Commission had objected to one plan because it

provided for the participation of stockholders despite the debtor's

clear insolvency and because of the excessive debt structure it proposed. Another plan providing for a fixed distribution to unsecured

creditors of 48 percent of their claims was found to be unfair because

i,tprecluded creditors from benefiting from a possible reduction in the

debtor's recorded claims Or a sale of the assets at a price in excess of

the opening bid. A third plan, which offered unsecured creditors a

49 percent stock interest in the company or a cash alternative of 50

percent of their claims, was found to be unfair because of the inadequate contribution of the plan proponent for the 51 percent stock

interest and control in the reorganized company, and valuable concession rights. As to the sixth plan and the amended plan which the

court has not yet reviewed, the Commission found them to be unfair

because each plan contains alternatives which are unfair, when measured by the parallel provisions in the other. One of the two plans

offers the unsecured creditors the largest stock interest of any proMW.D.N.Y., No. Bk 63-1954.

50 33rd Annual Report, pp.131-132.
TEITRTY-FOURTH ANNUAL REPORT 155

posed plan (59 percent) as an alternative to cash, and the other plan

offers the largest cash distribution of any proposed plan (75 percent)

as an alternative to stock. The trustee's motion for authority to sell

the assets of the debtor apart from any plan of reorganization was

opposed by the Commission and denied by the Court. One of the unsuccessful plan proponents has appealed the court's order rejecting

its plan."

In Arizona Lutheran H ospital,57 involving a nonprofit organization, the court approved and confirmed, as urged by the Commission,

the trustee's plan of reorganization which provided for the distribution of the proceeds of a previous sale of all the assets to Lutheran

Hospital & Homes Society of America, Inc. Under the plan, in accordance with the terms of the sale, the first mortgage bonds, held by about

1,000 persons, received cash payment in full for the outstanding principal balance of $2.7 million and accrued interest of $900,000.Unsecured creditors received nonnegotiable notes issued by the purchaser

of the assets representing the full amount of the principal of their

claims, to be paid over a 41;2year period without interest. The Commission noted that the court had found that the value of the assets

securing the bonds was less than the principal due on the bonds, and

that the bondholders nevertheless were to be paid in full, including

interest, while unsecured creditors would not receive interest on their

claims. The Commission pointed out, however, that a suit had been

instituted against the purchaser of the assets and others alleging

violations of Federal securities laws in the sale of the bonds to the

public investors; that dismissal of the suit was one of the conditions

of the sale and the plan; and that the payment to the bondholders reflected in part settlement of the suit.

In POlyCMt 001'p01'ation,58the plan of reorganization for the continuation of the debtor's business, which the court confirmed, provided

that all general unsecured creditors, including the public debenture

holders, would have the option of receiving for each $100 of claim

either $3 in cash or 10 shares of the new common stock. The debtor's

public stockholders would not participate in the plan, since the court

found the debtor to be insolvent. The plan proponents would receive

over 80 percent of the new common stock in return for a contribution

of cash and assets necessary for the operation of a new manufacturing

process. The Commission advised the court, and the court agreed, that

the plan was fair and equitable and feasible.

In Oommonwealth Investment Oorp.,59 the court, as recommended

56 C.A. 2, No. 31423.

01 D. Ariz., No. B-11137-Phx .

.. D. Oonn., No. 33718.

""D. S.D., No. 65-635.
156 SECURITIES AND EXCHANGE COMMISSION

by the Commission, approved a plan which provided for the sale of

the debtor's assets and the disposition of the proceeds to the debtor's

creditors and stockholders. Under the plan the stockholders were to

receive about $150,000 from the sale after the satisfaction of creditor

claims, plus whatever was recovered from pending causes of action on

behalf of the estate. The plan provided for the subordination of about

000,000shares of common stock held by former officersand directors.

In Atlas Sewing Oenters, lno.,60 as reported previosuly," the district

court in 1965 had declared a plan of reorganization to have been substantially consummated. However, the new securities and cash required to be issued were never issued and in 1967 the court found that

the plan proponent had not fulfilled his obligation to provide additional funds. The district court appointed a receiver and entered an

order adjudging the debtor a bankrupt. In March 1968,the trustee was

surcharged $56,666.67,the total of the fees he had been granted by the

court during the course of the Chapter X proceeding, because he had

acted in "deliberate defiance" of orders of the Court of Appeals for the

Fifth Circuit 62 and had given "unfaithful service" to the district

court. The trustee's appeal to the Court of Appeals for the Fifth Circuit from the surcharge order was pending at the close of the fiscal

year.

ACTIVITIES WITH REGARD TO ALLOWANCES

Every reorganization case ultimately presents the difficult problem

of determining the allowance of compensation to be paid to the various

parties for services rendered and for expenses incurred in the proceeding. The Commission, which under Section 242 of the Bankruptcy Act

may not receive any allowance for the services it renders, has sought to

assist the courts in assuring economy of administration and in allocating compensation equitably on the basis of the claimants' contributions to the administration of estates and the formulation of plans.

During the fiscal year 124 applications for compensation totaling

about $3 million were reviewed.

In Arlington Discount 00., 63 reported previously," the Commission filed a motion under Section 328 of Chapter XI, which was

granted, whereupon the debtor amended its petition to comply with

the requirements of Chapter X. Subsequently, the attorneys for the

60 S.D. Fla., No. 168-62-:M:-Bk-EC.

e, 33rd Annual Report, p. 136.

...The trustee has been cited for criminal contempt by the Court of Appeals

for the Fifth Circuit, U.s. v, Ray, No. 23,891,in that he allegedly failed to comply

with the interim orders of the court of appeals entered during appeals taken to

that court in the course of the Chapter X proceeding .

....S.D. Ohio, No. 48421 .

.. See 3300Annual Report, p, 140.
TEIRTY-FOURTH ~AL REPORT 157

debtor-in-possession in the Chapter XI proceeding requested a final

allowance of $40,000 for services rendered for the approximately 6-

month period during which the proceeding had been in Chapter XI.

The Commission recommended an allowance of $15,000, pointing out

that a great deal of the time spent by the attorneys had been unproductive and of no benefit to the estate because the debtor, on the advice of the applicants, had filed a petition under Chapter XI rather

than under Chapter X. The court allowed $7,500,stating, among other

things, that the use of Chapter XI by the attorneys was "in complete

disregard of the standards laid down by the Supreme Court" in Securities and Exchange tIomanlseion. v. American Trailer Rentals 00.,

379 U.S. 594 (1965). The attorneys have appealed to the Court of

Appeals for the Sixth Circuit 65 and the matter was pending at the

close of the fiscal year.

In Coast Investors, Inc.,66 as previously reported," counsel for a

committee appealed from an order of the district court which awarded

him $10,000as compensation for services. Counsel sought an allowance

of $18,000, which amount the Commission recommended. On appeal

the Commission argued that the district court erred in holding that

a different standard for allowances applies when the Chapter X reorganization plan provides, as in this case, for an orderly liquidation.

While the court of appeals agreed 68 that the same fee standards apply to all Chapter X proceedings, it held that in the instant case the

lower court's reference to the orderly liquidation over a period of

years under the plan was merely factual, and noted also that failure to

achieve a successful reorganization should not diminish the compensation for useful services since Congress desired to encourage bona fide

efforts to reorganize debtor corporations as going concerns.

In Food Town, Inc.,69 the proceeding had been referred generally

to the referee in bankruptcy who had held numerous hearings as referee and as special master over a period of years. The referee requested

a fee for his services pursuant to Section 241 of Chapter X. The Commission pointed out that the referee's salary is fixed by statute and

any allowances for his services are paid to the Treasury of the United

States for the Referees' Salary and Expense Funds; that these funds

are not allocated to any specific referee and thus referees have no interest in the charges for their official services; and that the annual

salary of the referee may serve as a guide for determining under Section 241 the compensation to be allowed for the referee's services in

.. Seiter, et at. v. Brock, Trustee, C.A. G, No. 18,G91 .

.. W.D. Wash., No. 53448.

et 33rd Annual Report, p. 138.

ea 388 F. 2d 622 (C.A. 9, 1968) .

.. D. Md., No. 11070.

327-506--68----12
158 SECURITIES AND EXCHANGE COMMISSION

Chapter X. The Commission rejected a suggestion that the allowances

for the referee's services should reflect overhead costs of his office.The

court, as recommended by the Commission, awarded the amount requested by the referee, without commenting on the issues raised by the

Commission.

In Westeo Oorporation,70 a practicing attorney who had been designated by the court as special master to conduct and preside over examinations to be taken on behalf of the trustee requested an interim

allowance based on a rate of $350 a day for his time spent so presiding

and in other matters such as conferences with attorneys. The Commission, noting that the applicant was acting as a quasi-judicial officer,

expressed the view that compensation provided for other judicial officers was an appropriate reference. Noting that a United States district

judge receives a salary of $35,000per annum, or a daily rate of $150 to

$175, it recommended an allowance for the special master at the rate

of $200 per day. The Commission took the position that the allowance

should reflect the fact that the special master must pay his officeoverhead but also the relatively limited scope of his responsibilities. The

court awarded the special master the fees requested by him.

In Hydrooarbon Ohemicale, lno.,71 appeals were taken from the

orders of the district court, previously reported," (1) denying compensation to the debtor's principal attorney because he traded in the

debtor's stock during the Chapter XI proceeding which preceded the

Chapter X proceeding, and (2) denying compensation to two attorneys

retained by the principal attorney on the basis that their retention had

not been authorized as provided by General Order 44 of the Bankruptcy Act (requiring prior court authorization for the services of an

attorney to be performed for a trustee, receiver, or debtor-in-possession). The principal attorney, who served in both the Chapter XI and

Chapter X proceedings, was denied any compensation because he had

sold short stock of the debtor 2 days before the filing of the Chapter

XI petition and had covered his short sale by the purchase of the

debtor's stock immediately after filing that petition. As urged by the

Commission, the court of appeals affirmed the denial of compensation,

noting that Section 249 of Chapter X was applicable to securities

transactions where, pursuant to Section 328 of Chapter XI, a Chapter

XI proceeding has been superseded by a Chapter X proceeding."

The court further held that General Order No. 44 did not bar an award

of compensation to the two attorneys retained by the principal attorney, who sought compensation for services rendered during the Chap7. S.D. Texas, No. 66-H-62.

71 D.N.J., No. B-743-63.

72 33rd .Annual Report, p. 137. See also 32nd .Annual Report, pp. 87, 90.

73 In re Hydrocarbon Obemicais, Inc. (C.A. 3, June 10,1968).
TEITRTY-FOURTH~AL REPORT 159

ter XI phase of the proceeding." Since a receiver had been appointed

during the Chapter XI proceeding, the debtor had not been in possession and General Order No. 44 did not apply to attorneys for the

debtor unless the services performed by the debtor's attorneys in the

Chapter XI proceeding had been of a character reserved to a receiver

in a Chapter XI proceeding. In accordance with the Commission's

suggestion, the questions of whether the services could have been performed only by counsel for the Chapter XI receiver and the amount

of compensation, if any, to be awarded, were remanded to the district

court for its consideration. The court also agreed with the Commission

that the disqualification from compensation of the principal attorney

did not also bar the attorneys he had retained. After the close of the

fiscal year, the court of appeals granted the petition of the Chapter

X trustee for rehearing on this point and ordered reargument en bane.

In Yale Express System, lne.,75 the collateral trustee under a trust

agreement between the debtor and certain of its institutional creditors

entered into prior to the inception of the reorganization proceeding

sought compensation of $15,000 for its own services as trustee and

reimbursement of $23,250 for payment of fees to its counsel. The

district court, agreeing with the Commission, held that the reasonableness of the fees must be based on reorganization standards, as

distinguished from ordinary commercial standards, although the

terms of the trust agreement would be a factor in evaluating reasonableness." The court awarded the trustee $8,593, as recommended by

the Commission. The Commission had recommended an allowance of

$17,500 for the trustee's counsel, and the court awarded $19,900.

In Parknoood, Inc.,77 the Commission submitted a memorandum in

connection with an application by the holder of a first deed of trust

on one of the debtor's real estate properties for reimbursement of fees

and expenses paid and to be paid to its counsel. The deed of trust and

note provided that the debtor would pay reasonable counsel fees if

suit were brought Orif any litigation occurred. The Commission urged

that, assuming the validity under applicable State law of the deed of

trust and note and of the provision relating to attorneys' fees, a Federal

standard must be applied in determining the reasonableness of the

fees to be awarded by the reorganization court and that the standards

of reasonableness which would be applied by the State courts were not

controlling. In the same case the Commission took the position with

regard to applicatons for interim allowances that such interim allown In re Hyd,'ocarbon Oliemicals, Inc. (C.A. 3, June 10, 1968).

5 S.D. N.Y., No. 65-B-404 .

0 The trust agreement had an express provision for fees and the court found

that the services rendered were "reasonably necessary for administration and

protection of the trust."

f7 D. D.C. 39-66.

•

•
160 SECURITIES AND EXCHANGE COMMISSION

ances should not be based on a fixed percentage of what the applicants

regard as full compensation. The Commission pointed out that, since

interim allowances are payments on account of a possible future allowance and do not purport in any way to reflect or measure the value of

the services rendered, the court does not adopt an assumed or hypothetical final allowance and then award a percentage of such allowance.

For the court to do so would create the erroneous impression that

implied approval had been given to the full amount claimed. The

referee in bankruptcy, sitting as special master, agreed with the Commission and the judge adopted his recommendations as to awards.

In the same proceeding the Commission recommended an award of

interim reimbursement of reasonable expenses incurred by a committee representing holders of second deeds of trust on various properties of the debtor, The Commission pointed out that interim allowances

for compensation and expenses are not usually recognized for persons

other than the trustee and his counsel. However, formation of committees to represent numerous and usually scattered equity holders is

to be encouraged in reorganization proceedings. Since committees

should be encouraged to take an active role in the proceeding and be

effective instruments for communication between the security holders

they represent, an award of interim reimbursement of reasonable expenses seemed warranted. The committee did not apply for interim

fees.

INTERVENTION IN CHAPTER XI PROCEEDINGS

Chapter XI of the Bankruptcy Act provides a procedure by which

debtors can effect arrangements with respect to their unsecured debts

under court supervision. Where a proceeding is brought under that

chapter but the facts indicate that it should have been brought under

Chapter X, Section 328 of Chapter XI authorizes the Commission or

any other party in interest to make application to the court to dismiss

the Chapter XI proceeding unless the debtor's petition is amended to

comply with the requirements of Chapter X, or a creditors' petition

under Chapter X is filed.

In Manu!actu'rers' Oredit Oorporation." the debtors, consisting of

the parent and 25 affiliated and subsidiary companies, were engaged

primarily in the business of operating bus lines in New Jersey and

vicinity. Over a period of many years certain of the debtors had sold

to the public their unsecured promissory notes carrying interest at

rates between 9 percent and 15 percent per annum, totalling approximately $58 million, without registration of these securities with this

Commission or the Interstate Commerce Commission. Approximately

5,000 public investors held these notes at the time of the filing of the

71 D. N.J., No. B-I084-67.
THIRTY-FOURTH ANNUAL REPORT 161

Chapter XI proceeding. The Court of Appeals for the Third Circuit,

affirming 79 the order of the district court, which had granted the

Commission's Section 328 motion," agreed with the Commission that

the proposed plan of arrangement under Chapter XI which would

have turned the companies over to the creditors (including the public

noteholders) was not sufficient to protect the public investors, but that

the full safeguards of Chapter X were required. In reaching this conclusion the court considered the need to make a substantial adjustment

of widely-held public debt, the necessity for a thorough investigation

of possible management improprieties by an independent trustee, and

the fact that there could exist causes of action under Federal securities

laws on behalf of the public investors which could better be prosecuted

by a trustee than by the individuals involved.

In Eendali Industries, Inc.,81 the Commission supported the motion

of creditors pursuant to Section 328 and urged that the financial condition of the debtor required more than a simple composition of its

unsecured debts and that, particularly, a large amount of secured debt

would have to be modified, necessitating the broader scope of Chapter

X. The court granted the motion and the debtor amended its petition

to comply with the requirements of Chapter X.

'"395 F. 2d 833 (1968).

so 278 F. Supp.384 (D. N.J., 1968).

81 C.D. oaur, No. 1798-00.

PART vm

SUPPORTING ACTIVITIES

PUBLIC INFORMATION SERVICES

Dissemination of Information

As the discussion in prior sections of this Report indicates, most

large corporations in which there is a substantial public investor

interest have filed registration statements or registration applications

under the Securities Act or the Securities Exchange Act with the

Commission and are required to file annual and other periodic reports.

Widespread public dissemination of the financial and other data

included in these documents is essential if public investors generally

are to benefit by the disclosure requirements of the securities laws. This

is accomplished in part by distribution of the prospectus or offering

circular in connection with new offerings. Much of the data is also

reprinted and receives general circulation through the medium of

securities manuals and other financial publications, thus becoming

available to broker-dealer and investment adviser firms, trust departments and other financial institutions and, through them, to public

investors generally.

Various activities of the Commission also facilitate public dissemination of information filed as well as other information. Among

these is the issuance of a daily "News Digest" which contains (1) a

resume of each proposal for the public offering of securities for which

a Securities Act registration statement is filed; (2) a list of issuers of

securities traded over-the-counter which have filed registration statements under the Securities Exchange Act; (3) a list of companies

which have filed interim reports disclosing significant corporate

developments; (4) a summary of all notices of filings of applications

and declarations, and of all orders, decisions, rules and rule proposals issued by the Commission; (5) announcements of the Commission's participation in corporate reorganization proceedings under

Chapter X of the Bankruptcy Act and of the filing of advisory

reports of the Commission on the fairness and feasibility of reorganization plans; (6) a brief report regarding actions of courts in litigation resulting from the Commission's law enforcement program; and

(7) a brief reference to each statistical report issued by the Commission. During the year, the News Digest included summary reports

on the 2,616 registration statements filed with the Commission (not

163
164 SECURITIES AND EXCHANGE COMMISSION

including investment company offering proposals filed as amendments to previously filed statements), 1,128 notices of filings, orders,

decisions, rules and rule proposals issued by the Commission, 289

developments in litigation under its enforcement program, 19 releases

on corporate reorganization proceedings, and 78 statistical releases.

The News Digest is made immediately available to the press, and it

is also reprinted and distributed by the Government Printing Office,

on a subscription basis, to some 2,956 investors, securities firms, practicing lawyers and others. In addition, the Commission maintains

mailing lists for the distribution of the full text of its orders, decisions, rules and rule proposals.

These informational activities are supplemented by public discussions from time to time of legal, accounting and other problems arising in the administration of the Federal securities laws. During the

year, members of the Commission and numerous staff officers made

speeches before various professional, business and other groups interested in the Federal securities laws and their administration and

participated in panel discussions of like nature. Participation in these

discussions not only serves to keep attorneys, accountants, corporate

executives and others abreast of developments in the administration

of those laws, but it also is of considerable value to the Commission in

learning about the problems experienced by those who seek to comply

with those laws. In order to facilitate such compliance the Commission

also issues from time to time general interpretive releases and policy

statements explaining the operation of particular provisions of the

Federal securities laws and outlining policies and practices of the

Commission.

During fiscal year 1968,the Commission published in booklet form

a compilation of releases, Commission opinions and other material

dealing with matters frequently arising under the Investment Company Act, and a compilation of releases dealing with matters arising

under the Securities Exchange Act and the Investment Advisers

Act. A previous compilation booklet, containing releases relating to

Securities Act matters, had been published in fiscal year 1965.

Puhlications.-In addition to the daily News Digest, and releases

concerning Commission action under the Acts administered by it and

litigation involving securities violations, the Commission issues a number of other publications, including the following:

Weekly:

Weekly Trading Data on New York Exchanges: Round-lot and odd-lot

transactions effected on the New York and American Stock Exchanges

(information is also included in the Statistical Bulletin).
THIRTY-FOURTH ANNUAL REPORT 165

Monthly:

Statistical Bulletln.s

Official Summary of Securities Transactions and Holdings of Officers, Directors and Principal Stockholders.o

Quarterly:

Financial Report, U.S. Manufacturlng Corporations (jointly with the Federal Trade Oommtsslon).« (Statistical Series Release summarizing this

report is available from the Publications Unit.)

Plant and Equipment Expenditures of U.S. Corporations (jointly with the

Department of Commerce).

New Securities Offerings.

Volume and Composition of Individuals' Saving.

Working Capital of U.S. Corporations.

Stock Transactions of Financial Institutions.

Annually:

Annual Report of the Oommlsston.«

Securities Traded on Exchanges under the Securities Exchange Act of 1934.

List of Companies Registered under the Investment Company Act of 1940.

Classification, Assets and Location of Registered Investment Companies under the Investment Company Act of 1940.b

Private Noninsured Pension Funds (assets available quarterly in the Statistical Bulletin).

Directory of Companies Filing Annual Reports,«

Other Publications:

Decisions and Reports of the Commission (Volume 41 only) .«

Securities and Exchange Commission-The Work of the Securities and

Exchange Commission.

Commission Report on Public Policy Implications of Investment Company

Growth.a

Availability of Information for Public Inspection

The many thousands of registration statements, applications,

declarations, and annual and periodic reports filed with the Commission each year are available Tor public inspection at the Commission's public reference room in its principal offices in Washington,

D.C. Also available at that location are some additional documents

contained in Commission files and indexes of Commission decisions.

The categories of materials which are available for public examination are specified in the Commission's rule concerning records and

information, 11 CFR 200.80, as revised to implement the provisions of

the Public Information Amendment to Section 3 of the Administrative Procedure Act which became effective July 4, 1967.The rule also

establishes a procedure to be followed in requesting records or copies

thereof, provides a method of administrative appeal from the denial

of access to any record, and provides for the imposition of fees when

a Must be ordered from the Superintendent of Documents, Government Printing

Office,Washington, D.C. 20402.

b This document is available in photocopy form. Purchasers are billed by the

printing company which prepares the photocopies.
166 SECURITIES AND EXCHANGE COMMISSION

more than one-half man-hour of work is performed by members of the

Commission's staff to locate and make available records requested.

The fee rate which has been established is $2.50 for each one-half manhour or fraction thereof after the first one-half man-hour.

The Commission has special public reference facilities in the New

York and Chicago Regional Offices,and some facilities for public use

in other regional and branch offices.Each regional officehas available

for public examination copies of prospectuses used in recent offerings

of securities registered under the Securities Act; registration statements and recent annual reports filed pursuant to the Securities Exchange Act by companies having their principal office in the region;

broker-dealer and investment adviser applications originating in the

region; letters of notification under Regulation A filed in the region;

and indexes of Commission decisions. Additional material is available

in the New York, Chicago and San Francisco regional offices.

Members of the public may make arrangements through the public

reference room at the Commission's principal officesto purchase copies

of material in the Commission's public files. Under the existing contract with a commercial copying company, the cost of facsimile copies

made from documents supplied by the Commission is 9 cents per

page for pages not exceeding 8%" x 14" in size, with a $2 minimum

charge. In a significant step forward during the fiscal year, the Commission entered into a contract with a private company pursuant to

which a microfilm and "microfiche" service will be available at reasonable cost to persons or firms who have or can obtain viewing facilities.

The microfiche service will provide up to 60 images of pages on a

4" x 6" film, referred to as a "fiche." Initially, annual microfiche subscriptions will be offered in a variety of packages covering all public

reports filed on Forms 10-K, 9-K and 8-K under the Securities Exchange Act of 1934 and Form N-1Q under the Investment Company

Act of 1940, with subscriptions retroactive to include reports filed

since January 1, 1968. The packages offered will include various

groupings of these reports, including reports based on selected industry classifications. Arrangements also may be made to subscribe to

reports of companies of one's own selection, but at a somewhat higher

cost than for standard subscription packages. It is believed that the

subscription system can be extended to additional groups of filings in

the future. The company also will supply at reasonable prices copies

in microfiche or microfilm form of any other public records of the

Commission desired by a member of the public. Readers will be installed in major public reference areas in the Commission's headquarters and regional offices,and sets of reports will be available for

examination there.

Visitors to the public reference rooms of the Commission's Washington, D.C., New York and Chicago offices also may make immediate
TBURTY-FOURTH ~AL REPORT 167

reproductions of material in those offices on coin-operated copying

machines at a cost of 25 cents per 8112"x 14" page. The charge for

an attestation with the Commission seal is $2. Detailed information concerning copying services available and prices for the

various types of service and copies may be obtained from the Public

Reference Section of the Commission.

Each year, many thousands of requests for copies of and information from the public files of the Commission are received by the Public

Reference Section in Washington, D.C. During the 1968 fiscal year,

8,715 persons examined material on file in Washington and several

thousand others examined files in the New York, Chicago, and other

regional offices.More than 16,833 searches were made for information

requested by individuals and approximately 2,470 letters were written

with respect to information requested.

ELECTRONIC DATA PROCESSING

Extension of Application of Automation Techniques

Reference has already been made in previous sections of this report

to certain uses of the Commission's computer.' During the 1968 fiscal

year the Commission expanded its use of automation for the analysis

of data related to the economics and practices of the securities industry. In one new application, the computer is now being used for the

analysis of data contained in the quarterly reports of management investment companies on Form N-1Q. These reports provide the Commission with information about portfolio transactions and holdings

for the same periods for all such companies and facilitate market impact and other studies. The computer is also used for the collection and

monthly updating of price and volume data for listed securities. This

data is processed in conjunction with Form N-1Q data in connection

with market impact studies.

In March 1968, the Commission revised Form N-1R, the annual report of management investment companies, to require such companies

to furnish much of the data in a manner readily adaptable to computer processing. A system has been designed to use the computer for

retrieval and analyses of data for industry studies. Italso will be used

to screen on a continuing basis the information furnished in the reports in order to identify companies or groups of companies in which

problems exist.

A system is under development for the processing of data contained

in the revised broker-dealer and investment adviser applioation forms.

Much of the examination of information contained in the new forms

will be done by the computer, and the EDP files also will be used for

comprehensive studies of the securities industry.

1See, e.g, pp. 87 and 107.
168 SECURITIES AND EXCHANGE COMMISSION

EDP applications planned for the future include systems for (a)

analyses of data contained in Forms X-17A-10, the new income and

expense reports of registered broker-dealers, and (b) processing of reports of security holdings and transactions of corporate insiders.

Increase in EDP Capability

In fiscal 1968 the Commission increased its EDP capability by making certain changes incident to the purchase of its IBM: System 360

computer configuration. A Model 40 control processing unit and an

1100 line per minute printer were substituted for the Model 30 unit

and the 600 line per minute printer, respectively, which previously had

been under lease.

The EDP staff also developed a series of general purpose statistical!

economic analyses computer programs that offer a high degree of flexibility for varied analyses of large bodies of data related to the economics of the securities industry and industry practices. In addition,

the staff began a study looking toward improved methods and equipment for conversion of data into machinable form.

Assistance to State Administrators and Others

As a further means of coordinating its regulatory activities with

those of the States and the self-regulatory institutions, during the past

year the Commission developed procedures for supplying certain information from its computer files. Under these procedures the Commission, upon request, furnishes State authorities or self-regulatory

institutions with data from the Commission's integrated regulatory

and enforcement information system or the over-the-counter market

surveillance system," In addition, selected data from the Commission's

computer files has been furnished to the Department of Justice in

response to a number of requests from that Department.

Sharing of EDP Facilities

During the past year the Commission continued its sharing arrangement with the Naval Ship Engineering Center, Department of the

Navy. Under this arrangement the Commission provides about 2,000

hours of computer time per year at a significant saving to the Government as compared with the prevailing rates of outside sources. In

January 1968, the Commission entered into a supplemental agreement

with the Center to keypunch and verify more than 1 million cards

per year. The rate charged by the Commission for this project also is

considerably lower than the prevailing outside rate. The Commission

has also provided small amounts of computer time to other Federal

agencies.

2 These systems were described in the 32nd Annual Report, p. 9.
THIRTY-FOURTH ANNUAL REPORT 169

EDP Training

During the year the Commission continued its training programs

geared to the specific needs of its computer specialists. The program is

designed to enable the Commission's EDP staff to utilize more advanced hardware and software in the development and implementation

of new and revised computer systems.

PERSONNEL AND FINANCIAL MANAGEMENT

Organizational Changes

During fiscal year 1968, certain organizational changes were effected

in accordance with the Commission's policy of continuing review of

all its operations to assure maximum utilization of manpower and the

most efficient and economical operations possible.

In August 1967, the Branch of Information Processing, formerly

located in the Office of Records and Service, was established as a

separate Officeof Data Processing. With the growing impact of EDP

on the Commission's activities, it is desirable that the head of the

Officeof Data Processing should be in a position to deal directly with

users and prospective users throughout the Commission, and, within

the framework of overall Commission policy, be free to make operating

and policy decisions concerning EDP activities.

In October 1967, an additional Associate Regional Administrator

position was established in the New York Regional Office.This position was designated as Associate Regional Administrator for Enforcement, and the previously established position was designated

as Associate Regional Administrator for Regulation. This change

was designed to provide for maximum attention to policy formulation and implementation in each of these programs.

In November 1967, a fifth Branch of Investment Company Regulation was established in the Division of Corporate Regulation. This

change was designed to enable the Division better to cope with the

significant increase in workload in the regulation of investment

companies.

Personnel Program

Highlights of the Commission's personnel program in fiscal 1968

included (1) the adoption of a formal Equal Employment Opportunity Action Plan; (2) the expansion of college recruitment efforts

to fill entrance level positions; (3) the continuation of training activities for employees; and (4) the addition of an important fringe

benefit in the form of a Dependent Life Insurance Plan.

Recognizing a need to translate stated policy into affirmative action,

the Commission, in July 1967, adopted a comprehensive Action Plan

under the Equal Employment Opportunity Program. The plan specifically and realistically outlines short and long-range objectives
170 SECURITIES AND EXCHANGE COl\£MISSION

under the program and specific action to be taken to carry out a

program of equal opportunity for employment and career development. In this connection, the Chairman appointed an Equal Employment Opportunity Officer,reporting directly to him, to serve as consultant and principal staff adviser to the Commission in carrying out

the over-all Equal Employment Opportunity Program.

In furtherance of the objectives of the Action Plan and the Civil

Service Commission's Program for the Maximum Utilization of Skills

and Training (MUST), the Director of Personnel launched a special

program to interview personally and individually all employeesin the

Headquarters Officeserving in nonprofessional jobs in the lower grade

levels. The primary purpose of these interviews isto determine whether

the skills of these employees are being fully utilized and to counsel

them about career development opportunities in genera1. As a consequence of these sessions, some jobs were redesigned and promotions

made based on increased duties and responsibilities.

During the fall and spring recruitment season of 1967-1968, the

Commission undertook a nationwide coordinated program for oncampus visitations to selected law schools and colleges with schools

of business administration, for the recruitment of attorneys and financial analysts. More schools than ever before were visited, with

very gratifying results. The Commission's effectiveness in attracting

high-quality graduates was enhanced this year because recruiters were

authorized to make advance commitments to honors graduates. Most of

the visits were made by members of the Commission's professional staff

who had attended or were graduates of the school visited.

Visits to predominantly Negro colleges and universities received

strong emphasis as the Commission stepped up its efforts to recruit

qualified minority group graduates. Additionally, as part of its equal

opportunity program, letters were written to all Spanish-surnamed

college graduates with majors in accounting, finance and economics

from schools throughout the country. They were informed of the

Commission's needs and urged to visit its nearest office for further

information regarding employment opportunities.

Additional emphasis was also placed on the recruitment of women

candidates by taking such positive steps as contacting law and business

schools to obtain the names of women students and sending personal

letters to them about specific job opportunities. Further, with the help

of the Commission's present women employees who belong to bar

associations, or other professional organizations, detailed information

was sent to these organizations about career opportunities for women

in the SEC, and applications were solicited from interested members.

Since the fan of 1967, the Commission has officiallysponsored a stenographic course, after hours, in the Headquarters Office.Upon com-
THIRTY-FOURTH ANNUAL REPORT 171 

pletion of the course, the participants, who are predominantly members 

of minority groups, hopefully will qualify in the necessary civil 

service examination and become eligible for reassignyent and possible 

grade promotion. This training course, whioli also willlelp to alleviate 

the problem of locating qualified stenographers and secretaries, is 

availableto any SEC employee interested in enrolling. 

In July 1967, all marfied employees of the Commission were offered 

enrollment in a voluntary Family Protection Plan sponsored by bhe 

SEC Recreation and Welfare Association. The program, providing 

complete protection for spouse and children, was designed to supplement insurance coverage already available to Government employees. 

This plan is offered as an employee service at no cost to the Commission since employees pay the total premium and deal &reedy with 

the insurance company or its agent on a private transaction basis. 

A8 part of its Thirteenth Annual Service and Merit Awards 

Ceremony held in November 1967, the Commission gave '<Distinguished 

Service Awards" to Messrs. Andrew Barr, Chief Accountant; Franklin E, Kennamer, Assistant General Counsel of the San Francisco 

Regional Office; Irving M. Pollack, Director of the Division of 

Trading and Markets; and Donald J. Stocking, Administrator of 

the Denver Regional Office. Sixteen employees were given 30-year 

pins for SEC service. Within-grade salary increases in recogqition 

of high quality performance were granted to 82 employees. ~n'addition, cash awards totaling $11,705 were presented to 85 employees 

for superior performance or special service. 

The Commission this year approved the adoption of a Pablic Service 

Award. This award is made to recognize those employees who make 

a significant contribution toward improving the quality of communications or services to the public. The first recipient of this award 

was the Public Reference Sedion of the Office of Records and Service. 

Personnel Strength; Finoncial Manngement 

The folloroing comparative table shows the personnel st,rength of 

the Commission as of June 30,1967 and 1968 : 

June30,1907 Juna30. 1808 I 

The table on pnge 173 shows the sltltus of the Colimiission's budget 

estimate for the fiscal years 1964 to 1968, from the initial submission 
172 SECURITIES AND EXCHANGE COMMISSION

to the Bureau of the Budget to final enactment of the annual appropriation.

The Commission is required by law to collect fees for (1) registration of securities issued; (2) qualification of trust indentures; (3)

registration of exchanges; (4) brokers and dealers who are registered

with the Commission but who are not members of a registered securities association (the National Association of Securities Dealers

(NASD) is the only such organization) ; and (5) certification of documents filed with the Commission."

The following table shows the Commission's appropriation, total

fees collected, percentage of fees collected to total appropriation, and

the net cost to the taxpayers of Commission operations for the fiscal

years 1966,1967and 1968.

Fees Percentage of fees Net cost of

Year Appropriation colIected colIected eomnnssion to tote! operations appropriation (percent)

1966____________________________________ 1967____________________________________ $16, 442, 000 $6,608,064 40 $9,833,936

17, OliO, 000. 9,767,067 56 7,782,933 1968____________________________________ 17,730,000. 14,622,567 82 3,107,433

Principal rates are (1) for registration of securities, 1/50 of 1 percent of

the maximum aggregate price of securities proposed to be offered, or 20 cents

per $1,000, with a minimum fee of $100 (PUblic Law 89-289 approved October

22, 1965, effective January 1, 1966); (2) for registration of exchanges 1/500

of 1 percent of the aggregate dollar amount of the sale of securities transacted

on the exchanges; (3) for nonmembers of N.ASDfor fiscal 1966, a basic registration fee of $150 for broker-dealers plus $7 for each associated person, plus

$30 for each office and $25 for each associated person joining such broker-dealer

after August 1, 1966; for fiscal 1967 and 1968, a basic registration fee of $100

for broker-dealers plus $5 for each associated person, $30 for each office and

$25 for each associated person for whom a nonmember broker or dealer has not

previously filed a form, and an initial assessment fee of $150.

•
THIRTY-FOURTH ANNUAL REPORT 173

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PART IX

APPENDIX

STATISTICAL TABLES

TABLE1,-A 34-year record of registrations effectiue under the Securities Act of 

1983-fiscal years 1955-1968 

[Amounts in millions of dollars1 

Por cash sae for scmunt of issuers 


Number 


Fl~ealyear ended June 30 of All rag&- 
 stat* trationr 

msnts I 

and notes 

I I i 

I Statements registering Amerjcnn Depositary Receipts against ouktanding faieicn securitiar ~s provided 

by Form s12 are inoluded. 2 For 10month.l endedJuna30 1085. a I~ludes threo ststemellls rigisteriug Lesse obligations rsiatillg to industria revenue bonds of $140 

million. 
178 SECURITIES AND EXCHANGE COMMISSION

TABLE 2.-Registrations effective under the Securities Act of 1933, fiscal year ended

June 3D, 1988

PART i.-DISTRIBUTION BY MONTHS

[Amounts In thousands of dollars 1]

All registrations Proposed for sale for account of Issuers 2

Year and month Totals' Corporate'

Number Number

of state- of Issues 2 Amount

ments Number Amount Number Amount

of ISSues 2 of Issues 2

1967 July .•.•.•.•. ..•......... 177 230 $4,231,274 173 $3,260,470 84 $1,927,558

August. ...•...•......... 198 245 3,930,337 175

1

3,191,677 101 1,812,756

September ••••••.•...•... 143 187 3,394,935 142 2,486,063 89 1,305,207

October .....•.•.....•..•. 195 253 5,902,425 186 3,154,891 105 1,600,281

November •.............. 164 198 2,554,130 148 1,543,384 89 900,118

December •............... 203 270 3,708,317 206 2,671,016 115 1,302,195

1968

January ••••..•.•......... 197 257 5,863,668 194 3,267,931 97 1,194,942

February ••...•....•.•••. 161 200 3,433,164 154 2,842,319 84 1,066,560

March •••.......•...••..• 190 228 3,947,598 174 3,268,482 109 1,292,934

Apnl , •...•...•......••.. 280 327 6,700,786 261 5,443,039 94 1,010,183

May .••....•..•••....•.•. 296 353 4,2"..3,715 277 3,255,284 123 1,183,859 June. __.. _... ____._._. ___ 210 242 6,045,354 179 2,884,325 108 1,766,459

---- 2,269137,268,880

Total, fiscal year

1968 •••••..•.... 2,414 2,990 53,935,702 1,198 16,363,052

See footnotes at end of Part 4 01 table.

PART 2.-PURPOSE OF REGISTRATION AND TYPE OF SECURITY

[Amounts In thousands of dollars]'

Type of security

Purpose of registration All types

Bonds, Preferred Common

debentures, stock stock' and notes 6

All registrations (estimated value), ••••••.•••••••••. $53, 935, 702 $15,547,731 $3,113,213 $35,274,758

For account of ISSuer for cash sale ................ 37,268,880 14,036,408 1,140,117 22,092,355

For immediate offermg ................... 17,520,285 13,760,114 905,927 2,854,245

Corporate .................................... 16,363,052 12,602,881 905,927 2,854,245

Offered to: General publlc ........................... 14,583,305 11,899,284 596,008 2,088,013

Security holders .......................... 1,716,127 685,780 301,191 729,156

Other special groups ••.••• .•.• 63,621 17,817 8,728 37,076

Foreign governments ................... __.... 1,157,233 1,157,233 0 0

For extended cash sale and other Issues s....... 19,748,595 276,295 234,190 19,238,110

For account of Issuer lor other than cash sale ••.•• 13,530,077 1,373,234 1,497,923 10,658,920

For account 01 other than Issuer .................. 3,136,745 138,089 475,173 2,523,483

For cash sale ................................... 1,743,822 38,718 4,317 1,700,787

Other .......................................... 1,392,923 99,371 470,856 822,696

See footnotes at end of part 4 of table.

_

'

•• ___

••• __ __ _•••
TEITRTY-FOURTH ANNUAL REPORT 179

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180 SECURITIES AND EXCHANGE COMMISSION

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19.94 '-Effective Registrations a of June 30,1968.Classified by Type of Orgenization and by Locatzon of Prznczpal Ofice 
182 SECURITIES AND EXCHANGE COMMISSION

TABLE 4.-Number of Security Issues and Iesuers on Exchanges

P ~~J'B~m5~EJ'J~*'iIWMI~~~~T Tis T~~¥lt&~Nli6fcCf:r~JH~s NU~~EE: s~~.ffJ>~n~

OF THE SECURITIES EXCHANGE ACT OF 1934, AND THE NUMBER OF ISSUERS

INVOLVED.

Status under the Act I Stocks Bonds Totalstoeks Issuers and bonds Involved

Registered pursuant to Section 12(b) ___________________ 3,094 1,534 4,628 2,634

Temporarily exempted from registration by Commis- slon rule _____________________________________________ 21 16 37 15 Adrmtted to unlisted trading privtleges on registered exchanges pursuant to Seetion 12(f) ___________________ 87 10 97 70 Listed on exempted exchanges under exemption orders of the Commission ___________________________________ 52 5 57 Admitted to unlisted trading pnvlleges on exempted

exchanges under exemption orders of the Commission , 12 0 12 12

Total 3,266 1,565 4,831 2,773

I Registered: A security may be registered on a national securities exchange by the issuer filing an application WIth the exchange and WIth the Commission contamlng certain types of specified Information.

Temporarily exempted: These are securities such as short term warrants, or securities resulting from

mergers, consolidations, etc., which the Oommission has by published rules exempted from registration

under specified conditions and for stated penods.

Admitted to unlisted trading privileges: ThIS refers to securittes which have been admltted to

trading on the irutiatrve of exchanges Without listlng Smce July 1964, the effeetrve date of the 1964 amendments to Section 12(f) of the Exchange Act, additional securities may be granted unlisted trading privileges

Oil exchanges only If they are listed and registered on another exchange.

Listed on exempted exchanges: Certain exchanges have been exempted from registration under

Section 6 of the Act because of the lirmted volume of transactions, The Comnussion's exemption orders

specify 111 each case that securities whreh were listed on thc exchange at the date of the order may continue

to be Iisted thereon, and that no additional securities may be listed except upon compliance WIth Sections

12(b), (c) and (d).

Unlisted on exempt exchangees The Commission's exemption orders specify that securities which were admitted to unlisted trading privileges at the date of the order may continue such privileges, and that

no additional securities may be admitted to unlisted trading privileges except upon compliance with Section

12(f).

PART 2.-NUMBER OF STOCK AND BOND ISSUES ON EACH EXCHANGE AS OF JUNE 30

1968, CLASSIFIED BY TRADING STATUS, AND NUMBER OF ISSUERS INVOLVED

Stocks Bonds Exchanges Issuers

R

~I~ XL XU Total R X U XL Total

American _____________ 1,050 996 3 98 ------ ------ 1,097 145 5 11 --_ ..._- 161 Boston. 511 60 11 450 521 12 12 Chicago Bd. of 'I'rade, 7 4 3 .. 7 -----S- ----i- ... .. Ctnemnatl, 189 32 1 162 ---io- 195 9 Colorado Springs' ____ 10 -_._--- _._--- --iioi- Detroit, ------ 10 -_._- .. -_.--- -_._.- ._---- ---_.- 282 87 5 ---4.i" ---iii- 293 ------- ----.- ----_ . ._--_. Honolulu" 46 53 ----ia- 5 5 Midwest. _____________ 463 336 10 156 _._ ... . ... SW --.--- --_._- .._--- 13 N ational, 43 45 ---ii- ----_. ..... -_._-- 45 2 ---iii- 2 New York 1,486 1,747 --ii03-._.--- 1,764 1,369 ---._- 1,381 Pacific Coast. ________ 610 492 9 ..._-- ------ 704 28 ----.- --.--- _._._- 28 Phlla.- B alt.-W ash 676 183 12 572 --_._. 767 51 --.--- --_ .. ....... 51 Pittsburgh ___________ 110 29 7 83 ---25- ----.- 119 1 ---_.- ------ --_._. 1 Richmond' 16 2 .._._- 27 -_._--- _._._. _._--- 1 1 Salt Lake ._ 59 57 .._._- 3 ------ _._--- 60 -_._._. _._-.- .._-- ._---- ------ Spokane ._ 24 22 5 .... -_._-- 27 -.-_._- -----. _._--- .-...-_. ------

Symbols: R-registered; X-temporarily exempted; U-admlttOO to unlisted trading privileges; XL- listed on an exempted exchange; XU-admltted to unlisted trading privileges on an exempted exchange. Notes:-Issues exempted under Beetion 3(a) (12) of the Act, such as obligations of the U.S. Government, the States and Cities, are not included in this table.

"Exempted exchanges.

~

_____• __• ___________________________________

_______________ ------ ------ ------ ------ ------ ------ ------ ---- - ------ ------ _ - -- ___________ ------ ------ ------

______________ ------ ____________ ------- ------ ------ ------ _ - _ _____________ _ ------ ------ _____• ___• __ ------ ------

_____ ------ _ -

________• __ ------ ------ ______• ____ _ ____________ ------ _ -
THIRTY-FOURTH ANNUAL REPORT 


TABLE5.-Value of stocks on ezdaanges 

184 SECURITIES AND EXCHANGE COMMISSION

TABLI: 5.-Dollar volume and share volume of sales effected on securities exchanges

in the calendar year 1967 and the 6-month period ended June 30, 1968

[Amounts in thousands]

PART 1.-12 MONTHS ENDED DEC. 31, 1967

Bonds Stocks Rights and

warrants

Total Exchanges dollar

volume Dollar I Prinetpal Dollar Share Dollar Num- volume amount volume volume volume ber of

units

6,087,432 15,393,598 I 161,746,464

--- Registered exchanges. 168,258, 138 4, 504,157 424,242 141,296

--- American 24, 150,375 659,064 530,702 23,111,274 1,290,205 380,038 30,257 Boston ___________________ 1,086,317 0 0 1,086,315 20,084 1 2 Chicago Board of Trade __ 0 0 0 0 0 0 0 Ctnemnan , 62,281 45 64 62,234 1,185 1 2 Detroit, . 709,629 0 0 709,625 15,269 3 51 Midwest ___._._. _________ 4, 995,889 112 1251 4,995,648 109,226 129 334 NationaL _. __. __________. 22,214 0 o 22,214 3,032 0 0 New York .. _. ____._. ____ 130, 790, 704 5,428,004 4,862,476 125,329, 105 2,885,748 33,595 107,056 Pacifle CoasL ___________ 4,538,732 180 204 4, 530, 208 113,001 8,344 1,323

Phlladelpma-Baltunore- Washmgton. ___________ 1,832,900 28 27 1,830,742 38,464 2,130 2, 271 Pittsburgh 51,964 0 0 51,964 1,151 0 0 Salt Lake . 8,265 0 0 8,265 12,439 0 0 San Francisco ..••. _______ 860 0 0 860 4,187 0 0 Spokane _____ .• _. _______. 8,010 0 0 8,010 10,167 0 0

--- Exempted exchanges. 18,546 41 14 18,505 1,072 0 0

1~ I

--- Colorado Springs ________ 0 0 0 0 0 0 Honolulu. _______._. __.. _ 16,757 41 16,716 1,024 0 0

RIchmond. -. ---.- --I 1,789 0 1,789 48 0 0

PART II.---u MONTHS ENDED JUNE 30, 1968

Bonds I Stocks Rights and

warrants

Total Exchanges dollar

volume Dollar Principal Dollar Share Dollar Numvolume amount volume volume volume ber of

units

---

RegiStered excbanges, 101,606,897 2,908,558 2,7n,915 98,467,581 2,70t,562 230,758 45,700

--- American ____._._ ..• _.. __ 18,697,961 659,116 518,781 17,820,266 824,615 218, 579 14, 582 Boston_. ___. ___.. __._._ .. 908,476 0 0 908,454 19,205 22 1 Chicago Board of Trade __ 0 0 0 0 0 0 0 CincinnatI. _.. ___________ 19,026 17 26 19,008 365 0 Detroit .. . 366,147 0 0 366, 147 8,690 . Midwest _____ ... _______.. 2, 976, 016 234 190 2, 975,399 68,880 384 127 Nattonal; . ____. ________._ 37,858 0 0 37,858 5,226 0 0 New York ____. _________. 74,949,940 2, 243, 244 2, 257,987 72,695,008 1,660,324 6,688 30,141 Pactflc Coast _____________ 2, 556,000 137 136 2,552, 231 68,524 3,632 Ml

Philadelphia. Baltimore- Washlngton 1,453 207 ___________. 1,044, 529 810 816 1,042,266 23,132 Pittsburgh .. ___________._ 27,462 0 0 27,462 662 0 0 Salt Lake ____.. __________ 11,259 0 0 11,259 15,524 0 0 Spokane __ . __. ___________ 12,222 0 0 12,222 9,417 0 0

--- Exempted exchanges. 6,664 0 0 6,633 307 31 342

--- Colorado Springs __ . ____. 0 0 0 0 0 0 0 Honolulu _________. __._._ 5,714 0 0 5,683 278 31 342 Richmond _____________._ 951 0 0 951 29 0 0

Less than 500 units or $500.

Note.-Data on the value and volume of securities sales on the registered exchanges are reported in connection WIth fees paid under Section 31 of the Becunties Exchange Act of 1934. Included are all securities

sales, odd-lot as well as round-lot transactions, effected on exchanges except sales of bonds of the U.S. Government wlueh are not subject to the fee. Comparable data are also supplied by the exempted exchanges. Reports of most exchanges for a grven month cover transactions cleared during the calendar month.

Clearances generally occurred on the 4th business day after that on which the trade was effected through

Fetruary 8,1968, and on the 5th business day thereafter.

_______• ________

___• __________ ___ ____• ________

___________• ___ ____ _______• ___

_ -- --

_______ ________ ~

•
THIRTY-FOURTH ~AL REPORT

TABLE 7.-Comparative share sales and dollar volumes on exchanges

185

Year Share sales NYS AMS MSE PCS I PBS BSE DSE PIT CIN Other

% % % % % % % % % %

---- ---- 1935___________ 681,970,500 73.13 12.42 I. 91 2. 69 0.76 0.96 0.85 0.34 0.03 6.91 1910___________ 377,896,572 75.44 13.20 2.11 2.78 102 1. 19 .82 .31 .08 2.05 945___________ 769,018, 138 65.87 21.31 1.77 298 .00 .66 .79 .40 .05 5.51 950___________ 893, 320, 458 76.32 13.54 2.16 3.11 .79 .65 .55 .18 .09 2.61 955 ________ . __ 1,321,400, 711 68.85 19.19 2.09 308 .75 .48 .39 .10 .05 5.02 1956___________ 1, 182,487, 085 66.31 21.01 2.32 3.25 .72 .47 .49 .11 .05 5.27 957 I, 293,021, 856 70.70 18 14 2.33 2.73 .98 .40 .39 .13 .06 4.14 1958___________ 1,400, 578,512 71.31 19.14 2.13 2.99 .73 .45 .35 .11. .05 2.74 959 1,699,696,619 65.59 24.50 2.00 281 .90 .37 .31 .07 .04 3.41 960___________ 1,441,047,564 68.48 22.27 2.20 3.11 .89 .39 .34 .06 .05 2.21 961. __________ 2,142, 523,490 64.99 25.58 2.22 3.42 .79 .31 .31 .05 .04 2.29 962___________ 1, 711,945,297 71.32 20.12 234 2.95 .87 .31 .36 .05 .05 1.63 1963 I, 860, 798, 423 72.94 18.84 233 2.83 .84 .29 .47 .04 .04 1.38 1964___________ 2, 126,373, 821 72.54 19.35 2.43 2.61 .93 .2'J .54 .05 .04 1.19 1965______._. __ 2,671,011,839 69.91 22.53 2.63 234 .82 .27 .53 04 .05 .88 1966 ___________ 3, 312,383, 4tl5 69.37 2285 2.57 268 .86 .40 .46 .04 .05 .72 1967___________ 4, 646,524,907 64.41 28.42 2.36 2.46 .88 .43 .33 .02 .03 .66 SiX months to

June 30, 1968 2, 750,910,941 61.45 30.51 2.51 2. 51 .85 .70 .32 .02 .01 1.12

Dollar volume

(1Jl thousands)

1985 $15, 396, 139 86.64 7.83 1. 32 1.39 .68 1.34 .40 .20 .01 .16 1910 8,419, m 85.17 7.68 2.07 1.52 .92 1.91 .36 .19 .09 .09 945___________ 16,284, 552 82. 75 10.81 2.00 1.78 .82 1.16 .35 .14 .06 .13 1950___________ 21,808,284 85.91 6.85 2.35 2.19 .9"2 1 12 .39 .11 .11 .05 955 38,039,107 86. 31 6. 98 2.44 1.90 .90 .78 .39 .13 .09 .08 1956 35,143,115 84. 95 7.77 2. 75 208 .96 .80 .42 .12 .08 .07 1957___________ 32, 214,846 85.51 7.33 2.69 202 1.00 76 .42 .12 .08 .07 958___________ 38,419,560 85.42 7.45 2.71 2.11 1. 01 .71 .37 .09 .08 .05 1959 52,001,255 83.66 9.53 2.67 1.94 1.01 .66 .33 .08 .07 .05 1960_ 45,306,603 83.81 9.35 2.73 1. 95 1.01 .60 .34 .06 .08 .04 1961. __________ 64, 071,623 82.44 10.71 2.75 2.00 1.04 .50 .37 .06 .07 .06 1962___________ 54,855,894 86.32 6.81 2. 76 2.00 1.05 .46 .42 .06 .07 .05 1963 64,438,073 85.19 7.52 2.73 2.39 1.07 .42 .52 .05 .06 .05 1'164 72,461,750 83.49 8. 46 3.16 2.48 1.15 .43 .66 .06 .06 .05 1965___________ 89,549,093 81.78 9.91 3.45 2.43 1.13 .43 .70 .05 .08 .01 1966 .. 123,666,443 79.78 11.84 3.14 2.85 1.10 .57 .57 .04 .08 .03 1967 162, 189,211 77.29 1448 3.08

1

2.80 1.13 .67 .41 .03 .04 .04

SIXmonths to

June 30,

1.06 031 1968___._. ___ 98,705,003 73.66 18.27 3.01 2.59 .92 .37 .02 .07

Note.-Annual sales, including stocks, warrants and rights, as reported by all U.S. exchanges to the

Commission. Figures for merged exchanges are Included iu those of the exchanges mto which they were

merged. Detalls for all years prior to 1955 appear 10 Table 7 in the Appendix of the 32nd Annual Report.

SymboIs.-NYS, New York Stock Exchange; AMS, Amencan Stock Exchange; MSE, Midwest Stock Exchange; PCS, Pacific Coast Stock Exchange; PBS, Philadelphia-Baltimore-Washington Stock Ex.

change; BSE, Boston Stock Exchange; DSE, Detroit Stock Exchange; PIT, Pittsburgh Stock Exchange;

CrN, Cincinnati Stock Exchange.

__________•

______• ____

________•__

_____• ___

__________•

______•____

________•__

______• ___•

__________•

• _________

____•______

______•____

__• __ ____ __________•

•
186 SECURITIES AND EXCHANGE CO:MMISSION

TABLE S.-Block distributions of stocks reported by exchanges

[Value In thousands of dollars]

Special offerings EXchange distribntlons Secondary distributions

Year

Nnm- Shares Vll1ue Nnm- Shares Value Nnm- Shares Value

ber sold ber sold ber sold

1942 79 812,390 $22,69! ....--- ------.---- 116 2,397,!54 $82,840 19!3 80 1,097,338 31,054 .---------- 81 !,270, 580 127,462 1944 87 1,053,667 32,454 ----_.- ----.------- 94 4,097,298 135,760 1945 79 947,231 29,878 --------.--- 115 9,457,358 191,961 1946 23 308,134 11,002 .. 100 6,481,291 232,398 1947 24 314,270 9,133 ----.------ 73 3,061,572 lU,671 1948 21 238,879 5,!66 95 7,302,420 175,991 1949. 32 500,211 10,956 86 3,737,U9 194,062 1950 20 150,308 4,940 77 !, 280,681 88,743 1951. _______ 27 323,013 10,751 ------- ----------- -.---------- 88 5,193,756 146,459 1952 22 357,897 9,931 76 4,223,258 149,117 1953________ 17 380,680 10,486 ------- ------.---- ----$24:664- 68 6,906,017 108,229 1954________ 14 189,772 6,670 57 705,781 84 5,738,359 218,490 1955________ 9 161,850 7,223 19 258,348 10,211 116 6,756,767 344, 871 1956________ 8 131,755 4,557 17 156,!81 4,645 146 11,696,174 520,966 1957________ 5 63,408 1,845 33 300,832 15,855 99 9,324, 599 339,062 1958________ 5 88,152 3,286 38 619,876 29,454 122 9,508,505 361,886 1959________ 3 33,500 3,730 28 545,038 26,491 148 17,330,941 822,336 1960________ 3 63,663 5,439 20 441,664 11,108 92 11,439,065 424, 688 1961. _______ 2 35,000 1,594 33 1,127,266 58,072 130 19,910,013 926,514 1962________ 2 48,200 588 41 2,345,076 65,459 59 12,143,656 658,780 1963________ 0 0 0 72 2,892,233 107,498 100 18,937,935 814,984 1964________ 0 0 0 68 2,553,237 97,711 110 19,462,343 909,821 1965 ________ 0 0 ° 57 2,334,277 86,479 142 31,153,319 1,603,107 1966 ________ 0 0

81 52 3,042,599 118,349 126 29,015,038 1,523,373 1967________ 0 0 51 3,452,856 125, 403, 727 143 30,783,604 1,154,479,370

Note.-The first special offering plan was made effective Feb. 14, 1942, the plan of exchange distribution was made effective Aug. 21, 1953; secondary distributions are not made pursnant to any plan but generally exchanges require members to obtain approval of the exchange to participate In a secondary distnbution

and a report on snch drstnbution is filed with this Commisslon,

________ ------------ ________ ------- ------------ ________ ----------- ________ ________ e __

------- ________ ------- ---- ------ ------------ ________ ------- ------------ ________ ------- ----------- ------------ _______ ------- ----------- ------------ ________ ------- ----------- ------------

________ ------- ----------- ------------
THIRTY-FOURTH ANNUAL REPORT 187 

TABLE9.-Unlisted Stocks on Ezchanges 

PART 1-NUMBER OF 8TOOE8 ON THE EXCHANGES A8 OP JUNE 30,1868 1 

LlSted and reglstsred on motherexchange irn1lSted 

' Admltted Admitted 

prior to &far. smee Mar. 

1,1934 3 1,19344 

Amerlom .............. 
 Boston........................................................ 
 Chicwo Board of Trade. ..................................... 
 CincbnaU.................................................... 
 Detroit ............. 
 Hanoiulu......................... ................... 
 Midvet......... ..................... 
 Paol5c Coast. ................................................ 
 Philadslphie-Baltimo18-W~ahinpt011
 ........................... 
 Pittsburgh .................................................... 
 Salt Lake ..................................................... 
 Spokane...................................................... 
 - Total 6............................................. 


Pnnr ZUNLISTED SHARE VOLUME OK THE EXCHANGES-CALENDAR YE.4R 1967 

Listed and registered on another eaohanga Unlisted 

only 2 

Admitted Admitted 

mior to since Mar. 1, . 1,9348 1934 4 

Ammiem..................................................... 
 BNton ........ 
 Chicago Bomd of Trsde ...................................... 
 Cinchti.................................................... 
 Detroit ....................................................... 
 Hondulll..................................................... 
 hlidwest. ..................................................... 
 P&d60Coart................................................. 
 Philadelphla-Baltim~1e-~1'BSbington..~... ..................... 
 Pittsbwh.................................................... 
 Salt LB~B .................................................... 
 Spokane - Total r.................................................. 
 I I ! 

1 Refer to tort wder heading "Unlisted Trading Privilege? On ~s@anges." in Part N of this Re rt volurx?eare as reported by thostock exchanges or other reporting agenolBr andare eacluslve01 those m sgrt term nghtn. , 

1 Inclndes mu= admitted under Clause 1oi Section 12(i) ns in effect prior ta the 1964 amendments to the 

~aohanee~ot and two stooks on the ~merican Stock Exohaom admitted under lormer SectLon 12(f), 
188 SECURITIES AND EXCHANGE COMMISSION

TABLE lO.-Summary of Cases Instituted in the Courts by the Commission Under the

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

Holding Company Act of 1935, the Investment Company Act of 1940, and the

Investment Advisers Act of 1940.

Total Total Cases Cases Cases In- Total Cases

cases 10- cases pending pending stituted cases closed stituted closed at end at end during pending during

Types of cases up to end up to end of 1968 of 1967 1968 durmg 1968 of 1968 of 1968 fiscal fiscal fiscal 1968 fiscal

fiscal fiscal year year year fiscal year

year year year

--- --- --- --- -------- Actions to enjom violatrons of the above Acts _______________ 1,648 1,576 72 75 93 HiS 96 Acnons to enforce subpoenas under the Secuntles Act and the Securities Exchange Act., 131 129 2 11 9 20 18

Actions to carry out voluntary

plans to comply With Section ll(b) of the Holdmg Com- pany Act _____________________ 152 150 2 1 2 3 1 MISCellaneous actions ___________ 57 57 0 0 0 0 0

~1L9l2 --- --- --- -m/-----u5 Total _____________________ 76 87 104
TEITRTY-FOURTH ANNUAL REPORT 189

TABLE ll.-A 55-year summary of all injunction cases instituted by the Commission

1934 to June SO, 1968, by calendar year

1934

1935

1936

1937

1938

1939

1940

1941

1942

1943 ._ 1944

~~i~ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~!I

!~~~~I~::I~~~~~~:

~~g6::::::::::::::::::::::::::::::::::::::::::::i 1961. 1

fHt~ 1966 ~~~~~~~~~~~~~~~~.~~~~~~~~~~~~~~~J

-(t:ri jurie -30)"'- : ~::::::::::::::::::::::::::: I

Total. !

Calendar Year

Number of cases instltuted I Number of cases In wlneh

by the Commission and the mjunctions were granted

number of defendants and the number of involved, defendants enjoined I

Cases Defendants Cases Defendants

7 24 2! 4

36 242 17 56

42 U6 36 JUS

96 240 91 2U

70 152

1

73 153

57 154 61 165

40

100 I 42 ~9

40 112 36 qO

21 73 20 54

19 81 18 72

18 80 14 35

21 74

1

21 ,,7

~1 45 15 34

eo 40 ~O 47

19 44 15 2u

25 59 24 55

27 I 26 71

22 17 43

27 103

1

18 50

20 41 23 tJ8

22 59 22 III

23 54' 19 43

53 J?? I 42

58 J92 \ 32 '"

~tl

71 408 : 51 1':,2

~8 20b I 71 172

99 270 84 229

84 368 I 85 27,)

!l9 403 i 52 223

91 358 : q8 3U:<

76 2....6 I 8S iFi2

72 302 I 68 ~il

56 236 ! [>01 1'1

89 3S0 : iq I ~'41

49 210 52 ! 210

1,648 ; 5,764 21,512 4, .~13

SC\I:IIARY

________________________________ c_a_sc_s __ 1 De!endaJ~~

Aj~~~~t:g~~l~'t\~~iie(C::::::::::::::::::::::::::::::::::::::::::::::::::::: ! Aetions pending .. ! Other disposrtrons :

TotaL :

1,648

1,486

30

132 ,

1,648 i

I

.\.7tJ4

4,513

32;")tj

1,012

5,764

I These columns show disposrtion of cases by year of dISpOSItIon and do not necessarily reflect the dispos:

lion of the cases shown as having bcen Instituted In the same years. , Includes 26 cases which were counted twice in this column because mjunctions against diflerent defend- ants ID the same cases were granted in different years . Includes 76 defendants in 17 cases III which Injunctions have been obtained as to 102 co-defendants Includes (a) actions disunssed (as to 895 defendants), (b) actions discontmued, abated, abandoned,

stipulated or settled (as to 71 defendants); (c) acnons in whieh judgment was denied (as to 42 defendants).

(d) acnons in which proseounon was stayed on strpulation to discontmue misoonduet charged (as to 4

defendants).

_

• • _ • • _

_

• _

• _ • • • _

_

_

_

~~

'

~~~

,I ,i

•

•

•
190 SECURITIES AND EXCHANGE COMMISSION

TABLE 12.-Summary of Cases Instituted Against the Commission, Petitions for

Review of Commission Orders, Cases in Which the Commission Participated as Intervenor or Amicus Curiae, and Reorganization Cases on Appeal Under Ch,

X in Which the Commission Participated

Types of cases

Total

cases instituted

up to end of 1968

fiscal

year

Total

cases

closed

up to end of 1968

fiscal

year

Cases

pending

at end

of 1968

fiscal

year

Cases

pending

at end of 1967

fiscal

year

Cases In- stituted

during

1968

fiscal

year

Total

cases

pending

during

1968

fiscal

year

Cases

closed

durmg

1968

fiscal

year

Actions to enjom enforcement of Securities Act, Securities Exchange Act or Public Utility Holding Company

Act With the exception of

subpoenas ISsued by the Commlsslon__________________ 78 76 2 2 2 4 2

Actions to enjoin enforcement

of or compliance With sub- poenas Issued by the Com- mlsslon______________________ 16 16 0 1 1 2 2

Petinons for review of Com- mission's orders by courts of appeals under the various

Acts adnnrnstored by the Co=lsslon__________________ 314 303 11 10 13 23 12

Miscellaneous actions against the Commlssion or olficers of the Oommissron and cases ill

wWch the CO=1SSlOn par- ticipated as intervenor or anucus curiae, 319 299 20 19 13 32 12

Appellate proceedings under Ch. X In which the Com- mission partlclpated__________ 221 219 2 4 7 11 9

TotaL. --;s-mj---ss----3-6 ---3-6 ---72----3-7
THIRTY-FOURTH ANNUAL REPORT 191

TABLE 13.-A 55-Year Summary of Criminal Cases Developed by the Commission1934 Through 1968 by Fiscal Year I

(See Table 14 for classltleatron of defendants as broker-dealers, etc.)

Number Number

of Number of these

Number persons of such Number defendants Number

of cases as to cases in of Number Number as to whom of these

referred whom which defend- of these of these proceedmgs defendFiscal year to Dept. proseeu- indict- ants defend- defond- have been ants as

of Jushce tion was menta Indicted ants ants dismissed on to whom

m eaeh recom- have m such convicted acquitted motion of cases are year mended been cases' U.S. pending'

meach obtained Attorneys

year

-------- ---- ---- 1934- ____________ 7 36 3 32 17 0 15 0 1935 _____________ 29 177 14 149 84 5 60 0 1936 _____________ 43 379 34 368 164 46 158 0 1937_____________ 42 128 30 144 78 32 34 0 1938_____________ 40 113 33 134 75 13 46 0 1939 _____________ 52 245 47 292 199 33 60 0 1940_____________ 59 174 51 200 96 38 66 0 1941_____________ 54 150 47 145 94 15 36 0 1942_____________ 50 144 46 194 108 23 63 0 1943_____________ 31 91 28 108 62 10 36 0 1944- ____________ 27 69 24 79 48 6 25 0 1945_____________ 19 47 18 61 36 10 15 0 1946 _____________ 16 44 14 40 13 8 19 0 1947_____________ 20 50 13 34 9 5 20 0 1948 _____________ 16 32 15 29 20 3 6 0 1949_____________ 27 44 25 57 19 13 25 0 1950_____________ 18 28 15 27 21 1 5 0 195'- ____________ 29 42 24 48 37 5 6 0 1952 _____________ 14 26 13 24 17 4 3 0 1953_____________ 18 32 15 33 20 7 6 0 1954 _____________ 19 44 19 52 29 10 13 0 1955_____________ 8 12 8 13 7 0 6 0 1956 _____________ 17 43 16 44 28 5 11 0 1957_____________ 26 132 18 80 35 5 40 0 1958_____________ 15 51 14 37 17 5 11 4 1959_____________ 45 217 39 234 117 20 34 63 1960_____________ 63 281 44 207 113 11 50 33 196'- ____________ 42 240 42 276 133 22 27 94 1962_____________ 60 191 51 152 85 15 52 0 1963_____________ 48 168 39 117 72 7 29 9 1964_____________ 48 164 37 173 94 11 16 52 1965_____________ 49 167 45 159 80 6 27 46 1966_____________ 44 118 38 179 86 11 17 65 1967_____________ 44 212 27 152 52 6 11 83 1968___________ '40 128 19 72 2 1 0 69

TotaL____ -----, 1,169 4,219 , 9651 4,145 2,167 412 '1,048 518

I The figures given for each year reflect actions taken and the status of cases as of the end of the most recent

fiscal year with respect to cases referred to tho Department of Justice during the year specified. For example,

convictions obtained In fiscal 1968 with respect to cases referred during fiscal 1967 are Included under fiscal

1967. While the table shows only 2 convictions under 1968, the total number of convictions for cases referred

dnring tnat year and prior years was 84, as noted in the text of this report. There were 42 indictments returned In 30 cases during fiscal year 1968

'_' The number of defendants 10 a case Is sometimes Increased by the Depai tment of Justice over the number

against whom prosecution was recommended by the Commission. Also more than one Indictment may result from a single reference.

See Table 15 for breakdown of pending cases . 'I'wenty-ona of these references involvmg 61 proposed defendants, and 13 prior references involving 36

proposed defendants, were still being processed by the Department of Justice as of the close of the fiscal year.

, Eight hundred and thirty-one of these cases have been completed as to one or more defendants. Convictions

have been obtained In 671 or 81 percent of such cases. Only 160 or 19 percent of such cases have resulted In

acqurttals or dismissals as to all defendants; this includes numerous cases in which Indictments were dismissed without trial because of the death ef defendants or for other administrative reasons. See n, 6, infra. Includes 87 defendants who died after Indictment.

•

•

•
192 SECURITIES AND EXCHANGE COMMISSION

TABLE 14.-A 35-Year Summary Classifying All Defendants in Criminal Cases

Developed by the Commission-1934 to June 30, 1968

Number as

to whom

cases were Number as

Number Number Number d1Slllissed to whom

Indicted Convicted AcqUItted on motion cases are

of United pending States

Attorneys

Registered broker-dealers 1 (including

principals of such firms) ................. 662 376 48 156 82

Employees of such registered brokerdealers , .......•......•.......... ....... 382 li8 21 92 91

Persons In general securrnes business but

I

not as registered broker-dealers (includes

principals and employees) ............... 862 432 68 306 56

All others •......•.....................••. 2,239 1,181 275 494 289

TotaL ....••..................•..... 4,1451 2,167 I 412 1,048 518

I Includes persons registered at or prior to time of indictment , The persons referred to III this column, while not engaged III a general business III securities, were almost

WIthout exception prosecuted for violations of law mvolvmg seeurtties transactions,

T _\BLE 15.-Summary of Crmunal Cases Developed by the Commission Which TVere Pendmg at June SO, 1968

Pending, referred to Department of JustICC III the Iiscal year,

Number of such defendants as to

whom cases me still pending and

reasons therefor

I I I

I I Number , Number of such

I of defendants

Cases defendants as to whom

In such cases have I

I CASes been completed

I :

-lg58-.-..•. •.• .. -._.-... .. -_.-.•• •._!'--I'---~r--0

1959••••.•••....•.••.••••..• _._._ 63 0

19G'J••••••. •••.••......••.•.•••. 1 I 33 I 0 I

~~~L::::::::::::::::::::::::::I 1~ ! : i

~ri~;L:::::::::::::::::::::::::: 7! 5i II g "

~~~t:::::::::::::::::::::::::::: I ~~ 1~ 1067.. _._._._ _1 14 105 I 22 I 19G8..•...................... : 1 17 70 1 ,

TotaL. ! (l9 I 5671 491

Sl;~nlARY

~ot yet

appre- I hendcd

0

16 I

3~ I

01

0,

1

! 1 1

01

Awnitmg

trial .

4i

26

6~ I

5r I

~I'

82

69 i

459

Awaitmg

appeal I

o

I

II

6

1

()

4

2

17

6

o

137

Total cases pending ..••......................•...•.........• _.......... ......................•.•.• 133

Total defendants _.... 664

Total defendants as to whom cases are pending _............................................ 615

IThe figures in this column represent defendants who have been convicted and whose appeals are pending. These defendants are also included 111 the ngures m column 3.

, As of the close of the fiscal year, indictments had 110t yet been returned as to 97 proposed defendants m

34 cases referred to the Department of Justice, These are reflected only in the recapituletion of totals at the

bottom of the table The figure for total cases pending mcludes 35 cases in a Suspense Category.

U S GOVERNMENT PRINTING OFFICE 1968

_

'

I'

I

'I

1

II ,i

-•• - -

_

- -•• -

~~

~~

I

~

Ii 1

"

~

II

'

'

'