31 st

ANNUAL REPORT

Securities

and Exchange

Commission

For the Fiscal Year Ended June 30, 1965

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

Washington, D.C., 20402- Price 50 cents (paper cover)
n

SECURITIES AND EXCHANGE COMMISSION

Headquarters Office

425 Second Street NW.

Washington, D.C. 20549

COMMISSIONERS

MANUEL F. COHEN, Chairman

BYRON D WOODSIDE C

HUGH F. OWENS

HAMER H. BUDGE

FRANCIS M. WHEAT

ORVAL L. DuBoIS, Secretary

•
LETI'ER OF TRANSMITTAL

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C., January 10, 1966

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

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

Commission covering the fiscal year July 1, 1964 to June 30, 1965, in

accordance with the provisions of Section 23(b) of the Securities Exchange Act of 1934, approved June 6, 1934; Section 23 of the Public

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

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

August 22, 1940; Section 216 of the Investment Advisers Act of 1940,

approved August 22, 1940; Section 3 of the Act of June 29, 1949,

amending the Bretton Woods Agreement Act; and Section 11(b) of

the Inter-American Development Bank Act.

Respectfully,

MANUEL F. COHEN,

Chairman;

THE PRESIDENT OF THE SENATE,

THE SPEAKER OF THE HOUSE OF REPRESENTATIVES,

Washington, D.O.

In

TABLE OF CONTENTS

Pa&1 Commissioners and staff officers ______ ____ __ ________ _______ XI

Regional and branch offiees..; ___ _ __ _ _____ __ __ _____ XII

Biographies of Commissioners.,., ____ ________ _____ __ __ ____ XIII

PART I

OPERATION OF THE SECURITIES ACTS AMENDMENTS OF 1964;

IMPLEMENTATION OF SPECIAL STUDY RECOMMENDATIONS_________________________________________________________ 1

Operation of 1964 ameudments ; ______ _____ ______ ___ ____ 1

Extension of disclosure requirements to over-the-counter secu- rities__ _____ _ _ _________________________ ____ 2

Exemptions from reglstration , _________ _______ ____ _ 7

Changes in prospectus delivery requirements___________________ 9

Enlargement of disciplinary authority as to broker-dealers______ 11

Regulation of broker-dealers who are not members of registered

securities association____ ____________ ____ ____ __ _ 11

Revision of retail quotations system__________________________ 13

Summary suspension of over-the-counter trading ___________ _ 13

Implementation of Special Study recommendations_________________ 14

Minimum net capital , _ ___ ____ ________________ _ 14

Supervision of selling practices , , ____________________ _ 15

Research and investment advice______________________________ 16

Financial responsibility _ _________________ ___________ _ 16

Specialists and floor traders_____ ___ __________________ _ 17

The "third market" _ _______ _____ ___ ___ ____ _ 17

Over-the-counter markets and NASD organization .__ 18

Level and structure of commission rate________________________ 19

Odd-lot differentiaL __ _ ____ __________________ __ _ 19

Automation of market facilities .___ 19

PART II

LEGISLATIVE ACTIVITIES_ _ __ _ ___ ____________________ 21

PART III

ADMINISTRATION OF THE SECURITIES ACT OF 1933________ 22

Description of the registration process____________________________ 22

Registration statement and prospectus; 22

Examination procedure______ __ ______ ________ ____ _____ 23

Time required to complete registration_______________________ 24

Volume of securities registered , __ ____ _ ____________ 25

Registration statements filed____ _____ __ __ ______ _ 28

Stoporderproceedings_________________________________________ 29

Examinations and investigations_________________________________ 32

v

_
VI TABLE OF CONTENTS

:Page

ADMINISTRATION OF THE SECURITIES ACT OF 1933-Con.

Exemption from registration of small issues_______________________ 33

Exempt offerings under Regulation A________________________ 33

Reports of sales ________ _____ ______________ _________ 34

Suspension of exemption________________________________ 34

Exempt offerings under Regulation B________________________ 37

Reports of sales , ______________________________________ 38

Exempt offerings under Regulation E_ 38

Exempt offerings under Regulation F 38

Revision of rules, regulations and forms__________________________ 39

Proposed amendment of Rule 485___________________________ 39

Amendments to Forms S-1, 8-8 and 8-1L___________________ 39

PART IV

ADMINISTRATION OF THE SECURITIES EXCHANGE ACT OF

1934___________________________________________________________ 40

Regulation of exchanges and exchange trading , __ _ 40

Registration and exemption of exchanges_____________________ 40

Commission inspections of the exchanges_____________________ 41

Section 19 (a)(l) proceedings against San Francisco Mining Exchange_ 41

Exchange disciplinary action__ __ __ ____ __ ___ _ __ 42

Registration of securities on exchanges___________________________ 42

Statistics relating to securities on exchanges_______________________ 44

Number of issuers and securities __,..__________________________ 44

Market value of securities available for trading________________ 45

Share and dollar volume of stocks traded ~_________________ 45

Foreign stocks on exchanges ~_______________________ 46

Comparative exchange statistics 47

Delisting of securities from exchanges____________________________ 48

Delisting proceedings under Section 19 (a)(2) __________________ 49

Unlisted trading privileges on exchanges__________________________ 49

Applications for unlisted trading privileges____________________ 50

Block distributions reported by exchanges________________________ 50

Registration of over-the-counter securities________________________ 51

Manipulation and Stabilization_____ ____ _________________________ 51

Manipulation; market surveillance___________________________ 51

Stabilization , ____ ______ _____ ___________________ 52

Insiders' security holdings and transactions _______________________ 53

Ownership reports __________________________ __ __________ 53

Recovery of short-swing trading profits by issuer______________ 54

Regulation of proxies , __ __ _ __________ ___ __ __ 54

Scope of proxy regulation.L;., ____________ _______________ 54

Statistics relating to proxy statements________________________ 55

Stockholders' proposals : __ ___ 56

Ratio of soliciting to nonsoliciting companies__________________ 56

Proxy contests , ___________________________________________ 57

Investigations with respect to reporting provisions_________________ 57

Regulation of broker-dealers and over-the-counter markets__________ 58

Re~stration---------------------------------------------- 58

Administrative proceedings , 58

Decisions of particular interesL_________________________ 61

Suspension of registration pending final determinatiou.c.L; , 66

__- _____ __________________
TABLE OF CONTENTS vn

ADMINISTRATION OF THE SECURITIES EXCHANGE ACT OF

1934-Continued

Regulation of broker-dealers and over-the-counter markets-Con. Page

Net capital rule -__ 66

Financial statements 67

Broker-dealer inspections 67

Supervision of activities of National Association of Securities Dealers,

Inc________________________________________________________ 68

N ASD disciplinary aetions 69

Commission review of N ASD disciplinary action.; _____________ 71

Commission review of N ASD action on membership 74

Commission inspections of the NASD________________________ 74

Revision of rules, regulations and forms__________________________ 75

~doption of Rule 0-8_ 75

Amendments of Rules 10b-6 and 16b-3______________________ _75

Rescission of Rule 12f-5 77

Amendments to Rules 138-15 and 15d-15____________________ 77

Amendments and proposed amendments to the proxy rules _____ 78

Amendments of Rule 15b-2 and Form BD____________________ 79

Amendments of Rule 15b-9 under the Exchange Act and Rule

9(b) under the Commission's Rules of Practice______________ 79

Rescission of Rule 15c2-2 79

Amendment of Rule 15c3-L________________________________ 80

Amendments of Rules 15ab-1 and 15ag-L____________________ 80

Amendment of Rule 16a-2____ ___ __ ___________ ________ 80

Adoption of Rule 16b-10_ ____ _______________ ___ _________ 81

Proposed amendments of Rules 17a-3 and 17a-4_ _ __ __ 81

Proposed amendments to Form 8-K_________________________ 81

Amendments to Forms 10 and 10-K_________________________ 82

Adoption of Forms 12 and 12-K_____________________________ 82

Proposed amendments to Forms 16 and 16-K_________________ 83

PA.RT V

ADMINISTRATION OF THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935 84

Composition of registered holding-company SysteffiS________________ 85

Section 11 matters in registered holding-company systems__________ 86

Exempt holding companies , 88

Financing of active registered public-utility holding companies and

their subsidiaries 90

Competitive bidding , 91

Policy as to refundability of bonds_______________________________ 91

Other matters 93

PA.RT VI

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

ACT -___ 95

Summary of activities --__________ 96

Jurisdictional, procedural and administrative matters 96

Trustee's investigation -_- 98

Reports on plans of reorganization_______________________________ 99

Activities with regard to allowances______________________________ 102

Intervention in Chapter XI proceedings__________________________ 103

- - _- - - _- _______

__- - - -- _- __ - - - - - - - - -- - - - - _ _

__ - - - - - - _________

L; _ _ _ __ _ _ _ _ __ _ _ _ _

- _______

-- _- - - ____ ____

- - - - - _________ __

- _ _________________ ________ ___

- - _- - - - - - - - - - - - - - - - - -- - - - - _- - - - _____

- - - - - - - - __- -- - - - - - - ________

- - -- ~_- - - -- - - - - -- - - __ - - - _________ _____

- __ ___ __________________ __

- - - - --- - - _ __ ___

-- - - --- - -- __ --- - - - __ _

- - - ______

- - - _- - -- - ______ __
VITI TABLE OF CONTENTS

PAUT VII

Page

ADMINISTRATION OF THE TRUST INDENTURE ACT OF 1939__ 106

Revision of rules, regulations and forms; 107

Proposed Rule 7a-9 -_ ________ __ __ 107

Proposed amendments to Forms T-1 and T-2_________________ 107

PART VIII

ADMINISTRATION OF THE INVESTMENT COMPANY ACT OF

1940 108

Companies registered under the Act______________________________ 109

Growth of investment company assets____________________________ 110

Inspection and investigation program_ 110

Revision of annual report form for management investment companies; 111

Filings reviewed; , ___ _ ___________________ ________ 112

Applications and proeeedings; _ __ ______ ____ _________ 113

Revision of rules, regulations and forms__________________________ 116

Adoption of Rule 2a-4_____________________________________ 117

PART IX

ADMINISTRATION OF THE INVESTMENT ADVISERS ACT OF

1940___________________________________________________________ 118

Registration statistles., _________________________________________ 119

Inspection program 119

Administrative proceedings , _______ __________ ______ __ _______ 119

PART X

OTHER ACTIVITIES OF THE COMMISSION 122

Civil litigation., __________ _ __ ______ _ _____ ___ 122

Criminal proceedings________ _ _________ 131

Complaints and investigations___________________________________ 135

Enforcement problems with respect to foreign securtties , _ _ 137

Foreign restricted list- _ _ ____________ _ 138

Section of securities violations___________________________________ 139

Applications for nondisclosure of information______________________ 140

Activities of the Commission in accounting and auditing____________ 140

International Bank for Reconstruction and Development___________ 145

Inter-American Development Bank______________________________ 147

Statistics and special studies____________________________________ 148

Issues registered under the Securities Act of 1933______________ 148

New securities offerings________ _ __ _________ 148

Individuaffi' savings_______________________________________ 148

Private pension funds______________________________________ 149

Financial position of corporations; ___ ____ _________ 149

Plant and equipment expenditures___________________________ 149

Directory of registered companies____________________________ 149

Stock market data_________________________________________ 149

Opinions of the COmmission_____________________________________ 150

Dissemination of information 150

Information available for public inspel.'tion____________________ 151

Publications___________________________________________________ 153

Organization__________________________________________________ 154

Personnel and financial managemenL____________________________ 154

New building and electronic data-processing equipment , ___________ 158

_

_

- _______________

- - ___ ____ _
TABLE OF CONTENTS

PART XI

APPENDIX-STATISTICAL TABLES

IX

(Page

Table 1. A 31-year record of registrations effective under the Securities Act

of 1933-Fiscal years 1935-1965___________________________ 161

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

ended June 30, 1965_ ___ ______________________________ 162

Part 1. Distribution by months_________________________________ 162

Part 2. Purpose of registration and type of security________________ 162

Part 3. Purpose of registration and industry of registrant___________ 163

Part 4. Use of proceeds and industry of registrant_________________ 164

Table 3. Brokers and dealers registered under the Securities Exchange Act

of 1934--effective registrations as of June 30, 1965, classified by

type of organization and by location of principal office_______ 165

Table 4. Number of issuers and security issues on exchanges____________ 166

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

trading on exchanges and the number of issuers involved, as of June 30, 1965_ _________ __________________ 166

Part 2. Number of stock and bond issues on each exchange and number of issuers involved, as of June 30,1965______________ 166

Table 5. Value of stocks on exchanges_______________________________ 167

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

exchanges in the calendar year 1964 and the 6-month period

ended June 30, 1965_ ____________________________________ 168

Part 1. 12 months ended December 31, 1964______________________ 168

Part 2. 6 months ended June 30,1965___________________________ 168

Table 7. Comparative share sales and dollar volumes on exchanges , _____ 169

Table 8. Block distributions of stocks reported by exchanges____________ 170

Table 9. Unlisted stocks on exchanges; ___ 171

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

categories as of June 30,1965__________________________ 171

Part 2. Unlisted share volume on the exchanges-calendar year 1964_ 171

Table 10. Summary of criminal cases developed by the Commission

which were pending at June 30,1965______________________ 172

Table 11. 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_ ______________________________________ 172

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

for review of Commission orders, cases in which the Commission participated as intervenor or amicus curiae, and reorganization cases under Chapter X in which the Commission partici- pated on appeal, , ___________________________________ 173

Table 13. A 32-year summary of criminal cases developed by the Commission-1934 through 1965 by fiscal year_____________________ 174

Table 14. A 32-year summary classifying all defendants in criminal cases

developed by the Commission-1934 to June 30, 1965________ 175

Table 15. A 32-year summary of all injunction cases instituted by the

Commission-1934 to June 30,1965, by calendar year_______ 176

COMMISSIONERS AND STAFF OFFICERS

Term

Commissioners :f.tni;e;

MANUEL F. COHEN of Maryland, Chairman____________________________ 1968

;BYROND. WOODSIDEof Virginia_______________________________________ 1967

-HUGH F. OWENS of Oklahoma_________________________________________ 1970

HAMER H. BUDGE of Idaho_____________________________________________ 1969

F~CIS M. WHEAT of California_____________________________________ 1966

Secretary: ORVALL. DuBoIS

Executive Assistant to the Chairman: LEONARDM. LEIMAN

Sraff Officers

EDMUNDH. WORTHY,Director, Division of Corporation Finance.

ROBERTH. BAGLEY,Associate Director.

SOLOMONFREEDMAN,Director, Division of Corporate Regulation.

J. ABNOLDPINES, Associate Director.

HAROLDV. LESE, Associate Director.

LOUGHLINMoHUGH, Ohief Economist:, Office of Policy Research.

IRVINGM. POLLAOK,Director, Division of Trading and Markets.

--- Associate Director.

PHILIP A. LoOMIS,JR., General Counsel.

DAVID FE1mEB, Solicitor.

WALTER P. NORTH, Associate General Counsel.

ANDREWBARB,Chief Accountant.

LEONARDHELFENSTEIN,Director, Office of Opinions and Review.

W. VICTORRODIN,Associate Director.

WILLIAM E. BEOKER,Chief Management Analyst.

FRANK J. DONATY,Comptroller.

ERNESTL. DESSEOKER,Records and Service Officer.

HARRy POLLAOK,Director of Personnel.

XI
REGIONAL AND BRANCH OFFICES

Regional Administrators

Region 1. New York, New Jersey.-Llewellyn P. Young, 225 Broadway, New

York, N.Y., 10007

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

Boston, Mass., 02109 .

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

carolina, Georgia, Alabama, Mississippi, Florida, that part of Louisiana lying east of the Atchafalaya River.-William Green, Suite 138,

1371Peachtree Street, NE., Atlanta, Ga., 30309

Region 4. Illinois, Indiana, Iowa, Kansas City (Kansas), Kentucky, Michigan, Minnesota, Missouri, Ohio, Wisconsin.-Thomas B. Hart, U.S. Courthouse & Federal Bldg., 219 South Dearborn Street, Chicago, Tll., 60604

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

west of the Atchafalaya River, and Kansas (except Kansas City).-

Oran H. Allred, United States Courthouse, Room 301, Tenth and Lamar

Streets, Fort Worth, Texas, 76102

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

Dakota, Utah.-Donald J. Stocking, Room 802, Midland Savings Building,

444 17th Street, Denver, Oolo., 80202

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

Calif., 94102

Region 8. Washington, Oregon, Idaho, Montana, Alaska.-J'ames E. Newton,

9th Floor, Hoge Bldg., 70;) Second Ave., Seattle, Wash., 98104

Region 9. Pennsylvania, Maryland, Virginia, West Virginia, Delaware, District of Columbia.-Alexander J. Brown, Jr., Room 300, Courts Bldg.,

310 Sixth Street NW., Washington, D.C., 20549

Branch Offices

Cleveland, Ohio, 44113.-Room 1628, Standard Building, 1370 Ontario Street.

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

234 State Street.

Houston, Texas, 77002.-Room 2226, Federal Office and Courts Building,

515Rusk Ave.

Los Angeles, Calif., 90028.-Room 309, Guaranty Building, 6331 Hollywood

Blvd.

Miami, Fla., 38230.-Room 1504, 51 S.W., First Ave.

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

St. Paul, Minn., 55101.-Room 1027, Main Post Office and Customhouse, 180

East Kellogg Blvd.

Salt Lake City, Utah, 84111.-Room 8440, Federal Building, 125 South

State Street.

XU
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 on 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 W.estern Europe. In

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

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

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

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

of articles on securities regulation published in domestic and foreign

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

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

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

designated Chairman of the Commission on August 20, 1964.

Byron D. Woodside

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

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

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

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

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

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

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

xm
XIV SECURITIES AND EXCHANGE COMMLSSION

of that Commission which was charged with the administration of

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

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

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

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

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

five-man board which reviewed reorganization plans of Japanese

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

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

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

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

June 5, 1967.

Hugh F. Owens

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

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

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

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

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

law firm specializing in securities law. He returned to Oklahoma

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

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

of the United States Junior Chamber of Commerce. During World

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

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

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

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

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

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

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

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

Administrator of the then newly enacted Oklahoma Securities Act

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

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

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

expiring .Tune 5, 1965, and was reappointed for the term expiring

June 5, 1970.
COMMISSIONERS xv

Hamer H. Budge

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

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

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

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

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

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

discharge as Lieutenant Commander. Elected to the Idaho State

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

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

November 1950, he represented Idaho's Second Congressional District

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

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

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

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

the term of officeexpiring June 5, 1969.

Francis M. Wheal

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

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

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

Commission, Commissioner Wheat was a member of the Los Angeles

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

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

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

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

been active in bar association work, including service as Chairman

of the Committee on Corporations of the Los Angeles County Bar

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

of Securities, American Bar Association (Banking and Business Law

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

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

and state law. He took officeas a member of the Commission on October 2,1964, for the term expiring June 5,1966.

PART I

OPERATION OF THE SECURITIES ACTS AMENDMENTS OF

1964; IMPLEMENTATION OF SPECIAL STUDY RECOM.

MENDATIONS

OPERATION OF 1964 AMENDMENTS

Fiscal year 1965 marked the enactment and the beginning of the

Commission's administration of the Securities Acts Amendments of

1964, the most significant statutory advance in Federal securities regulation and investor protection since 1940. The principal objectives

of the 1964 amendments were to extend to investors in securities traded

over the counter the same fundamental disclosure and insider trading

protections as were previously afforded by the Securities Exchange

Act of 1934 to investors in listed securities, to strengthen the standards

of entrance into the securities business, and to make more effective the

disciplinary controls of the Commission and the rules of industry selfregulatory organizations over securities brokers and dealers and persons associated with them.

Obviously, the full impact of such far-reaching legislation could not

be felt during the fiscal year. Aside from certain built-in delays in

the statutory scheme, the Commission moved forward deliberately,

well aware of the need of newly regulated companies for adequate

time to prepare for bringing themselves into compliance and of the

need for further study in some areas before taking definitive action.

Nevertheless, the amendments have already had significant consequences and a substantial beginning has been made toward full incorporation of the new provisions into the fabric of securities regulation.

In the course of the year, among other things, over-the-counter issuers

filed a total of 1,508 registration statements pursuant to new Section

12(g) of the Exchange Act, and thus took the first step toward bringing themselves within the full panoply of the Exchange Act's disclosure and reporting requirements. The Commission, in addition to making the necessary internal preparations to meet its additional responsibilities, took steps to implement the legislation through the adoption

or revision of various rules and forms. In a number of administrative

proceedings against broker-dealers and persons associated with them,

it imposed the new direct sanctions available against such associated

persons. Itmade use in two instances of its new authority to suspend

over-the-counter trading in specified securities. These matters and

other action taken pursuant to the amendments are discussed in more

detail in the following sections.

1

791-468--65----2
2 SECURITIES AND EXCHANGE COMMISSION

Extension of Disclosure Requirements to Over-the-Counter Securities

The 1964 amendments extended to a significant portion of the securities traded in the over-the-counter markets the registration, periodic

reporting, proxy solicitation and insider reporting and trading provisions of the Exchange .Act previously applicable to securities 'listed

on the securities exchanges. The principal statutory mechanism for

achieving this extension was the enactment of new Section 12 (g) which

requires an issuer of securities traded in over-the-counter markets with

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

equity security held of record by '750 or more persons 1to register such

security by filing a registration statement with the Commission within

120 days after the last day of its first fiscal year ended after July 1,

1964, on which it meets the above standards. In order to provide a

reasonable period for preparation of the required filing by the issuers

involved and to permit gradual assumption by the Commission of its

administrative burdens, the Commission postponed the required filing

date until.April30, 1965, for those issuers which otherwise would have

been required to file at an earlier date, except for companies required to

file reports with the Commission under Section 13 or 15 (d) of the .Act.2

In an effort to bring the new legislation to the attention of companies which might be subject thereto, the Commission notified more

than '7,000 companies not previously subject to the Commission's reporting requirements which, according to information obtained from

over-the-counter quotation services and commercial financial reporting

services, appeared possibly to be subject to Section 12(g), of the applicability of that Section. Those companies which on the basis of responses to a questionnaire were apparently required to register securities with the Commission were provided with copies of the appropriate

forms, rules and regulations.

The first registration statements under Section 12(g) were filed in

the second quarter of the fiscal year. From a total of 50 statements

filed in that quarter, the number increased to 186 in the third quarter

and to 1,2'72 in the final quarter. Thus, as has been noted, a total of

1,508 registration statements had been filed pursuant to Section 12(g)

by the end of the fiscal year. Two statements were withdrawn before

the end of the year by the issuers when it was determined that they

were not required to file under the .Act. Of the total of 1,508 registration statements, 929 were filed on behalf of issuers already subject

to the reporting requirements of Section] 3 or 15 (d) of the .Act.

During the fiscal year, requests by 180 issuers for extensions of time

for filing were granted. .Amajority of these requests was based on the

l.After July 1, 1966, this number will be reduced to 500.

"Rule 12g-1(a), adopted September 15,1964 in SecUrities Exchange .Act Release No. 7429.
THIRTY-FIRST ANNUAL REPORT 3

difficulties encountered by independent accountants in preparing certified financial statements within the prescribed time where prior

financial statements had not been certified.

During the year the Commission adopted rules defining terms which

are key factors in determining whether an issuer is required to register its securities. Pursuant to its authority under Section 3(a) (11)

of the Act to include within the term "equity security" securities it

deems similar to those specified in that section, the Commission

adopted Rule 3all-1 which includes within that term a broad range of

equity interests," Rules 12g5-1 and 12g5-2 define the terms "held of

record" and "total assets." 4 Generally speaking, Rule 12g5-1 includes as a separate holder each person identified on records maintained in accordance with accepted practice as the owner of the security. However, if the issuer knows or has reason to know that the

form of holding securities of record is used primarily to circumvent

the provisions of the Exchange Act, the rule as adopted provides that

the beneficial owners shall be deemed to be the record holders thereof.

At the time of the adoption of Rule 12g5-1 the Commission indicated that it would continue to evaluate the rule to determine in the

light of experience whether it may he necessary or appropriate, in

order to prevent circumvention of the Act and to achieve the intended

coverage on a uniform and acceptable basis, to count securities held

in customers' accounts, 'but registered in the name of a broker, dealer

or bank, as being "held of record" by the number of separate accounts

for which they are held. The Commission also indicated it would

give similar consideration to the necessity of including as record holders employees who have a direct beneficial interest in securities held

by an employee plan.

Rule 12g5-2 defines "total assets" to mean the total assets as shown

on the issuer's balance sheet or the balance sheet of the issuer and its

subsidiaries consolidated, whichever is larger, prepared in accordance

with the pertinent provisions of Regulation S-X.

As a result of the 1964:amendments, the date on which securities become "registered" pursuant to Section 12 assumes great importance.

That date determines the applicability of the periodic reporting, proxy

solicitation and insider reporting provisions of Sections 13, 14 and 16

of the Act. In addition, Section 15(d) of the Act, as amended, provides that the obligation of an issuer to file periodic reports thereunder is suspended if and so long as the issuer has a class of security

"registered" pursuant to Section 12. In order to resolve any uncert.ainty as to when a security is "registered," the Commission adopted

Rule 12b-6 which provides that for the purposes of the above Sections

Securities Exchange Act Release No. 7581 (April 23, 1965) .

Securities Exchange Act Release No. 7492 (January 5,1965).

•

•
4 SECURITIES AND EXCHANGE COMMISSION

and the rules and regulations thereunder, securities are not deemed

to be registered pursuant to Section 12 until an application for exchange registration or a registration statement filed with respect to

over-the-counter securities has become effective,"

The rules of the Commission adopted under Section 14(a) of the

Act governing the solicitation of proxies were redesignated as Regulation 14A and were amended to apply to solicitations with respect to

securities registered pursuant to Section 12(g) as well as securities

registered on a national securities exchange." However, the amendment applies only to solicitations commenced on or after July 1, 1965,

and the proxy rules therefore did not apply to over-the-counter securities registered during the fiscal year/

As a result of the extension of the proxy rules to over-the-counter

securities, the Commission also amended Rule 14a-3, relating to the

information to be furnished to security holders in connection with the

solicitation of proxies," This rule previously provided, in part, that

where the management of an issuer solicits proxies with respect to an

annual meeting of security holders at which directors are to be elected,

its proxy statement must be accompanied or preceded by an annual

report to such security holders containing such financial statements

for the last fiscal year as will in the opinion of management adequately reflect the financial position and operations of the issuer, and

if such statements differ materially from those filed with the Commission, an explanation of the effect of the difference. As amended,

the rule also requires an issuer which has not previously submitted

to its security holders an annual report pursuant to the rules and regulations under Section 14 to include in its first such annual report such

information as to its business operations during the past fiscal year

as will, in the opinion of management, indicate the general nature

and scope of the business of the issuer and its subsidiaries. In connection with the adoption of the amendment the Commission indicated that after it gained additional experience with respect to the

reporting practices of unlisted companies, it would consider whether

such companies should be required to include a description of their

business in each annual report to security holders.

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

amendments, provides that issuers of registered securities shall, in accordance with rules and regulations prescribed by the Commission,

transmit to security holders from whom proxies are not solicited in

Securities Exchange Act Release No. 7500 (January 5,1965).

Securities Exchange Act Release No. 7566 (AprilS, 1965).

7 Although not required, preliminary proxy statements of 17 such issuers

were received and processed during the fiscal year.

S Securities Exchange Act Release No. 750S (January 15,1965).

•

•
THIRTY-FIRST ANNUAL REPORT 5

connection with meetings of security holders information comparable

to that which would be furnished in proxy material. During the fiscal

year, the Commission announced that it has under consideration a new

Regulation 14C to implement Section 14(c), and invited public commerits," The proposed regulation would provide that in connection

with every annual or other meeting of holders of a class of registered

securities, the issuer shall transmit a written information statement

containing substantially the same information as that which would be

required in a proxy statement to every security holder who is entitled

to vote in regard to any matter to be acted upon at the meeting and

from whom a proxy is not solicited on behalf of the management. In

the case of an annual meeting the issuer would also be required to

transmit an annual report including financial statements which with

some exceptions would have to be certified by independent public or

certified public accountants.

Section 16 (a) of the Act, as amended by the Securities Acts Amendments of 1964, requires the directors, officers and principal equity

security holders of listed companies and companies registered pursuant

to the new Section 12(g) of the Act to file reports of their beneficial

ownership of equity securities of their respective companies. The rules

under this Section were amended during the fiscal year to make them

applicable to the additional reports required by the amended section."

Section 16 (b) of the Act provides that profits realized by persons

beneficially owning more than 10 percent of any class of equity security

registered pursuant to Section 12, or any director or officer of the issuer

of such security, from the purchase and sale, or sale and purchase,

of any equity security of such issuer, whether or not registered, within

a period of less than 6 months, inure to and are recoverable by or on

behalf of the issuer. In interpreting this Section, the courts have

indicated that recovery may be allowed of profits realized by a director

or officer as a result of the purchase (sale) of an equity security before

the effective date of the first registration of an equity security of the

issuer under Section 12 and a sale (purchase) made subsequent to

such effective date. In order to provide directors and officers of issuers

registering under new Section 12(g) with an opportunity to become

familiar with the provisions of Section 16 (b), the Commission adopted

Rule 12h-3 which exempts from the operation of Section 16 (b) any

acquisition or disposition of an equity security by a director or officer

of the issuer of such security made prior to the first registration of

Securities Exchange Act Release No. 7512 (January 18, 1965).

.. Securities Exchange Act Release No. 7525 (February 5,1965). The majority

of registration statements filed under Section 12(g) was not effective until late in

the fiscal year, and in many instances no reports were required to be filed durtna

the 1iscal year. See p. 54, infra.

•
6 SECURITIES AND EXCHANGE COMMISSION

an equity security by the issuer under Section 12 (g).u The exemption

is limited to transactions by directors or officers of issuers which first

file a registration statement under Section 12 (g) on or prior to

October 31,1967.12

The revision of Section 15(d) and the addition of Section 12(g)

necessitated certain amendments to Rule 12f-4, which provides exemptions from Sections 13, 14 and 16 of the Act for issuers having

securities admitted only to unlisted trading privileges on a national

securities exchange. IS Prior to the 1964 amendments, some companies

exempt under that rule were required to :file with the Commission

certain annual and periodic reports pursuant to Section 15(d). Since

Section 12(£) (6) of the Act provides that securities admitted to unlisted trading privileges are deemed to be "registered on a national

securities exchange," the amendment to Section 15 (d) suspending

the obligation to file reports if any security of the issuer is "registered

pursuant to Section 12" had the effect of eliminating the need for

issuers to file under that Section where they had a class of securities

admitted to unlisted trading privileges. The effect of the amendment

to Rule 12f-4 is to subject such issuers to the reporting requirements

of Section 13 if they would be subject to the equivalent requirements

under Section 15 (d) but for the fact that they now are deemed to have

a class of security "registered on a national securities exchange."

The General Rules and Regulations under the Exchange Act were

amended to make them applicable to issuers required to register pursuant to Section 12(g) of the Act.14 And various forms heretofore

used for the registration of securities on a national securities exchange

and for periodic reports by the issuers of such securities were amended

or otherwise made available for the registration of securities pursuant

to Section 12(g) and for periodic reports by the issuers of such

securities," Regulation 15D, containing certain special rules relating

." Securities Exchange Act Release No. 7598 (May 10, 1965). The rule makes

no reference to transactions by persons beneficially owning more than 10 percent

of a registered class of equity security because the exception in the last sentence

of Section 16 (b) makes further exemption unnecessary.

12 The 1964 amendments redesignated Section 16(d) of the Act as Section 16 (e).

Rule 16d-l, which relates to arbitrage transactions under Section 16, was reo

designated as Rule 16e-l and made applicable to securities registered pursuant

to Section 12(g). Securities Exchange Act Release No. 7525 (February 5,1965).

11 Securities Exchange Act Release No. 7491 (January 5,1965) .

.. Securities Exchange Act Release No. 7525 (February 5, 1965) .

liThe forms referred to are Form 10 (Securities Exchange Act. Release No.

7544, March 5, 1965) ; Form 8-A (Release No. 7508, January 15, 1965) ; Form

8-B (Release No. 7615, June 3, 1965); Form 8-C (Release No. 7616, June 3,

1965) ; Form ro-x (Release No. 7545, March 5, 1965) ; and Forms 7-K, 8-K and

9-K (Release No. 7525, February 5, 1965). In addition, proposed amendments

of Forms 16 and 16--K were published for comment on.the last day of the 6scal

year (Release Nos. 7636 and 7637). . .
THIRTY-FIRST ANNUAL REPORT 7

to the filing of periodic and other reports required by Section 15(d),

was amended to conform such rules to the provisions of Section 15(d)

as amended. In addition, Rule 15d-20, containing an exemption for

certain closely held issuers from the reporting requirements of Section

15(d), was rescinded as no longer necessary under the amended

Section."

Section 12(i) provides, in effect, that with respect to securities

issued by banks, the functions and duties of administering and enforcing Sections 12,13, 14(a), 14(c) and 16 are vested in the Comptroller

of the Currency, the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation with respect to

banks under their respective primary supervisory jurisdiction. The

Commission understands that information regarding the operation of

the Securities Acts Amendments of 1964 with respect to banks under

the supervision of these agencies is discussed in their respective annual

reports or is otherwise available from them."

Exemptions From Registration

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

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

to grant exemptions from the provisions of Section 12(g) or Sections

13, 14, 15(d) or 16, if it finds that such action is not inconsistent with

the public interest or the protection of investors by reason 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. Pursuant to this authorization, the Commission adopted Rule 12h-2 which exempts from registration pursuant to Section 12(g) any interest or participation in an employee

stock bonus, stock purchase, profit sharing, pension, retirement, incentive, thrift, savings or similar plan if the interest or participation is

not transferable except in the event of death or mental incompetency,

as well as any security which is issued solely to fund such plans."

Other exemptions may be provided by rule as the Commission gains

experience under the new requirements of the Act. In addition, 43

applications for complete or partial exemptions from the above provisions of the Act were filed during the fiscal year. Of these, 16 were

granted, 3 were denied and the remainder were pending at the close

of the fiscal year.

Inaddition to the broad exemptive authority conferred on the Commission by Section 12(h) of the Exchange Act? Section 12(g) (2) ex11 Securities Exchange Act Release No. 7598 (May 10, 1965). The rule makes

,. See 51st .Annual Report of Board of Governors of Federal Reserve System,

pages 50-51; Statement of Operations (1964), Federal Deposit Insurance Corporation, page 20; Annual Report for 1964 of Federal Deposit Insurance Corporation, page 67.

18 Securities Exchange Act Release No. 7581 (April 23, 1965).
8 SECURITIES AND EXCHANGE COMMISSION

empts various types of securities from the registration requirements of

Section 12(g), including securities issued by an insurance company if

all of the following conditions are met: (1) the company is required

to and does file an annual statement, conforming to that prescribed by

the National Association of Insurance Commissioners ("N.AIC"),

with the insurance regulatory authority of its domiciliary state;

(2) it is regulated in the solicitation of proxies as prescribed by the

N.AIC; and (3) after July 1, 1966, the purchase and sale of securities

issued by such insurance company by beneficial owners, directors or

officersof the company are subject to reporting and trading regulations

by its domiciliary state in the manner provided by Section 16 of the

Act.

The N.AIC has prescribed a uniform annual reporting form which

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

required annual report form for insurance companies. In addition,

the N.AIC, as part of that form, has developed a "stockholders' information supplement" which is designed to elicit whether the company's

stockholders have been furnished information substantially equivalent

to that which the Commission would require under its periodic reporting requirements and proxy rules. The Commissioners of each of the

50 states and the District of Columbia have stated that they would

require insurance companies within their respective jurisdictions to

file the supplement and any future revisions thereof and to comply

with the proxy solicitation practices referred to therein. However,

subsequent to the passage of the 1964 amendments, the insurance regulatory authorities of many states expressed the opinion that it may be

necessary or desirable to receive express legislative authority to adopt

the proxy regulations prescribed by the N.AIC. In order to provide

additional time for this purpose, the Commission adopted Rule

12h-1 granting insurance companies a temporary exemption from

the registration requirements of Section 12(g) for the calendar year

1965, even if they do not meet the condition relating to the regulation

of proxies," As of August 15, 1965,29 states had passed the necessary

legislation. In some of the remaining states such legislation is not

believed necessary and it is pending in the others and in the District

of Columbia.

The NAJC has also undertaken a program to bring about enactment of a "model insider trading statute" in each state and the District

of Columbia which would afford investor protections comparable to

those provided in Section 16 of the Exchange Act. As of August 15,

1965, 40 states had passed such legislation and the remainder of the

states and the District of Columbia have such legislation pending.

,. Securities Exchange Act Release No. 7562 (March 26,1965),
TEITRTY-FIRST ANNUAL REPORT 9

The NAIC expects that all jurisdictions will have complied with condition (3) by July 1, 1966,the date specified in the Act.

Section 12(g) (3) specifically authorizes the Commission to exempt

foreign securities and certificates of deposit issued against such securities from the registration requirements if it finds that such action is in

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

Pursuant to this authority, the Commission has adopted Rule 12g3-1

which provides a temporary exemption from such requirements for

foreign issuers until 120 days after their first fiscal year end following

November 30, 1965.20 The adoption of Rule 12g3-1 was intended to

give the Commission time to study the problems involved in the coverage of foreign securities. During the fiscal year, the Commission and

its staff engaged in a study of these problems and, with the cooperation

of various representatives of the foreign securities industry, extensive

information relating to the various aspects of these problems has been

collected. On the basis of this study, proposed rules will be formulated which will determine the extent to which various foreign issuers

and their insiders will be subject to the disclosure requirements of the

Exchange Act. Prior to the adoption of any rules, all interested persons-including foreign issuers, groups of foreign issuers, and American broker-dealers interested in foreign securities-will have an

opportunity to present their comments.wThe Commission believes that, to the extent practicable, American

investors in foreign securities should be afforded the same protections

as American investors in domestic securities. However, the Commission recognizes the practical problems of enforcement and compliance

and of differing foreign laws. The Commission believes that it can

administer the provisions of the 1964 amendments with respect to

foreign securities in a manner that will provide the greatest practicable benefits for American investors, while at the same time not disrupting existing trading markets.

Changes inProspectus Delivery Requirements

The effect of the dealers' transaction exemption, now contained in

Section 4(3) of the Securities Act of 1933, is to require all dealers,

whether or not they participate in the initial distribution of a registered security, to deliver a prospectus for a designated period in

connection with all transactions in such security in which the mails

.. Securities Exchange Act Release No. 7427 (September 15, 1964)

... On November 16, 1965, the Commission published its rule of proposals for

comment. Securities Exchange Act Release No. 7746.

•
10 SECURITIES AND EXCHANGE COMMISSION

or facilities of interstate commerce are used, excepting only unsolicited brokers' transactions. Prospectuses must be delivered by an

underwriter continuing to act as such and by a dealer effecting transactions in securities constituting the whole or a part of an unsold

allotment to or subscription by such dealer as a participant in the

distribution so long as such underwriter or dealer is participating

in a distribution, no matter how much time has elapsed since the

commencement of the offering. In other situations, the period during

which prospectus delivery was required prior to the Securities Acts

Amendments of 1964, in the case of a security as to which a registration statement had been filed, expired 40 days after the effective date

of such registration statement or the first date upon which the security was bona fide offered to the public by or through an underwriter

after such effective date, whichever was later. In addition to renumbering the various provisions of Section 4 of the Act, the 1964 amendments made two substantive changes in the dealers' transaction

exemption. First, the 40-day period was extended to 90 days if no

securities of the issuer had previously been sold pursuant to an earlier

effective registration statement-so-called "first registered offerings."

Second, the amendments give the Commission power to shorten the

40-day or 90-day period by rule, regulation or order.

In order that dealers will be apprised more readily of their obligation to deliver a prospectus, the Commission adopted a new Rule

425A, which requires a statement on the cover of a prospectus specifying the date on which the relevant 40 or 90-day period will expire."

At the same time, the Commission also adopted Rule 1'74 which

exempts offerings of certain types of securities from the propectusdelivery requirements, establishes 40 days as the maximum period

during which dealers must deliver a prospectus if the issuer has a

class of securities listed and registered on a national securities

exchange, and provides that where securities are to be offered at

different times by one or more of several offerors, no new prospectusdelivery period will begin for dealers trading in the offering after the

first 40- or 90-day prospectus-delivery period has expired following

the initial offering of any of the registered securities for the accounts

of any of the offerors." Other suitable relaxations of the dealers'

exemption in Section 4(3) may become apparent as the Commission

and the financial community gain experience under the amended

requirements of the Securities Act. In the meantime, the rule

reserves to the Commission the power to modify the applicable period

by order upon application or on its own motion in particular cases.

21 Securities Act Release No. 4749 (December 23, 1964).

=Il1id.
THIRTY-FIRST ANNUAL REPORT 11

Enlargement of Disciplinary Authority as to Broker-Dealers

The 1964 amendments modified in important respects the provisions

of Section 15 of the Exchange Act relating to disciplinary action

against brokers and dealers and persons associated with them. For

the first time, the Commission was authorized to proceed directly

against individuals associated with broker-dealer firms and to impose

sanctions on such individuals, including suspension or bar from being

associated with a broker-dealer. The sanctions which the Commission may impose upon broker-dealers were expanded to include censure and suspension of registration for up to 12 months, and the

statutory disqualifications from being registered as a broker-dealer

or associated with a broker-dealer were expanded to include certain

additional types of injunctions, convictions and violations.

The Commission has generally not applied these new provisions

in any administrative proceeding commenced prior to August 20, 1964,

the date when the Securities Acts Amendments were enacted. Since

most of the administrative proceedings concluded during the fiscal

year were commenced prior to that date, the operation of the amendments in this area was correspondingly limited. However, as a result

of the consents of respondents in several such cases and the defaults

or consents of respondents in a number of cases commenced subsequent to such date, 25 persons were barred during the fiscal year from

association with any broker or dealer, three persons were suspended

for varying periods from such association and one person was formally censured. In addition, one broker-dealer firm was censured and

the registration of another was suspended. One proceeding was instituted only against individuals and not against their employer firm.

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

Association

Prior to the passage of the 1964 amendments, broker-dealers registered with the Commission who were not members of the National

Association of Securities Dealers, Inc. (N.A.SD), or one of the principal exchanges, were not subject to any comprehensive regulation

concerning qualifications, experience in the securities business, or fair

business practices. A major objective of the amendments, according

to the House Committee on Interstate and Foreign Commerce, was

''to insure that the Commission has the necessary authority to provide

regulation of non-member brokers and dealers comparable to that imposed by (self-regulatory) associations on their membership, including the requirement that these non-member brokers and dealers pay

fees which will compensate the Commission for this additional

regulation." 23

.. House Report No. 1418, 88th Cong., 2d Sess., p. 12.
12 SECURITIES AND EXCHANGE COMMISSION

In August 1964, the Commission, as contemplated by new subsections (8), (9),and (10) of Section 15 (b) of the Exchange Act, began

to formulate a regulatory program for those broker-dealers who are

not members of a registered securities association. The new provisions authorize the Commission to adopt rules and regulations prescribing standards of training, experience and other qualifications

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

to adopt rules and regulations governing non-member broker-dealers

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

safeguards against unreasonable profits or unreasonable rates of commissions or other charges, and in general to protect investors and

the public interest and to remove impediments to and perfect the

mechanism of a free and open market.

In February and March 1965, the Commission prepared studies of

non-NASD broker-dealers, based upon information obtained in replies

to a questionnaire sent to all such firms. On the basis of these studies,

and after conferences with securities industry representatives, the

Commission published for comment proposed Rule 15b8-1,24which

proposed to establish qualification requirements and set fees for nonNASD broker-dealers who do an over-the-counter business, and for

their principals, salesmen and other persons associated with them.

Subsequent to the end of the fiscal year, the Commission adopted

Rule 15b8-1 with revisions that took into account comments from

broker-dealers, the NASD, state securities administrators and others."

The rule includes a requirement that persons associated with nonmember broker-dealers in certain capacities successfully complete a

qualifications examination; that non-member broker-dealers file with

the Commission a personnel form for each of their associated persons

engaged in securities activities; and that they pay fees to defray the

additional costs of regulation incurred between August 20, 1964, the

date of the enactment of the 1964 amendments, and June 30, 1965.

The rule exempts from its provisions broker-dealers who are members of a national securities exchange if they do not carry customers'

accounts and if their annual gross income derived. from over-thecounter business is no more than $1,000. This exemption applies

mainly to exchange specialists and other floor members who on occasion introduce accounts to other members.

The Commission is currently drafting rules under Section 15(b)

(10) relating to broker-dealers' business conduct, and under Sections

15{b) (8) and (9) relating to a permanent fee schedule. Indrafting

.. Securities Exchange Act Release No. 7603 (May 18, 1965) .

.. Securities Exchange Act Release No. 7697 (September 7, 1965).
THIRTY-FIRST ANNUAL REPORT 13

these rules, the rules of the NASD and the principal stock exchanges

are being carefully considered.

Revision of RetaU Quotations System

One of the most significant recent developments in the regulation

of trading in the over-the-counter markets occurred during the past

year when the NASD adopted a revision of its retail quotations system.

The Special Study had recommended that the existing system of providing the public with quotations be improved to reflect more accurately the best prevailing inter-dealer bid and asked quotations. In

the 1964 amendments Congress added a new provision to the Exchange

Act (Section 15A(b) (12» which requires national securiti~s associations to promulgate rules designed to produce fair and informative

quotations.

Under the revised NASD system, which was adopted in response to

the Congressional mandate and the Study recommendations, newspaper quotations for securities on the "National List" are now published on the basis of prevailing inter-dealer quotations as of a particular time and the masthead accompanying such published quotes

states that the prices shown 'are subject to markups, markdowns or commissions in retail transactions. "Local List" securities are quoted as

before but the masthead has been revised to provide a more accurate

description of what the quotations purport to be. The NASD has

engaged an outside management consulting firm to study the effects of

the revised system and to determine the appropriateness of further

changes in this and various related areas of the over-the-counter

markets.

Summary Suspension of Over-the-Counter Trading

The 1964 amendments provide the Commission in new Section

15(c) (5) with authority to summarily suspend over-the-counter trading in any security (except an exempted security) for periods of 10

days if, in its opinion, the public interest and protection of investors

so require. Broker-dealers are prohibited from trading in any such

security during the period of suspension. This provision is a counterpart to Section 19(a) (4), which provides for summary suspension of

trading in securities listed on a national securities exchange.

During the 1965 fiscal year the Commission used this new authority

in two instances. Trading in the stock of Empire Petroleum Company was suspended for a 5-day period to permit adequate dissemination of the company's annual report which contained adverse information, so that brokers and dealers as well as investors would be apprised

of the facts before engaging in any further transactions in such stock.

Trading in Idamont Oil and Mining Co. securities was suspended

following the institution by the Commission of, court action to enjoin

violations of the Federal securities acts in the offer and sale of such
14 SECURITIES AND EXCHANGE COMMISSION

securities. The suspension was later terminated following entry of

a court order preliminarily enjoining the further offer and sale of such

securities in violation of the Securities Act registration and anti-fraud

provisions.

IMPLEMENTATION OF SPECIAL STUDY RECOMMENDATIONS

Aside from the enactment of the 1964 amendments and the implementation of that legislation as described above, further significant

progress was made during the 1965 fiscal year in the implementation

of recommendations of the Special Study Report. .

Minimum Net Capital

The Special Study recommended the adoption of a minimum net

capital requirement as one of several different approaches to assuring

a broker-dealer community of principals and firms "reasonably qualified in terms of responsibility and commitment." Its Report commented that such requirement need not and should not be a uniform

one for all firms but should be appropriately scaled to reflect the type

and size of business engaged in.

Following extensive discussions with a number of industry groups

and several statistical studies conducted by the Commission in an effort

to arrive at a meaningful and workable proposal which would carry

out the recommendation of the Special Study, the Commission adopted

amendments to Rule 15c3-1 under the Exchange Act which provide

for a minimum net capital requirement of $5,000 for firms engaged in

a general securities business and $2,500 for firms solely engaged in

transactions in shares of registered investment companies," These requirements are minimum figures and broker-dealers subject to the rule

must also comply with the requirement that their ratio of aggregate

indebtedness to net capital not exceed 2000 percent.

The Commission postponed the effectiveness of the minimum capital

provisions until December 1, 1965, in order to provide broker-dealers

with sufficient time to bring. themselves into compliance. It stated

that after the minimum net capital requirements had been in effect for

a reasonable period the adequacy of such requirements would be given

further study to determine whether it is necessary for the protection

of investors to modify such requirements and if so, to what extent.

In order to permit the Commission to exempt particular brokers or

dealers from the provisions of the rule in unusual circumstances, a

new paragraph (b) (3) provides that the Commission may, upon written application, exempt from the rule either unconditionally or on

specified terms and conditions, a broker or dealer wh~ satisfies the

Commission that because of the special nature of his 'business, his

financial position, and the safeguards he has established for the pro- - -

.. Securities Exchange Act Release No. 1611 (May 26r 1005).
THIRTY-FIRST ANNUAL REPORT 15

tection of customers' funds and securities it is not necessary in the

public interest or for the protection of investors to subject him to the

provisions of the rule. The Commission also adopted an amendment

to paragraph (b) (1) of the rule which limits the scope of the exemption previously provided by that paragraph. The amended exemptive

provision now applies only to a broker who is also licensed as an

insurance agent, whose securities business is limited to selling variable

annuity contracts as agent for the issuer, who promptly transmits all

funds and delivers all variable annuity contracts, and who does not

otherwise hold funds or securities for or owe money or securities to

customers, and only if the issuer files with the Commission a satisfactory undertaking that it assumes responsibility for all valid claims

arising out of the activities of the agent.

Supervision of Selling Practices

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

selling activities of salesmen and other employees and recommended

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

procedures to assure more effective supervision by their member firms.

In the 1964:amendments, Congress clearly recognized the importance

of proper supervision by providing in new Section 15(b) (5) (E) of

the Exchange Act that failure to supervise properly which results in

the violation of the securities acts or rules thereunder is a ground for

disqualification from broker-dealer registration or from being a person

associated with a broker-dealer.

During fiscal 1965,new rules establishing or clarifying standards of

supervision were adopted in response to the Special Study recommendations by the American, Midwest, New York, and Pacific Coast

Stock Exchanges. In addition, the New York Stock Exchange and

the N.A.SDcontinued the expansion and improvement of their existing

branch officeinspection programs. These inspection programs have as

a primary function the surveillance of supervisory procedures executed at the branch office level.

A major step taken during the past year in this area was the adoption by the NASD of new rules which incorporate required standards

of supervision by its members. These rules require the establishment

and enforcement of written supervisory procedures and designation of

a partner or officer as responsible for their execution. The internal

procedures must include periodic review of customer accounts and at

least an annual inspection of each branch office. The rule governing

discretionary accounts has also been amended to require written customer authorization and supervisory review and approval of activity

in such accounts. The NASD also adopted a revised statement for
16 SECURITIES AND EXCHANGE COMMISSION

inclusion in its Manual which enumerates many of the selling practices

which violate members' responsibility for fair dealing. To aid in the

implementation of these rules the Association has prepared and

distributed to its members a comprehensive supervision manual which

contains detailed guidelines and suggestions for effective supervisory

procedures.

Research and Investment Advice

Significant progress has been made since the publication of the Special Study Report with respect to the upgrading of standards applicable to the research and investment advice disseminated by brokerdealers and investment advisers. The major self-regulatory agencies

have amended their rules to include interpretations and statements

of policy designed to meet important deficiencies. These rules now

generally provide that recommendations must have a basis that can

be substantiated as reasonable; firms must accurately describe their

research facilities and staffs; and existing proprietary positions or

other interests must be disclosed. 'With respect to the activities of

investment advisers who are not subject to rules of a self-regulatory

body, the Commission staff has prepared a draft rule under the Investment Advisers Act incorporating similar requirements. This rule

is presently being circulated to affected industry groups for informal

comment and discussions.

Financial Responsibility

Inthe area of financial responsibility and the protection of customers'

funds and securities there have been several significant developments

since the publication of the Special Study Report. As discussed in

last year's annual report, the adoption of Rule 15c3-2 provides investors with meaningful information regarding the status and nature of

free credit balances left with broker-dealers. Several of the selfregulatory organizations have revised their rules on the hypothecation

and lending of securities to require that there be a "reasonable relationship" between the amount of each customer's securities that can

by hypothecated or lent by a member broker-dealer and the amount

of the customer's indebtedness. In addition, the NASD has revised

its Rules of Fair Practice to require the segregation and identification

of customers' free and excessmargin securities.

As a result of the Ira Haupt & Co. insolvency, the New York Stock

Exchange established a Special Trust Fund of $25 million which can

be utilized to satisfy the claims of customers in the event of the insolvency of any member organization of that Exchange. Furthermore, the NYSE and the other major exchanges have amended their

rules to provide special adjustments and "haircuts" in the computation

of members' net capital to reflect the commodities activities of their

members. In the recent amendments to Rule 15c3-1 the Commission
TIDRTY-FIRST ANNUAL REPORT 17

also provided that in computing net capital there should be deducted

from net worth an amount equal to 1% percent of the greater of customers' long or short commodities positions in each commodity.

Specialists and Floor Traders

Two of the areas which were studied in great depth by the Special

Study were the activities and responsibilities of floor traders and specialists on the exchanges. The recommendations of the Special Study

in these areas gave rise to extended discussions between members of the

staff and of the New York and American Stock Exchanges culminating in the adoption on June 2,1964, of Rule lIa-l under the Exchange

Act,27regarding floor trading, and the adoption on November 23, 1964,

of Rule lIb-12s respecting specialists. These rules were discussed at

pages 3 and 4 of the Commission's 30th Annual Report and the plans

filed by the New York and American Stock Exchanges pursuant to

Rule lIa-l were discussed at pages 13 and 14. Both exchanges have

also adopted the necessary rule changes and additions required for

compliance with Rule Ll.b-L

The "Third Markel"

The Special Study described a sharp increase in recent years in

the volume of off-board trading in common stocks traded on the New

York Stock Exchange and other national securities exchanges. To

correct the deficiency of information concerning this growing market,

which it described as the "third market," the Study recommended

establishment of a system for identification of market makers and for

reporting of trading activity. The adoption of Rule 17a-9 and related reporting forms X-17A-9(1), X-17A-9(2), and X-17A-9(3) 29

implements this recommendation by providing a system for the identification of broker-dealers making off-board markets in common stocks

traded on national securities exchanges and for the reporting of summaries of over-the-counter trading in common stocks traded on those

national securities exchanges whose annual sales volume exceeds $20

million.

Under the rule and the forms, brokers and dealers are required to

report their trading over the counter and on exchanges in common

stocks in which they are market makers, and to report certain offboard trading in common stocks traded on exchanges in which they do

not make a market. Broker-dealers who are not market makers are

also required to report certain third market transactions. It is expected that the Commission will regularly publish summaries of third

market trading, as compiled from the reports filed under the rule.

:rr Securities Exchange Act Release No. 7330 .

.. Securities Exchange Act Release No. 7465 .

... Securities Exchange Act Release No. 7474 (December 1, 1964).

791-468--6a----3
18 SECURITIES AND EXCHANGE COMMISSION

However, the reports of transactions filed by individual broker-dealers

will not be made public.

The Commission plans periodically to conduct detailed transaction

studies for the purpose of analyzing particular aspects of activities

in the off-board market. The data to be obtained from the reports

under Rule 17a~9 and from the transaction studies will enable the

Commission to evaluate the need for more detailed reporting and further regulation of this market.

Over-the-Counter Markets and NASD Organization

Reference has already been made to the very significant development in the regulation of trading in the over-the-counter markets that

occurred during the past year-the revision by the NASD of its retail

quotations system which was adopted in response to the Congressional

mandate in new Section 15A(b) (12) of the 1934 Act and the recommendations of the Special Study." As noted, the NASD has engaged

an outside management consulting firm to study the effects of the

revised system. This study is also designed to determine the possible

effects and appropriateness of the Study's recommendations regarding the prohibition of so-called "riskless" principal transactions and

requiring certain disclosures to investors of prevailing inter-dealer

quotations.

The NASD has taken further steps to improve its organizational

structure 'and internal operations in response to certain criticisms inthe

Special Study Report. For example, during the year the NASD submitted to its membership for approval proposed revisions in its

bylaws which are intended to expedite disciplinary actions and proceedings relating to employment of disqualified persons. The changes

were approved by vote of the members after the end of the year. In

addition, the Board of Governors has approved a new fee structure

which will go into effect in 1966.

Other recommendations regarding the over-the-counter market have

received attention in the past fiscal year. Rule 15c2-7 under the Exchange Act, which relates to the operation of the inter-dealer, quotation systems, was adopted during fiscal 1965. The rule, which was

proposed last year, was discussed in detail at pages 4,16 and 17 of the

Commission's 30th Annual Report. The staff has held several conferences with representatives of the NASD Trading Committee in an

effort to develop appropriate standards and/or policy statements concerning a broker-dealer's obligation to provide his customer with the

best execution and to furnish bonafide and firm price quotations. In

addition, a special committee of the NASD has had under consideration a clarification of its standards with respect to members' pricing

practices in transactions with the public .

.. Supra, p. 13.
THIRTY-FIRST ANNUAL REPORT 19

Level and Structure of Commission Rate

In connection with staff research on the level of the commission

rate, major efforts were directed to improving and expanding the income and expense reports of broker-dealer firms in cooperation with

the staff of the New York Stock Exchange. Agreement was reached

with the Exchange on a new Exchange rule that would make mandatory the filing of such reports by firms conducting a public commission business; and an understanding was reached that if studies now

underway establish the feasibility of certain reports, all New York

Stock Exchange firms may be required to report on a mandatory basis.

This building-up of an inventory of financial information for securities firms is an essential first step in the gauging of the reasonableness of the commission rate level. The Commission is also pursuing

the development of reporting forms to provide detailed financial information regarding all broker-dealers and investment advisers.

These reports would give the Commission a more complete picture of

the economics of the securities industry and are expected to assist the

Commission in the determination of many of the complex matters

which are within its responsibilities.

In the last half of the fiscal year, the Commission staff engaged in

a series of discussions with the New York Stock Exchange staff on the

commission rate structure. These initial steps were directed towards

gaining a fuller understanding of the various practices now in effect

which permit arrangements allowing for deviation from the fixed

minimum commission schedule established by the Exchange. Based

partly on the results of these discussions, the Commision staff has been

directed to develop proposals for submission to the Commision aimed

at evaluating such current practices as "give-ups," reciprocal arrangements and the provision of special services, with a view to insuring a

reasonable commission rate structure.

Odd-Lot Differential

The Commission staff has also undertaken a review of the odd-lot

differential charged by New York Stock Exchange firms. The Special

Study recommended that the Exchange, with the cooperation of the

Commission, undertake a cost study of the odd-lot business. This

study was begun by Price Waterhouse & Co. in fiscal 1964 and completed in fiscal 1965. During 1965the Commission staff: (1) met with

the Exchange Committee on odd-lots, (2) maintained a continuing

oversight of the progress of the Price Waterhouse & Co. cost study,

(3) analyzed the cost study report, and (4) began analysis of the oddlot differential in anticipation of a report from the Exchange Committee on odd-lots.

Antomation of Market Facilities

Throughout the past year the staff has met frequently with representatives of the various exchanges, the National Association of Secur-
20 SECURITIES AND EXCHANGE COMMISSION

ities Dealers, suppliers of stock market information and others, on the

subject of automation of market facilities. The purpose of these meetings has been twofold. First, they have served to keep the Commission informed of the many developments in this field. Secondly, the

meetings have enabled the Commission to make judgments on the direction in which these developments have been moving and to suggest

changes, if necessary, for the protection of the public investor.

Discussions with the exchanges have dealt with the central bookkeeping systems, automating surveillance procedures, improving quotations, a central depository for securities, automation of the clearing

operation, and the institution of procedures for automating the execution of odd-lot transactions.

Automation in the over-the-counter market has been discussed with

the National Association of Securities Dealers and broker-dealers, as

well as with vendors who hope to supply the equipment and related

services for any such program.
PART II

LEGISLATIVE ACTIVITIES

Early in the fiscal year the President signed Public Law 88-467,

the Securities Acts Amendments of 1964. This legislation, amending

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

represented the most significant statutory advance in Federal securities regulation and investor protection since 1940. A summary of the

amendments appeared in. the 30th Annual Report, at pages 8 and 9.

In March 1965, the Commission submitted to the 89th Congress a

proposed amendment to the Securities Act of 1933 to provide for an

increase in the fees paid in connection with the filing of registration

statements for securities offerings, in order to enable the Commission

to recover to a greater extent the costs of administration of the Federal securities laws. Subsequent to the end of the fiscal year, the

proposed amendment was enacted into law.

On July 23, 1964, then Acting Chairman Cohen testified before

Subcommittee No.1 on Foundations of the Select Committee to Conduct Studies and Investigations of the Problems of Small Business,

House of Representatives, concerning the relation of the Commission's

administration of the Federal securities laws to the Federal Government's supervision of tax-exempt foundations and charitable trusts.

On June 2, 1965, Chairman Cohen also appeared before the Subcommittee on Domestic Finance of the Committee on Banking and Currency, House of Representatives, and testified. with respect to H.R.

7372, a bill to amend the Bank Holding Company Act of 1956.

During the fiscal year the Commission and its staff analyzed or commented on 36 bills and other legislative matters referred to it by

various committees of the Senate and House of Representatives, by

individual members of Congress, and by the Bureau of the Budget.

21
PART m

ADMINISTRATION OF THE SECURITIES ACT OF 1933

The Securities Act of 1933 is designed to provide disclosure to

investors of material facts concerning securities publicly offered for

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

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

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

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

the issuer and the offering. The registration statement is available

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

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

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

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

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

to provide him with an opportunity to evaluate such securities and

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

statement. The Commission has no authority to control the nature

or quality of a security to be offered for public sale or to pass upon

its merits or the terms of its distribution. Its action inpermitting a

registration statement to become effective does not constitute approval

of the securities, and any representation to the contrary to a prospective purchaser is made unlawful by Section 23 of the Act.

DESCRIPTION OF THE REGISTRATION PROCESS

Registration Statement and Prospectus

Registration of any security proposed to be publicly offered may

be effected by filing with the Commission a registration statement on

the applicable form containing the prescribed disclosure. Generally

speaking, a registration statement relating to securities issued by.a

corporation or other private issuer must contain the information

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

securities issued by a foreign government must include the information specified in Schedule B. These schedules specify in considerable

detail the items of information which must be disclosed in order to

permit prospective investors to make a realistic appraisal of the issuer

22
THIRTY-FIRST ANNUAL REPORT 23

and the securities being offered. 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 minimizing 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; pending or threatened

legal procedings; and the purposes to which the proceeds of the

offering are to be applied, and must include financial statements

certified by independent accountants. The registration statement of

a foreign government must contain comparable information in regard

to the underwriting and distribution of the securities being registered,

the natural and industrial resources of the country, its revenues, obligations and expenses, a description of the securities being registered,

and similar matters. The prospectus constitutes a part of the registration statement and presents the more important of the required

disclosures.

Examination Procedure

Registration statements are examined for compliance with the

standards of adequate and accurate disclosure by the Commission's

staff. This examination is primarily the responsibility of the Division

of Corporation Finance; however, as a result of a reallocation of

functions during the fiscal year,' statements filed by investment companies registered under the Investment Company Act of 1940 are now

examined by the Division of Corporate Regulation. If it appears that

a statement does not conform in material respects with the applicable

requirements, the registrant is usually notified by an informal letter

of comment and is afforded an opportunity to file correcting or clarifying amendments. In addition, the Commission has the power, after

notice and opportunity for hearing, to issue an order suspending the

effectiveness of a registration statement if it finds that material repre1See Securities Act Release No. 4731 (November 10, 1964).
24 SECURITIES AND EXCHANGE COMMISSION

sentations are misleading, inaccurate or incomplete. In certain instances, such as where the deficiencies in a registration statement

appear to stem :from careless disregard o:f applicable requirements

or :from a deliberate attempt to conceal or mislead, the letter of comment procedure is not used and the Commission either institutes an

investigation to determine whether "stop-order" proceedings should

be instituted or immediately institutes such proceedings. Information

regarding the exercise of the "stop-order" power during fiscal year

1965 appears below under the heading "Stop-Order Proceedings."

Time Required to Complete Registration

The Commission's staff endeavors to complete its examination of

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

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

amendments, they usually do not become effective until some time

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

effective date is intended to afford investors an opportunity to become

familiar with the proposed offering through the dissemination of the

preliminary form of prospectus. The Commission is empowered to

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, and 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 :fromthe date of

original filing to the effective date with respect to the 1,097registration

statements that became effective during the 1965 fiscal year 2 was 36,

the identical figure as in the previous year when only 960 registration

statements became effective. The corresponding figure for fiscal year

1963 was 52 days for 985 registration statements. The number of

registration statements filed during fiscal year 1965 was 1,376, as compared with 1,192 and 1,159, respectively, in the 2 preceding years,"

The following table shows by months during the 1965 fiscal year the

number of calendar days elapsed during each of the three principal

This figure excludes 169 registration statements filed by investment companies pursuant to the provisions of Section 24(e) of the Investment Company

Act of 1940. The median elapsed time with respect to these statements was 16

calendar days.

These figures include 167, 153 and 174 registration statements filed by investment companies pursuant 00 Section 24(e) of the Investment Company Act of

1940 for fiscal years 1965, 1964 and 1963, respectively.

•

•
THIRTY-FIRST ANNUAL REPORT 25

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

effective.

Time in registration under the Securities Act of 1933 by months during the fiscal

year ended June 30, 1965

NUMBER OF CALENDAR DAYS

From date of From date of From amend- Totalnum- Number of

original fil- letter of com- ment after ber of days registraMonths ing to date of ment to date letter to et- in regtstra- tion statestaff's letter of filing fective date tion ments effecof comment amendment of registra- tlve »

thereafter twn

July 1964________________________ AUgust. 17 13 6 36 91 _________________________ 17 18 7 42 64 september ______________________ 16 14 7 37 77 October _________________________ 21 13 7 41 76 November _______________________ 24 17 8 49 67 December _______________________ 22 11 6 39 86 January 1965____________________ 17 14 6 37 71 February _. ______________________ March 20 11 7 38 64 __________________________ 15 11 6 32 107 April; ___________________________ May 16 11 5 32 158 ____________________________ 17 10 5 32 128 June ____________________________ 18 12 6 36 108

Fiscal 1965 for median

effective registration statement _______________ 18 12 6 36 1,097

see footnote 2 to text, suor«.

VOLUME OF SECURITIES REGISTERED

A total of 1,266 statements registering securities in the amount of

$19.4 billion became effective under the Securities Act of 1933 during

the fiscal year 1965. This was an increase of 13 percent in the number

of statements, and an increase of 15 percent in the dollar amount of

securities registered over the preceding fiscal year. The chart all

page 26, shows the number and dollar amounts of registrations from

1935 to 1965.

The figures for 1965 cover 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 1965, 75 percent was for the account of issuers for cash sale, 10

percent for the account of issuers for other than cash sale, and nearly

15 percent for the account of others, as shown below.

Accounts for which securities were registered under the Securities Act of 1933

during the fiscal year 1965 compared with the /l8Ml years 1964 and 1963

1965 In Percent 1964 In Percent 1963 In Percent millions of tots! millions of total milhons of total

--- --- --- --- --- Registered for account of issuers for cash sale _____________________________________ $14,656 75.4 $14,784 87.7 $11,869 80.2 Registered for account of issuers for other than cash sale ___________________________ 1,990 10.2 612 36 1,782 12.1 Registered for account of others than the issuers __________________________________ 2,791 14.4 1,464 8.7 1,139 7.7

Tots!, --- --- 19,437 100.0 16,860 100.0 14,700 100.0

•

_______________________________ ---
26 SECURITIES AND EXCHANGE COMMISSION

SECURITIES EFFECTIVELY REGISTERED WITH S.E.C.

Dollars Boillono 1935 1965

20

16

12

8

4

15

10

5

o

I

DOLLAR VOLUME

1935 40 45 50

(FIscal Years)

55 60 65

05-4566

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

issuers, $14.7 billion, was about the same as in the preceding :fiscalyear.

Registration of new common stock issues aggregated $10.6 billion, $632

million more than in the 1964 fiscal period, largely reflecting increased

registrations of investment company issues which totaled a record $6.4

billion. Registration of new bonds, notes and debentures declined

19 percent from the previous year and accounted for $3.7 billion of the

1965 volume. Preferred stock issues registered for the account of

issuers amounted to $307 million, an increase of 37 percent. Appendix

Table 1 shows the number of statements which became effective and

total amounts registered for each of the fiscal years 1935 through 1965,

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 1965 is given in Appendix Table 2.

Corporate issues to be offered immediately after effective registration amounted to $5.3 billion, a decrease of $1.2 billion from the previous year. Of the total, electric, gas and water companies registered

-
THIRTY-FIRST ANNUAL REPORT 27

$1.'7billion of new issues, which was less than in 1964and 1963. Issues

of communication companies amounted to $720million, a sharp decline

from $2.2 billion of securities registered in the previous year which

included the $1.2billion A.T. & T. issue and the $200million Communications Satellite offering. Manufacturing company issues totaled $1.5

billion, the largest amount since the 1962 fiscal period. Among the

other industry groups, registration of financial and real estate issues

declined slightly to $922 million while issues classified in the "commercial and other" group were somewhat larger in amount than in

1964. Registrations of foreign government issues were almost three

times larger than in the previous year, amounting to $303 million.

The following table gives the distribution by industry of issues

registered for the account of issuers to !be offered for cash sale during

the last 3 fiscal years:

1

2

1

1

6

6

7

4

o

1965 in Percent of -1964 in Percent of 1963 in Percent 0

millions total millions total millions total - -

Issues offered for immediate sale:

Corporate.

=~~f~~~================== ===:::

$1,451 ;~9.9 $923 6.2 $844 7. 141 1.0 113 .8 141 1. Electric, gas and water ________________ 1,719 11.7 2,103 14. 2 2,266 19. Transportation, other than rsrlroad ___ 145 1.0 121 .8 16 Communication ______________________ 719 4.9 2,156 14. 6 1,135 9. Financial and real estate ______________ Trade ________________________________ 922 6.3 1,010 6.8 541 4.

Service _______________________________ 162 1.1 33 .2 88 66 0.4 41 .3 02 Construction and IDlSC ________________ 22 0.2 14 .1 3

42:9 Total. ______________________________ 5,347 36.5 6,515 44.1 5,086

Foreign government ____________________--- --- --- --- --- 303 2.1 118 .8 266 2.2

--- --- --- --- --- Total for immediate sale ____________ 5,650 38.6 6,633 44.9 0,352 45.1

--- --- --- --- --- Issues offered over an extended period ____ 9,006 61.4 8,151 55.1 6,516 54.9

--- --- --- --- --- Total for cash sale for account of issuer

14, 656 100.0 14, 784 100.-0 11,869 100.0

Registration of issues to be offered over an extended period

amounted to $9.0 billion compared with $8.2 billion in 1964, an

increase of 10.5 percent. These issues are classified below :

1965 In 1964 In 1963 In

millions m1llIons m1llIons

----------------'-----1--- ------ Investment company Issues:

M::~:::~=d'~~d-_-:====:==:==:::===::::=========:============:: $4, 9~ $3,~~ $3,5:rJ Unit Investment trust________________________________________________ 1,131 851 1,055

Face-amount certlficates______________________________________________ 200 170 96

--------- Total Investment companies________________________________________ 6,355 0,020 4, 720

Employee saving fclan certificates 2.,~1_0_c_________ 797 687 667

Securities for emp oyees stock option plans________________________________ 1,584 1,470 990 Other, including stock for warrants and options ,._____________ 270 968 139

.... JJ:'!

Of the $5.3 billion expected from t~crtimmediate cash sale of corporate securities for the account of issuers in 1965, 83 percent was

-

~

•____________________________

===
28 SECURITIES AND EXCHANGE COMMISSION

designated for new money purposes, including plant, equipment and

working capital, 3 percent for retirement of securities, 'and 14 percent

for all other purposes including purchases of securities. As compared

with the 1964 fiscal period, funds for new money purposes and retirement of securities declined slightly while funds for other purposes

showed a moderate rise.

REGISTRATION STATEMENTS FILED

During the 1965 fiscal year, 1,376 registration statements were .filed

for offerings of securities aggregating $19.1 billion, as compared with

1,192 registration statements .filed during the 1964 fiscal year for

offerings amounting to $18.6 billion. This represents an increase of

15.4 percent in the number of statements .filed and 3 percent in the

dollar amount involved. Filings by companies that had not previously .filed registration statements totaled 458, representing 33 percent

of the total. Corresponding figures for the 1964-and 1963 fiscal years

were 322, or 27 percent, and 357, or 31 percent, respectively.

Since the effective date of the Securities Act and through June 30,

1965, a total of 25,422 registration statements has been .filed by 11,643

different issuers covering proposed offerings of securities aggregating

over $277 billion. Particulars regarding the disposition of these

statements are summarized in the following table

Number and disposition Of registration statements fiZed

Prior to July 1,1964 Total

July 1,1964 to June 30, June 30, 1965

1965

ReJdgtratlon statements: FIIed ____________________________ . ______ 24,046 -1,376 25,422

D~re::;:{net) ___________•_____•__________________________ 20,805 bl,263 22, 055 Under stop or refusal order _________________________ Wlthdrawn _______________________________________________ 225 4 229 2,738 82 2,820 Pending at June 30, 1964__________________________________ 278 ...._-- ....... ...... Pending at June 30,1965 -----------318 --------_ ......... ...

Total ___________________________________________________24, 046 ------_ .. ......_-- 25,422

Aggregate As dollar amount: filed (In billions) _______________________________________ $258.7 $19.1 $277.8

As effective (in hllllons)-_-_----------------_-----_-------- 247.6 19.4 267.0

Includes 167registration statements covering proposed offerings totaling $5,617,389,958filed b:y invest- ment companies under Section 24(e)(1) ofthe Investment Company Act of 1940which permits reglstration by amendment to a previously effective registration statement. b Excludes 3 registration statements that became effective during the year but were subsequently withdrawn; these statements are included in the 82statements withdrawn during the year . Excludes J registration statement that became effective prior to July I, 1964,which was placed under

stop order during the year, and 12registration stetementa effective prior to July I, 1964,which were with.

drawn during the year; these statements are_Tellectedunder stop orders and withdrawn,respectively.

During the 1965 fiscal year, 82 registration statements were withdrawn. The reasons assigned by the various registrants for requesting withdrawal are shown inthe following table:

=

•___________________

• ____• •

_ - __________________________________ - -------------

-

•

•
THIRTY-FIRST ANNUAL REPORT 29

Number of Percent of

Reason for withdrawal request statements total

withdrawn withdrawn

1. Withdrawal requested after receipt of letter of comment

2. Registrant was advised that stop-order proceedings would be instituted Ifstate- ment not WIthdrawn

3. After stop-order proceedlngs

4. Change In financing plans 5. Change Inmarket conditions

6. Flnanciug obtained elsewhere

7. Registrant unable to negotiate acceptable agreement with underwriter 8. Filing to be made on proper form

9. New reglstratlon statement to be filed

TotaL

8

2

1

57

8

1

1

2

2

82

10

2

1

71

10

1

1

2

2

100

STOP ORDER PROCEEDINGS

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

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

whether a stop order suspending the effectiveness of the registration

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

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

the registration statement has been amended to cure the deficiencies

and the Commission has lifted the stop order.

At the beginning of the 1965 fiscal year, four stop order proceedings

were pending. Three additional proceedings were instituted during

the year, six were terminated (four through issuance of stop orders,'

one through dismissal, subject to distribution of the Commission's

opinion," and one through withdrawal of the registration statement

pursuant to an offer of settlement 6), and one was pending at the end of

the year. For the first time, stop orders were issued pursuant to delegated 'authority (by the Director of the Officeof Opinions and Review)

in those instances where the registrants concerned consented to the

issuance of such orders,"

Clinton Engines Corporation, Securities Act Release No. 4724 (September 28,

1964), discussed at p. 32, infra; White Caps Gola Mining Company, Securities

Act Release No. 4774 (March 29,1964) ; Oetron. Electronics Corporation, Securities Act Release No. 4780 (May 11, 1965) ; Hercules Mines Company of Nevaaa,

Securities Act Release No. 4787 (June 28, 1965).

Franchara Corporation (formerly Glickman Corporation), Securities Act Release No. 4710 (July 31,1964), discussed at pp. 30-32, infra.

e Shasta Minerals cE Chemical Company, Securities Act Release No. 4741 (November 24, 1964).

White Caps Gola Mining Company, Oetron. Electronics Corporation, and Hercules Mines Company of Nevada, all supra.

_

• _ •__

__• _

_

_

•

_

_

_

• _

•

•

•
30 SECURITIES AND.J._ EXCHANGE. COMMISSION 1.1..

Franchard Corporation (formerly Glickman Oorporation) 8_

These proceedings raised issues as to the adequacy of three registration

statements (all of which had become effective) filed by a large cash flow

real estate company and of a series of post-effective amendments to

one of those statements. The Commission found the registration statements materially false and misleading because of their failure to disclose that large sums had been transferred from registrant to its

controlling stockholder and chief executive officer for use in his own

business ventures and that such controlling person had pledged his

holdings in registrant as collateral for high-interest loans from unconventional sources, which loans had placed him in a strained financial

position, had created a likelihood of a shift in control, and had also

given rise to potential conflicts between his interests and those of the

other shareholders. In its discussion of these matters the Commission

pointed out that all of registrant's public offerings had been predicated

on its controlling person's reputed expertise as an investor in and manager of real property. Although the diversion of registrant's funds

was known only to the controlling person and one subordinate, the

Commission held that regar.dless of the diligence which may have been

exercised in the preparation of a registration statement, such statement was materially false and misleading whenever it failed-for

whatever reason-to meet the statutory standard of disclosure.

In holding that the controlling person's pledges should have been

disclosed, the Commission rejected registrant's contentions that such

disclosure would have been an unwarranted intrusion into his personal

affairs and was in any event not called for by the registration forms

under the Securities Act. The Commission pointed out that an insider

of a corporation that is asking the public for funds cannot keep private

those of his personal affairs that impinge significantly on the affairs

of the company. The Commission disposed of the second contention by

observing that its registration forms are not exhaustive enumerations

of every item that might possibly be material in the special circumstances of a particular offering and by pointing out that Rule 408

under the Securities Act requires the disclosure of all material information that may be necessary to keep the required statements from

being misleading.

As to one important issue, however, the Commission agreed with the

registrant and rejected the staff's charges. The staff contended that

registrant's filings should have disclosed that its directors had failed

to exercise the necessary diligence with respect to the day-to-day operations of the company. While noting that it had required disclosure

concerning directors' performance where there was a virtual abdication of responsibility or where affirmative representations had been

• Securities Act Release No. 4710 (July 31, 1964).
THIRTY-FIRST ANNUAL REPORT 31

made regarding such performance, the Commission held that, in view

of the diverse and uncertain standards applicable, "to generally require information in Securities Act prospectuses as to whether directors have performed their duties in accordance with the standards of

responsibility required of them under state law would stretch disclosure beyond the limitations contemplated by the statutory scheme and

necessitated by considerations of administrative practicality." 9

The Commission considered the deficiencies in registrant's effective

filings extremely serious, but did not issue a stop order. In its view

the distribution of copies of its opinion to all of registrant's past and

present stockholders, as registrant proposed, was sufficient under the

circumstances to give adequate public notice of the deficiencies in the

filings. Among the factors that led the Commission to this conclusion

were the departure of the wrongdoing chief executive, the transfer of

his controlling shares to a management that had made a substantial

investment in registrant's securities, had made voluntary remedial disclosures to the Commission's staff and to registrant's stockholders, and

had filed post-effective amendments which represented a bona fide

effort to remedy the deficiencies in the effective filings, and the unusually extensive publicity that had already been given to such deficiencies.

The Commission refused however to declare the post-effective

amendments effective. It found some of those amendments deficient

because of their failure to state clearly that registrant's cash distributions to its stockholders would exceed the cash derived from its operations, and it found all of them deficient because of the absence of a

lucid disclosure of the complex of risk elements peculiar to cash flow

real estate securities. Among the risk elements that were in the Commission's view inadequately presented were: (1) the adverse leverage

effect of the high ratio of debt to equity capital characteristic of cash

flow real estate companies; (2) the ambiguity of the phrase "cash

derived from operations," which should, the Commission held, be precisely defined so as to make it clear whether extraordinary non-recurring receipts were or were not included therein; and (3) the limited

duration of the tax advantages derived from the cash flow system and

their eventual transformation into tax disadvantages. The format of

Ina decision rendered subsequent to the end of the fiscal year (lmperw,l Financial Services, Inc., Securities Exchange Act Release No. 7684 (August 26,1965»,

the Commission noted that while its decision in f.ranchard had rejected a standard of requiring on a routine basis in prospectuses an evaluation of directors' performances, it had recognized that there were 'areas where disclosure might be

necessary as to acttvttles of directors which do not comply with applicable

standards. The Commission went on to hold that the prospectuses of an investment company which failed to disclose that unaffiliated directors were not informed of material transactions were matertally misleading.

•
32 SECURITIES AND EXCHANGE COMMISSION

the post-effective amendments was also found objectionable. The

Commission pointed out that each non-effective post-effective amendment consisted of a prospectus that had been rendered obsolete by lapse

of time and by numerous material changes in registrant's affairs, and

of a lengthy supplement thereto, concluded that this "obscure and

uncoordinated presentation" was inadequate and misleading, and held

that a thorough-going revision that would "give investors the clear,

comprehensive picture of the registrant's business and affairs contemplated by the Securities Act" was necessary.

Clinton Engines Corporation lO-Here a registration statement

that had become effective in 1960 was found seriously deficient because:

(1) The unaudited financial material therein was materially deceptive

by reason of a substantial inventory overstatement which led to

material overstatements of earnings and assets, distorted the historical

operating record, and "had the effect of presenting the financially

straitened registrant in a wholly illusory picture of incipient prosperity"; (2) the discussion of the causes of registrant's low profit

margins concealed significant adverse factors; and (3) a suggestion

that significant improvements in efficiency could be effected by a program to be financed out of the registrant's future earnings was highly

misleading since the prospectus failed to point out that such improvements would have required a massive program of capital investment

that had not even been formulated and could not be financed without

the sale of long-term debt or equity securities as to the successful

flotation of which there was no assurance. The Commission concluded

that deficiencies of such seriousness required the issuance of a stop

order. Registrant's assertion that the issuance of a stop order would

have an adverse effect on it was held insufficient in view of the fact that

registrant had never taken adequate steps to bring the deficiencies in

its registration statement to the attention of investors and of the demonstrated effectiveness of stop orders in achieving that result.

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 B(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

10 Securities .Act Release No. 4724 (September 28, 1964).
THIRTY-FIRST ANNUAL REPORT 33

omits to state any material fact. The following tabulation indicates

the number of such examinations and investigations with which the

Commission was concerned during the year:

Pending at beginning of fiscal year

Initiated during fiscal year

Closed during fiscal year

Pending at close of fiscal year

32

18 50

13

37

EXEMPTION FROM 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 thus be exempted.

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

Rule 234: Exemption of first lien notes.

Rule 235: Exemption of securities of cooperative housing corporations.

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

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

$300,000.

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

up to $100,000.

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

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

Under Section 3( c) of the Securities Act, which was added by Section

307(a) of the Small Business Investment Act of 1958, the Commission

is authorized to adopt rules and regulations exempting securities issued

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

business investment company under the Small Business Investment

Act. Acting pursuant to this authority, the Commission adopted

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

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

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

prohibiting fraudulent conduct in the offer or sale of securities and

imposing civil liability or criminal responsibility for such conduct.

Exempt Offerings Under Regulation A

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

791-46&-.65---4

_

_

_

_
34 SECURITIES AND EXCHANGE COMMISSION

from a public offering of its securities without registration, provided

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

supplying basic information about the company with the Regional

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

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

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

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

During the 1965 fiscal year, 397 notifications were filed under

Regulation A, covering proposed offerings of $77,367,235,compared

with 462 notifications covering proposed offerings of $89,317,615 in

the 1964 fiscal year. Included in the 1965 total were 29 notifications

covering stock offerings of $3,298,877by companies engaged in the exploratory oil and gas business, 12 notifications covering offerings of

$2,732,760 by mining companies and 14 notifications covering offerings

of $3,102,095 by companies featuring new inventions, products or

processes.

The following table sets forth various features of the Regulation A

offerings during the past 3 fiscal years:

Offerings under Regulation A.

Fiscal year

1965 1964 1963

Size:$100,000 or less 98 126 143 Over $100,000 but not over $200,000 101 96 104 Over $200,000 but not over $300,000 198 240 270

--- 397 462 517

Underwriters: Used 68 72 108 Not used -_ 329 390 409

--- --- Ofierors: Issuing companies 371 418 476 Stockholders 19 39 34 Issuers and stockholders jointly 7 5 7

Reports of Sales

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

month period following the date of the original offering circular

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

issuer or other person for whose account the securities are offered

shall file a report containing specified information and that a final

report shall be made upon completion or termination of the offering.

During the fiscal year 1965,795Reports of Sales were filed reporting

an aggregate amount of sales of $45,554,313. ...

Suspension of Exemption

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

--- ---

_____________________________________________________

____________________________________

____________________________________

--- ---

--- --- =

________________________________________________________- ____--

-

___

_________________________________________________ _________

--- _____________________________• ______________________ __________________________________________________________

_______________________________________
TffiRTY-FIRST ANNUAL REPORT 35

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 1965fiscal year, temporary suspension orders were issued

in 23 cases, which, added to the 19 cases pending at the beginning of

the fiscal year, resulted in a total of 42 cases for disposition. Of these,

the temporary suspension order was vacated in 3 cases and became

permanent in 32: in 14 by lapse of time, in 12 by withdrawal of the

request for hearing, and in 6 after hearing. Thus, there were 7 cases

pending at the end of the fiscal year.

Three of the cases disposed of during the year are summarized below

to illustrate the type of misrepresentations and other noncompliance

with the regulation which led to the issuance of suspension orders:

Isthmus Steamship & Salvage Co., IncP-The issuer was organized in 1956, for the stated purposes of salvaging cargoes of sunken

ships and engaging in the general steamship business. After filing a

notification under Regulation A, the issuer in February 1958 commenced a public offering of 150,000shares at $2 per share. The efforts

of three broker-dealers to sell the offering having been largely unsuccessful, Robert Edelstein was designated sole underwriter on a "bestefforts" basis in May 1959. On August 7, 1959,issuer filed a report of

sales on Form 2-A stating that 148,088shares had been sold and that

the offering had been terminated as to the unsold shares.

In consolidated Regulation A and broker-dealer proceedings, the

Commission found that the offering circular used by the issuer was

materially misleading in regard to the value of salvage rights which it

stated the issuer owned in the sunken ship 8.8. Bayard which had gone

down off the Louisiana coast in 1942. The circular stated that the ship

carried "copper wire, copper tubing, slab zinc, nickel, sheet brass and

other salvageable materials" having an estimated "maximum delivered

market value ... in excess of $2 million." However, a certified copy

of a 43-page manifest, filed in the New Orleans officeof the Bureau of

Customs the day before the ship had sunk, showed that the Bayard

cargo consisted primarily of perishable goods and not the valuable

and salvageable goods referred to in the offering circular.

The Commission stated in its Opinion that "while the truth of the

statements contained in [the manifest] is not established by the fact

U Securities Act Release No. 4716, Securities Exchange Act Release No. 7400

(August 20, 1964).
36 SECURITIES AND EXCHANGE COMMISSION

that it was so filed, its very existence casts serious doubt upon the

affirmative representations contained in the offering circular" and

"this apparent conflict clearly should have 'been disclosed to prospective investors.... "

The Commission permanently suspended the issuer's exemption

and revoked the broker-dealer registration of Edelstein's successor

firm, finding among other things that Edelstein as underwriter failed

to exercise reasonable care to satisfy himself as to the accuracy of the

offering circular and made false and misleading statements in the sale

of issuer's securities.

Marion Oil Company, Inc.12-The issuer, a Pennsylvania corporation, was organized in February 1963, to engage in the business of

prospecting for, producing and selling petroleum and natural gas.

Issuer filed a notification with the Commission on March 12, 1964,

with respect to a proposed public offering under Regulation A of'

100,000shares of its Class B non-voting stock at $3 per share.

On May 11, 1964, the exemption was temporarily suspended. On

the basis of the record established at a hearing requested by the

issuer, the Commission permanently suspended the exemption. It

found that the issuer's offering circular was materially misleading in

that it did not disclose the existence of a predecessor of the issuer

of which the issuer's general manager and secretary had been president and secretary-treasurer, respectively, nor that such predecessor

had undertaken production of oil on the same tract to be developed

by Marion and had lost the lease to the tract through foreclosure

because of a lack of operating funds. The offering circular was further deficient in failing to disclose the production history of the tract

and unfavorable production information as to bordering properties

which it characterized as "oil producing property."

The Commission also found that the offering circular was materially

misleading in not adequately disclosing the immediate dilution of a

purchaser's investment from $3 per share to .45 cents per share if all

the securities were sold. Issuer also failed to meet the requirements

of Regulation A in not escrowing certain insider shares pursuant to

Rule 253(c), and consequently the filing involved an offering in

excess of the $300,000 limitation on Regulation A offerings.

Capitol Leasing Corporation IS_An affiliate of the issuer, .American Trailer Rental Company (ATR), had managed and rented a

fleet of automobile-type utility trailers which it obtained through

sale-leaseback arrangements. Some of the trailer owners were entitled to receive monthly a percentage of the cost of the trailer and

others a percentage of the amount realized through the use of the

12 Securities Act Release No. 4777 (April 21, 1965).

13 Securities Act Release No. 4714 (August 18, 1964).
THIRTY-FIRST ANNUAL REPORT 37

trailer. .A.TR had sustained 3 years of substantial losses and was

delinquent in its payments to trailer owners. .A.TR's directors realized

that the company's financial position probably would deter trailer

owners from exchanging their interests for an equity position in .A.TR,

and therefore decided to form the issuer, which would acquire

$300,000 of trailers in exchange for its shares and would then make

an additional public offering of $6 million for the purpose of purchasing trailers, including those owned by .A.TR. When this plan was

not successful, issuer offered its stock under Regulation A, primarily

to .A.TR trailer owners, at $2 per share, or alternatively for trailers

at an exchange rate based on the retail cost of the trailers.

The Commission found that the issuer's offering circular was

materially misleading in that it failed to disclose that the issuer was

formed, and the proposed offering was designed, for the purpose of

effecting a program of financial relief for ATR; that the offering

was primarily being made to ATR trailer owners; that persons to

whom the offer was made were merely being given an opportunity to

exchange their rights under the .A.TRcontracts for an equity interest

in substantially the same enterprise; that ATR had never operated at

a profit; that the subject offering was one step in a larger financing

plan involving a much larger public offering; and that efficers and

directors of the issuer were also creditors and stockholders of ATR.

The Commission permanently suspended the exemption, rejecting the

issuer's argument that the proceedings should be dismissed because

it had not been given an opportunity to correct the deficiencies in the

offering circular.

Exempt Offerings Under Regulation B

During the fiscal year ended June 30, 1965, 173 offering sheets and

203 amendments thereto were filed pursuant to Regulation Band

were examined by the Oil and Gas Section of the Commission's Division of Corporation Finance. During the 1964 and 1963 fiscal years,

242 and 231 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 1963-65. The

balance of the offering sheets filed became effective without order.

Action taken on offering sheets filed, under Regulation B

Fiscal years

1965 1964 1963

Temporary suspension orders (under Rule 340(a» Orders terminating proceeding after amendment.

Orders consenting to withdrawal of offering sheet and terminating proceedIng----- ------ --- ------- ----------- -- ---- --- --- ------- ------ -- -- -- ---- --- Orders fixing effective date of amendment (no proceeding pending)

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

Total number of orders

13 18 25

7 8 13

2 3 4

128 187 153

5 15 12

--- ------ 155 231 207

_

_

_

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38 SECURITIES AND EXCHANGE COMMISSION

Reports of sales.-The Commission requires persons who make offerings under Regulation B to file reports of the actual sales made

pursuant to that regulation. The purpose of these reports is to aid

the Commission in determining whether violations of law have occurred in the marketing of such securities. The following table shows

the number of sales reports filed under Regulation B during the past

3 fiscal years and the aggregate dollar amount of sales during each

of such fiscal years.

Reports of sales 'Under Reg'Ulation B

1965 1964 1963

Number of sales reports tIled________________________________________2,015 2,658 2,747 Aggregate dollar amount of sales reported ___________________________ $1,603,144 $2,247,259 $2,866,652

Exempt Offerings Under Regulation E

Regulation E provides a conditional exemption from registration

under the Securities Act for securities of small business investment

companies which are licensed under the Small Business Investment

Act of 1958 or which have received the preliminary approval of the

Small Business Administration and have been notified by the Administration that they may submit an application for such a license. As

has been noted, the terms and conditions of the exemption are substantially similar to those provided by Regulation A. Two notifications were filed under Regulation E during the 1965 fiscal year. One

was subsequently withdrawn and the other was pending at the close

of the year.

Exempt Offerings Under Regulation F

Regulation F provides an exemption for assessments levied upon

assessable stock and for delinquent assessment sales in amounts not

exceeding $300,000 in anyone year. Itrequires the filing of a simple

notification giving brief information with respect to the issuer, its

management, principal security holders, recent and proposed assessments and other security issues. The regulation requires a company

to send to its stockholders, or otherwise publish, a statement of the

purposes for which the proceeds of the assessment are proposed to be

used. Copies of any other sales literature used in connection with the

assessment must be filed. Like Regulation A, Regulation F provides

for the suspension of an exemption thereunder where the regulation

provides no exemption or where the offering is not made in accordance

with the terms and conditions of the regulation or in accordance with

prescribed disclosure standards.

During the 1965 fiscal year, 19 notifications were filed under Regulation F, covering assessments of $789,508. Underwriters were not

employed in any of the Regulation F assessments. No Regulation F

filings were suspended during the .fiscalyear.
TEURTY-FIRST~UAL REPORT 39

REVISION OF RULES, REGULATIONS AND FORMS

Inaddition to the matters discussed below, two new rules (174 and

425A) were adopted during the fiscal year in implementation of the

1964 amendments to Section 4 of the Securities Act. The substance

of these rules is discussed in Part I of this Report.

Proposed Amendment of Rule 485

During the fiscal year, the Commission invited comments on certain

proposed amendments to Rule 485.14 This rule sets forth the procedure

to be followed by a registrant in applying to the Commission for confidential treatment of a material contract or a portion of such a contract. The proposed amendments would have required that the

registration statement indicate that the contract or a portion thereof

has been omitted and filed separately with the Commission. A further

amendment would have required applications pursuant to the rule to

state whether or not the applicant would be willing to permit the disclosure of the contract or portion thereof to other agencies of the

Federal Government.

Subsequent to the end of the fiscal year, the Commission, after further consideration of the matter in the light of the comments and

suggestions received, determined not to adopt the proposed

amendments and accordingly withdrew them.>

Amendments to Forms S-l, S-8 and 8-11

The amendments to the above forms adopted during the fiscal year

are discussed at pp. 75-76, infra, in connection with the discussion of

related amendments of Rules 10b-6 and 16b-3 under the Securities

Exchange Act of 1934.

.. Securities Act Release No.4 788 (June 30, 1965).

.. Securities Act Release No. 4801 (September 13, 1965).
PART IV

ADMINISTRATION OF THE SECURITIES EXCHANGE ACT

OF 1934

The Securities Exchange Act of 1934, as amended by the Securities

Acts Amendments of 1964,provides for the registration and regulation

of securities exchanges, the registration of securities listed on such

exchanges and, under new Section 12(g), the registration of securities

traded over the counter where the issuers of such securities have total

assets in excess of $1 million and the securities constitute a class of

equity securities held of record by at least 750 persons (after July 1,

1966, the number will be reduced to 500). It establishes, for issuers

of securities registered under the Act, financial and other reporting

requirements and regulation of proxy solicitations and, for directors,

officers and principal security holders of such issuers, reporting requirements and restrictions on trading in the securities of their companies. The Act also provides for the registration and regulation of

national securities associations and of brokers and dealers doing business in the over-the-counter markets, contains provisions designed to

prevent fraudulent, deceptive and manipulative acts and practices on

the exchanges and in the over-the-counter markets and authorizes the

Board of Governors of the Federal Reserve System to regulate the use

of credit in securities transactions. The principal purpose of the various statutory provisions is to ensure the maintenance of fair and

honest markets in securities transactions on the organized exchanges

and in the over-the-counter markets.

REGULA nON OF EXCHANGES AND EXCHANGE; TRADING

Registration and Exemption of Exchanges

As of June 30, 1965, 14 stock exchanges were registered under

the Exchange Act as national securities exchanges:

Pacific Coast Srock Exchange

Philadelphia-Baltimore- Washington

Stock Exchange

Pittsburgh Stock Exchange

Salt Lake Stock Exchange

San Francisco Mining Exchange

Spokane Stock Exchange

American Stock Exchange

Boston Stock Exchange

Chicago Board of Trade

Cincinnati Stock Exchange

Detroit Stock Exchange

Midwest Stock Exchange

National Stock Exchange

New York Stock Exchange

Three exchanges were exempted from

mission pursuant to Section 5 of the Act:

40

registration by the Com-
THIRTY-FIRST ANNUAL REPORT 41

Colorado Springs Stock Exchange

Honolulu Stock Exchange

Richmond Stock Exchange

The Wheeling Stock Exchange ceased activity and its exemption

from registration as a national securities exchange was terminated

effectiveApril 30, 1965.

Commission Inspections of the Exchanges

One of the Commission's primary roles under the regulatory scheme

of the Exchange Act is the oversight of the national securities exchanges in the performance of their self-regulatory activities. To

facilitate this oversight the Office of Regulation in the Division of

Trading and Markets conducts regular and periodic inspections of

various phases of exchange activity. During the past year, 11 such

inspections were made of the New York and American Stock Exchanges and general inspections were conducted of the Cincinnati,

Detroit, Honolulu, Pacific Coast and Salt Lake Exchanges. These

periodic inspections enable the Commission to insure that the exchanges are complying with their self-regulatory responsibilities and

to recommend improvements and refinements designed to increase the

effectiveness of self-regulation.

The inspections conducted of the two New York exchanges covered

such areas as procedures relating to the financial responsibility of

member organizations, surveillance of registered traders, surveillance

of specialists, procedures for handling public complaints, and practices and procedures regarding admission and qualification standards

for members and registered representatives.

Where it appeared to the staff of the Commission that revisions in

exchange procedures or policies were desirable in order to improve

an exchange's performance, its views were communicated to the particular exchange and discussions were held between the Commission and

exchange staffs to arrive at appropriate solutions. During the past

year a number of significant improvements in exchange operations

were accomplished as a result of the inspection program and the subsequent discussions.

Section 19(a) (1) Proceedings Against San Francisco Mining Exchange

During the fiscal year further progress toward a final determination

was made in the pending proceedings under Section 19(a) (1) of the

Act to determine whether the registration of the San Francisco Mining Exchange should be withdrawn for the protection of investors.

The proceedings are based on allegations that the Exchange failed to

require its members and issuers of securities registered on the Exchange to comply with the Act's reporting, proxy-soliciting, recordkeeping and other requirements, that it permitted its facilities to be

used in connection with unlawful securities distributions, and that it
42 SECURITIES AND EXCHANGE COMMISSION

did not have adequate listing or delisting standards and was not properly organized to discharge the responsibilities of a national securities

exchange under the Act. Following an evidentiary hearing, the hearing examiner filed a recommended decision in May 1965, in which he

found the existence of a number of serious deficiencies but recommended that the Exchange be given a further opportunity to effect

a thorough reorganization and change of management and that if such

reorganization were not accomplished within a 90-day period the Exchange's registration be withdrawn. In July 1965, subsequent to the

end of the fiscal year, the Commission heard oral argument. The Exchange urged acceptance of the hearing examiner's recommendations,

while the Division of Trading and Markets urged that the registration of the Exchange be withdrawn.

Exchange Disciplinary Action

Each national securities exchange reports to the Commission disciplinary actions taken against its members, member firms or persons connected therewith for violation of any rule of the exchange or of the

Securities Exchange Act or any rule or regulation thereunder.

During the fiscal year, six exchanges reported 127 such actions, including impositions of fines in 23 cases ranging :from $25 to $20,000,

with total fines aggregating $28,875, and the suspension from membership of 14 individuals and three member organizations. These exchanges also reported the imposition of various sanctions against 60

registered representatives and employees of member firms. In addition, a number of informal staff actions of a cautionary nature were

reported by several exchanges.

REGISTRATION OF SECURITIES ON EXCHANGES

Unless a security is registered on a national securities exchange under the Securities Exchange Act or is exempt from such registration it

is unlawful for a member of such exchange or any broker or dealer to

effect any transaction in the security on the exchange. Ingeneral, the

Act exempts from registration obligations issued or guaranteed by a

state or the Federal Government or by certain subdivisions or agencies

thereof and authorizes the Commission to adopt rules and regulations

exempting such other securities as the Commission may find.necessary

or appropriate to exempt in the public interest or for the protection of

investors. Under this authority the Commission has exempted securities of certain banks, certain securities secured by property or

leasehold interests, certain warrants and, on a temporary basis, certain

securities issued in substitution for or in addition to listed securities.

Pursuant to Section 12 of the Exchange Act, an issuer may register

a class of securities on an exchange by filing with the Commission and
THIRTY-FIRST ANNUAL REPORT 43

the exchange an application which discloses pertinent information

concerning the issuer and its affairs. Information must be furnished

regarding the issuer's business, its capital structure, the terms of its

securities, the persons who manage or control its affairs, the remuneration paid to its officers and directors, and the allotment of options,

bonuses and profit-sharing plans, and financial statements certified by

independent accountants must be filed as part of the application.

Form 10 is the form used for registration by most commercial and

industrial companies. There are specialized forms for certain types

of securities, such as voting trust certificates, certificates of deposit

and securities of foreign governments. These forms are also used for

the registration under new Section 12(g) of securities traded in the

over-the-counter markets.

Section 13 requires issuers having securities registered on an exchange to file periodic reports keeping current the information furnished in the application for registration. These periodic reports include annual reports, semi-annual reports, and current reports.

The principal annual report form is Form 10-K which is designed to

keep up-to-date the information furnished in applications filed on

Form 10. 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 have occurred. A report on this form

deals with matters such as changes in control of the registrant, important acquisitions or dispositions of assets, the institution or termination of important legal proceedings and important changes in the

issuer's capital securities or in the amount thereof outstanding. The

above requirements are now also applicable to issuers having securities

registered under new Section 12(g).

The following table shows the number of reports filed during the

fiscal year pursuant to Section 13 of the Exchange Act and those filed

under Section 15(d) of the Act by issuers obligated to file reports by

reason of having publicly offered securities registered under the Securities Act of 1933. As of June 30, 1965, there were 3,184 such issuers, including 315 that were also registered as investment companies

under the Investment Company Act of 1940. The table also includes

the number of annual reports, quarterly reports and reports to stockholders filed by issuers subject to the reporting requirements of Section 30 of the Investment Company Act.
44 SECURITIES AND EXCHANGE COMMISSION

Number of annuaZana other periodic reports filed by issuers under the Beourities

El1Jchange.Act of 1934 and the Investment Oompany .Act 01 1940 during the

fiscaZ year ended June 30, 1965

Number of reports filed byLISted Over-the- Issuers

issuers counter filmg Total

Type ofreports filing issuers re~rts reports

reports filing un er Sec- filed

under reports bon 30 of

Section under Investment

13 Section Company 15(d) Act

Annual reports on Forms lQ-K, N-30A-l, etc ______________ 2,501 2,145 484 5,130 Semi-annual reports on Form 9-K.. _______________________ 2,050 1,538 ---_~_---_~- 3,588 Current reports on Form 8-K ____________________________ 4, 739 3,248 ~_---------- 7,987 Quartelly reports on Form 7-K 38 212 250 Quarterly reports on Form N-30B-L ____________________ ------------ ------------ 286 286 Reports to stockholders (Section 30(d» ___________________ ------------ ------------ 1,749 1,749

Total reports filed__________________________________ 9,328 7,143 2,519 18,990

As of June 30, 1965,851issuers subject to Section 15(d) had filed registration ststements pursuant to Section 12(g). The reports of such issuers, following the effective date of registration, Wl11be filed under

section 13rather than Section 15(d). However, the nature ofthe reports required will remam unchanged,

STATISTICS RELATING TO SECURITIES ON EXCHANGES

Number of Issuers and Securities

As of June 30, 1965, a total of 2,522 issuers had 4,127 classes of

securities listed and registered on national securities exchanges, of

which 2,913 were classified as stocks and 1,214 as bonds. Of these

totals, 1,417 issuers had 1,625 stock issues and 1,118 bond issues listed

and registered on the New York Stock Exchange. Thus, 56 percent

of the issuers, 156percent of the stock issues and 92 percent of the bond

issues were on the New York Stock Exchange. Table 4 in the appendix

to this report contains comprehensive statistics as to the number of

securities issues admitted to exchange trading and the number of

issuers involved, as of June 30, 1965.

During the 1965 fiscal year, 149 issuers listed and registered securities on a national securities exchange for the first time, while the

registration of all securities of 94 issuers was terminated. 'A total of

279 applications for registration of securities on exchanges was filed

during the year.

Market Value of Securities Available for Trading

The market value on December 31, 1964, of stocks and bonds, both

listed and unlisted, admitted to trading on one or more stock exchanges

in the United States was approximately $636 billion.

The New York Stock Exchange and American Stock Exchange

figures were reported by those exchanges. There was no duplication

of issues between them. The figures for all other exchanges were for

the net number of issues appearing only on such exchanges, excluding

the many issues on them which were also traded on one or the other of

the New York exchanges. The number and market value of issues

•

__________________________ ------------

•
THIRTY-FIRST ANNUAL REPORT 45

Number Market value

of Issues Dec. 31, 1964 (millions)

Stocks:

~~~~~:~:~~lr~~~=============::=:==:====:::=========:==:==

1,606 $474,322

1,022 28,220 446 4, 315

Total stocks ._ ._. ._ 3,073 606,857

Bonds:

New York Stock Exchange_ _. 1,186 127,725 American Stock Exchange ._ '. 91 1,267 Exclusively on other exchanges 23 124

Total bonds ._ .' "_ 1,300 129,116

Total stocks and bonda., 4,373 635,973

as shown excluded those suspended from trading and a few others for

which quotations were not available. The number and market value

as of December 31, 1964, of preferred and common stocks separately

was as follows:

Preferred stocks Common stocks

Number Market value Number Market value

(millions) (milllons)

Listed on registered exchanges, ._ 520 $9,882 2,352 $481,143 All other stocks G. 44 468 157 15,364

564 10,350 2,509 496,507

Stocks admitted to unlisted trading privileges only or solely llsted on exempted exchanges.

The 3,073 preferred and common stocks represented over 11.4 billion

shares, of which over 10.9 billion were included in the 2,872 issues listed

on registered exchanges.

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 December 31 totals annually since 1936. Aggregates for

stocks exclusively on the remaining exchanges have been compiled as

of December 31 annually by the Commission since 1948. The available

data since 1936 appear in Table 5 in the appendix of this Annual

Report. It should be noted that changes in aggregate market values

over the years reflect not only changes in prices of stocks but also such

factors as new listings, mergers into listed companies, removals from

listing and issuance of additional shares of a listed security.

Share and Dollar Volwne of Stocks Traded

The following figures show the annual volume of shares actually

traded on all exchanges during the years 1955 through 1964, and the

first 6 months of 1965 :

•••• __ •• __ ___••••• _•••••••• __ •••• __•• __•• _•• _•___•__

•••••••••••• __•• ___••• ____•• ______•___••••• __ •• ____•_____•____••• ___ ___•___••• ' •• " •• ' ___•____•• _•••••• _••••• __•• _______••• __•__

•••• __ ••__•••• __••• __••• _•• _••• __•••• ___ __ •• " •__•• _

••• -••• -- •••• _••••• _••••••••• ___••• __•••• __•••

•••____________________ ___ ••• ________ • _______________________

•
46 SECURITIES AND EXCHANGE COMMISSION

New York American

I All other Calendar year Stock Stock Exchanges Total Exchange Exchange

Share volume (thousands)

1955____________________________________________ 909,785 253,531 158,084 1,321,401 1956____________________________________________ 7ll4, 066 248,456 149,962 1,182,487 1957____________________________________________ 1958____________________________________________ 914, 153 234,494 144,365 1,293,022

1959____________________________________________ 998,762 258, 097 133,719 1,400,579

1,114, 758 416,451 168,487 1,699,697 1960____________________________________________ 986,878 320,906 133,263 1, 441, 048 1961. ___________________________________________ 1962____________________________________________ 1,392,573 548,161 201,790 2,142,523

1,220,854 344, 347 148,744 1, 711, 945 1963____________________________________________ 1,371,808 354, 305 154, 686 1,880,798 100<'-___________________________________________ 1,542,373 411,450 172,551 2,12.6, 374 1965 (1st 6 Mos.) _______________________________ 858,436 259,771 99,118 1,217,325

Dollar volume (thousands)

1955 ____________________________________________ 32,830,838 2,657,!l16 2,551.253 38,039,107 1956 29,854,717 2,731,3'60 2,557,038 35,143,115 1967____________________________________________ 27,546. 762 2,3&1,940 2, 306, 144 32, 214, 848 1958____________________________________________ 32,818,440 2,864, 486 2,736,634 38,419,560 1959____________________________________________ 43,503,502 4,954,568 3,543,185 52, 001,255 1960____________________________________________ 37,972, 433 4,235,686 3,098,484 45,306,603 1961. ___________________________________________ 52,820,306 6,863,110 4,338,207 64,071,623 1962____________________________________________ 47,353,334 3,736,619 3,765,941 54,855,894 1963____________________________________________ 54,897,096 4, 844, 912 4,696, 065 64,438, 073 1964____________________________________________ 60,501,229 6,127,236 5,833,285 72,481,750 1965 (1st 6 Mos.) _______________________________ 32,912,244 3,432,963 3,488, 444 39,833,651

These volume figures include shares, warrants and rights. Tables 6

and 7 in the appendix of this Annual Report contain comprehensive

statistics on volumes, by exchanges.

Foreign Stocks on Exchanges

The market value on December 31, 1964, of all shares and certificates

representing foreign stocks on U.S. stock exchanges was $17 billion,

of which $14.1 billion represented Canadian and $2.9 billion represented other foreign stocks. The market values of the entire Canadian

stock issues were included in these aggregates. Most of the other

foreign stocks were represented by .American Depository Receipts or

American shares, only the outstanding amounts of which were used

in determining market values.

Foreign BtockB on elDchangeB

Canadlan Other foreign Total December 31, 1964

Issues Value Issues Value Issues Value

Exchange: New York ________________ 14 $6, 374, 733, 000 12 $2, 272, 204, 000 26 $8,646,937,000 Amerlcan _________________ Others 66 7,721,576,000 36 578, 504, 000 102 8, 300, 080,000 only _______________ 2 25,847,000 3 18,430,000 5 44,277,000

Total. 82 14, 122, 156,000 61 2, 869, 138, 000 133 16, 991, 294, 000

The number of foreign stocks on the exchanges has declined in

recent years, owing principally to a reduction on the American Stock

Exchange from 145 issues in 1960, to 102 in 1964. However, trading

in foreign stocks represented 17.9 percent of the reported share volume

__________• _________________________________

_•• _______________
THIRTY-FIRST ANNUAL REPORT 47

on that Exchange in 1960, and 18.5 percent in 1964. Trading in

foreign stocks on the New York Stock Exchange has declined from

2.7 percent of its reported share volume in 1960, to 2 percent in 1964.

Reported trading volumes in foreign shares during 1964 consisted

of about 44.7 million Canadian shares and 24.6 million other foreign

shares on the American Stock Exchange and about 12.3 million Canadian shares and 11.7 million other foreign shares on the New York

Stock Exchange. While the share volume on the American exceeded

that on the New York Stock Exchange, it would appear that in view

of higher average share prices, the latter exchange had a greater

dollar volume in foreign shares.

Comparative Exchange Statistics

During fiscal year 1965, there was a moderate increase in the number

of stocks listed on the New York Stock Exchange, consistent with the

trend of recent years; the number listed on the American Stock

Exchange also increased moderately, representing the first gain since

1962; and the number of stocks available for trading exclusively on

the other exchanges continued to decline.

Net number of stocks on e:cchanges

New York American Exclusively Total stocks

June 30 Stock Stock on other on Exehange Exchange exchanges exchanges

1940 1,242 1,079 1,289 3,610 1945 1,293 895 951 3,139 1950 1,484 779 775 3,038 1955 1,543 815 686 3,044 1960 1,532 931 555 3,018 1961 1,546 977 519 3,042 1962 1,565 1,033 493 3,091 1963 1,579 1,025 476 3,080 1964 _. 1,613 1,023 463 3,099 1965_. ._. 1,627 1,044 440 3,111

Since 1948, aggregate values of stocks listed on the New York Stock

Exchange have generally represented an increasing proportion of

total share values on all the exchanges.

Share values on e:cchanges, in percentages

New York American Exclusively December 31 Stock Stock on other Exchange Exchange exchanges

1948. 81.81 14.53 3.66 1950. 84. DO 12 52 2.98 1955 . _. 86 98 11 35 1.67 1960. . ._ ._._. 91 56 7.22 1.22 1961.. 91. 02 7.74 1 24 1962 ._. 92.41 6.52 1 07 1963 93.12 5.91 0 97 1964... . 93.59 5 56 0 85

The ratio of share volume on the regional exchanges to the total

on all exchanges has continued to decline over the years. However,

the regional exchange percentage of dollar volume has increased

_____________• ___________________________• __ __________________• ______________________• __ _____________• ___________________________• __

____• ___________________________• ______• ____

____• _____________• ________• ____• _____• _• ___ ____• _______________________• ___• ___________

____• ________• ____• _____________• ____• ______ ____• _____________• ______• ______• ___________

____• _____________• ___________• ___________

__• _• ___________• _____________ _________

__________________• _____________• _________________________

____________• _____• _________• ___• _________• _______________

_____• _____________' __ ________•• ____________• ____• ______

__________________• ____ _____________• ___ ___• ______ ___• ________• ______• ______• _____• _________________• ______ _____• ________ _____________________________• ____________

____________• _________________________• ________•____• ______

________• _____• _______• ____• _______•• ________•____•• ____
48 SECURITIES AND EXCHANGE COMMISSION

slightly. In the following presentation, shares, warrants and rights

are included. Annual data since 1935 are shown in Appendix Table 7

in this Annual Report.

AnnuaZ sote« of stock on exchanges, in percentages

Percent of share volume Percent of dollar volume Calendar year

New York American All other New York American All other

1940___________________________ 75.44 13.20 11 36 85 17 7.68 7.15 1945___________________________ 65.87 21.31 1282 8275 1081 644 1950___________________________ 76.32 13.54 10.14 85.91 685 7.24 1955___________________________ 6885 1919 11 96 86.31 698 6.71 1960___________________________ 68 48 22.27 9.25 83.81 9.35 6.84 1961.__________________________ 64.99 2558 943 82.44 1071 6.85 1962___________________________ 71.32 20.12 856 86.32 681 687 1963_________. _________________ 72.94 1884 822 85.19 7.52 7.29 1964___________________________ 7254 19.35 8.11 83 49 846 805 ist 6 months, 1965_____________ 70.52 21.34 8.14 8262 8.62 8. 76

DELI STING OF SECURITIES FROM EXCHANGES

Application may be made to the Commission by exchanges to strike

securities or by issuers to withdraw their securities from listing and

registration on exchanges pursuant to Rule 12d2-2 under Section

12(d) of the Securities Exchange Act. During the :fiscalyear ended

June 30, 1965,the Commission granted applications by exchanges and

issuers to remove 64 stock issues, representing 62 issuers, from listing

and registration. Since 8 stocks were each delisted by two exchanges,

there was a total of 72 stock removals, as follows:

Application filed by: Stocks B0n48

American Stock Exchange; 11

Detroit Stock Exchange, _ _ __ __ _ _ __ __ _ _ __ _ _ __ __ __ __ _ _ ___ _ _ 2

Midwest Stock Exchange__ 26

National Stock Exchange_________________________________ 1

New York Stock Exchange_______________________________ 17 1

Pacific Coast Stock Exchange_____________________________ 4

Philadelphia-Baltimore-Washington Stock Exchange; _ __ _ ___ _ 2

Pittsburgh Stock Exchange_______________________________ 2

Sali Lake Stock Exchange________________________________ 5

Issuer__________________________________________________ 2

Total____________________________________________ 72 1

The two applications by issuers which were granted during the year

removed from the Detroit and Pittsburgh Stock Exchanges securities

whose principal exchange markets were on the New York Stock

Exchange.

Revisions in the listing and delisting standards of the American

and New York Stock Exchange became effective in February and

April 1965, respectively. The Midwest Stock Exchange adopted a

number of listing policy changes in 1964,and adopted delisting standards in January 1965.
THIRTY-FIRST ANNUAL REPORT 49

Delisting Proceedings Under Section 19(a) (2)

Section 19(a) (2) authorizes the Commission to suspend for a period

not exceeding 12months, or to withdraw, the registration of a security

on a national securities exchange if in its opinion such action is necessary or appropriate for the protection of investors and it finds, after

notice and opportunity for hearing, that the issuer of the security has

failed to comply with any provision of the Act or the rules and

regulations thereunder. The one proceeding under this Section pending at the beginning of the fiscal year 1was terminated, and no additional proceedings were instituted during the year.

UNLISTED TRADING PRIVILEGES ON EXCHANGES

Stocks with unlisted trading privileges which are not also listed

and registered on other exchanges continued to decline in number,

from 140 on June 30, 1964, to 132 on June 30, 1965. The American

Stock Exchange accounted for all the removals. The distribution of

unlisted stocks and share volumes therein among the exchanges is

shown in Appendix Table 9.

The statutory provisions regarding unlisted trading privileges were

amended in several respects by the Securities Acts Amendments of

1964. Thus, the provision authorizing an exchange, with the approval

of the Commission, to extend unlisted trading privileges to any security as to which the disclosure requirements and other duties and

obligations of the issuer were substantially equivalent to those applicable to listed securities has been deleted. The Commission is now

authorized to extend unlisted trading privileges only for securities

listed and registered on another national securities exchange. In addition, the 1964 amendments broadened the standards by which the

Commission must judge applications for unlisted trading privileges

by deleting a requirement that an applicant exchange demonstrate

the existence of widespread public distribution and trading activity

in the security in the vicinity of the exchange. The Commission is now

allowed to consider all factors affecting the public interest or the protection of investors in extending, suspending or terminating unlisted

trading.

During the calendar year 1964,the reported volume of trading on the

exchanges in stocks with only unlisted trading privileges was about

24,521,000 shares or about 1.2 percent of the total share volume on

all exchanges. About 96 percent of this volume was on the American

Stock Exchange while four other exchanges contributed the remaining

4 percent. The share volume in these stocks on the American Stock

1Precision Microwave Oorporation, Securities Exchange Act Release Nos. 7319

(May 22, 1964) and 7377 (July 23, 1964), discussed at page 52 of the 30th

Annual Report.

791-468--65-----0
50 SECURITIES AND EXCHANGE COMMISSION

Exchange represented 5.9 percent of the total share volume on that

Exchange.

Unlisted trading privileges on exchanges in stocks listed and registered on other exchanges numbered 1,661 as of June 30, 1965. The

volume of trading in these stocks for the calendar year 1964 was

reported at about 67,927,000 shares. About 14 percent of this volume

was on the American Stock Exchange in stocks listed on regional

exchanges, and. 86 percent was on regional exchanges in stocks

listed on the New York or American Stock Exchange. While the

67,927,000 shares amounted to only 3.3 percent of the total share

volume on all exchanges, they constituted substantial portions of the

share volume of the leading regional exchanges, as reflected in the

following approximate percentages: Boston 74 percent; Cincinnati

73 percent; Detroit 68 percent; Philadelphia-Baltimore-Washington

68 percent; Pittsburgh 52 percent; Midwest 32 percent; and Pacific

Coast 30 percent.

Applications for Unlisted Trading Privileges

Applications by exchanges for unlisted trading privileges in stocks

listed on other exchanges, filed pursuant to 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. 1965, as follows:

Number Stock exchanges oj stocks Boston 12

CiocUuilati 15

lJetroit 6

Pacific Coast____________________________________________________ 4

Philadelphia-Baltlimore- Washington _ 23

Pittsburgh 3

63

BLOCK DISTRmUTIONS REPORTED BY EXCHANGES

The usual method of distributing blocks of listed securities considered too large for the auction market on the floor of an exchange

is to resort to "secondary distributions" over the counter after the close

of exchange trading. Secondary distributions, as reported since 1942,

reached a peak of $926,514,000 during the calendar year 1961, and the

total of $909,821,000 during 1964 is close to this peak. During the

first 6 months of 1965, there were 74 secondary distributions aggregating $1,099,121,000, or more than the total for the entire year 1964.

This record total includes two unusually large secondary distributions, one by Ford Motor Co. and one by General Motors Co., which

together accounted for more than half of the total value.

In an effort to keep as much trading as possible on their floors, the

leading exchanges adopted Special Offering Plans in 1942, and the

somewhat more flexible Exchange Distribution Plans in 1953. Spe-
TEITRTY-FIRST~AL REPORT 51

Value

cial offerings have disappeared in the last few years, while the number

of exchange distributions has grown. The largest number of special

offerings was 87 in 1944, with $32,454,000 aggregate value. In 1962,

there were only two offerings and in 1963 and 1964 there were none.

Exchange distributions reached a record with 72 in 1963, compared

with 68 in 1964; the value of such distributions was $107,498,000 in

1963,compared with $97,711,000 the following year.

Block di8tributioll-8 of stocks reported by ea:changes

Number I S~&: ill I Shares sold I

12 months ended December 31, 1964

~~=~~~tWbiitions~~==:::: Secondary distributions ::::: :=::::: :==:=====

~=~~~J.8butIOns-_-_==:=:::::= ==:=.; :==:==:::= Secondary dtstrtbuttons. - -- -- -----

01 0 I 0 I 0 68 2,733,487 2,553,237 $97,711,241

110 18,622,284 19,462,343 909,821,410

6 months ended June 30, 1965

01 0 I 0 I 0 27 I, 113,296 980,447 40,751,677

74 19,737,276 20,585,664 1,000, 121,142

Details of these distributions appear in the Cornmissron's monthly Statistical Bulletins. Data for prior

years are shown in Appendix Table 8 ill this Annual Report.

REGISTRATION OF OVER.THE-COUNTER SECURITIES

The provisions of Section 12(g) of the Exchange Act requiring the

registration of certain securities traded in the over-the-counter markets, which was added by the Securities Acts Amendments of 1964,

the implementation of that Section and of Section 12(h) (relating to

exemptions from the requirements of Section 12 (g) ) through the adoption or amendment of various rules and forms by the Commission,

statistics regarding the number of registration statements filed during

the fiscal year pursuant to Section 12 (g), and related matters are discussed in some detail in Part I of this Report.

MANIPULATION AND STABILIZATION

Manipulation; Market Surveillance

The Exchange Act describes and prohibits certain forms of manipulative activity in any security registered on a national securities exchange. The prohibited activities include wash sales and matched

orders effected for the purpose of creating a false or misleading appearance of trading activity in, or with respect to the market for, any such

security; a series of transactions in which the price of such security

is raised or depressed, or in which actual or apparent active trading is

created, for the purpose of inducing purchases or sales of such security

by others; circulation by a broker, dealer, seller, or buyer, or by a

person who receives consideration from a broker, dealer, seller or buyer,

of information concerning market operations conducted for a rise or a

•

_

•
52 SECURITIES AND EXCHANGE COMMISSION

decline in the price of such security; and the making of any false or

misleading statement of material information by a broker, dealer,

seller, or buyer regarding such security for the purpose of inducing

purchases or sales. The Act also empowers the Commission to adopt

rules and regulations to define and prohibit the use of these and other

forms of manipulative activity in any security registered on an exchange or traded over the counter.

In August 1964, the Commission transferred to the headquarters

officeresponsibility for overall surveillance of the securities markets.

To implement a more effective and expanded program of surveillance,

designed to be integrated into the Commission's regulatory program,

procedures were adopted whereby the activities of the Commission's

market surveillance staff were closely coordinated with the stockwatching operations of the New York and American Stock Exchanges.

Within this framework, the Commission's market surveillance 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 from other sources, determines the matters of

interest, the apparent violations, if any, of applicable law and the

appropriate action to be taken.

The Commission's market surveillance staff also observes the tickertape quotations of securities listed on the New York Stock Exchange

and on the American Stock Exchange, the sales and quotation sheets

of regional exchanges, and the bid and asked prices published by the

National Daily Quotation Service for unlisted securities to observe

any unusual or unexplained price variations or market activity. The

financial news ticker, leading newspapers, and various financial publications and statistical services are also closely followed. Investigations are conducted if it appears that violations have occurred.

When securities are to be offered to the public, their markets are

watched very closely to make sure that the price is not unlawfully

raised prior to or during the distribution. During the fiscal year,

such surveillance took place with respect to a total of 1,163 registered

offerings, with a value of $12.8 billion, and 397 offerings under the

small issues exemption from registration (Regulation A under the

Securities Act) with a value of $77 million. In addition, 204 other

offerings, such as secondary distributions and distributions of securities under special plans filed by the exchanges, having a total value

of $1,039 million, were also kept under surveillance.

Stabilization

Stabilization involves open-market purchases of securities to prevent or retard a decline in the market price in order to facilitate a

distribution. It is permitted by the Exchange Act subject to the

restrictions provided by the Commission's Rules 1Ob-6,7 and 8. These
THIRTY-FIRST ANNUAL REPORT 53

rules are designed to confine stabilizing activity to that necessary for

the above purpose, to require proper disclosure and to prevent unlawful

manipulation.

During fiscal year 1965,stabilizing was effected in connection with

stock offerings totaling 42,092,451shares having an aggregate public

offering price of $1,634,723,254 and bond offerings having a total

offering price of $427,105,000. In these offerings, stabilizing transactions resulted in the purchase of 1,443,148 shares at a cost of

$52,005,854and bonds at a cost of $1,651,630. In connection with these

stabilizing transactions, 6,418 stabilizing reports, showing purchases

and sales of securities effected by persons conducting the distribution,

were received and examined during the fiscal year.

INSIDERS' SECURITY HOLDINGS AND TRANSACTIONS

Corporate insiders, by virtue of their position, may have knowledge

of a company's condition and prospects which is unavailable to the

general public and may be able to use such information to their personal advantage in trading in the company's securities. Section 16 of

the Exchange Act and corresponding provisions in Section 17 of the

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

Investment Company Act of 1940 are designed to prevent the unfair

use of such information by giving publicity to insiders' security transactions and holdings, and removing the profit incentive in short-term

trading.

Ownership Reports

Prior to the 1965 fiscal year, Section 16(a) of the Securities Exchange Act required eyery person who was a direct or indirect beneficial owner of more than 10 percent of any class of equity security

which was registered on a national securities exchange, or who was a

director or an officerof the issuer of any such security, to file statements

with the Commission and the exchange disclosing his ownership of

the issuer's equity securities and changes in such ownership. The

Securities Acts Amendments of 1964 extended the reporting requirements of Section 16(a) to the insiders of issuers of securities registered

under Section 12(g). 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 Holding

Company Act and Section 30(f) of the Investment Company Act,

respectively. The administration of the insider reporting provisions

of the three Acts is combined in one section in the Division of Corporation Finance.

During the fiscal year, 56,554 ownership reports (14,594 initial

statements of ownership on Form 3 and 41,960statements of changes in
54 SECURITIES AND EXCHANGE COMMISSION

ownership on Form 4) were filed with the Commission. This represents an increase of 11,923 over the 44,631 reports (6,573 initial statements and 38,058 statements of changes) filed during the 1964 fiscal

year. The bulk of the increase is attributable to the extension of the

reporting requirements to insiders of issuers of over-the-counter securities registered under new Section 12(g), although the majority

of the initial statements of ownership by the insiders of the more than

1,500 companies affected was not filed until after the close of the fiscal

year.

All ownership reports are made available for public inspection as

soon as they are filed at the Commission's officein 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 on a subscription basis to more than 20,000 persons.

Recovery of Short-Swing Trading Profits by Issuer

In order to prevent insiders from making unfair use of information

which may have been obtained by reason of their relationship with a

company, Section 16(b) of the Exchange .1\ct, 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 described under "Ownership Reports" from certain purchases and sales, or sales and purchases,

of securities of the company within any period of less than 6 months.

The Commision has certain exemptive powers with respect to transactions not comprehended within the purpose of these provisions, but

is not charged with the enforcement of the civil remedies created

thereby.

REGULATION OF PROXIES

Scope of Proxy Regulation

Under Sections 14(a) of the Securities Exchange Act, 12( e) of the

Public Utility Holding Company Act of 1935, and 20(a) of the Investment Company Act of 1940, the Commission has adopted Regulation 14A requiring the disclosure in a proxy statement of pertinent

information in connection with the solicitation of proxies, ,consents

and authorizations in respect of securities subject to those provisions,

in order to enable holders of such securities to act intelligently on the

matters involved. The regulation also provides, among other things,

that when the management is soliciting proxies, any security holder

desiring to communicate with other security holders for a proper

purpose may require the management to furnish him with a list of

all security holders or to mail his communication to security holders
THIRTY-FIRST A.L"'~UALREPORT 55

for him. A security holder may also, subject to reasonable prescribed

limitations, require the management to include in its proxy material

any appropriate proposal which such security holder desires to submit

to a vote of security holders. Any security holder or group of security

holders may at any time make an independent proxy solicitation upon

compliance with the proxy rules, whether or not the management is

making a solicitation. Certain additional provisions of the regulation

are applicable where a contest for control of the management of an

issuer or representation on the board is involved.

Copies of proposed proxy material must be filed with the Commission in preliminary form prior to the date of the proposed solicitation.

Where preliminary material fails to meet the prescribed disclosure

standards, the management or other group responsible for its preparation is notified informally and given an opportunity to correct the

deficiencies in the preparation of the definitive proxy material to be

furnished to security holders.

The Securities Acts Amendments of 1964 extended the proxy solicitation requirements to those over-the-counter securities which are

registered under Section 12(g) of the Act. As previously noted,"

Regulation 14A is applicable to solicitations of proxies with respect

to such securities where the solicitation is commenced on or after

July 1, 1965. The amendments also authorize the Commission to

promulgate rules and regulations requiring an issuer to send information to security holders even though a proxy solicitation is not made,

and requiring broker-dealers to transmit proxy material to customers. 3

Proposed Regulation HC to implement the former provision is discussed in Part I of this report.

Statistics Relating to Proxy Statements

During the 1965 fiscal year, 2,661 proxy statements in definitive

form were filed under the Commission's Regulation 14A for the

solicitation of proxies of security holders; 2,639 of these were filed

by management and 22 by non-management groups or individual stockholders. These 2,661 solicitations related to 2,433 companies, 228 of

which had more than one solicitation during the year, generally for a

special meeting not involving the election of directors. There were

2,391solicitations of proxies for the election of directors, 248 for special

meetings not involving the election of directors, and 22 for other

assents and authorizations.

During fiscal year 1965, the votes of security holders were solicited

with respect to the following types of matters, other than the election

of directors:

See page 4, supra.

See pages 4-5. supra.

•

•
56 SECURITIES AND EXCHANGE COMMISSION

Mergers, consolidations, acquisitions of businesses, purchases and ,

sales of property, and dissolutions of companies________________ 196

Authorizations of new or additional securities, modifications of existing securities, and recapitalization plans (other than mergers, con- solidations, etc.) 337

Employee pension and retirement plans (including amendments to

existing plans)_________________________________________________ 48

Bonus or profit-sharing plans and deferred compensation arrangements (including amendments to existing plans and arrangements) 104

Stock option plans (including amendments to existing plans) 411

Selection by management of independent auditors 1,027

Miscellaneous amendments to charter and by-laws, and miscellaneous

other matters (excluding those listed above) 796

Stockholders' Proposals

During the 1965 fiscal year, 191 proposals submitted by 42 stockholders were included in the proxy statements of 132 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, 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, a change of the place of the annual stockholders' meeting, and the approval by stockholders of management's

selection of independent auditors.

A total of 54 additional proposals submitted by 38 stockholders

was omitted from the proxy statements of 29 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 for omission of proposals

Number

Not timely submitted_____________________________________________ 19

VVithdrawn by proponent_________________________________________ 10

Not a proper subject matter under state law 8

Concerned a personal grievance against the company 7

Related to the ordlnary eonduet of the company's business__________ 4

Converse of management's proposaL______________________________ 2

Involved substantially the same matter as one previously proposed.,., 1

Reason for proposal deemed misleading____________________________ 1

Management had included a similar proposaL_____________________ 1

Company omitted the proposal and stated that in its opinion the proposal was not a proper subject matter___________________________ 1

Ratio of Soliciting to Nonsoliciting Companies

Of the 2,522 issuers that had securities listed and registered on

national securities exchanges as of June 30, 1965, 2,338 had voting

securities so listed and registered. Of these 2,338 issuers, 3 listed

_
THIRTY-FIRST ANNUAL REPORT 57

and registered voting securities for the .first time after their annual

stockholders' meeting in .fiscal 1965; of the remaining 2,335 issuers

with voting securities, 1,999, or 85.6 percent, solicited proxies under

the Commission's proxy rules during the 1965.fiscalyear for the election of directors.

Proxy Contests

During the 1965 fiscal year, 26 companies were involved in proxy

contests for the election of directors. A total of 400 persons, both

management and non-management, .filed detailed statements as participants under the requirements of Rule 14a-11. Proxy statements

in 16 cases involved contests for control of the board of directors and

those in 10 cases involved contests for representation on the board.

Management retained control in 7 of the 16 contests for control

of the board of directors, 4 were settled by negotiation, non-management persons won 3 and 2 were pending as of JIDle30, 1965. Of the

10 cases where representation on the board of directors was involved,

management retained all places on the board in 6 contests, opposition

candidates won places on the board in 2 cases, 1 was settled by negotiation and in 1 contest a representative of certain shareholders won

a seat.

INVESTIGATIONS WITH RESPECI' TO REPORTING PROVISIONS

Section 21(a) of the Act authorizes the Commission to make such

investigations as it deems necessary to determine whether any person

has violated or is about to violate any provision of the Act or any rule

or regulation thereunder. The Commission is authorized, for this

purpose, to administer oaths, subpoena witnesses, compel their attendance, take evidence and require the production of records. In addition

to the investigations undertaken in enforcing the anti-fraud, brokerdealer registration, and other regulatory provisions of the Act, which

are discussed in Part X of this report under "Complaints and Investigations," the following investigations were undertaken in connection

with the enforcement of the reporting provisions of Sections 12, 13, 14

and 15(d) of the Act and the rules thereunder, particularly those provisions relating to the .filing of annual and other periodic reports and

proxy material:

Investigations pending at beginning of fiscal year__________ 25

Investigations initiated during fiscal year__________________ 19

44

Investigations closed during fiscal year___________________________ 13

Investigations pending at close of fiscal year_____________________ 31
58 SECURITIES A..N"DEXCHANGE COMMISSION

REGULATION OF BROKER-DEALERS AND OVER.THE.COUNTER

MARKETS

Registration

Section 15(a) of the Securities Exchange Act requires the registration of all brokers and dealers who use the mails or instrumentalities of interstate commerce to effect or induce transactions in

securities in the over-the-counter market. Brokers and dealers conducting an exclusively intrastate business or dealing only in exempted

securities, commercial paper, commercial bills or bankers' acceptances

are exempt from registration. The 1964 amendments added Section

15(a) (2) which permits the Commission to exempt broker-dealers or

classes of broker-dealers, either unconditionally or upon specified terms

or conditions, from the requirement of registration.

The following tabulation reflects certain data with respect to registrations of brokers and dealers during the fiscal year ended June 30,

1965.

Effective Tegistrations at close of preceding fiscal year 4,871

Applications pending at close of preceding fiscal year______________ 35

Applications filed during fiscal year_______________________________ 445

Applications denied______________________________________________ 5

Applications witbdra WD_________________ __ _ 12

Registrations withdra wn_________________________________________ 615

Registrations cancelled___________________________________________ 69

Registrations revoked____________________________________________ 69

Registrations suspended__________________________________________ 2

Effective registrations at close of year 4,543

Applications pending at close of year______________________________ 39

Administrative Proceedings

The scope of the administrative sanctions which the Commission

may impose against brokers and dealers and persons associated with

a broker or dealer, pursuant to Sections 15(b) and 15A of the Exchange Act, was enlarged in significant respects by the Securities Acts

Amendments of 1964. Thus, in addition to the previously available

sanctions against a broker-dealer of denial or revocation of registration and expulsion or suspension from a registered securities association or national securities exchange, the Commission may now

suspend a broker-dealer's registration for a period not to exceed 12

months and may impose censure. Under prior law the Commission

could not proceed directly against individuals associated with a

broker-dealer firm, although incidental to a proceeding against the

firm it could make findings with respect to such individuals which had

the effect of disqualifying them from employment in the securities

industry. The Act, as amended, permits direct action against

associated persons, with or without joining the firm. The Commission

may censure an associated person, may suspend or bar him from being
TIITRTY-FIRST ANNUAL REPORT 59

associated with a broker or dealer, and may suspend or bar him from

being associated with a member of a registered securities association.

Under Section 15(b), a sanction of revocation, denial or suspension

of registration, or censure may be imposed upon a broker-dealer if,

after notice and opportunity for hearing, the Commission finds that

such sanction is in the public interest and that the broker-dealer, or

any person associated with such broker-dealer, is subject to one or

more of the specified statutory disqualifications. The Commission

may censure, or bar or suspend from association with a brokerdealer, an associated person where it finds that such action is in the

public interest and that such person has committed or omitted any act

or omission which would be a basis for the imposition of a sanction if

such person were a broker-dealer. The statutory disqualifications,

which have been enlarged by the 1964 amendments, include the

following:

(1) wilfully false or misleading statements in an application forregistration or other report required to be filed under the Exchange

Act;

(2) conviction within the previous 10 years of a felony or misdemeanor which involved the purchase or sale of securities; arose out of

the conduct of business as a broker-dealer or investment adviser; involved embezzlement, fraudulent conversion, or misappropriation of

funds or securities; or involved violation of the provisions of the

United States Code dealing with various frauds and swindles committed by use of the mails, telephone, telegraph, radio or television;

(3) injunction by a court of competent jurisdiction against engaging

in certain practices related to the securities business;

(4) wilful violation of any provision of the Securities Act of 1933,

the Exchange Act, the Investment Advisers Act of 1940 or the Investment Company Act of 1940 or any of the Commission's rules or regulations thereunder;

(5) wilfully aiding or abetting another person in a violation of the

Federal securities laws or rules and regulations thereunder or failing

reasonably to supervise other persons who commit such violations; and

(6) employing a person barred or suspended from being associated

with a broker-dealer.

Section 15A of the Exchange Act as amended empowers the Commission to suspend or expel a broker-dealer from membership in a

registered securities association or to suspend or bar any person from

being associated with a member, upon a finding of violation of the

Federal securities laws or any rule or regulation thereunder. The

National Association of Securities Dealers, Inc. ("NASD") is the

only such association. Section 19(a) (3) of the Act gives the Commission power to take similar action against members of national

securities exchanges.
60 SECURITIES AND EXCHANGE COMMISSION

Set forth below are statistics with respect to administrative proceedings pursuant to Sections 15(b) and 15A of the Securities Exchange Act which were pending during fiscal year 1965:

Proceedings pending at beginning of fiscal year:

Against broker-dealer registrants__________________________________ 111

Against broker-dealer applicants___________________________________ 8

Total__________________________________________________________ 119

Proceedings instituted during fiscal year:

Against broker-dealer registrants__________________________________ 97

Against broker-dealer applicants___________________________________ 5

Against individuals only 1

Total__________________________________________________________ 103

Total proceedings current during fiscal year____________________________ 222

Disposition of proceedings:

Registration revoked____________________________________________ a 57

Registration revoked and firm expelled from exchange______________ 1

Registration revoked and firm expelled from NASD________________ b 15

Registration revoked and firm expelled from exchange and NASD____ 1

Registration cancelled____________________________________________ 6

Suspended for period of time from NASD__________________________ 3

Suspended for period of time from NASD and exchange____________ 2

Registra tion denied______________________________________________ 5

Dismissed on withdrawal of registration__________________________ 20

Dismissed and registration continued in effect or permitted to become

effeeti ve ._______________________________ 7

Totul__________________________________________________________ 117

Proceedings pending at end of fiscal year:

Against broker-dealer registrants_________________________________ 98

Against broker-dealer applicants__________________________________ 6

Against individuals only 1

Total proceedings pending at end of year_________________________ 105

Total proceedings accounted for________________________________ 222

Action taken against individuals associated with the firms included above:

Named as cause__________________________________________________ 96

Barred___________________________________________________________ 25

'Suspended_______________________________________________________ 3

Censured ._______________________________ 1

Total__________________________________________________________ 125

This figure Is based on number of proceedings Instituted. In three instances, two

proceedings were instituted against the same broker-dealer.

This figure is based on number of proceedings instituted. In two Instances. two

proceedings were tnstt tuted against the same broker-dealer,

_

•

•
THIRTY-FIRST ANNUAL REPORT 61

Decisions of Particular Interest

The physical limitations imposed upon this report preclude an

extensive review of the many decisions rendered by the Commission

during the 1965fiscal year in administrative proceedings with respect

to brokers and dealers. However, a few cases of unusual interest or

significance are set forth in some detail in the following paragraphs:

In ..Axe Securities (Iorporatiotu: the Commission censured Axe

Securities Corporation, a registered broker-dealer, E. W". Axe & Co.,

a registered investment adviser, and a principal of both firms on the

basis of findings that they had wilfully violated the anti-fraud provisions of the Securities Act and the Investment Advisers Act.

The violations resulted from the publication by respondents of an

article, "Your Investment Program," in a book entitled To the Bride.

The book, which also contained recipes, household hints and recommendations of various products and was distributed to prospective

brides by about 96department stores, urged brides to initiate an investment program by purchasing shares in a mutual fund. Itstated that

E. W. Axe & Co. was "one of the outstanding nationally recognized

investment counsels" whose "proven ability in economic research and

evaluation, and their record in economic and market analysis, had led

many financial institutions to retain them."

The article was paid for by Axe Securities and E. W. Axe & Co.

and described, analyzed and recommended a group of mutual funds of

which the registrants were the underwriter and investment adviser,

respectively. The book contained no statement of the receipt and

amount of the consideration paid by the registrants for the recommendations made.

The Commission found that the article may have carried to unwary

readers the implication of an objective unpaid endorsement of, the

funds by the publisher, and that its publication violated the antifraud provisions. The Commission also found that other provisions

of the Federal securities statutes were violated, including those relating to transmission of prospectuses. Because of certain mitigating

factors, including cooperation with the Commission's staff in its investigation, rescission offers to recipients of the books who purchased

the funds and adoption of internal procedures with respect to the

distribution of sales materials, the Commission found that the public

interest did not require a more severe sanction than censure.

In Oapital Funds, Ino.," the Commission denied broker-dealer

registration to the firm and found its principals each a cause of the

denial on the basis of a finding, among others, that respondents wilSecurities Exchange Act Release No. 7442, Investment Advisers Act Release

No. 176 (October 14, 1964).

Securities Exchange Act Release No. 7398 (August 20, 1964), afl"d 348

F. 2d 582 (O.A. 8, 1965).

•

•
62 SECURITIES AND EXCHANGE COMMISSION

fully violated the registration provisions of the Securities Act of 1933

in the sale of stock of Peoples Loan & Investment Co. Inc., an

Arkansas corporation.

Capital Funds was the underwriter of a public offering of stock

of Peoples, assertedly limited to residents of Arkansas. One thousand shares of stock, however, were sold to two residents of Oklahoma. Respondents claimed the transactions in fact represented sales

by one of the firm's salesmen of stock which he had previously purchased from the firm. The Commission rejected this contention, however, finding that the salesman had not become the bona fide owner of

the shares or, even if he had, that under all the circumstances such

shares had not come to rest in the hands of a resident before being

sold to non-residents.

The Commission accordingly concluded that no intrastate exemption under Section 3(a) (11) of the Securities Act was available for the

respondents' offering of Peoples stock and pointed out that it is incumbent upon an underwriter and others connected with a public

offering in reliance on that exemption to make certain that the offering

does not in fact become interstate in character.

The Commission also rejected the further contention that the

securities of Peoples were exempt from registration under Section

3(a) (2) of the Securities Act as securities issued by 'a banking institution, finding that Peoples was an industrial loan institution rather

than a banking institution.

Early in the fiscal year, the Commission, pursuant to an offer of

settlement, entered an order with respect to J. H. Gorklard &: 00.,

Inc. suspending registrant from membership in the National Association of Securities Dealers, Inc. for a period of 45 days and, upon

termination of such suspension, from membership in the Boston Stock

Exchange for 90 days." Subsequently, the Commission issued its

Findings and Opinion," It found that registrant sold shares of

unregistered stock of United Security Life Insurance Co. at increasing prices resulting from its manipulative market activities accompanied by the dissemination of false and misleading market letters.

It further found that, in entering bids in the "pink" sheets and purchasing such securities while engaged in their distribution, registrant

violated Rule 10~6 under Section lO(b) of the Exchange Aot.

In Sidney Tager, doing business as The Tager Oompany,8 the

Commission revoked the broker-dealer registrations of Tager and

Darius Incorporated, expelled Tager from membership inthe NASD,

Securities Exchange Act Release No. 7361 (July 2,1964).

Securities Exchange Act Release No. 7618 (June 4, 1965) .

8 Securities Exchange Act Release No. 7368 (July 14, 1964), aft"d 344 F. 2d

5 (C.A. 2, 1964).

•

•
THIRTY-FIRST ANNUAL REPORT 63

suspended Englander & Co., Inc. from NASD membership for a

period of 15 days, and found certain individual respondents to 'be

causes of the sanctions imposed on their firms. The Commission

found that Tager, together with or aided and abetted by the other respondents, wilfully violated the anti-fraud provisions of the securities

acts, including Rule 10b-6.

Tager, while engaged as underwriter in distributing stock of Diversified Collateral Corporation, induced Darius to enter quotations

for the stock in the National Quotation Bureau sheets at prices suggested by Tager. Englander also entered quotations in the sheets

during the same period. Both were told by Tager that the stock

was free for trading. The Commission pointed out that under Rule

1Ob-6 it is a manipulative or deceptive device for an underwriter

engaged in a distribution of a security to bid for or purchase such

security for any account in which he has a beneficial interest or to

attempt to induce any person to purchase any such security. It held

that Tager wilfully violated the rule since he attempted to induce

purchases by others by causing Darius and Englander to make a

market in the stock and insert quotations in the sheets while he was

still engaged in the distribution of the stock. The Commission further

held that the participation of Darius and Englander and the individual respondents in Tager's violations was wilful since they failed

to take reasonable precautions to satisfy themselves that the distribution was over instead of merely accepting Tager's self-serving

assertion that it was, before making a market in the security.

The Commission added that its findings and conclusions did not

mean that a dealer is not free to trade in a stock being distributed

by another dealer. The gravamen of the violations here was that

these respondents joined with Tager in activities designed to stimulate

purchases and maintain or increase the price of Diversified stock at

a time when Tager was engaged in a distribution which they knew

or should have known was not yet terminated.

In Albert J. DiGiacomo, doing business as Albert James 00.,9 the

Commission, pursuant to an offer of settlement submitted by respondent, and based on findings that he had wilfully violated the registration and anti-fraud provisions of the securities acts in the sale of unregistered shares of J-F Machine, Diesel and Electronics, Inc.

through the use of a false and misleading offering circular, and had

wilfully violated the record-keeping requirements under the Exchange Act, suspended his broker-dealer registration for 120 days

subject to the conditions that he would withdraw his registration

at the end of the suspension period and that the findings and order

of themselves would not be a bar after the termination of the suspen-

• Securities Exchange Act Release No. 7572 (April 12, 1965).
64 SECURITIES AND EXCHANGE COMMISSION

sion to his future employment in the securities business upon a showing that he would be employed under appropriate supervision. The

case is of interest in that it is the first instance in which the Commission, as newly empowered under Section 15(b) of the Exchange Act,

imposed a suspension of broker-dealer registration for a specified

period.

In Vidor R. Redstone, 10 the Commission found registrant responsible for wilful violations of the Federal securities laws committed by

persons whom he permitted to conduct a securities business under his

trade name and revoked his registration as a broker-dealer.

It was found that registrant, a sole proprietor, doing business as

Vanguard Investment Company, had agreed with two other persons to

form a corporation, also to be known as Vanguard Investment Company, to engage in the securities business at a time when his securities

business was dormant and he was engaged in the insurance business.

The other two parties to the agreement opened an officeand engaged

in the securities business under registrant's trade name. Thereafter,

these two individuals sold unregistered securities by means of false

and misleading statements in wilful violation of the Federal securities

statutes.

The Commission rejected registrant's claim that he was unaware

that securities were being sold under his trade name, citing several

instances evidencing his knowledge of such fact. Itstated that registrant was under a duty to exercise control and supervision over the

securities activities being conducted under his trade name, and since

he failed to do so, must be held responsible for the violations which

such activities entailed.

The Commission revoked the broker-dealer registration of Financial

Uounsellors, Lnc., and found Ernest F. Boruski, Jr. a cause of such

action, on the basis of findings that the registrant failed to disclose

in its application for registration, and amendments thereto, that Boruski controlled its business." The Commission found that Boruski,

a registered broker-dealer specializing in the retail sale of mutual

fund shares, conceived the idea of forming the registrant after revocation proceedings were instituted against him, in order to protect future

concessions on sales of mutual fund shares previously effected. The

record showed that the registrant was entirely under his control,

domination and management. In considering the question of what

remedial action was required in the public interest, the Commission

look into account the "intentional concealment and evasion," and

to Securities Exchange Act Release No. 7516 (January 22, 1965).

11 Securities Exchange Act Release No. 7371 (July 17, 1964), aff'd 399 F. 2d

196 (C.A. 2, 1964).
TEITRTY-FIRST~AL REPORT 65

emphasized the importance of the application for registration to the

performance of its enforcement functions.

Subsequently, the Commission revoked Boruski's broker-dealer registration and expelled him :from membership in the NASD on the

basis of his wilful violations of Section 17(a) of the Exchange Act

and Rule 17a-5 thereunder." The Commission found that for several

years Boruski had submitted reports of financial condition which

were not certified, as required by the rule, despite the fact that no exemption from certification was available. Following each submission

he was advised by the Commission's staff that the uncertified reports

did not qualify as a filing under the rule and that in order to avoid

a violation it would be necessary for him to file a proper report. Boruski contended that he was unable to find an accountant to certify his

reports and that the certification requirement was illegal since he could

not compel an accountant to do so.

The Commission rejected this argument, stating that the certification requirement contemplates a thorough review of a broker-dealer's

accounts and financial affairs for the purpose of safeguarding funds

and securities of customers and to give the public the protection which

an audit is designed to achieve, including the detached objectivity of

a disinterested person. The Commission stated that a broker-dealer

who submits a financial report which is not certified, whether because

he chose not to have it certified or because he submitted it to an accountant for certification in a form or under circumstances which

caused the accountant to refuse to certify it, is not complying with its

reporting requirements.

The Commission at the same time denied Boruski's application for

registration as an investment adviser, on the basis of its findings in the

B01'Uski and Financial Oouneellors broker-dealer proceedings.

Indicative of the fact that "boiler-rooms" present a continuing

problem are the decisions during the fiscal year in Albion Securities

Oompany, Inc.,I3 Wright, ~!lfyers&: Bessell, Inc.,14 lVilliam Glal1zman

&: 00., Inc.,t5 and Fabrikant Securities Oorporaiionr" The Commission, finding wilful violations of the anti-fraud provisions of the Federal securities acts by principals and salesmen of each of these firms,

revoked their broker-dealer registrations and in the Fabrikomt Securities case barred 12 individuals, most of them salesmen, from being associated with any broker or dealer.

1S Securities Exchange Act Release No. 7418, Investment Advisers Act Release

No. 175 (September 11, 1964) , aff'd 340 F. 2d 991 (C.A. 2, 1965).

13 Securities Exchange Act Release No. 7561 (March 24, 1965) .

.. Securities Exchange Act Release No. 7415 (September 8,1964).

,. Securities Exchange Act Release No. 7437 (October 8, 1964).

13 Securities Exchange Act Release No. 7600 (May 14, 1965) .

791-468-65---6
66 SECURITIES AND EXCHANGE COMMISSION

In all these proceedings the Commission found that the respondents had engaged in the sale of securities by the use of high pressure

telephone selling techniques, including the use of false and misleading

statements concerning the securities being sold and their issuers. As

is typical of "boiler-room" activities, the securities involved were unseasoned and speculative and were generally sold to persons with

whom the respondents were not acquainted and whose financial needs,

objectives and circumstances were unknown to them.

Suspension of Registration Pending Final Determination

Section 15(b) of the Securities Exchange Act authorizes the Commission to suspend a broker-dealer's registration pending final determination as to whether registration should be revoked. In order to

suspend registration, the Commission must find, after notice and opportunity for hearing, that suspension is necessary or appropriate

in the public interest or for the protection of investors. The registrations of two broker-dealers were suspended during the past fiscal year

on the basis of such findings." The entry of a suspension order is of

course not determinative of the ultimate issue whether registration

should be revoked.

Net Capital Rule

As previously noted," Rule 15c3-1 under the Exchange Act, commonly known as the net capital rule, was amended during the fiscal

year to impose minimum net capital requirements on brokers and dealers (effective December 1, 1965) and in certain other respects. The

amendments do not affect the previously existing requirement which

limits the amount of indebtedness which may be incurred by a brokerdealer in relation to its capital, by providing that the "aggregate indebtedness" of a broker-dealer may not exceed 20 times the amount

of its "net capital" as computed under the rule. During the past fiscal

year, violations of the net capital rule were charged in 11 injunctive

actions and in 16 administrative proceedings instituted against brokerdealers.

Registered broker-dealers who participate in "firm commitment"

underwritings must have sufficient capital to permit the participation

provided by the underwriting contract without impairing the capitaldebt ratio or minimum net capital prescribed by the rule. If a brokerdealer is unable to meet such requirements, he must decrease his "firm

commitment" until compliance with the rule is reached. If necessary

he may have to withdraw from the underwriting or particpiate on a

"best efforts" basis only.

l1Linder, Bilotti <£ 00., Inc.; Securities Exchange Act Release No. 7460 (November 13, 1964) and Brotunoalt Securities, Inc., Securities Exchange Act Release

No. 7556 (March 12, 1965).

IS See pp. 14-15, supra.
TEITRTY-FIRST~AL REPORT 67

Financial Statements

Rule 17a-5 under Section 17(a) of the Exchange Act requires registered broker-dealers to file annual reports of financial condition with

the Commission. Such reports must be certified by a certified public

accountant or public accountant who is in fact independent, with certain limited exemptions applicable to situations where certification

does not appear necessary for customer protection. A broker-dealer's

first report must reflect his flnancial condition as of a date between the

end of the 1st and 5th months after the effective date of registration.

All reports must be filed within 45 days after the date as of which the

report speaks.

Through these reports the Commission and the public may evaluate the financial position and responsibility of broker-dealers. The

financial report is one means by which the staff of the Commission determines whether the registrant is in compliance with the net capital

rule. Failure to file the required reports may result in the institution

of revocation proceedings.

During the fiscal year 4,317 reports of financial condition were filed

with the Commission, compared to tlie 1964total of 4,503.

Broker-Dealer Inspections

Section 11(a) of the Exchange Act provides for regular and periodic inspections of registered broker-dealers. During the fiscal year

a total of 1,392 such inspections was conducted. Inspections provide

one of the most useful means available to the Commission for the protection of investors. Among other things, the inspection determines

a broker-dealer's financial condition, reviews his pricing practices,

evaluates the safeguards employed in handling customers' funds and

securities, and determines whether adequate and accurate disclosures

are made to customers.

The Commission's inspectors also determine whether brokers and

dealers are keeping books and records as required by the Exchange

Act and the Commission's rules thereunder and are conforming to the

margin and other requirements of Regulation T of the Board of Governors of the Federal Reserve System. Inspectors also look for excessive trading or switching in customers' accounts. They frequently

find evidence of the sale of unregistered securities or of fraudulent

practices such as use of improper sales literature or sales techniques.

When an inspection reveals that a broker-dealer is in violation of applicable statutory provisions or rules, the action taken depends on the

type of violation and its effect on the public. The Commission does

not take formal action as a result of every infraction discovered. However, if the violation appears to be wilful and the public interest is

best served by formal action against the broker-dealer, the Commission promptly institutes appropriate proceedings.
68 SECURITIES AND EXCHANGE COMMISSION

The table below shows the types of infractions uncovered by the

inspection program during the fiscal year:

Number oj

brokerType dealer8

Financial difficulties_________________________________________________ 104

Improper hypothecation______________________________________________ 28

Unreasonable prices in securities purchases and sales___________________ 71

Non-Compliance with Regulation T____________________________________ 113

"Secret profits" 15

Non-eompliance with confirmation and bookkeeping rules________________ 907 Other 506

Total indicated violations 1,744

The National Association of Securities Dealers, Inc. and the principal stock exchanges also conduct inspections of their members, and

some states have inspection programs. Each inspecting agency conducts inspections in accordance with its own procedures and with particular reference to its own regulations and jurisdiction. Inspections

by the Commission are primarily concerned with the detection of violations of the Federal securities laws and the Commission's rules and

regulations. The inspection programs of the self-regulatory agencies

and of the states afford added protection to the public. The Commission and certain other inspecting agencies coordinate their inspections to avoid duplication and to obtain the widest possible coverage of

brokers and dealers. Agencies now participating in this coordination

program include the New York Stock Exchange, the American Stock

Exchange, the Boston Stock Exchange, the Midwest Stock Exchange,

the Pacific Coast Stock Exchange, the Philadelphia-BaltimoreWashington Stock Exchange, the Pittsburgh Stock Exchange, and the

National Association of Securities Dealers, Inc. Itis hoped that even

closer coordination may become possible in the future as recommended

by the Special Study of Securities Markets. This coordination, however, does not preclude the Commission from inspecting any brokerdealer that has also been inspected by another agency, and such

inspections are made whenever reason therefor exists.

SUPERVISION OF AcrIVITIES OF NATIONAL ASSOCIATION OF

SECURITIES DEALERS, INC.

Section 15A of the Exchange Act provides for the registration with

the Commission of national securities associations and establishes

standards and requirements for such associations. The Act contemplates that such associations will serve as a medium for self-regulation

by over-the-counter brokers and dealers. Their rules must be designed

to protect investors and the public interest, to promote just and equitable principles of trade, and to meet other statutory requirements.

They are to operate under the general supervision of the Commission,
TEITRTY-FIRST~AL REPORT 69

which is authorized to review disciplinary actions taken by them and

to consider all changes in their rules. The National Association of

Securities Dealers, Inc. (NASD) is the only association registered

under the Act.

The Securities Acts Amendments of 1964 significantly changed several statutory provisions regarding registered securities associations.

Such associations are now required to adopt appropriate standards

regarding the training, experience and other qualifications of members

and persons associated with members and to have rules designed to

produce fair and informative quotations of over-the-counter securities.

In addition, they may now bring disciplinary action directly against

individuals associated with members. The revision by the NASD of

its retail quotations system during the fiscal year is discussed in Part

I of this Report.

In adopting legislation permitting the formation and registration

of national securities associations, Congress provided an incentive to

membership by permitting such associations to adopt rules which preclude a member from dealing with a non-member except on the same

terms and conditions as the member affords the investing public. The

NASD has adopted such rules. Accordingly, membership is necessary

to the profitable participation in underwritings since members may

properly grant price concessions, discounts and similar allowances

only to other members. Loss or denial of membership due to expulsion or suspension or other ineligibility due to a statutory disqualification, or the failure to meet standards of qualification established in

NASD rules, may thus impose a severe economic sanction.

At the close of the fiscal year the NASD had 3,865members, reflecting a net decrease of 292 members during the year. This decrease was

the net result of 193admissions to and 486 terminations of membership.

During the year the registered representative population, which generally includes all partners, officers, traders, salesmen and other persons employed by or affiliated with member firms in capacities which

involve their doing business directly with the public, declined by 992

to stand at 16,843 as of June 30,1965. This decline was the net result

of 9,836 initial registrations, 10,288 re-registrations and 21,116

terminations of registrations during the year.

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.

mere violations are found the NASD may impose one or more sanctions upon a member, including expulsion, suspension, fine or censure.

If an individual is involved his registration as a representative may
70 SECURITIES AND EXCHANGE COMMISSION

be suspended or revoked, he may be suspended or barred from being

associated with all members, and he may be fined or censured. Under

Section 15A(b) (4) of the Exchange Act and the NASD's by-laws, 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;

is barred or suspended from association with a broker or dealer or with

all members of the NASD or an exchange; his registration as a brokerdealer has been denied, suspended or revoked; he has been found to be

a cause of certain sanctions imposed by the Commission, the NASD or

an exchange; or he has associated with him any person subject to one

of the above disqualifications.

During the past fiscal year the Association reported to the Commission its final disposition of disciplinary complaint actions against

294 member firms and 266 individuals associated with them.> With

respect to 80 members, complaints were dismissed as a result of findings

that the allegations of violations had not been sustained.w In the remaining cases, violations were found and penalties were imposed on

214 members and 186 registered representatives or other individuals.

The maximum penalty of expulsion from membership was imposed

against 43 members, and 20 members were suspended from membership for periods ranging from 1 day to 2 years. In many of these

cases, substantial fines were also imposed. In another 124 cases, members were fined amounts ranging from $50 to $20,000. In 27 other

cases, the only sanction imposed was censure, although censure was

usually a secondary penalty where a more severe penalty was also

imposed.

Various penalties were also imposed on registered representatives

found in violation of NASD rules. The registrations of 86 representatives were revoked and 45 had their registrations suspended for periods

:a Some members were involved in more than one action and some decisions

covered more tban a single complaint. Thus, two members were eacb expelled in

two disciplinary actions reported in separate decisions. On the other band, three

decisions each related to four complaints wbicb bad been consolidated for

purposes of hearing and decision .

.. The majority of the cases wbere allegations against members were dismissed

involved misuse of customers' and/or firm securities or funds by a representative

under such circumstances that the member could not bave known of or prevented

such impropriety. Association procedures did not, in this period, permit disciplinary action solely against a registered representative 'but required the naming of

the member as a respondent even though it was clear that the member was blameless. Tbe Securities Acts Amendments of 1964 in etrect autborized registered

securities associations to take disciplinary action directly against individuals

associated with members. The NASD has amended its rules to provide for such

action.
TEURTY-FIRST ANNUAL REPORT 71

ranging from 2 weeks to 3 years." Fines in various amounts were

also imposed against many revoked or suspended representatives. In

addition, 40 other representatives were fined amounts ranging from

$50 to $3,000. Allegations of violations against 80 representatives

were dismissed on findings that no violations had been established.

Commission Review of NASD Disciplinary Action

Section 15A(g) of the Act, as amended, provides that disciplinary

actions by the NASD are subject to review by the Commission on its

own motion or on the timely application of any aggrieved person.

This Section also provides that upon application for review 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 Commission finds that the disciplined

party engaged in or omitted such acts or practices as were found by

the NASD, that such acts, practices, or omissions to act are in violation

of such rules of the Association as have been designated in the determination, and that such conduct was inconsistent with just and equitable principles of trade, the Commission must dismiss the review proceedings unless it finds that the penalties imposed are excessive or

oppressive, having due regard to the public interest, in which case it

must cancel or reduce such penalties.

At the start of the fiscal year, 19 NASD disciplinary decisions were

pending before the Commission on review. During the year 18 additional cases were brought up for review as a result of timely petitions

by aggrieved parties." Two review petitions were withdrawn prior

to determination and 16 cases were disposed of by the Commission. In

7 of these cases, the Commission sustained the disciplinary action

taken by the NASD,28 in 4 it set aside the Association action," and

in the remaining 5 cases the Commission reduced the penalties imposed

%1.As has been noted, a person found a cause of the expulsion or suspension

of a member is disqualified from associwtion with a member. The cause finding is

therefore often used where an individual found ,00have violated Association rules

should have been but was not registered as a registered representative. The

numbers used in the text include unregistered individuals found to have been a

cause of the expulsion or suspension of a member with registered representatives

whose registrations were revoked or suspended, since this is the practical consequence of a cause finding.

"The Commission rejected as untimely review petitions in two other cases.

.. Securities Exchange Act Release Nos. 7390 (August 14, 1964) ; 7407 (September 3, 1964); 7409 (September 2, 1964); 7456 (November 5, 1964); 7464

(November 19, 1964) ; 7479 (December 7,1964) ; and 7619 (June 3, 1965).

.. Securities Exchange Act Release Nos. 7364 (July 9, It/64); 7463 (November 19, 1964) ; 7469 (November 23, 1964) ; and 7626 (June 9, 1965).
72 SECURITIES AND EXCHANGE COMMISSION

by the Association.s" Nineteen cases were pending as of the end of the

year.

In a significant decision reversing an NASD decision adverse to

Southern Brokerage 00., Ino., the Commission found that the failure

of the firm to consummate a stock-purchase contract resulted from the

firm's good faith belief that the transaction was part of a manipulative and fraudulent scheme," The Commission concluded that under

these circumstances the firm's action did not violate an NASD rule

requiring the observance of "high standards of commercial honor and

just and equitable principles of trade," and it set aside the penalties

imposed by the NASD of censure, a $1,000 fine and a 30-day suspension of the firm from NASD membership.

Southern Brokerage had failed to accept delivery of and pay for

400 shares of Jerome, Richard & Co., Inc., a New York broker-dealer

firm, in July 1963. According to the Commission's decision, the firm

refused to consummate the transaction after it learned that Commission employees were investigating transactions in Jerome stock, that

one of the firms to which it was supposed to deliver Jerome stock had

refused to pay a draft and another had turned out to be non-existent,

and that the only persons with whom it had had any personal dealings

in Jerome stock had suddenly left their employment and were una vailable. For these and other reasons, the Commission concluded that the

firm "honestly and with reasonable basis" believed that its transaction

with the complainant was part of a fraudulent scheme, and that its refusal to carry out the transaction "did not constitute unethical or dishonorable conduct" in violation of the NASD rule. '

In another opinion issued on the same day, the Commission sustained NASD disciplinary action against Nassau Securities Service

for its failure to pay the $325 balance arising out of a "buy-in." 27

Such failure had been found by the NASD to violate its rules and it

had censured the firm and fined it $1,000.

According to the Commission's decision, the Nassau firm made a

short sale of 100 shares of stock of Cryplex Industries, Inc., at $6.75

per share for delivery October 31st (later extended). The purchaser

(complainant), in a separate transaction, sold 100 shares of Cryplex

stock to a third firm, which later executed a buy-in against the complainant by purchasing Cryplex shares at $10 per share. The complainant then notified Nassau that the buy-in was being treated as a

es Securities Exchange Act Release Nos. 7378 (July 29,1964) ; 7438 (October 9,

1964) ; 7453 (October 30,1964) ; 7527 (February 10, 1965) ; and 7564 (March 26,

1965).

.. Securities Exchange Act Release No. 7463 (November 19,1964).

27 Securities Exchange Act Release No. 7464 (November 23, 1964), a1'f'd 34R

F.2d 133 (C.A.2,l965).
TEITRTY-FIRST~~AL REPORT 73

close-out of Nassau's transaction with the complainant. In the meantime, Nassau had purchased 100Cryplex shares at $8.25 per share, but

by reason of late delivery the tender of these shares to complainant

was not made until a day after the November 13th deadline fixed by

complainant, and was refused as too late. Complainant paid the

balance owed by it to the third firm, but Nassau did not pay complainant the $325 difference between its contract price and the buy-in price.

Nassau defended its action by claiming that the market for Cryplex

stock was being manipulated and that the buy-in procedure was being

used as a part of the manipulation scheme. However, according to

the Commission's decision, Nassau participated (with some 16 other

firms) in the making of a market in Cryplex when it was aware of

most of the factors which it was claiming suggested a manipulation.

Furthermore, when bought-in by complainant, Nassau did not communicate its asserted suspicions of fraud to complainant but, instead,

sought a further extension for delivery of the Cryplex shares. Although Nassau offered to put the $325 in escrow pending an investigation of the Cryplex market, it only made this offer to the NASD, not

to complainant. The Commission concluded that applicant was not

justified in resorting to non-payment of an obligation owed a fellow

NASD member as a lever to secure an investigation, that in view of all

the circumstances Nassau "had no equitable justification for its refusal to honor its obligation to complainant," and that its conduct

therefore violated NASD rules.

The Commission also sustained action by the NASD revoking

the registration of Hugh M. Casper, president and a registered representative of an NASD member."

The sole issue was whether the penalty, which was imposed as a result of Casper's admittedly taking, on behalf of a trainee of the member, an NASD qualification examination for registered representatives, was excessive. Casper urged in mitigation that he was a close

friend of and had a deep personal interest in the trainee, that his decision to take the examination for the trainee, at the latter's request, was

made on the spur of the moment, and that it involved no personal

profit or gain and was motivated by kindness and charity for the

trainee who was beset by financial, health and other problems.

The Commission, in its decision, concluded that the record failed to

provide an adequate basis for leniency. After stressing the importance of examinations in upgrading the level of competence in the securities business, the Commission's decision stated, "we regard a deception in connection with the taking of those examinations, particularly as was practiced in this case, to be so grave that we would not

find the extreme sanction of revocation or expulsion to be excessive or

.. Securities Exchange Act Release No. 7479 (December 7, 1964).
74 SECURITIES AND EXCHANGE COMMISSION

oppressive unless the most extraordinary mitigative facts were

shown." The Commission regarded Casper's conduct as "particularly

reprehensible" because he agreed to take the examination for the

trainee even though, as president of the member, he had previously

certified as to the trainee's good character and competence in the application for registration of the trainee submitted to the NASD by

the member.

Commission Review of NASD Action on Membership

As previously noted, Section 15A(b) (4) of the Act and the by-laws

of the NASD provide that, except where the Commission finds it

appropriate in the public interest to approve or direct to the contrary,

no broker or dealer may be admitted to or continued in membership

if he, or any person associated with him, is under any of the several

disabilities specified in the statute or the by-laws. A Commission order

approving or directing admission to or continuance in Association

membership, notwithstanding a disqualification under Section 15A (b)

(4) of the Act, or under an effective Association rule adopted under

that Section or Section 15A (b) (3), is generally entered only after the

matter has been submitted initially to the Association by the member

or applicant for membership. The Association in its discretion may

then file an application with the Commission on behalf of the petitioner. 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, two applications for approval of

admission to or continuance in membership were pending. During

the year four additional applications were filed, four were approved,"

and one was denied," leaving one application pending at the year's

end.

Commission Inspections of the NASD

Under the regulatory scheme of the Exchange Act the Commission

is also charged with general oversight of national securities associations in the performance of their self-regulatory activities. In carrying out this responsibility the Commission staff conducts periodic

inspections of various phases of NASD activity. These inspections

assist the Commission in insuring that the NASD is complying with

its self-regulatory responsibilities and enable the Commission to recommend improvements designed to increase the effectiveness of such

self-regulation.

During the past fiscal year, inspections were made of the operations

of the Association's district offices in San Francisco, Los Angeles and

29 Securities Exchange Act Release Nos. 7862 (July 6, 19tH) ; 7452 (October

28,1964) ; 7458 (November 5,1964) ; and 7606 (l\Iay 20, 19C>5).

'0 Securities Exchange Act Release No. 7440 (October 8, 19M).
TIDRTY-FIRST A1Ii"£-.TUALREPORT 75

Atlanta, and of the programs of the NASD's national office for supervising the enforcement activities of all of the district offices and for

the review of members' advertising and securities sales literature pursuant to the recently adopted NASD statement of policy with respect

to such literature. Where it appeared to the staff of the Commission

that modifications of NASD procedures or policies were desirable in

order to improve the Association's performance, the staff's views were

communicated to the Association and conferences where held to arrive

at appropriate solutions. During the year the NASD took steps to

upgrade its regulatory performance in several areas as a result of

the inspection program and these discussions.

REVISION OF RULES, REGULATIONS AND FORMS

Part I of this Report discusses a number of new rules and forms,

and amendments to existing rules and forms, which were adopted or

proposed during the fiscal year in connection with the implementation

of the Securities Acts Amendments of 1964 and the Report of the

Special Study of Securities Markets. Additional revisions are summarized below.

Adoption of Rule 0-8

Section 15 (b) (4) of the Exchange Act, as amended in 1964, provides

that any section of that Act' (other than Section 5 and subsection (a)

of Section 15) which prohibits any act, practice, or course of business

if the mails or any means or instrumentality of interstate commerce

are used in connection therewith, shall also prohibit any such act, practice, or course of business by any broker-dealer registered under Section 15 (b) or by any persons acting on behalf of such broker or

dealer irrespective of any use of the mails or interstate facilities. In

order to conform those rules and regulations under the Act which refer

to the use of the mails or interstate facilities, the Commission during

the fiscal year adopted Rule o.-.:s which is in the terms of the statutory

provision."

Amendments of Rules lOb-6 and 16b-iJ

During the fiscal year the Commission extended the exemptive provisions of Rule 16b-3 and paragraph (e) of Rule 10b-6 to options

which meet the conditions set forth in Section 4:24(b) of the Internal

Revenue Code for "restricted stock options" except for the fact that

they were granted after January 1, 1964.82

Rule .10b-6 makes it unlawful for participants in a distribution of

securities, including the issu~r of the securities, to purchase any such

security, or any security of the same class or series, until completion

of their participation in the distribution, subject to specified excep111 Securities Exchange Act Release No. 7406 (August 28, 19(4) .

.. Securities Exchange Act Release No. 7667 (November 20, 1964).
76 SECURITIES AND EXCHANGE COMMISSION

tions. Paragraph (e) of Rule 10b-6 provides that the prohibitions of

the rule do not apply, inter alia, to any distribution of securities by an

issuer to its employees, or to employees of its subsidiaries, or to a trustee

or other person acquiring securities for the account of such employees,

pursuant to a stock option plan involving only "qualified stock options"

or "restricted stock options" or qualifying as an "employee stock purchase plan." Previously these terms were defined only by reference to

Sections 422 through 424 of the Internal Revenue Code of 1954, as

amended.

Rule 16b-3 provides an exemption from Section 16(b) for shares of

stock (other than stock acquired upon the exercise of an option, warrant, or right) acquired by an officer or director pursuant to a stock

bonus, profit sharing, retirement, incentive, thrift, savings or similar

plan meeting specified conditions. The rule also exempts the acquisition of a "qualified" or a "restricted" stock option pursuant to a qualified or a restricted stock option plan, or a stock option pursuant to an

"employee stock purchase plan." As with Rule 10b-6 (e), the terms

"qualified stock option," "restricted stock option" and "employee stock

purchase plan" previously were defined only by reference to Sections

422 through 424 of the Internal Revenue Code, as amended.

On August 27, 1964, the Commission adopted certain amendments

to Rules 10b-6 and 16b-3 and Form 10 under the Exchange Act and

Forms S-1, S-8, and S-l1 under the Securities Act with respect to stock

options which are eligible for special tax benefits." These amendments

were designed to make the Commission's forms and rules consistent

with the Internal Revenue Code, as amended by the Revenue Act of

1964, i.e., to provide all tax-favored options the same exemptive or

favorable treatment as had been extended to the previous tax-favored

options. Thereafter, it was brought to the attention of the Commission

that certain companies desired to continue to grant options which met

the former requirements for "restricted stock options" but which were

not eligible for special tax benefits as a result of the amendments to the

Internal Revenue Code. The effect of the further amendments of

Rules 10b-6 and 16b-3 is to make the exemptive provisions of those

rules applicable to such options if they meet the requirements of Section 424(b) for "restricted stock options" except for the fact that they

were granted after January 1, 1964. At the same time, the Commission

amended Form S-8 to authorize its use for the registration of stock to

be offered pursuant to such options."

An additional amendment to Rule 16b-3 adopted during the fiscal

year extended the exemption to certain plans which could not presa Securities Exchange Act Release No. 7403, Securities Act Release No. 4718,

discussed at pp. 12-13 of the 30th Annual Report.

S< Securities Act Release No. 4733 (November 20,1964).
TEITRTY-FIRST ANNUAL REPORT 77

viously meet the conditions of the rule." One of the conditions of the

exemption is that the plan must have been approved by the holders of

a majority of the securities of the issuer present, or represented, and

entitled to vote at a meeting of shareholders, or by the written consent

of the holders of a majority of the securities of the issuer entitled to

vote.

Prior to the amendment, the rule required that the security holders'

vote or written consent must have been solicited substantially in accordance with the rules and regulations in effect under Section 14(a)

of the Act at the time of such vote, whether or not such rules and regulations were applicable to the solicitation. In order to extend the

benefits of the exemption to plans approved, prior to registration of

securities under Section 12 of the Act, by the vote or written consent

of shareholders not solicited substantially in accordance with the

rules and regulations under Section 14(a) because such rules were not

then applicable, the rule as amended requires only, subject to certain

conditions, that such vote or written consent have been obtained in

accordance with the applicable laws of the state or other jurisdiction

in which the issuer was incorporated.

Rescission of Rule 12f-5

The 1964 amendments deleted from Section 12(f) of the Exchange

Act the provision requiring "any national securities exchange" or "any

person directly or indirectly controlled by such exchange" to differentiate, in the publication of quotations or transactions, between listed

securities and securities to which unlisted trading privileges have been

extended. Rule 12f-5 which provided for the manner in which quotations or transactions should be differentiated was therefore

rescinded;"

Amendments to Rules 13a-15 and 15d-15

During the fiscal year, the Commission on two occasions adopted

amendments to Rules 13a-15 and 15d-15 which require the filing of

quarterly reports by certain real estate companies. Rule 13a-15 relates to real estate companies having securities registered on a national

securities exchange pursuant to Section 12(b) of the Act and to overthe-counter real estate companies having securities registered with the

Commission pursuant to the new Section 12(g) of the Act. Rule

15d-15 relates to real estate companies which have registered securities

under the Securities Act of 1933 and are required to file reports with

the Commission pursuant to Section 15(d) of the Securities Exchange

Act. The first amendments adapted the rules to the Securities Acts

IS Securities Exchange Act Release No. 7559 (March 22, 1965) .

.. Securities Exchange Act Release No.7 408 (September 1, 1964).
78 SECURITIES A..~D EXCHANGE COMMISSION

Amendments of 1964.31 The subsequent amendments made some language corrections in the rules."

Amendments and Proposed Amendments to the Proxy Rules

As previously noted, the Commission amended. the proxy rules during the fiscal year to make them applicable to solicitations, commenced

on or after July 1, 1965, with respect to securities registered. pursuant

to the new Section 12(g) .39 Inaddition, the proxy rules, which were

adopted pursuant to Section 14(a) of the Act and were previously

designated "Regulation 14," were redesignated "Regulation 14A"

in order to differentiate them from other rules which the Commission may adopt pursuant to Sections 14(b) and (c) of the Act. The

Commission also amended Rule 14a-6 of Regulation 14A, which requires the filing of proxy material with the Commission and with

any exchange on which the issuer has securities listed and registered.

The amendment increased from four to eight the number of definitive copies of the proxy statement, form of proxy and other soliciting

material required to be filed with the Commission. Four copies will

be kept in the Commission's principal office for the use of the staff

and for public inspection. The additional copies will be placed in

the principal regional offices of the Commission and in the regional

office for the region in which the registrant has its principal office.

This is intended to make the information contained in such material

more readily available to interested persons, in line with the recommendations of the Special Study of Securities Markets.40

Prior to the adoption of the foregoing amendments, the Commission

invited public comments on a number of proposed amendments to the

proxy rules which would clarify the existing rules and embody in

the rules certain long-standing practices of the Commission. A limited number of substantive changes in the rules were also proposed.

For example, a proposed amendment to Rule 14a-4 would require

that, in certain instances, the form of proxy contain a provision

whereby a security holder may grant or withhold authority to vote

for elections to offices where other specified matters are being voted

upon. In addition, the scope of Item 7 (f) of Schedule 14A, calling

for a description of any material interest of certain persons in transactions with the issuer, would be clarified and extended, A detailed.

description of all of the proposed amendments is contained in Securities Exchange Act Release No. 7481 (December 7,1964). Consideration of the amendments has not been completed and the matter was

pending at the close of the fiscal year .

...Securities Exchange Act Release No. 7525 (February 5,1965).

as Securities Exchange Act Release No. 7576 (April 14, 1965) .

.. See page 41, 8upra.

40 Securities Exchange Act Release No. 7566 (April 8, 1965).
TEURTY-FIRST~AL REPORT 79

Amendments of Rule lSb-2 and Form BD

As has been noted, the 1964 amendments to Section 15(b) of the

Exchange Act expanded the grounds on which the Commission is

empowered to deny broker-dealer registration or to impose a sanction

on a registered broker-dealer. Although consideration is being given

to substantive amendments to Form BD (the form used for applications for registration as a broker-dealer and for amendments to such

applications) and applicable rules, it was deemed necessary in the

meantime to amend Form BD to include reference to the new disqualifications.v At the same time the Commission also amended Rule

15b-2 which requires the filing of amendments to applications for

broker-dealer registration when pertinent facts have changed, to

delete certain archaic provisions and to provide that every amendment

filed pursuant to the rule shall constitute a "report" within the meaning of all applicable provisions of the Act, as amended."

Amendments of Rule lSb-9 under the Exchange Act and Rule 9(b) under the

Commission's Rules of Practice

The procedures relating to the participation of associated persons

in broker-dealer proceedings are prescribed by Rule 15b-9 under the

Exchange Act and Rule 9(b) of the Commission's Rules of Practice.

In order to implement the amendments to the Exchange Act which

permit direct action against such persons, the Commission amended

these rules during the fiscal year to provide that unless the Commission otherwise directs, such rules shall apply only to proceedings

instituted prior to August 20, 1964, the date of the enactment of the

Securities Acts Amendments of 1964.43

Rescission of Rule lSc2-2

Section 15(c) (5) which was added to the Exchange Act by the

Securities Acts Amendments of 1964, authorizes the Commission summarily to suspend over-the-counter trading in any non-exempt security

for a period not exceeding 10 days. It also prohibits any broker

or dealer from effecting any transaction in, or inducing the purchase

or sale of, any security in which trading is suspended. This Section

eliminated the need for Rule 15c2-2 which prohibited a broker or

dealer from effecting transactions in, or inducing the purchase or sale

of, a security in which trading was suspended pursuant to Section

19(a) (4) and that rule was therefore rescinded."

U Securities Exchange Act Release No. 7430 (September 10, 1964) .

.. Ibid .

.. Securities Exchange Act Release No. 7408 (September 1, 1964) .

.. Securities Exchange Act Release No. 7422 (September 22, 1964).
80 SECURITIES AND EXCHANGE COMMISSION

Amendment of Rule 15c3-1

The amendments of Rule 15c3-1, the net capital rule, have already

been discussed in some detail." Among the amendments, in addition

to one providing for minimum net capital requirements, was one

requiring broker-dealers not subject to exchange rules to make appropriate adjustments in computing net capital if they carry futures

commodities contracts for customers. The New York Stock Exchange

and other national securities exchanges whose members handle the

great majority of commodities futures transactions have imposed

additional capital requirements on those members who conduct such

a business. These changes resulted from a recognition that there are

situations in which, either because of the nature of trading in commodities futures or the limited amount of margin required to be

obtained from customers under the rules of various commodity

exchanges, brokers who effect futures commodities transactions for

customers may incur liabilities which create additional risks for the

iunds and securities of securities customers. Additional amendments

relate to the circumstances under which subordinated loans may be

excluded from "aggregate indebtedness" and to the exemptions from

the requirements of the rule.

Amendments of Rules 15ab-l and 15ag-l

In implementation of the 1964 amendments to Section 15A expanding the conditions under which a person may be ineligible for membership in a national securities association or for association with a

member thereof, and reducing from 60 days to 30 days the time within

which an application for review of association disciplinary action

must be filed, the Commission amended Rule 15ab-1 (procedures for

applying for relief from statutory disqualification) and Rule 15ag-l

(procedures for applying for review of disciplinary action or denial

of membership by a registered securities association) to conform

their provisions to the amended statutory provisions."

Amendment of Rule 16a-2

During the fiscal year the Commission invited public comments on

a proposed amendment of Rule 16a-2 relating to the method of computing percentage ownership under Section 16(a) of the Act,47and,

shortly after the close of the fiscal year, the rule was amended.v

As amended, Rule 16a-2 provides in general that for the purposes

of computation under Section 16(a) of the Act the amount of a class

of equity securities shall be deemed to consist of the total amount of

... See pp. 14-15, 8upra .

.. Securities Excha'llge Act Release No. 7408 (September 1.1964) .

r Securities Exchange Act Release No. 7580 (ApriI 21, 1965) .

...Securities Exchange Act Release No. 7667 ,August 3, 1965).

•
THIRTY-FIRST ANNUAL REPORT 81

securities outstanding of the class, exclusive of any securities of the

class held by or for the account of the issuer. Previously, the rule

provided that such computations should be based on the amount of

the class issued, whether or not any portion of the class was held by

or for the account of the issuer.

The amended rule provides that a person acting in good faith may

rely on information with respect to the amount of securities outstanding of a class contained in the issuer's latest consolidated financial

statement in a registration statement or annual report (e.g., Form

lO-K or 12-K) filed with the Commission under the Exchange Act.

Adoption of Rule 16b-IO

The Commission adopted a new Rule 16b-l0 which exempts from

the operation of Section 16(b) of the Exchange Act (providing for

the recovery of "short swing" profits realized by insiders) certain

acquisitions of securities from the issuer made in exchange for other

securities by a railroad or other person subject to Part I of the Interstate Commerce Act.49

Proposed Amendments of Rules 17a-3 and 17a-4

During the fiscal year the Commission announced that it had under

consideration a proposal to amend Rules 17a-3 and 17a-4. 50 The

proposed amendments would require certain members of national

securities exchanges and other broker-dealers to prepare a record of

computation of the ratio of aggregate indebtedness to net capital as

of the date of the trial balance they are now required to make at least

once a month and to preserve such computation for not less than 3

years. One purpose of the proposed requirement is to assist members, brokers and dealers to keep currently informed of their capital

positions under Rule 15c3-l.

The proposed amendments were still under consideration at the

closeof the fiscal year.

Proposed Amendments to Form 8-K

Form 8-K is prescribed for current reports filed pursuant to Sections 13 and 15(d) of the Securities Exchange Act. During the fiscal

year, the Commission announced that it has under consideration

certain proposed amendments to Form 8-K and invited public comments."" Proposed amendments to Form 8-K have been published

on two previous occasions." The comments and suggestions received

in response to those proposals were carefully considered in the preparation of the current proposals .

.. Securities Exchange Act Release No. 7551 (March 10,1965) .

.. Securities Exchange Act Release No. 7550 (March 10, 1965).

61 Securities Exchange Act Release No. 7495 (December 31,1964) .

.. Securities Exchange Act Release No. 6770 (April 5, 1962) ; Securities Exchange Act Release No. 5979 (June 9, 1959).

791-468--65-7
82 SECURITIES AND EXCHANGE COMMISSION

Prompt public disclosure of significant developments in the business

and financial affairs of a company is of the utmost importance to

insure fair dealing in the company's securities. This fact has received

increasing recognition. To a growing extent the national securities

exchanges have supplemented the basic disclosure requirements of the

Commission (as set forth in Form 8-K) with provisions in their listing agreement forms, and with other policies under which listed

companies must make immediate public disclosure of a variety of

material developments which might significantly affect the market

for their securities and the interests of investors.

The proposed amendments are largely of a clarifying nature. In

some instances they operate to make explicit certain long-standing

administrative interpretations. In addition, certain new requirements have been added to elicit information which experience has

shown to be of significance to investors. The principal changes proposed involve the reporting of timely information in connection with

the pledging of securities which may result in a change in control

if there is a default under the pledge agreement, the acquisition or

disposition of a significant amount of assets otherwise than in the

ordinary course of business, the interest of management and others

in certain transactions and the issuance of debt securities by

subsidiaries.

These amendments were still under consideration at the close of the

fiscal year.

Amendments to Forms 10 and 100K

Form 10 is a general form for registration of securities on a national

securities exchange or pursuant to Section 12(g) of the Securities Exchange Act. Form 1G-K is a general form for annual reports of

issuers having securities registered on a national securities exchange,

issuers required to file reports pursuant to Section 15(d) of the Act,

and issuers of securities registered under Section 12(g) of the Act.

As previously noted," Forms 10 and 1G-K were amended during the

fiscal year for the principal purpose of making them available for

registration of securities pursuant to Section 12(g) and for annual

reports of issuers of such securities.

Adoption of Forms 12 and 12-K

During the fiscal year, the Commission adopted new special forms

under the Securities Exchange AFt for registration of securities, and

for annual reports, of certain issuers which file reports with the Federal Power Commission, the Interstate Commerce Commission or the

Federal Communications Commission."

G3 See p. 6, 8upra.

Ii< Securities Exchange Act Release Nos, 7552 and 7553 (March 12, 19(5).
THIRTY-FIRST ANNUAL REPORT 83

Form 12may be used by such issuers for the registration of securities

on a national securities exchange pursuant to Section 12(b) or for the

registration of equity securities pursuant to Section 12(g). Registration statements on the new form consist largely of copies of the annual

reports of such issuers to the other Federal agencies together with

certain other exhibits, including copies of material contracts. Use of

the form is optional and any issuer may use Form 10 if it desires to

do so.

Form 12-K may be used for annual reports of such issuers pursuant

to Section 13 or 15(d) of the Act. Annual reports on the new form

consist largely of copies of the annual reports of such issuers to the

other Federal agencies together with certain other exhibits. Use of

the form is optional and any issuer may use Form 100K if it so desires.

Proposed Amendments to Forms 16 and 16-K

During the fiscal year, the Commission announced that it has under

consideration proposed revisions of Forms 16 and 16-K under the

Securities Exchange Act and invited public comrnents."

Form 16 is prescribed for the registration of voting trust certificates

on a national securities exchange. The revised form would be prescribed for that purpose and also for registration of voting trust

certificates pursuant to Section 12(g) of the Act.

Form 16-K is now prescribed for annual reports relating to voting

trust certificates which are registered on a national securities exchange.

The revised form would also be used for annual reports relating to

voting trust certificates registered pursuant to Section 12(g) of the

Act and for annual reports filed pursuant to Section 15(d) of the Act

relating to voting trust certificates registered under the Securities Act

of 1933. Reports pursuant to Section 15(d) are now filed on Form

3-MD, which would be rescinded.

The format of the revised forms would, in general, follow that of the

Commission's more recently adopted forms. The separate instruction

books would be abolished and the necessary instructions contained

therein would be incorporated in the forms proper in accordance with

current practice. Some of the general instructions, including certain

definitions which are now contained in the General Rules and Regulations, would be dropped from the forms to avoid duplication. Appropriate references to the General Rules and Regulations would be

contained in the revised forms.

Certain additional items would be added to Form 16-K to require

disclosure with respect to matters such 3S the amounts of securities

deposited and withdrawn during the year and the exercise of voting

and other powers by the voting trustees .

.. Securities Exchange Act Release Nos. 7636 and 7637 (June 30, 1965).
PART V

ADMINISTRATION OF THE PUBLIC UTILITY HOLDING

COMPANY ACT OF 1935

In administering the Public Utility Holding Company Act of 1935

the Commission regulates interstate public-utility holding-company

systems engaged in the electric utility business and/or in the retail distribution of gas. The Commission's jurisdiction also extends to natural gas pipeline companies and other non-utility companies which

are subsidiaries of registered holding companies. Although the matters under the Act dealt with by the Commission and its staff embrace

a variety of intricate and complex questions of law and fact generally

involving more than one area of regulation, briefly there are three

principal regulatory areas. The first covers those provisions of the

Act, contained principally in Section 11(b) (1), which require the

physical integration of public-utility companies and functionally related properties of holding-company systems and those provisions,

contained principally in Section 11(b) (2), which require the simplification of intercorporate relationships and financial structures of holding company systems. The second covers the financing operations of

registered holding companies and their subsidiaries, the acquisition

and disposition of securities and properties, and certain accounting

practices, servicing arrangements and intercompany transactions,

The third includes the exemptive provisions of the Apt, the provisions

covering the status under the Act of persons and companies, and those

regulating the right of a person affiliated with a public-utility company to acquire securities resulting in a second such affiliation. Matters embraced within this last area of regulation come before the Commission and its staff frequently. Many such matters do not result in

formal proceedings and others are reflected in such proceedings only

in an indirect manner when they are related to issues principally under

one of the other areas of regulation.

The Branch of Public Utility Regulation of the Commission's

Division of Corporate Regulation performs the principal functions

under the Act. It observes and examines problems which arise in

connection with transactions which are or may be subject to regula84
TEIRTY-FIRST ANNUAL REPORT 85

tion under the Act and discusses such problems with interested persons

and companies and advises them as to the applicable sections of the

Act, the rules thereunder and Commission policy with respect thereto.

Questions are raised with and problems presented to the staff daily.

These include questions raised by security holders and problems presented by companies contemplating transactions which require the

filing of an application or declaration, particularly financing operations and the acquisition and disposition of securities and properties.

This day-to-day activity includes prefiling discussions and conferences,

in person and by telephone, with company representatives and with

other persons where the matter under consideration affects their interests. In those instances where formal proceedings are held, members

of the staff actively participate in hearings and often aid the Commission in the preparation of its decision on a particular matter. The

staff continually re-examines the status of exempt companies, examines

the annual reports filed with the Commission and those sent to stockholders and must keep abreast of new technical developments in the

electric and gas industry, including the use of atomic energy as a

source of power.

COMPOSITION OF REGISTERED HOLDING-COMPANY SYSTEMS

At the close of the fiscal year there were 23 holding companies registered under the Act. Of these, 18 are included in the 16 remaining

holding-company systems which are herein classified as "active registered holding-company systems," 2 of the 18 being subholding companies in these active systems,' The remaining 5 registered holding

companies are of relatively small size and are excluded from the active

holding-company systems.2 In the 16 active systems there are 86 electric and/or gas utility subsidiaries, 42 non-utility subsidiaries, 9 inactive companies, or a total, including the 18 parent holding companies, of 155 system companies. The following table shows the

number of holding companies and the number of subsidiaries (classified as utility, nonutility, and inactive) in each of the active systems

as of June 30, 1965, and the aggregate assets of these systems, less

valuation reserves, as of December 31, 1964:

1The two subholding companies are The Potomac Edison Co., a subsidiary of

Allegheny Power System, Inc., and Southwestern Electric Power Co., a subsidiary

of Central and South West Corp.

These holding companies are American Gas Co.; British American Utilities

Corp.; Kinzua Oil & Gas Corp., and its subholding company, Northwestern

Pennsylvania Gas Corp.; and Standard Gas & Electric Co., which is in process

of dissolution.

•
86 SECURITIES AND EXCHA..~GE COMMISSION

Otassiftoatton. ot companies as of June 30, 1965

Aggregate on- system as- util- In- Total sets, less

ity active com- valuation. bsid- com- panies reserves, aries panles at Dec. 31, 1964

(thousands)

7 1 22 $679,623

9 1 23 1,752,683

4 ----_.-- 7 1,003,389

1 1 8 835,215

9 -------- 20 1.497,786

3 -------- 8 920,193

------ -------- 3 246,796

------ 2 7 108,745

3 -------- 10 1,177,30S

1 3 10 939,702

3 8 258,146

1 -------- 18 759,178

5 764,204

----2- 1 3 57,810

-------- 8 1.799,000

2 323,488

43 9 162 13,123,263

-1 0 -7

-----.-- 293,073 ---

42 9 155 13,416.336

12

12

2

4

10

4

2

4

6

5

4

16

4

1

5

1

92

86

-6

Registered

holdmgoperating s companies

---

I 1

1 0

1 0

1 1

1 0

1 0

1

1 0

1 0

1 0

1 0

1 0

1

I

0

1 ---6

---

6

o

o

o

1

o

12

Solely Elecregis- trio N

tered and/or

hold- gas

mg utrlrty su com- subsid- i parne iarfes

Subtotals ••• 12

Less: Adjustment to elumnate dupheation In countresultmgfrom 3companies being subsldiaries In 2 systems and 2

companies being subsidianes In 3 sys- tems

Add: Adjustment to include the assets of

these 5 jointly owned subsidfarres and

~~s~~~~ t~~ef::,h\chO~~fr:cf~d~':i In the system assets above

T~;~;~.r~~~-~~-~-~~~s-~~-~::-1

1. Allegheny Power System, Inc

2. Amencsn Electric Power Co .Tne 3. American Natural Gas Co

4. Central and South West Corp

5 Columbia Gas System, Inc .• 'I'he.;

6. Consolldated Natural Gas Co

7. Delaware Power d; Light Co

8 Eastern Utilities Associates,

9. General Public Uti1ities Corp 10. Middle South Utlllties, Inc. 11. National Fuel Gas Co

12. New England Electric System_._. 13. Ohio Edison Co.

14. Phlladelphia Electric Power Co

15. Southern Co., 'I'he,

16. Utah Power d; Light Co

Represents the consohdatsd assets,less valuation reserves, ofeach system as reported to the Commission on Form U5S for the year 1964

'These five companies are Beachbottom Power Co.• Inc. and Windsor Power House Coal Co., which are Indirect subsidraries of American Electric Power Co., Inc. and Allegheny Power System, Inc.: Ohio Valley Electrre Corp. and Its substdiary, Indiana-Kentucky ElectrIc Corp., which are owned 37.8 percent by American Electrrc Power Co., Inc., 16.5 percent by Ohio Edison Co., 125 percent by Allegheny Power

System, Inc., and 33,2 percent by other companies; and The Arklahoma Corp., which Is owned 32 percent by Central and South West Corp system, 34percent by Middle South Utllltles, Inc. system and 34percent by an electric utility company not associated WIth a registered system.

SECTION II MA1TERS IN REGISTERED HOWING.COMPANY

SYSTEMS

On March 19, 1964,the Commission issued its Findings, Opinion and

Order directing New England Electric System to divest itself of its

gas properties," The Commission found that these properties were

not retainable as an additional integrated public-utility system under

clause (A) of Section 11(b) (1), which requires as a basis of retention

a finding that divestment would result in a "loss of substantial

economies". The Commission in this case, as in prior cases (some of

which had been affirmed on review), had interpreted this provision to

mean a loss of such a nature that the additional system, if separated

from the principal system, would be incapable of independent

economic operation. On review, the Court of Appeals for the First

Circuit reversed the Commission's order and remanded the case to the

3 Neur England Electric Syste1ll, Holding Company Act Release No. 15035.

•

_

_

_

_

_

_

_ • _

_

_

_ -------- _

_ ------ -------- _ •• _

_ ------ --------

' • • _

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

_

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

•
THIRTY-FIRST ANNUAL REPORT 87

Commission for further proceedings,' primarily because, in the Court's

view, "substantial economies" means "economies which in ordinary

business parlance and by ordinary business standards are of a substantial nature, considering, of course, the size of the companies to

which the economies relate."

The Commission's Order 5 approving Step 2 of a plan filed by Eastern Utilities Associates ("EU A") pursuant to Section 11(e),

providing for the sale of all the outstanding common stock of Valley

Gas Co., was enforced by the district court," On November 23, 1964,the

Commission issued a supplemental order approving the proposed subscription price for the Valley Gas Co. common stock,' and the sale was

consummated in December 1964. The consummation of Step 2 completed disposition by the EUA system of its interests in all its gas

utility properties pursuant to the provisions of Section 11(b) (1).8

A Section 11(b) (1) problem still exists as to whether Middle South

Utilities, Inc. may, through its subsidiary company, New Orleans Public Service Inc., retain its interest in the gas and transportation properties of that subsidiary company together with the system's electric

properties. The latter properties have heretofore been found by the

Commission to constitute a single integrated public-utility system.

Since 1962 a bill has been introduced in each Congress providing, in

effect, that New Orleans Public Service Inc. shall not be required to

dispose of its gas and transportation properties pursuant to any provision of the Holding Company Act,". The House Committee on Interstate and Foreign Commerce, to which these bills have been referred,

took no action on any of the prior bills and, as of the close of the fiscal

year, had taken no action on the present bill, and no proceedings have

been instituted by the Commission.t"

In appropriate proceedings under Section 11(b) (2) of the Act, the

Commission has heretofore ordered the elimination of public minority

interests in most of the registered holding-company systems, but the

New England Electric System v. S.E.O., 346 F.2d 399 (1965). Subsequent to

the close of the fiscal year the Commission filed a petition for a writ of certiorari

with the Supreme Court.

Holding Company Act Release No. 15020.

In the Matter of Valley Gas 00. et al., n.R.I., Civil Action No. 2685, July

14, 1964.

Holding Company Act Release No. 15152.

Prior proceedings in this matter are discussed at page 109 of the 27th Annual

Report; page 85 of the 28th Annual Report; and pages 88-89 of the 30th Annual

Renort.

The most recent of these bills is H.R. 2490, 89th Cong., 1st Sess.

'0 No further action was taken during fiscal 1965 with respect to certain Section

neb) (1) problems of several other registered holding companies referred to at

page 104 of the 27th Annual Report.

•

•

•

•

•

•
88 SECURITIES AND EXCHANGE COMMISSION

problem remains in several others." On November 13, 1964, the Commission approved a plan filed by Allegheny Power System pursuant to

Section 11(e) of the Act, providing for the elimination of a 4.8 percent

public minority interest in the common stock of its subsidiary company, "'iVestPenn Power Company, through the exchange of 3.4 shares

of Allegheny's $2.50 par value common stock for each share of

publicly-held ""VestPenn common stock.P The plan was enforced by

order of the District Court."

On December 31, 1964, the Commission approved a plan filed by

American Electric Power Company, Inc. pursuant to Section 11(e),

providing for the elimination of outstanding publicly-held scrip for

fractional shares of American Electric's common stock.> The plan

provided for the distribution of approximately 1,590 full shares of

American Electric common stock and/or cash in exchange for the

scrip. Thereafter, the plan was enforced in the district court."

On February 3, 1965, the Commission entered an order approving

a plan filed by Genesee Valley Gas Company, Inc., pursuant to Section 11(e), providing for the pro rata distribution to Genesee's stockholders of the common stock of Pavilion Natural Gas Company,

Genesee's sole direct public-utility subsidiary oompany.>" Subsequently, upon application by Genesee, the Commission on June 1,

1965, entered an order, pursuant to Section 5(d), declaring Genesee

to be no longer a holding company."

EXEMPT HOLDING COMPANIES

A "holding company" is defined by Section 2(a) (7) (A) of the

Act to mean any company which owns or controls 10 percent or more

of the outstanding voting securities of an electric or gas public-utility

company. Section 3 (a) of the Am provides that the Commission shall

exempt any holding company (and its subsidiary companies, as such)

11 Holding-company systems in which a minority interest problem exists, and

as to which no proceedings have been instituted, are The Columbia Gas System,

Jne., Eastern Utilities Associates, and New England Electric System. The minority interests of the last-named holding-company system are confined to several of

the gas utility subsidiaries, the retainability of which, as noted above, has not

been finally resolved.

12 Holding Company Act Release No. 15145.

12 In re West Penn Power 00., et oi; W.D. Pa., No. 64-1220, February 2,1965.

14 Holding Company Act Release No. 1'5171.

15 In re American Electric Power 00., Inc., S.D.N.Y., No. 65-165, March 3,

1965.

1.Holding Company Act Release No. 15183. For many years prior to the

filing of its Section 11(e) plan, Genessee had been an exempt holding company

pursuant to Section 3(a) (1) of the Act. On December 23,1964, upon application

by Genesee, the Commission entered an order revoking Genesee's exemption

(Holding Company Act Release N<>.15169).

17 Holding Company Act Release No. 15250.
THIRTY-FIRST ANNUAL REPORT 89

from the duties and obligations of the Act if the company meets one

or more of the exemptive standards set forth in that section, unless

the Commission finds that the exemption would be detrimental to

the public interest. An exemption may 'begranted by the Commission

by order upon application, or (as to certain types of exemption) may

be claimed by the holding company by the filing in "good faith" of

a statement pursuant to Rule 2 promulgated by the Commission under

Section 3. During the fiscal year, the Commission issued orders

granting three applications for exemption under Section 3(a) .18 At

the close of the fiscal year there were on file with the Commission

exemption statements under Rule 2 submitted by a total of 58 companies." Each initial Rule 2 statement filed and each annual statement renewing the claimed exemption is carefully reviewed by the

Commission's Division of Corporate Regulation to ensure that the

claimant holding company is entitled to its asserted exempt status.

Exempt holding companies are nevertheless subject to the provisions of Section 9(a) (2) of the Act, which prohibits them from

acquiring 5 percent or more of the voting stock of any other publicutility company unless the acquisition has been approved by the Commission under Section 10. During the fiscal year two exempt holding companies applied for and were granted authority to acquire

controlling interests in additional public-utility companies; 20 and at

the close of the fiscal year another such application was pending

before the Commission.

When an exempt holding company proposes to acquire 10 percent

or more of the voting securities of a public-utility company, there invariably arises the question whether as a consequence of the acquisition the exemption from the Act will continue to be available. The

same question is presented in the case of such acquisition 'by a company which at present is not a holding company as defined in the Act.

Generally these matters are explored informally with the staff of the

Division. Insome instances, the proposed acquisition, although satisfying the requirements of Section 10, has been abandoned when it

appeared that no exemption from the Act would be available for the

acquiring company.

18 Oarol Pellet 00., Holding Company Act Release No. 15216 (March 31, 1965) ;

A.luminum Oompany of America (reaffirmation of previous exemption order),

Holding Oompany Act Release No. 15262 (June 18, 1965) ; Brown Oompany,

Holding Company Act Release No. 15271 (June 30,1965).

18 This total includes three initial Rule 2 exemption statements filed during

the fiscal year by Alabama-Tennessee Natural Gas Co., Oolonial Utilities Corp.

(New Hamphire), and Missouri Natural Gas Co.

.. Oommonwealth Natural Gas 00., Holding Company Act Release No. 15225

(April 21, 1965) ; Penn Fuel Gas, Inc., Holding Company Act Release No. 15230

(April 29, 1965).
90 SECURITIES AND EXCHANGE COMMISSION

FINANCING OF ACfIVE REGISTERED PUBLIC-UTILITY HOLDING

COMPANIES AND THEIR SUBSIDIARIES

During the fiscal year 1965, 9 active registered holding-company

systems sold to the public and financial institutions for cash 21 issues

of long-term debt and capital stocks aggregating $386 million, 21 pursuant to authorizations granted by the Commission under Sections

6 and 7 of the Act. All but one of these issues were sold for the

purpose of raising new capital. The one exception was an issue by

Arkansas Power & Light Company, a subsidiary of Middle South

Utilities, Inc., of 75,000 shares of preferred stock of $100 par value

for the purpose of refunding preferred stock of the same par value

carrying a higher dividend rate.

The following table presents the amounts and types of securities

issued and sold for cash by registered holding companies and their

subsidiaries during fiscal 1965: 22

Securities issued and sold for cash to the pubZic and financiaZ iustitutions by

registered holding companies and their subsidiaries, fiscal year 1965

[In millions]

Holding company system Bonds Debentures Preferred Common

stock stock

Amencan Columbia Natural Gas Gas Co.: Milwaukee Gas Light Co__ $18 ------------ ------------ ------------ System, Inc., The ------------ $80 ------------ Delaware Power & Light Co 25 --------._-- ------------ General Public Utilities Corp.: Jersey Central Power & Light Co____________________ 18 5 ------------ ------------ New Jersey Power & Light Co ------------ 6 Metropohtan Edison Co ---------20- 6

Mr=~~~~t~1~~~~: --------------------------- ------------ ------------ ------------

Arkansas Power & Light Co 25 $15 Mississil: Power & Light Co 20 ------------ New Eng d Electric System: Oonnecncut Yankee Atomic Power Co____________________________________40 ------------ ------------ $18 Philadelphia Electric Power Co ------------ 25 Southern Company, The: Georgia Power Co____________________________________28 5 Gulf Power Co 12 ------------ ----------6- ------------ Utah Power & Light Co 15

TotaL ___________________________________________221 122 25 I 18

Two Issues.

The table does not include securities issued and sold by subsidiaries

to their respective parent holding companies, short-term notes sold to

banks, portfolio sales by any of the system companies, or securities

issued for stock or assets of non-affiliated companies. These issuances

21 Debt securities are computed at their principal amount, preferred stock at

par value or at price to the company if no par value stated, and common stock at

offering or SUbscription price .

.. The active registered holding-company systems which did not issue and

sell 'long-term debt or capital stocks for cash were Allegheny Power System,

Inc., American Electric Power Co. Ine., Central and South West Corp., Consolidated Natural Gas Co., Eastern Utilities Associates, National Fuel Gas Co.

and Ohio Edison Co.

_______________________ ------------ • ___________________________ ------------

_______________________ ------------ ------------ _____________________________ ------------ ------------

_________________________ ------------ ------------ • _______________________ ------------ ------------

________________________ ------------ ------------

_______________________________________ ------------ ------------ _______________________________ ------------ ------------

•
TffiRTY-FIRST ANNUAL REPORT 91

and sales also require authorization by the Commission except (under

Section 6(b) of the Act) the issuance of notes having a maturity of

9 months or less where the aggregate amount does not exceed 5 percent of the principal amount and par value of the other securities of

the company.

Competitive Bidding

All of the 21 issues of securities sold for cash in fiscal 1965, as shown

in the preceding table, were offered for competitive bidding pursuant

to the requirements of Rule 50 promulgated under the Act.

During the period from May 7, 1941, the effective date of Rule 50,

to June 30, 1965, a total of 905 issues of securities with an aggregate

value of $13,513 million were sold at competitive bidding under the

rule. These totals compare with 231 issues of securities with an aggregate value of $2,371 million which have been sold pursuant to

orders of the Commission granting exceptions from the competitive

bidding requirements of the rule under paragraph (a) (5) thereof."

Of the total amount of securities sold pursuant to such orders, 126 issues with a total value of $1,888 million were sold by the issuers and the

balance of 105 issues with a dollar value of $483 million were portfolio

sales. Of the 126 issues sold by the issuers, 70 were in amount from

$1 to $5 million and 2 bond issues were in excess of $100 million eaoh.>

POllCY AS TO REFUNDABILITY OF BONDS

Inaccordance with its long-standing policy under the Act, the Commission has continued to require that bonds and preferred stock sold

by registered holding companies and their subsidiaries be fully refundable at the option of the issuer upon reasonable notice and that any redemption premium be reasonable in amount. During fiscal year 1965

one issuer subject to the Act took advantage of the refunding privilege

and of prevailing favorable market conditions to refund a preferred

stock issue at a lower dividend rate.25 The annual dividend savings on

this issue were $42,300.26

Continuing studies made by the Commission's staff for fiscal year

1965 with respect to electric and gas utility bond issues sold at competitive bidding, whether or not subject to the Act, indicated that the

.. Paragraph (a) (5) of Rule 50 provides for exceptions from the competitive

bidding requirements of the rule where the Commission finds such bidding is not

necessary or appropriate under the particular circumstances of the individual

case .

.. Ohio Valley Electric Corp., a $360 million issue, and United Gas Oorp., a $116

million issue.

Arkansas Power d Light Company, Holding Company Act Release No. 15213

(March 30,1965).

OIl Based on excess of "yield" of refunded issue (ratio of dollar dividend rate

to redemption price) over "yield" of new issue (ratio of dollar dividend rate to

price received by company).

""
92 SECURITIES AND EXCHANGE COMMISSION

presence or absence of a restriction on free refundability has not affected the number of bids received by an issuer at competitive bidding.

With respect to the ability of the winning bidder to market the bonds,

the data for fiscal year 1965 are at some variance with the data for the

previous fiscal year and for all but one of the prior fiscal years covered

in the staff's study. The 30th Annual Report, at pages 95-96, contains

a summary of the results of an examination of all electric and gas

utility bond issues (including debentures) sold at competitive bidding between May 14,1957, and June 30,1964, by companies subject

to the Act as well as those not so subject. This study was extended

to include fiscal year 1965.

During the period from May 14, 1957, to June 30, 1965, a total of

512 electric and gas utility bond issues, aggregating $11,550.9million

principal amount, was offered at competitive bidding. The refundable issues numbered 379 and accounted for a total of $7,280.5million,

while the non-refundable issues-all being non-refundable for a period

of 5 years, except one which was non-refundable for a period of 7

years-numbered 133 and totaled $4,270.4 million principal amount.

The number of refundable issues thus represented 74.0 percent of the

total number of issues, while, in terms of principal amount, the

refundable issues accounted for 63.0percent."

The weighted average number of bids received on the refundable

issues for the period was 4.77, while on the nonrefundable issues it was

4.30. The median number of bids was 5 on the refundable and 4 on

the non-refundable issues." With respect to the success of the marketing of the bond issues, an issue was considered to have been successfully marketed if at least 95 percent of the issue was sold at the syndicate price up to the date of termination of the syndicate. On this

basis, 67.0 percent of the refundable issues were successful, while 63.9

percent of the non-refundable ones were successful." In terms of

principal amount, 63.5 percent of the refundable issues were successful,

while 61.5 percent of the nonrefundable ones were successful. so Extension of the comparison to include the aggregate principal amounts

of all issues which were sold at the applicable syndicate prices up to the

termination of the respective syndicates, regardless of whether a parInDuring fiscal year 1965, a total of 46 bond issues was offered, aggregating

$1,149 million principal amount, consisting of 29 refundable issues totaling $679

million and 17 nonrefundable issues totaling $470 million. The number of refundable issues represented 63.0 percent of all the issues, while, in terms of principal amount, the refundable issues accounted for 59.1 percent.

During fiscal year 1965, the weighted average number of bids was 5.34 on the

refundables and 5.06 on the non-refundables, while the median number of bids

was 5 on the refundables and 5 on the nonrefundables .

.. During fiscal year 1965, 37.9 percent of the refundable issues were successful, as against 52.9 percent for the nonrefundables.

80 During fiscal year 1965, in terms of principal amount, 38.1 percent of the

refundables were successful, as against 45.7 percent for the non-refundables.

'"
THIRTY-FIRST ANNUAL REPORT 93

ticular issue met the definition of a successful marketing, indicates

that 84.1 percent of the combined principal amount of all the refundable issues were so sold, as compared with 81.8 percent for the non-refundable issues." While the statistics for the total period from May

14, 1957, to June 30, 1965, developed in respect of the two groups of

bond issues support the Commission's policy of requiring free refundability of utility bond issues subject to the Act, the Commission's staff

will continue its studies of refundability provisions, particularly in

light of the inconsistent marketing results in fiscal year 1965.

OTHER MA1TERS

The Southern Company and its four electric utility subsidiary companies, including Alabama Power Company, filed an applicationdeclaration with the Commission, pursuant to Section 6(b) ; proposing,

among other things, the issue and sale to Southern of $14 million aggregate par value of common stock by Alabama Power. That company

proposed to use these and other funds for the construction of electric

facilities within the State of Alabama where it was organized and

carries on its public-utility business. The Alabama Electric Cooperative, Inc. requested leave to intervene and a hearing on the asserted

ground that certain of the proposed electric facilities would duplicate

the Cooperative's facilities, would invade the service area of the Cooperative, and were consequently unnecessary and not in the public

interest or the interest of investors or consumers. On June 1, 1965,

the Commission issued its Findings, Opinion and Order, authorizing

Alabama Power's proposed financing and denying the Cooperative's

petition." The Commission found, among other things, that the proposed financing had been expressly approved by the Alabama Public

Service Commission (before which the Cooperative had also appeared

in opposition to the company's proposals) and that the issues raised

and contentions advanced by the Cooperative were exclusively within

the jurisdiction of the State authorities. The Cooperative filed a

petition for review in the Court of Appeals for the District of

Columbia Circuit."

31 During fiscal year 1965, the applicable percentages were 65.4 percent for the

refundables and 78.3 percent for the nonrefundables.

J: Holding Company Act Release No. 15252.

.. The Alabama Electric Cooperative, Inc. v. £J.E.C., No. 19403. In June 1965,

another application was filed with the Commission by Alabama Power regarding

the proposed public sale of bonds and preferred stock, to finance construction. On

July 7, 1965, the Cooperative filed a petition for leave to intervene and for a hearing for the same reasons it had urged in the prior proceeding; and on JUly 29,

1965, the Commission issued an order authorizing the proposed transactions and

denying the petition for the reasons set forth in its prior decision. Holding Company Act Release No. 15287. The Cooperative has appealed to the Court of

Appeals for the Fifth Circuit. Alabama Electric Cooperative, Inc., v. £JoE.C., No.

22858.
94 SECURITillS AND EXCHANGE COMMISSION

As reported previously," on March 3, 1964, the Commission issued

an interim ruling that Pacific Northwest Power Company would not

become an electric utility company as defined in Section 2(a) (3) at

least prior to the time at which the grant of a license by the Federal

Power Commission for the construction and operation of a hydroelectric plant had become final, either by the expiration of the appeal

period or by a final determination of the appellate courts affirming

the grant;" Three appeals from the grant of the license have been filed

in the Court of Appeals for the District of Columbia Circuit," but as

of the closeof the fiscal year no decision had been rendered .

.. 30bh .Annual Report, pp. 96-97 .

.. Pacific Northwest Power Company, Holding Company.Act Release No. 15026 .

.. United States of America, e3Jret. Stewart L. Udall, Secretaru Of Interim' v.

F.P.C., No. 18731; State of Washington Department of Conservation v. F.P.C., No.

18729; Washington Public Power Supply System v. F.P.C., No. 18728.
PART VI

PARTICIPATION OF THE COMMISSION IN CORPORATE RE.

ORGANIZATIONS UNDER CHAPTER X OF THE BANK.

RUPTCY ACT

The Commission's role under Chapter X of the Bankruptcy Act,

which provides a procedure for reorganizing corporations in the 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. Itpays 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. Where

the Commission files a report, copies or a summary must be sent to all

security holders and creditors when they are asked to vote on the

plan. The Commission has no authority to veto or to require the

adoption of a plan of reorganization.

The Commission has not considered it necessary or appropriate to

participate in every Chapter X case. Apart from the excessive administrative burden, many of the cases involve only trade or bank creditors

and few public investors. The Commission seeks to participate principally in those proceedings in which a substantial public investor

interest is involved. However, the Commission may also participate

because an unfair plan has been or is about to be proposed, public

security holders are not represented adequately, the reorganization

proceedings are being conducted in violation of important provisions

of the Act, the facts indicate that the Commission can perform a useful

service, or the judge requests the Commission's participation .

. The Commission has lawyers, accountants and financial analysts

in its New York, Chicago and San Francisco regional officeswho are

, 95
96 SECURITIES AND EXCHANGE COMMISSION

engaged actively in Chapter X cases in which the Commission has

filed its appearance. Supervision and review of the regional offices'

Chapter X work is the responsibility of the Division of Corporate

Regulation of the Commission, which, through its Branch of Reorganization, also serves as a field officein cases arising in the Atlanta and

Washington, D.C. regional areas.

SUMMARY OF ACTIVITIES

In fiscal year 1965, the Commission continued to maintain a high

level of activity under Chapter X. During the year, the Commission

entered its appearance in 17 new proceedings involving companies

with aggregate stated assets of $168 million and aggregate indebtedness of approximately $150 million. These proceedings involved the

rehabilitation of corporations engaged in various businesses including,

among others, heavy manufacturing, real estate and mortgage investments, operation of hospitals and motels, the manufacture of mechanical and electronic components, the manufacture and distribution of

chemicals and motor freighting.

During the year the Commission was a party in a total of 104reorganization proceedings, including the new proceedings. The stated assets

of the companies involved in these proceedings totaled approximately

$963 million and their indebtedness approximately $899 million. The

proceedings were scattered among district courts in 32 states and the

District of Columbia, as follows: 15 in New York; 11 in Florida; 9

in California; 6 in Illinois; 5 each in Kentucky and Michigan; 4 each

in New Jersey and North Carolina; 3 each in Arizona, Iowa, Nevada,

Oklahoma, Texas, Pennsylvania and Washington; 2 each in Colorado,

Kansas, Louisiana, Maryland, Montana and Ohio; and 1 each in the

District of Columbia, Arkansas, Connecticut, Idaho, Massachusetts,

New Mexico, South Dakota, Tennessee, Utah, Wyoming, West Virginia and Virginia. Proceedings involving 15 principal debtor corporations were closed during the year. Thus, at the end of the year

the Commission was participating in 89 reorganization proceedings.

JURISDICTIONAL, PROCEDURAL AND ADMINISTRATIVE MATfERS

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 lIfuskegon lIf otor Specialties 00.,1the debtor was found insolvent,

the confirmed plan of reorganization did not accord the stockholders

any participation, and the preferred stockholders committee appealed,"

1E.D. Mich., No. 47795.

• C.A. 6, No. 16,492.
THIRTY-FIRST ANNUAL REPORT 97

Subsequently, the Commission moved to vacate the order of confirmation on the ground that, because of a substantial increase in earnings

since confirmation and other developments, the debtor may be solvent.

In view of the pendency of the appeal, the district judge prepared an

order vacating the order of confirmation, and this proposed order was

presented to the court of appeals as the basis for a motion to remand.

In the interim, the purchasers under the plan filed in the district court

a motion for rehearing of the Commission's motion to vacate. The

court of 'appeals continued the hearing on the motion to remand, stating that it would grant the motion if the district court denied the

motion for rehearing.

Certain stockholders of the debtor appealed from a district court

order in Shawano Development Oorporatiorc: which adjudicated the

debtor a bankrupt and thereby precluded the Chapter X trustee from

proceeding with pending suits against former members of management

and others. The court of appeals agreed with the Commission's view

that a proceeding under Chapter X rather than in bankruptcy is a

preferable forum for the prosecution of a debtor's lawsuits where such

suits are financed, in part, by the stockholders. However, the court

held, inter alia, that the district court did not abuse its discretion in

adjudicating the debtor a bankrupt and that appellants had failed

to appeal from an earlier order refusing approval of a proposed

plan of liquidation which included a provision for the prosecution

of these Iawsuits."

In Texas Independent Ooffee Organization,5 the Commission objected to the trustee's petition to cancel all delinquent investment

contracts held by the public and to forfeit the installments paid

thereon. The Commission urged that the bankruptcy court, as a court

of equity, should not countenance forfeitures, especially where, as

in this case, there was no assurance that investors would receive in

value that for which they had contracted. It was also urged that

investors should not be required to make payments, under penalty

of forfeiture, on contracts which had been sold in violation of the

registration provisions of the Securities Act of 1933. The court

agreed with the Commission and denied the trustee's petition.

InInvestors Associated, Ine.,6 the debtor contested an involuntary

Chapter X petition on the ground that it was not insolvent as alleged

in the petition. The debtor had issued and sold.over $1 million principal amount of subordinated debentures, $691,000of which had been

exchanged for common stock. The Commission, appearing at the

D. Wyo., No. 3163 (Bankruptcy).

In the Matter of Shawano Development Oorp., C.A. 10, Nos. 7699, 7956.

S.D. Tex., No. 65--C-1.

W.D. Wash., No. 55449-By.

791-468-65--8

•

•

•

•
98 SECURITIES AND EXCHANGE COMMISSION

request of the district judge, supported the petition, urging that the

stockholders who had acquired stock in this manner be treated as

creditors for the purpose of determining insolvency since they had

been induced to convert their debentures into common stock by the

fraudulent assertions of management. Prior to the filing of the

Chapter X petition, the Commission had obtained an order against

the debtor, its officers,directors, and others enjoining violations of the

registration and anti-fraud provisions of the securities laws in the

sale of securities of the debtor. The special master's report adopted

the Commission's views and the district judge approved the petition.

As reported previously,' in Joe Newcomer Finance Oompany 8 a

debentureholders committee was enjoined, on motion of the Commission, from further soliciting contributions from public investors,

and the funds already collected were ordered held in escrow pending a

ruling on their disposition. The court subsequently required the return

of the funds to the contributors and refused to allow committee members reimbursement of expenses from these funds.

In Trans-United Industries, Inc.,9 the Chapter X court in Connecticut held that it had jurisdiction to determine the validity of tax

assessments levied against the debtor's property in Philadelphia by

the City of Philadelphia, and disallowed the claim.

TRUSTEE'S INVESTIGATION

A complete accounting for the stewardship of corporate affairs by

the old 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 Automatic Washer 00.,10 reported previously," the court of appeals affirmed 12 the order of the district court, which held that the

stock interests of Bankers Life & Casualty Company and of Bellanca

Corporation (now Olson Brothers, Inc.) should be subordinated to the

publicly held stock of the debtor to the extent of $1.50 per share. As

the Commission urged, the court held that subordination was not precluded because of a money judgment for fraud obtained by the trustee

against Bankers, nor because the plan of reorganization was one of

liquidation. The subordination nearly doubled the distribution to the

T 30th Annual Report. p. 100.

8 D. Colo .• 1\0. 34452.

D. Conn., No. H-3832.

,. S.D. Iowa, No. 5-4-26.

11 30th Annual Report, p. 103.

"Bllnkers Lite & Oa~ualty 00. V. Kirtley, 338 F.2d 1006 (C.A. 8, 1964).

•
THIRTY-FIRST ANNUAL REPORT 99

public stockholders, and, since the per share distribution to them was

substantially less than $1.50, was tantamount to a disallowance of the

stock interests of Bankers and Bellanca.

In Swan-Fi11XJh Oil 001'pOTation,13 the trustee settled an action

against the American Stock Exchange and J osephthal & Co. for

$150,000and $300,000,respectively. The action had been based upon

alleged violations of the securities laws in the sale, through dummy

accounts at Josephthal & Co., of 578,000shares of unregistered SwanFinch common stock in a rigged market and by use of the facilities

of the Exchange. The trustee had also alleged that the Exchange

did not carry out its responsibilities under the Securities Exchange

Act of 1934. The proceeds of the settlement will enhance the distribution to creditors and stockholders under the proposed plan of

liquidation. Substantially all of the facts alleged in the trustee's

complaint were derived from an investigation conducted by the Commission's staff.14

The court, in The Sire Plan, lno./5 authorized the trustees to accept

$20,000in settlement of an action against two attorneys. The trustees

had alleged, inter alia, that, within 1 year prior to the filing of the

reorganization petition, at a time when the debtor corporations were

insolvent, they transferred funds to the attorneys without fair

consideration.

In Dilbert's Quality Supe'T"'J'narkets,Ina.,IG the court authorized the

trustee to settle for $60,000 a suit against a supplier and its directors

for monies allegedly paid as a commercial bribe to a former officer

of the debtor. In Equitable Plan 00.,17 the court authorized the

trustee to settle a suit against Doeskin Products, Inc., based upon

allegedly fraudulent acts committed by Lowell M. Birrell when he

controlled Doeskin. Under the settlement, Doeskin recognized as

validly issued 150,000 shares of the 194,000 shares of its stock held

by the trustee. The 150,000 shares had a market value of about

$450,000 at the time of settlement. IS

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 Commission may state its views briefly by letter, and authorize its counsel

as S.D.N.Y., No. 93046.

1< For other settlements in this proceeding, see 30th Annual Report, p. 103;

29th Annual Report, p. 91.

1li S.D.N.Y., No. 63-B-l40.

28 E.D.N.Y., No. 62-B-920.

11 S.D. Calif., No. 86,096-T.

18 For other settlements in this proceeding, see 30th Annual Report, p. 103.
100 SECURITIES AND EXCHANGE COMMISSION

to make an oral or written presentation to amplify the Commission's

views. During this fiscal year the Commission published two formal

advisory reports." The Commission conveyed its views to the court

on 14 other plans, on some by oral statement of its counsel at the

hearing, and on the others by letter and supporting memoranda."

In TMT Trailer Ferry, Ino., 21 the district court, on remand by the

court of appeals," held further hearings on the internal plan of

reorganization, which gives no recognition to the interests or claims

of the debtor's public common stockholders. For reasons previously

stated to the court, the Commission's report concluded that the plan

was not fair and equitable because the evidence as to insolvency was

not adequate and because of the failure to treat as creditors public

stockholders who, as urged by the stockholders committee, had claims

against the debtor based upon the sale to them of the debtor's stock

in alleged violation of the Federal securities laws. The district court

confirmed the plan and the stockholders committee appealed." After

the close of the fiscal year, the court of appeals denied the Commission's motion for a stay pending appeal, and reserved decision on the

trustee's motion to dismiss the appeal or to affirm summarily."

In Yuba Oonsolidated Industries, lno.,25 the plan provided for the

internal reorganization of Yuba, which will continue in the steel fabrication and industrial engineering business through two divisions and

two subsidiaries, with other properties to be liquidated. The plan's

principal provisions relate to the treatment of the three classes of unsecured creditors, including the debentureholders whose claims are

subordinated to creditor claims which arose after the issuance of the

debentures. The plan provided for a distribution to the unsecured

creditors of a minimum of $1,050,000in cash, a maximum of 550,000

III TMT Trailer Ferry, Lnc., Corporate Reorganization Release No. 226 (March

9, 1965) ; Yuba Consolidated Industries, Inc., Corporate Reorganization Release

Nos. 229 (May 3, 1965) and 234 (June 9, 1965) .

••Atlas Sewing Centers, Inc., S.D. Fla., No. 168-62-M-Bk-EO; Brookwood

Country oua, N.D. Ill., No. 59 B 1201; Fleetwood Motel Oorp., D.N.J., No.

B-909-60; GFE Industries, Ino., S.D. Iowa, No. 2-159; Hughes Homes, Inc.;

D. Mont., No. 3174; su« Industries, Inc., W.D. Mich., No. 24,525; Leeds Homes,

I1w., E.D. Tenn., No. 19,987; Mason M()I1'tgage& Investment Oorp., D.D.C., Nos.

98-60 through 101-60; Muskegon Motor Specialties Oo., E.D. Mich., No. 47795;

Sire Post Office Plan, Inc., S.D.N.Y., No. 63-B-140; LaGuardia Hotel 8iJre Plan,

Inc., S.D.N.Y., No. 63-B-140; Swan-Finch Oil C()I1'p.,S.D.N.Y., No. 93046; Taylor

International Corp., S.D. Fla., No. 346-62-Bk-DD; 'I'oumsenti Growth Fund,

Inc., S.D.N.Y., No. 61-B-375.

21 S.D. Fla., No. 3659-M .

.. Protective Committee, etc. v. Anderson, 334 F.2d 118 (C.A. 5, 1964).

.. For previous reports on the plan of reorganization, see 30th Annual Report,

p.105; 29th Annual Report, pp. 91-92 .

.. Protective Committee, etc. v. Anderson, C.A. 5, No. 22652 (August 4, 1965).

's N.D. Cal., No. 64103.
TEITRTY-FIRST~AL REPORT 101

shares of $10 par value preferred stock and a like or greater number

of shares of $10 par value common stock, the total of all of which to

equal Yuba's reorganization value as determined by the court. The

creditors whose claims predated the debenture issue would receive

their proportionate amount of the cash and of the preferred and common stocks. The creditors to whom the debentures are subordinated

would receive the remaining cash and preferred stock and, depending

upon Yuba's reorganization value, all or part of the remaining common

stock, but not exceeding in aggregate par value an amount which, together with the cash and par value of the preferred stock, would equal

the dollar amount of their claim. The debentureholders would receive such amount of any remaining common stock as was not required

for the purpose of satisfying the claims of the creditors, to whom the

debentureholders are subordinated.

The court determined the value of the debtor's assets to be

$12,536,000, which included the capitalized value of prospective earnings, excess working capital, and the present value of the tax loss carry

forward and of the earnings and sales proceeds of the liquidating properties. In its report the Commission had recommended a value of

$13,398,000. The court agreed with the Commission's conclusion that

the proposed distribution under the plan provided fair and equitable

treatment among the three classes of creditors since it accorded appropriate recognition to their status and priority inter se.26 As was suggested inthe Commission's report, the plan was amended to provide for

the issuance of no par value common stock and to permit the reorganized company, at its option after a specified date, to redeem the preferred stock at par plus a premium and accrued dividends. In its

supplemental advisory report, the Commission concluded that the plan,

as amended, was fair and equitable and feasible, 27 and the plan, as

amended, has been approved."

In General Economics Corporation: 29 the court confirmed a plan of

reorganization for a subsidiary, General Economics Syndicate, Inc.

("Syndicate"), which provided that the proceeds of $200,000 from the

sale by the parent of its majority stockholdings in Syndicate, which

were claimed by both the parent and the subsidiary, should be held in

escrow pending a ruling on their disposition. The Commission urged

that since it had been established that the parent, as a majority stockholder, had breached its fiduciary obligation by defrauding the subIII Yuba Oonsolidated Industries, Ino., Corporate Reorganization Release No. 229

(May 3,1965).

21 Yuba OonsoZidatedIndustries, Ino., Corporate Reorganization Release No. 234

(June 9,1965) .

...Since the end of the fiscal year, some stockholders have appealed from the

order approving the plan

.. S.D. N.Y., 63-B-618.

•
102 SECURITIES AND EXCHANGE COMMISSION

sidiary and its public shareholders of over $900,000, the parent should

be divested of any interest in the stock or in the proceeds of its sale, and

the court awarded the sales proceeds to the subsidiary.

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 350 applications for compensation totaling about

$9.5 million were reviewed.

In Bevis Shell Homes, I n{].,30 a partner of the attorney representing

the debentureholders protective committee sold, at a loss, 500 shares of

the debtor's stock during the Chapter X proceeding. It was represented to the court that the selling partner had no knowledge of the

proceeding other than that disseminated by the trustee to all of the

stockholders, and that the partner representing the committee had no

knowledge that his partner owned and then sold this stock until after

the firm filed its application for a final allowance. The firm then filed

a petition requesting the court to approve the sale and, in its discretion,

to award an allowance. The district court, as urged by the Commission, ruled that, although the services performed were meritorious and

contributed to the confirmed plan, Section 249 was an absolute bar to

the award of any compensation.

In Hudson &: Manhattan Railroad Oompany, 31 the court of appeals,

agreeing with the Commission, increased the final allowance to special

counsel to the trustee." The court said that "the district judge erred in

giving weight to the fact that the firm on six occasions did not seek the

maximum interim allowance; this only encourages firms to apply for

the maximum allowance regardless of the value of the services rendered." Counsel had requested a total 'allowance of $107,350, the Commission recommended $75,000, the district court allowed $50,000, and

the court of appeals increased the allowance to $65,000. In this connection, the court noted that counsel had not kept accurate time records

and emphasized that "any attorney who hopes to obtain an allowance

from the court should keep accurate and current records of work done

and time spent. . .. There is no excuse for an established law firm

.. D.C. M.D. Fla., No. 4204 Bky-T.

31 S.D. N.Y., No. 90460.

3:l In tile Matter ot Hudson and Manhattan Railroad- Oompany, 339 F.2d 114

(C.A. 2, 1964).
THIRTY-FIRST ANNUAL REPORT 103

to rely on estimates made on the eve of payment and almost entirely

unsupported by daily records or for it to expect a court to do so."

In the same decision the court of appeals ruled that the district

judge erroneously denied any allowance to a law firm which represented a bondholder who made continued purchases and one sale of the

debtor's bonds. The court held that Section 249 did not bar the law

firm which did not trade and whose appearance for its client did not

facilitate trading. Itstated, "as the Commission points out 'the record

indicates no problems of shifting interests and contains no indication

that knowledge gained by the applicant was used to assist [the client's]

trading.' We agree with the Commission that, where a client has

traded in the debtor's securities, weight must be given to the purpose

for which the attorney appeared in the proceeding." 33

Walco Building Oorporationr: the debtor, operated an officebuilding constructed on land leased from the fee owners. The Chapter X

proceeding was dismissed, and bondholders appealed. The appeal was

thereafter dismissed under the terms of a settlement with the fee owners who advanced $25,000 to the indenture trustee to be paid as compensation to the bondholders' attorneys. The court agreed. with the

Commission that, since the services of counsel were rendered in connection with the Chapter X proceeding, the district court had exclusive jurisdiction to review and determine their compensation, even

though such compensation was not to be paid by the estate.

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 American Trailer Rentals Oompany,ss reported previously," the

Supreme Court reversed the court of appeals which had affirmed the

district court's order denying the Commission's motion under Section

328.31 The Supreme Court held that "... although there is no absolute rule requiring that Chapter X be utilized in every case in which

33 !d. at 115-116 .

.. N.D. Ill., No. 61 B 8059 .

ss D.C. Colo., No. 33276.

OIl 29th Annual Report, p. 95; 30th Annual Report. p. 108.

.. S.E.O. v. American Trailer Rentals 00., 379 U.S. 594 (1965).
104 SECURITIES AND EXCHANGE COMMISSION

the debtor is publicly owned, or even where publicly held debt is adjusted, as a general rule Chapter X is the appropriate proceeding for

adjustment of publicly held debt." The Court indicated that there

were "... narrow limits within which there are exceptions to this

general rule. .. for example, where the public investors are few in

number and familiar with the operations of the debtor, or where, although the public investors are greater in number, the adjustment of

their debt is relatively minor, consisting, for example, of a short

extension of time for payment."

The Commission's motion under Section 328 was granted by the district court, with the debtor's consent, in Liberty Mortgage Corporation.58 The debtor then filed an amendment petition under Chapter X,

but the petition was dismissed for lack of good faith, the court having

found that rehabilitation of the debtor as a going concern was not

possible and that there was no alternative but to liquidate the debtor.

Referring to the decision in Amerioan Trailer Rentals,59 the district

court stated that, while the granting of a motion under Section 328

will be determinative of one of the elements of good faith specifically

stated in Section 146(2)-that adequate relief is not obtainable under

Chapter XI-the court must still determine whether it is reasonable

to expect that a plan of reorganization can be effected. In S.E.O. v.

Orumpton Builders, Irw.,40 decided before American Trailer Rentals,

the court of appeals reversed the district court's denial of the Commission's Section 328 motion. On remand, the district court dismissed

the debtor's amended petition under Chapter X, since it appeared that

a successful reorganization under Chapter X was not feasible.

In Oanandaigua Enterprises Oorp.,41 reported previously," the

court of appeals, prior to the American Trailer Rentals decision, reversed the order of the district court denying the Commission's Section 328 motion to dismiss the Chapter XI petition." The court stated

that "... the need for a readjustment of publicly held debt creates

a presumption in favor of Chapter X, whereas a case calling only for

modification of the claims of trade creditors or others who have had

private dealings with the debtor is presumptively to be handled under

Chapter XI."

In American Guaranty Oorporation,44 the Commission appealed

from the order denying its motion under Section 328.45 While the

.. N.D. Ohio, No. B-64-5617 .

.. 379 U.S. at 618.

4.337 F. 2d 907 (a.A. 5, 1964). See also 29th Annual Report, p, 96.

41 W.D. N.Y., No. Bk-63-1954 .

.. 30th Annual Report, pp. 107-108.

.. S.E.O. v. Oanandaigua Enterprises Oorp., 329 F. 2d 14 (a.A. 2, 1964) .

.. D. R.I., No. 63B17. For previous report see 29th Annual Report, pp. 95-96

.. 221 F. Supp. 961 (D. R.I., 1963).

•
TInRTY-FIRST ANNUAL REPORT 105

appeal was pending, the Commission filed a motion to remand the case

to the district. court for further consideration in the light of the

Supreme Court's decision in American Trailer Rentals and the substantial debt reduction during the pendency of the appeal. The Commission's motion was granted," the district court heard oral argument,

and the case was pending for decision at the end of the fiscal year.

In Strouse, Inc.,47 the Commission moved under Section 328 to dismiss the Chapter XI petition, but from subsequent developments it

appeared that the motion was no longer appropriate and, by leave of

court, the Commission withdrew its motion. In United Star Oompanies, Ino., 48 reported previously, 49 the court of appeals granted the

Commission's unopposed motion for an order remanding the case to

the district court with a direction to vacate as moot the district court's

order denying the Commission's Section 328 motion to dismiss the

debtor's Chapter XI petition;" The motion for a remand was predicated on the ground that during the pendency of the Commission's

appeal the debtor was adjudicated a bankrupt .

.. S.E.O. v. Burton, 342 F. 2d 782 (C.A. 1, 1965) .

.. E.D. Pa .• No. 28310

.. M.D. Fla., No. 63-4-Bk-T .

••29th Annual Report, p. 97•

.. S.E.O. v, United Star Oompanies, Inc., C.A. 5, No. 20577.

•
PART VII

ADMINISTRATION OF THE TRUST INDENTURE ACT OF 1939

The Trust Indenture Act of 1939 requires that bonds, notes, debentures and similar securities publicly offered :for sale, except as specifically exempted by the Act, be issued under an indenture which meets

the requirements of the Act and has been duly qualified with the Commission. The Act requires that indentures to be qualified include

specified provisions which provide means by which the rights of

holders of securities issued under such indentures may be protected and

enforced. These provisions relate to designated standards of eligibility and qualification of the corporate trustee to provide reasonable

financial responsibility and to minimize conflicting interests. The Act

outlaws exculpatory provisions formerly used to eliminate all liability

of the indenture trustee and imposes on the trustee, after default, the

duty to use the same degree of care and skill in the exercise of the

rights and powers vested in it by the indenture as a prudent man

would use in the conduct of his own affairs.

The provisions of the Trust Indenture Act are closely integrated

with the requirements of the Securities Act. Registration pursuant

to the Securities Act of securities to be issued under a trust indenture

subject to the Trust Indenture Act is not permitted to become effective unless the indenture conforms to the requirements of the latter

Act, and necessary information as to the trustee and the indenture

must be contained in the registration statement. In the case of securities issued in exchange for other securities of the same issuer and

securities issued under a plan approved by a court or other proper

authority which, although exempted from the registration requirements of the Securities Act, are not exempted from the requirements

of the Trust Indenture Act, the obligor must file an application for the

qualification of the indenture, including a statement of the required

information concerning the eligibility and qualification of the trustee.

Indenture8 tiled under the 'I'ruet Indenture Act during the fiscaZ year

ended June 30, 1965

Number Aggregate filed amount

~~~:~~= lrr~d:rJJ:'~ ~o:r:==::::::::::=:::::=:::=:::: :::=:::::::: ::=

23 $458, 378, 280

182 3, 930, 966, 642

Total for disposal, _____________________________________________________ 205 4, 389, 344, 922

Disposition during fiscalyear: 3, 763, 837, 950 f~~:~=3=J1;yamendment-o,:Wiihdrawn::==:::::=:=:=::::====== 164

6 136,042,173 Indentures pending June 30, 1965 _. 35 489, 464, 799

TotaL_. __________-______. __________________ . __________________ . _.____ 205 4, 389, 344, 922

106

______________ • _______________________
TEITRTY-FIRST~AL REPORT 107

REVISION OF RULES, REGULATIONS AND FORMS

Proposed Rule 7a-9

Public comments were invited during the fiscal year on a proposed

new rule, to be designated Rule 7a-9, under the Trust Indenture Act.'

The new rule would provide for the filing with an application for the

qualification of an indenture under the Act, or as an amendment to

such an application which has not become effective, of an amendment

which would delay the effectiveness of the application until a further

amendment superseding the delaying amendment is filed, or until the

Commission accelerates the effective date upon request of the obligor.

Applications for qualification of an indenture are required to be filed

in those cases, not otherwise exempt, where the securities to be issued

under the indenture are not required to be registered under the Securities Act of 1933. Rule 473 under the Securities Act makes similar provision for the filing of delaying amendments to registration statements

under that Am.

This matter was pending at the close of the fiscal year.

Proposed Amendments to Forms T-I and T-2

During the fiscal year, the Commission invited public comments on

proposed amendments to Forms T-1 and T-2 under the Trust Indenture Act.2 Form T-1 is prescribed for statements of eligibility

and qualification of corporations designated to act as trustees under

indentures qualified under the Act. Form T-2 is prescribed for statements of eligibility and qualification of individuals designated to act

as trustees under such indentures. The proposed amendments would

clarify and simplify the forms in certain respects, would delete certain

required information deemed not essential to a determination of the

eligibility and qualifications of the trustee, would require certain additional information deemed significant in such determination, and

would bring the forms in line with the format of the Commission's

more recently adopted forms under other acts.

'Trust Indenture Act Release No. 222 (June 10, 1965).

a Trust Indenture Act Release Nos. 222 and 223 (June 10, 1965).
PART VIII

ADMINISTRATION OF THE INVESTMENT COMPANY ACT

OF 1940

The Investment Company Act of 1940 provides for the registration

and regulation of companies primarily engaged in the business of

investing, reinvesting, owning, holding, or trading in securities, The

Act, among other things, requires disclosure of the financial and

investment policies of such companies; prohibits changing the nature

of their business or their investment policies without shareholder

approval; regulates the means of custody of the companies' assets;

requires management contracts to be submitted to security holders for

approval; prohibits underwriters, investment bankers, and brokers

from constituting more than a minority of the directors of such companies; and prohibits transactions between such companies and their

officers,directors, and affiliates except with approval of the Commission. The Act also regulates the issuance of senior securities and

requires face-amount certificate companies to maintain reserves adequate to meet maturity payments upon the certificates.

The securities of investment companies which are offered to the

public are also required to be registered under the Securities A.,ctof

1933 and the companies must file periodic reports. Such companies

are also subject to the Commission's proxy rules and certain "insiders"

of closed-end companies are subject to reporting and "short swing"

trading rules. In November 1964, certain functions relating to investment companies were reallocated from the Division of Corporation

Finance to the Division of Corporate Regulation, including the administration of the disclosure requirements with respe~t to registration

statements filed by such companies under the Securities Act of 1933

and the administration of the periodic reporting, proxy solicitation

and other provisions of the Securities Exchange Act of 1934 with

respect to registered investment companies. On the basis of the experience since the transfer of functions, the resulting concentration of

responsibility in the Division of Corporate Regulation for the administration of the securities laws as they apply to investment companies

has been of material convenience to registrants and other persons

concerned with investment companies.

108
THIRTY-FIRST ANNUAL REPORT 109

COMPANIES REGISTERED UNDER THE Acr

As of June 30, 1965, there were 727 investment companies registered

under the Act, including 69 small business investment companies. Of

this total, 616 were "active" companies, whose assets had an aggregate

market value of approximately $44.6 billion. Compared with the

corresponding totals at June 30, 1964, these figures represent an overall

increase of approximately $3 billion in the market value of assets,

while the number of registered companies decreased by four. The

classification of the registered companies and the approximate market

value of the assets in each category as of June 30, 1965, are shown in

the following table:

Number of registered companies Approximate

market value

of assets of

active comActive Inactive. Total parues

(mllhons)

Management open-end _________________________ 345 31 376 $32,615 Management closed-end 150 43 193 7,633 Unit investment trust __________________________ 115 35 150 3,310 Face-amount certificate 6 2 8 1,020

TotaL _' _________________________________ 616 III 727 44,578

"Inactive," as used herein, refers to registered companies which, as of June 30, 1965, were in the process

of being Iiqnidated or merged, or which have otherwise gone out of existence and remain registered only

until such time as the Commission ISSues orders under Section 8(f) of the Investment Company Act termi- nating their registration.

The approximately $3.3 billion of assets of the "active" registered

unit investment trusts includes approximately $2.8 billion of assets of

registered unit investment trusts which invest in securities of other

registered investment companies, substantially all of them management open-end companies.

During the fiscal year, 50 new companies, including 3 small business

investment companies, registered under the Act while the registrations

of 54 companies, including 7 small business investment companies,

were terminated. The classification of these companies is as follows:

Registered Registration

during the terminated fiscal year during the

fiscal year

~:aa::::i~f~~~~d=== 30 20 10 24 Unit investment trust 10 8 Face-amount certineete., -------------- 2

TotaL 50 54

___• ____________________

__• _____________________

•

_______============= ••• ____• ___________ =============== •_______________ ====================== • _____•• _____

••_________•____•___________________________________

______•_________________________________• ________________________
110 SECURITIES AND EXCHANGE COMMISSION

GROWTH OF INVESTMENT COMPANY ASSETS

The following table illustrates the striking growth of assets of

investment companies over the years since the enactment of the

Investment Company .Act:

Number of 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 1965

Number of companies Estimated

FIScal year ended June 30

aggregate

market value Registered Registered Registration Registered of assets at at beginning during year terminated at end of end of year of year during year year (m mlllions)

194L ____________________________ 0 450 14 436 $2,500 1942_____________________________ 436 17 46 407 2,400 1943_____________________________ 407 14 31 390 2,300 1944_____________________________ 390 8 27 371 2,200 1946 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 195L ____________________________ 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 0011- ____________________________ 512 67 9 570 23,500 961. ____________________________ 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

TOtal ______________________

-------------- 1,322 595 -------------- --------------

1

1

The Increase In aggregate assets reflects the sale of new securities as well as capital appreciation.

INSPECTION AND INVESTIGATION PROGRAM

During fiscal year 1965, a total of 146 investment company inspections was completed pursuant to the statutory authority conferred on

the Commission by Section 31(b) of the Investment Company .Act.

.Alarge number of the inspections disclosed violations not only of the

Investment Company .Act but also of other statutes administered by

the Commission. .A number of the violations uncovered during the

course of routine inspections were serious in character. These included

inadequate arrangements for safekeeping of the investment company's

portfolio securities or failure to observe the safekeeping procedures

which had been established. The inspections also disclosed several

situations in which the procedures for pricing shares for purposes of

purchase or redemption were not in conformity with the statute or the

investment company's prospectus. Several instances were found in

which the investment company failed to redeem shares within the

required statutory period. The inspections further uncovered a number of instances in which transactions violating Section 17 of the .Act

had been effected by affiliated persons.

___ - _________________--- _____

________ •____________________

___ - __________________-- _____

•

•
TIDRTY-FIRST ANNUAL REPORT 111

Largely as an outgrowth of information obtained during these inspections, 23 private investigations were commenced during the fiscal

year. On the basis of the facts obtained in the investigations, two

civil actions were instituted by the Commission. One of the actions

(S.E.O. v, Oapital Funds, Ino., et al.)l sought to enforce compliance

with the proxy solicitation requirements of the Investment Company

Act and the Securities Exchange Act of 1934 in connection with a

proxy solicitation of shareholders of Modern American Mortgage Corporation, a then registered investment company. In that civil action,

the Commission also sought to enjoin the defendants from offering to

purchase the securities of Modern American Mortgage Corporation by

means of allegedly fraudulent statements concerning, among other

things, the net worth, earnings, assets and future market value of the

securities of that company.

As a result of the Commission's inspection and investigation program, a total of $1,541,000 was returned during fiscal 1965 to investment companies for the benefit of shareholders or to the shareholders

directly. Following one inspection, a court-ordered liquidation of an

unregistered investment company resulted in a distribution of assets

totalling $1,287,170 to that company's shareholders." In another instance, the Commission's staff, during a routine examination, discovered that an investment company officerhad been converting funds by

causing the company to purchase worthless short-term notes of a fictitious enterprise. Following this discovery, the investment company

was fully indemnified for its losses, which aggregated $195,000. In

a third instance, through the efforts of the Commission's staff, $39,441

was returned to an investment company in settlement of that company's claims against an affiliated broker-dealer firm arising from

excessive brokerage commissions and trading profits and from the

broker-dealer's activities in causing the company to engage in certain

unauthorized principal trades with another affiliated business entity.

REVISION OF ANNUAL REPORT FORM FOR MANAGEMENT

INVESTMENT COMPANIES

Even under an expanded inspection program, such as has been pursued by the Division of Corporate Regulation in the past few years,

certain investment companies inevitably require closer or prompter

scrutiny. Because of this and the continued growth in the number and

size of investment companies, the Commission considered that the

public interest and the protection of investors would be served by

strengthening the annual report filed by investment companies, and

1No. LR-64e-123, E.D. Ark. (Apri120, 1965).

S.1iJ.C.v. Maa: J. Rouer, Business Development Corp. et at., Civ. Act. IP 63--C334 S.D. Ind. (Order dismissing action, August 28, 1964).•
112 SECURITIES AND EXCHANGE COMMISSION

adopted a revised form, captioned Form N-1R, effective for all fiscal

years ending on and after December 31, 1964.3

In adopting Form N-1R the Commission determined to amend

the reporting requirements in two major respects.' First, the previous form was revised to provide for additional information in the

public reports filed by registered management investment companies.

Second, a new nonpublic report is provided as a part of the form.

The data in both reports will materially assist the Commission in its

inspection program. In addition, the reports will serve the

purpose of bringing to the attention of the persons responsible for

the management and operations of investment companies information

which will assist them to determine more readily whether the statutory

standards and requirements are, in fact, being complied with, and

thus contribute to the achievement of a substantial degree of selfinspection.

BLINGS REVIEWED

Investment companies offering their shares for sale to the public

must file a registration statement for their securities under the Securities Act of 1933 as well as register under the Investment Company

Act. The registration statements and revised prospectuses of investment companies filed pursuant to the Securities Act are reviewed for

compliance with that Act and the Investment Company Act. The

Commission's rules promulgated under the Investment Company Act

generally require that the basic information contained in notifications

of registration and in registration statements of investment companies

be kept current through periodic and other reports. In addition,

proxy soliciting material filed by investment companies is reviewed

for compliance with the Commission's proxy rules. The following

table sets forth the volume of filings processed during the past fiscal

year:

3 Investment Company Act Release No. 4151 (January 25, 1965). Because of

the increased scope of this form, the due date of the first annual report filed by a

registered company on the form was extended, from not more than 120 days as

previously required for the filing of annual reports, to not more than 180 days

after the close of the fiscal year covered by the report. For companies whose

fiscal year ended on December 31, 1964, the first report on Form N-1R was thus

required to be filed not later than June 29, 1965.

As noted at p, 116, intra, the proposal to amend Rule 2Oa-2 with respect to

information to be disclosed in proxy statements was withdrawn. In connection

with the withdrawal the Commission indicated that further consideration of an

amendment of Rule 20a-2 will be undertaken, including the extent to which the

information called for by certain items of Form N-1R should be disclosed

in proxy statements, prospectuses and reports to shareholders of registered

investment companies.

•
TEITRTY-FLRST~AL REPORT 113

Pending I Pending

Type of material June 30, Flied Processed June 30, 1964 1965

Registration statements and fftst-effectlve amendments under the Securities Act 0 1933______________________ 60 783 771 72 Registranons under the Investment Company Act of 1940__________________________________________________ 28 67 67 28 Proxy-soliciting material; ______________________________ 4 430 417 17 Annual reports _________________________________________ 487 484 645 326 Quarterly reports _______________________________________ 67 286 314 39 Periodic reports to shareholders contamlng financial statements ___________________________________________ 778 1,749 1,928 599 Copies of sales literature ________________________________ 665 2,829 2,858 636

APPLICATIONS AND PROCEEDINGS

Under Section 6(c) of the Act, the Commission, by rules and regulations, upon its own motion or by order upon application, may exempt

any person, security, or transaction from any provision of the Act

if and to the extent that such exemption is necessary or appropriate

in the public interest and consistent with the protection of investors

and the purposes fairly intended by the policy and provisions of the

Act. Other Sections, such as 6(d), 9(b), 10(f), 17(b), 17(d), and

23(c), contain specific provisions and standards pursuant to which

the Commission may grant exemptions from particular sections of the

Act or may approve certain types of transactions. Also, under certain

provisions of Sections 2, 3, and 8 the Commission may determine

the status of persons and companies under the Act. One of the principal activities of the Commission in its regulation of investment

companies is the consideration of applications for orders under the

sections referred to.

During the fiscal year, 260 applications filed under various sections

of the Investment Company Act were before the Commission. The

sections of the Act with which these applications were concerned and

the disposition of such applications are shown in the following table:

Applications filed with or acted upon by the Oommission under the Investment

Oompany Act of 1940 dUring the fiscal year ended June 90, 1965

Subject

Pending Pending secnons July I, Flied Closed June 30, 1964 1965

-- -- -- 2 ________________ Definition of controlled person ______________________ 7 1 2 6 3 and 6__________ Stat1JS and exemption _______________________________ 7(d) _____________ 15 19 21 13 Registration of foreign mvestment companies _______ 1 0 1 0 8(0 ____________-- Termination of registration _________________________ 27 63 58 22 9, 10, 16__________ R=tion of affihation of directors, officers, em- 2 2 3 1 P oyees, Investment advisers, underwriters and

others. 12, 13, 14(a), 15__ Regu\ation of functions and activities of Investment 7 14 19 companies. 11,25 ____________ Regulation of securities exchange offers and reorganl- 1 1 1 1 zatlon matters. 17_______________ Regulation of transactions with affiliated persons ____ 30 55 64 21 18, 19, 21, 22, 23___ Requirements as to capital structures, loans, d1strl- 7 15 18 4 bntlons and redemptions, and related matters. 27_______________ Periodic payment plans _____________________________ 1 0 1 0 28 _______________ Regulation of face-amount certificate companies. ____ 2 0 2 0

Total _________________________________________ -- -- -- -- 100 160 190 70

791-46S--65----9
114 SECURITIES AND EXCHANGE COMMISSION

Some of the more significant matters in which applications were

considered are summarized below:

On November 9, 1964,the Commission issued a notice and order for

hearing with respect to an application of American & Foreign Power

Company Inc. ("Foreign Power") for an order pursuant to (i) Section 3 (b) (2) of the Act declaring that Foreign Power is not an investment company or (ii) Section 6(c) exempting Foreign Power from

the provisions of the Act," The application was occasioned by Foreign

Power's sales of or contracts to sell, between 1958 and 1964, its interests in public utility subsidiaries in Argentina, Mexico, Columbia, and Brazil t.o the governments or government agencies of those

countries largely in exchange for notes of such governments or

agencies. The proceeding on Foreign Power's application was consolidated with the proceeding on an application which had previously been

filed by Electric Bond and Share Company ("Bond and Share"), the

majority stockholder of Foreign Power, for an order pursuant to (i)

Section 8(f) of the Act declaring that Bond and Share had ceased to be

an investment company as defined in Section 3(a), or (ii) Section 3 (b)

(2) of the Act declaring that Bond and Share is not an investment

company."

Hearings were held during which Bond and Share amended its application to include a request, pursuant to Section 6(c) of the Act, for

an order exempting it from the provisions of the Act. On January

29,1965, the Division of Corporate Regulation filed its proposed findings and conclusions and brief in support thereof recommending that

the Commission deny the applications of Bond and Share and Foreign

Power. On February 16, 1965,Foreign Power entered into an agreement providing for the sale of its interests in its public utility subsidiaries in Chile to an agency of the Chilean Government primarily in

exchange for notes guaranteed by that Government. Following the

reopening of the record of the proceedings to receive evidence with

respect to that sale, reply briefs were filed by the applicants and by

the Division of Corporate Regulation, and oral argument by the parties was heard by the Commission. At the close of the fiscal year

the matter was pending.

On April 7, 1965,the Commission issued its opinion and order granting an application filed pursuant to Section 6(c) of the Act by Variable Annuity Life Insurance Company of America ("VALIC"), for

a limited exemption from the provisions of Sections 22(d) and 27 (a)

of the Act.'

5 Investment Company Act Release No. 4075.

The notice and order for hearing with respect to the Bond and Share application are contained in Investment Company Act Release No. 3MO (March 24,

1964).

7 Investment Company Act Release No. 4217.

•
THIRTY-FIRST ANNUAL REPORT 115

The Commission's order under Section 22( d) permits VALIC to sell

group variable annuities to those employers satisfying the provisions

of Section 403(b) of the Internal Revenue Code of 1954, as amended,

("Code") at the same sales load charged employees' pension and profitsharing trusts which satisfy Section 401 of the Code and also charged

tax exempt organizations enumerated under Sections 501(c) (3) and

(13) of the Code. The exemption also permits variation in the sales

load charged to those employers enumerated in Section 403(b) of the

Code so as to increase the amount of purchase payments on behalf of

any individual at any time after the first year in order that the same

uniform sales load can be charged during the contract year in which

the increase is made.

With respect to Section 27(a), the Commission's order permits

VALIC to charge, in the sale of its variable annuities to pension

trusts, a sales load of up to 12.08percent in each of the first 6 contract

years, 5.5 percent in each of the next 6 contract years, and 2 percent

each year for the remainder of the accumulation period. Under the

order, the total cumulative deductions for sales load will be less at any

point over the life of such contracts than the maximum cumulative deductions permitted by Section 27(a), namely, 50 percent the first year

and uniform rate thereafter.

On June 2,1965, the Commission granted an application filed under

Section 6(c) of the Investment Company Act by Investors Diversified

Services, Inc. ("IDS"), and its wholly-owned subsidiary, Investors

Accumulation Plan, Inc. ("Plan Company"}." Plan Company proposed to offer periodic payment plan certificates for accumulation of

shares of Investors Stock Fund, Inc., a registered open-end diversified

management investment company. IDS acts as investment adviser

and underwriter fur Investors Stock Fund, Inc., and will act as underwriter for the securities offered by the Plan Company. The Commission's order permits the deduction of sales loads on periodic payment

plan certificates at the rate of 20 percent of payments during the 1st

year, 18 percent during the 2nd and 3rd years, 7 percent during the 4th

year and 4.2 percent thereafter. Over the course of the plan the sales

load would be 8 percent of aggregate payments. The total cumulative

deductions for sales load will be less at any point of time over the life

of such contracts than the maximum cumulative deductions permitted

by Section 27(a).

During the fiscal year, Amoskeag Oompany ("Amoskeag"), a registered closed-end, nondiversified investment company organized as a

trust, submitted to the Commission a plan of reorganization and requested, pursuant to Section 25(b) of the ,Act, that the Commission

render an advisory report in respect to the fairness of the plan and its

8 Investment Company Act Release No. 4261.
116 SECURITIES AND EXCHANGE COMMISSION

effect upon the two classes of security holders of Amoskeag. The plan

called for the transfer of the assets of the trust to a newly created corporation, in exchange for all of the debentures and common stock to

be issued by the new corporation; the transfer of the debentures of the

new corporation or cash to the preferred shareholders of the trust; the

transfer of the common stock of the new corporation to the common

shareholders of the trust; and the liquidation of the trust. It was

proposed for the following stated reasons: (1) the new corporation

would have perpetual existence in contrast to the limited term of the

trust; (2) the trust form of :organization deprived management and

counsel of the relative legal certainty and flexibility of operation available to corporations; (3) dividends on preferred shares were not deductible by the trust for Federal income tax purposes (in the opinion

of counsel, interest paid on the proposed debentures would be deductible) ; and (4) holders of preferred shares would have the election

of receiving in cash the full liquidation preference of $100 per share

plus accrued dividends for their holdings, which would be in excess of

the over-the-counter market bid quotations for the shares ranging from

82 to 95 during the 5 years 1960 to 1964, inclusive.

In its advisory report issued May 20, 1965,9 the Commission concluded that, on the basis of a comparison of the rights and financial attributes of the preferred and common shares of the trust with those of

the debentures and common stock of the new corporation, the terms of

the plan were within such limits of fairness as would justify its submission to the security holders of Amoskeag for their consideration.

The Commission pointed out, however, that it had no statutory power

to approve or disapprove the plan, and that in no sense was the report

to be deemed a recommendation, endorsement or approval of the plan.

REVISION OF RULES, REGULATIONS AND FORMS

During the fiscal year Rules 3c-3 and 17g-1 were amended and Rule

12d-1 was adopted. The amendments and adoption, respectively, of

these rules were noted, and their provisions discussed, in the 30th

Annual Report of the Commission." The proposed amendment of

Rule 20a-2 relating to certain financial and other information to be

disclosed in proxy statements of registered investment companies was

also discussed in the 30th Annual Report where it was noted that the

amendment was pending.v The proposal was withdrawn during the

past fiscal year.12

Investment Company Act Release No. 4250.

0 30th Annual Report, pp. 21-24.

u30th Annual Report, pp. 24-25 .

.. Investment Company Act Release No. 4152 (January 25, 1965). But see

fn. 4, p. 112, 8upra.

•

•
TEITRTY-FIRST~AL REPORT 117

Adoption of Rule 2a-4

During the fiscal year the Commission adopted Rule 2a-4, which

defines the term "current net asset value" as used in the A.ct with

reference to redeemable securities issued by a registered investment

company." Under the rule, portfolio securities for which market

quotations are readily available are to be valued at current market

value, and other securities and assets are to be valued at fair value as

determined in good faith by the board of directors of the registered

company. The rule also provides that changes in holdings of portfolio

securities or in the number of outstanding shares of the registered

company shall be reflected no later than the first calculation on the

first business day following the trade date or date of change. Under

the rule, expenses, including 'any investment advisory fees, are to be

included to the date of calculation; dividends receivable are to be

included to date of calculation either at ex-dividend dates or record

dates, as appropriate; and interest income and other income are to be

included to date of calculation. The rule also provides for interim

determinations of current net asset value between calculations made

as of the close of the New York Stock Exchange on the preceding

business day and the current business day so as to reflect any change.

13 Investment Company Act Release No. 4105 (December 22,1964).
PART IX

ADMINISTRATION OF THE INVESTMENT ADVISERS ACT

OF 1940

The Investment Advisers Act of 1940 established a pattern of

regulation of investment advisers similar to that contained in the

Securities Exchange Act with respect to the conduct of broker-dealers.

W"ith certain specific exceptions, the Act requires persons engaged for

compensation in the business of advising others with respect to securities to register with the Commission and to conform to statutory

standards designed to protect the public interest. The Act prohibits

fraudulent conduct, and authorizes the Commission to define, and

prescribe means reasonably designed to prevent fraudulent, deceptive

or manipulative acts or practices. Pursuant to such authority, Rule

206(4)-1 proscribes, among other things, the use of testimonials, circumscribes permissible references to past recommendations and the

use of graphs and charts, and prohibits the use of false or misleading

statements. Under Rule 206(4)-2, an investment adviser who has

custody or possession of the funds or securities of clients must segregate

them, maintain them in the manner provided in the rule and comply

with certain other conditions.

The Act prohibits an investment adviser from basing his compensation upon a share of the capital gains or appreciation of his

client's funds, and prohibits the assignment of investment advisory

contracts without the client's consent. Advisers are also required to

make, keep and preserve books and records in accordance with the

Commission's rules and the Commission is empowered to conduct

inspections of such books and records.

Investment advisers who violate any of the provisions of the Act

or of the rules thereunder are subject to appropriate administrative,

civil or criminal sanctions. The Act provides, in Section 203(d) ,

that the Commission shall deny, revoke, or suspend for not more than

12 months, the registration of an investment adviser if it finds thac

such action is in the public interest and that the investment adviser

or any partner, officer, director or controlling or controlled person

of the investment adviser is subject to a specified disqualification.

These disqualifications include wilful misstatements in an application

or report filed with the Commission, the existence of a conviction or

injunction based on or related to specified types of misconduct, wilful

violation of any provision of the Securities Act, Securities Exchange

118
THIRTY-FIRST ANNUAL REPORT 119

Act or Investment Advisers Act or any rule or regulation thereunder,

and aiding and abetting any other person's violation of such provisions,

rules or regulations. In addition, the Commission may seek injunctions to restrain violations of the Act and may recommend criminal

prosecution by the Department of Justice for fraudulent misconduct

or wilful violation of the Act or the Commission's rules thereunder.

Registration Statistics

At the close of the fiscal year 1,600 investment advisers were registered with the Commission. The following tabulation contains other

statistics relating to registrations and applications for registration:

Investment adviser registrations-fiscal year 1965

Effective registrations at close of preceding year 1,613

Applications pending at close of preceding year________________________ 22

Applications filed during year________________________________________ 261

Registrations cancelled or withdrawn during year______________________ 259

Registrations denied or revoked during year____________________________ 5

Applications withdrawn during year___________________________________ 10

Applications pending at end of year___________________________________ 23

Inspection Program

During fiscal 1965,260 inspections of investment advisers were completed by the Commission's staff (as compared to 239 the preceding

year). These inspections disclosed a total of 171 indicated violations

of the Act and the rules and regulations promulgated thereunder, as

reflected inthe following table:

Violations noted. in investment adviser inspection reports-fiscal year 1965

Books and records deficient___________________________________________ 43

Registration application inaccurate____________________________________ 58

False, misleading, or otherwise prohibited advertising__________________ 20

Improper "hedge clause" a 12

Failure to provide for nonassignability in investment advisory contractc..; 23 Others 15

Total indicated violations______________________________________ 171

G "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.

Administrative Proceedings

Set forth below are statistics with respect to administrative proceedings under the Investment Advisers Act which were pending during

fiscalyear 1965:

Proceedings pending at beginning of fiscal year:

Against investment adviser registrants____________________________ 13

Against investment adviser applicants_____________________________ 1

Total 14
120 SECURITIES AND EXCHANGE COMMISSION

Proceedings instituted during fiscal year:

Against investment adviser registrants____________________________ 1

Against investment adviser applicants_____________________________ 1

'rotal 2

Total proceedings current during fiscal year____________________ 16

Disposition of proceedings:

Registration revoked_____________________________________________ 4

Registration denied______________________________________________ 1

Registration canceled_____________________________________________ 2

Registrant censured______________________________________________ 1

Registrant ordered to refrain for a period of time from advertising

for new subscribers to its publications___________________________ 2

Proceedings dismissed____________________________________________ 3

'rotal 13

Proceedings pending at end of fiscal year:

Against investment adviser registrants____________________________ 2

Against investment adviser applicants_____________________________ 1

'rotal 3

'rotal proceedings accounted for_________________________________ 16

Among the decisions rendered during the fiscal year was one in

which the Commission discussed at some length the obligations of investment advisers with respect to advertising material. In view of

mitigating factors, the Commission, in Spear &: Staff, Incorporatedr

accepted an offer of settlement consenting to findings that the registrant, aided and abetted by its president, wilfully violated the antifraud provisions of the Act and providing for an order directing

registrant to refrain for 90 days from advertising for new subscribers

to its publications and to undertake during that period to establish

controls for the purpose of preventing future violations.

Inits Findings and Opinion," the Commission analyzed registrant's

advertising for its market letters, and found that such advertising

was couched in enthusiastic and dramatic language, insistently implying that registrant possessed the ability to select stocks that were certain to appreciate in price substantially and rapidly and that "a certain

road to riches was at hand for those who availed themselves of registrant's guidance." A frequently used advertisement inquired of prospective subscribers whether they desired to double their money in

perhaps 12 or 24 months and urged that if they were so interested, they

t Investment Advisers Act Release No. 174 (July 14, 1964).

'Investment Advisers Act Release No. 188 (March 25,1965).
TEIRTY-FLRST ~AL REPORT 121

should learn about special situation investing from registrant. Another technique was to recount outstanding successstories and attribute

the success of the selected individuals to investments in special situations, thereby furthering the impression that registrant was able to

uncover for its subscribers opportunities for outstanding profits comparable to those which the described individuals had realized.

The Commission concluded that registrant's advertisements were

deceptive and misleading in their over-all effect, particularly on unsophisticated investors, even though arguably no single statement was

literally false. Itstated that the advertisements obscured the numerous uncertainties and imponderables inherent in any attempt to forecast security prices. The Commission stated that in accepting

respondents' offer of settlement, despite the seriousness with which it

viewed the violation, it took into account that this was one of the first

administrative proceedings in which it had dealt with the question

of improper investment advisory advertising material, and various

other mitigating factors. It emphasized, however, that the relative

leniency of the sanction imposed should not be misconstrued since in

light of the admonitions of its opinion it would be disposed to deal

more severely with any future instances of false and misleading

advertising by investment advisers.
PART X

OTHER ACTIVITIES OF THE COMMISSION

CIVIL LITIGATION

The several statutes administered by the Commission authorize the

Commission to seek injunctions against continuing or threatened violations of such statutes. Such violations may involve a wide range of

illegal practices, including the purchase or sale of securities by fraud,

and the sale of securities without compliance with the registration requirements of the Securities Act. The Commission also participates

in various other types of proceedings, including appearances as amicus

curiae in litigation between private parties where it is important that

its views regarding the interpretation of the statutory provisions

involved be furnished to the court, corporate reorganization proceedings under Chapter X of the Bankruptcy Act, and various types of

civil appellate proceedings.

Tables 11 and 12 in the appendix to this report contain statistics

with respect to the various types of civil proceedings in which the Commission participated prior to and during the fiscal year. A summary

of injunction proceedings instituted by the Commission since 1934

may be found in Table 15. This section describes a few of the more

noteworthy cases which were pending during the .fiscalyear, not including, however, cases arising under the Public Utility Holding

Company Act or Chapter X of the Bankruptcy Act; such cases are

discussed in the sections of this report dealing with those statutes.

During the year, the Commission was involved in significant litigation, both as a party and in an amicus curiae capacity, based upon Rule

10b-5 under the Securities Exchange Act of 1934. InSecurities and

Exchange Oommiesion. v. Texas Gulf Sulphur 00.,1 an action instituted

in April 1965, the Commission alleges that the rule was violated when

certain officials of the defendant company purchased shares of its

stock, as well as calls on such stock, between November 12, 1963 and

April 16, 1964,without disclosing to the sellers material facts of which

the officials were aware concerning the company's mining activities

near Timmins, Ontario, Canada. The complaint alleges that on November 12, 1963, the company had completed a drill hole which has

been characterized as the "most impressive ... in modern times." Itis

alleged that additional violations of the rule occurred when certain

1S.D.N.Y., No. 65 Civ.1l82.

122
TEITRTY-FLRST~AL REPORT 123

Texas Gulf officials advised other persons to engage in similar purchases, when certain of them received stock options from the company

without disclosing the material facts about the ore strike to the board

of directors and when the company itself, on April 13, 1964, issued a

false and misleading press release concerning its activities in Timmins

3 days prior to its issuance of a second release which for the first time

confirmed the existence of a rich copper and zinc ore body in the

Timmins area. In addition to injunctive relief against a repetition of

the allegedly unlawful activities, the Commission seeks an order directing rescission of the allegedly unlawful purchases of stock and calls

by the defendants, directing cancellation of the stock options in

question and directing those defendants who advised others to purchase

to make restitution to the sellers.

In a subsequent action, Securities and Eechanqe Oomanissiom v.

Golconda Mining 00. and Harry F. Magnuson,2 it is alleged that

Golconda and Magnuson, a substantial stockholder and controlling

person of Golconda, violated the rule by purchasing stock of Hecla

Mining Co. and selling stock of Lucky Friday Silver-Lead Mines Co.,

without disclosing to the respective sellers and purchasers a proposed

merger between the two companies, known to Magnuson by virtue of

his position as a director of each, at an exchange ratio different from

the ratio of the market prices of the two stocks prevailing during the

period of the alleged purchases and sales. The Commission seeks

both an injunction against future violations and an order directing

the defendants to make restitution to each person from whom they

purchased Hecla stock and to whom they sold Lucky Friday stock

during the period covered by the complaint.

During the fiscal year the Commission also agreed to a settlement

of the case of Securities and Etcohamqe Uommiseion. v. Aldred Investment T'l'U8t, et al.,3 which was instituted under Rule 1Ob-5 in 1961.

In this case the Commission alleged that Richard L. Rosenthal, president and majority stockholder of Aldred Investment Trust, an investment company having less than 100 shareholders, had purchased

through Birnbaum & Co., a registered broker-dealer, minority shares

of Aldred stock at $16 per share without disclosing to the sellers the

identity of the purchaser, the purchaser's relationship to Aldred, the

details of Aldred's investment portfolio or the fact that the net asset

value of the stock had risen :from $27 to $90 per share during the

period in which the purchases took place. Birnbaum & Co. consented

to the entry of a permanent injunction against future violations and

the action was dismissed as against Rosenthal, after he offered rescission of their transactions to each of the persons from whom he

S.D.N.Y., No. 65 Civ.1512.

S.D.N.Y., No. 61 Civ. 2885.

•

•
124 SECURITIES AND EXCHANGE COMMISSION

purchased, and as against Aldred, after it had been recapitalized to

eliminate all minority holdings.

Two private suits under the rule in which the Commission participated amicue curiae were 0'Neill v, M aytag, et «1.4 and List v, Fashion

Park, Inc., et al.5 In O'Neill the plaintiff, suing derivatively on

behalf of National Airlines, Inc., alleged that National was defrauded

within the meaning of the rule when its controlling directors caused

it to acquire a large block of its own stock at an excessive price for

the purpose of removing the threat to the directors' control represented by such stock. The district court dismissed plaintiff's complaint and the court of appeals affirmed, holding that while plaintiff

did allege a breach of fiduciary duty by the directors, he did not allege

a violation of Rule 10b--5because the complaint failed to allege facts

amounting to "deception" on the part of the defendants. The court

pointed out, however, that "deception" might not be required under

the rule where the fiduciary duty allegedly breached is one that was

created "with particular reference to the purchase or sale of securities,"

as in the case of a broker-dealer or investment adviser. The Commission's brief, urging reversal, had argued that it was clear from

a reading of the entire complaint that plaintiff was claiming, although

implicitly, that the directors did not fully disclose the conflicting

interest which motivated the securities transactions to those entitled to

such disclosure.

In the List case, a director of Fashion Park, Inc. and his broker

had purchased from the plaintiff 5,100 shares bf Fashion Park stock

at $18.50 per share without disclosing to him (1) that one of the

purchasers was a director or (2) that the board of directors had 1

week earlier resolved to seek to sell or merge the company. The

court of appeals affirmed the district court's dismissal of the complaint

following trial, holding that although a securities purchaser may violate Rule lOb--5while maintaining complete silence, the district court

was not clearly in error in concluding that the plaintiff would have

sold his stock even if he had known that a director was the purchaser,

i.e, there was no "reliance" upon this nondisclosure, or in concluding

that the corporate resolution was too remote to have influenced the

conduct of a reasonable investor, i.e., the adoption of the resolution

was not a "material" fact. While the Commission did not participate

in this case at the trial or appellate levels, the Solicitor General,

subsequent to the close of the fiscal year, submitted to the Supreme

Court, at the Court's invitation, a memorandum amicus curiae expressing the Commission's views upon the question of whether the plaintiff's

pending petition for a writ of certiorari should be granted. The

339 F.2d 764 (C.A. 2, 1964).

340 F.2d 457 (C.A. 2,1965).

•

•
TffiRTY-FLRST ANNUAL REPORT 125

position taken in this memorandum is that the court of appeals

correctly determined that the rule may be violated by maintaining

complete silence, but that the court's test of reliance is confusing and

inappropriate in cases of complete nondisclosure and that the court

erred in failing to evaluate the combined and cumulative impact of

the two elements of nondisclosure. It is urged, however, that review

by the Supreme Court is not warranted in view of the fact that the

case involves primarily factual determinations and the petition does

not appear to raise the questions which trouble the Commission.

The Commission's action against James J. Ling, Royce B. McKinley, and Joseph F. McKinney, former officers or directors, and Paul

E. Broderick, the present treasurer of Electro-Science Investors, Inc.,6

a registered investment company, was concluded on August 3, 1965,

when the court entered final judgment based on stipulation and consent of all the parties.

The complaint alleged, among other things, that Ling, with the

assistance of other defendants, took personal advantage of a corporate

opportunity of the company to purchase and resell a large block of

common stock of Tamar Electronics Industry, Inc., in which the company also had an interest, thus violating Section 17 of the 1940 Act,

and that he realized substantial personal benefits from the transaction

which rightfully belonged to the company. The complaint sought

an accounting for and return of such profits of the company and an

injunction pursuant to Section 36 of that Act preventing any of the

defendants from serving as officersor directors of a registered investment company.

All defendants filed undertakings not to serve as officersor directors

of any registered investment company (except that Mr. Broderick

may continue as treasurer of the company). The court also approved

a monetary settlement under which defendant Ling is to pay $225,000

to the company in compromise of any claim the company may have

against him.

In Hoover v. Allen/ a derivative action by shareholders of

American-Hawaiian Steamship Co., plaintiffs alleged that Daniel K.

Ludwig, the principal shareholder of the company, had made false and

misleading statements which were designed to depress the value of

American-Hawaiian's stock and to induce other stockholders to sell

their stock to the company, in order to enable Ludwig to obtain complete control of the company. Plaintiffs further alleged that Ludwig,

after gaining such control, had committed acts of corporate waste.

The complaint alleged violations of Sections 14(a) (proxy provisions)

and 18(a) (false reports) of the 1934 Act and Sections 7(a) (2) and

N.D. Tex., No. CA.-3-447. See discussion in 30th A.nnual Report, pp. 128-129.

241 F. Supp.213 (S.D. N.Y., 1965).

•

•
126 SECURITIES AND EXCHANGE COMMISSION

(4) (registration provisions), 20(a) (proxy provisions), 34(b) (reporting provisions) and 36 (gross abuse of trust) of the 1940 Act.

The court dismissed all claims (except those involving Section 36)

on the ground that the company suffered no injury directly connected

with the purchase or sale of securities, noting that the company in fact

benefited from its purchases since they were made at an allegedly depressed price. The court found that the acts of waste complained of

were not so connected with the alleged fraud that they were cognizable

under Section 10(b) and that no injury was so connected with allegedly

misleading proxy material as to state a cause of action under the proxy

provisions of either Act.

The Commission's participation as amicus curiae, which was at the

request of the court, was limited to the issues (1) whether a dormant

nonoperating water carrier which held an IOC certificate was excluded from regulation under the 1940 Act under Section 3(c) (9)

thereof as a company "subject to regulation under the Interstate Commerce Act ... " and (2) whether substantive violations of the 1940

Act were chargeable to a nonregistered company which should have

been registered, under sections of the Act which in terms apply to a

"registered investment company."

The court held that the Section 3(c) (9) exemption was unavailable

to water carriers, whether active or dormant. Further, by refusing to

dismiss the Section 36 claims, the court also recognized that an action

may be brought for substantive violations of the 1940 Act occurring

during a period when an entity was illegally unregistered.

The Commission's action under the Investment Company Act

against Oontinental Growth Fund, Inc.,s a registered investment company, and certain of its officers and directors, seeking to enjoin the

individual defendants from continuing to act as officers and directors

on the ground that they had been guilty of gross misconduct and gross

abuse of trust, was terminated during the fiscal year with the settlement of the action against J. Dudley Devine, the only remaining

defendant, on the basis of a stipulation which recites that Mr. Devine

has entered into an undertaking with the Commission.

In August 1963, on the Commission's application, the court had

appointed a receiver for the fund's assets and in November 1963,it had

entered an order permanently enjoining Richard G. Jacobs, a promoter

of the fund and its former president, from further violations of the

Investment Company Act. On June 24, 1964, the action was settled

and discontinued by order of the court as against the other defendants

on the basis of a stipulation which recited, among other things, that

certain of the defendants and others had paid to the fund's receiver

8 S.D.N.Y., 63 Oiv. 2252. See discussion of earlier developments in this action,

30th Annual Report, p, 128.
THIRTY-FIRST ANNUAL REPORT 127

$220,300 in settlement of losses resulting from the activities charged

in the Commission's complaint, and had entered into undertakings

similar to the above undertaking by defendant Devine.

In Securities and Ewohange (Iomandssion. v. United Benefit Life Insurance Oompany,9 the Commission sought to enjoin the defendant

company from offering and selling, in violation of the registration

provisions of the Securities Act, a contract described by the company

as an Annual Premium Flexible Fund Retirement Annuity. The

Commission contended that the contract, representing a participation

in a fund of securities, was a security within the meaning of that Act

and also that the fund of securities constituted an investment company

required to be registered under the Investment Company Act. At the

close of the presentation of the Commission's evidence the district

court dismissed the complaint, holding that the contract was an exempt

"insurance product" and not a security. An appeal has been taken by

the Commission to the Court of Appeals for the District of Columbia

Circuit where the matter is now pending.

In a number of cases in which petitions for review were filed during

or shortly prior to the fiscal year, various courts of appeals have

affirmed Commission orders revoking the registrations of brokerdealers and in their decisions have expressed holdings of considerable

significance. In Boruski v, S.E.O.I0 the court, in rejecting the contention that the Commission's regulations requiring certified reports

of financial condition were unreasonable, remarked that "it is difficult

to see how the Commission could carryon its task of protection of the

public investor without financial information such as it sought here."

In response to Boruski's further contention that the Commission

should have appointed counsel to represent him in the administrative

proceeding, the court stated: "We know of no requirement that counsel

be appointed in these administrative proceedings. The orders, although serious in their effect, are not criminal judgments."

In a companion case, Financial (Iounsellors, Inc. v, S.E.OY the revocation of the broker-dealer registration of Financial Counsellors,

Inc. was based upon its failure to disclose in its registration application that Boruski controlled it. The Act expressly requires disclosure

of the identity of any person controlling the applicant and the court

concluded that "the registration requirement provisions are ~f vital

importance to the statutory scheme of securities regulations" and that

revocation was "fully warranted."

D. D.C., No. CA. 3096-62. The institution of this action is described in the

29th Annual Report, pp. 119-20.

1°340 F.2d 991 (C.A. 2, 1965).

11339 F.2d 196 (C.A. 2, 1964).

•
128 SECURITIES AND EXCHANGE COMMISSION

A similar holding was made in the case of Oapital Funde, [no. v.

S.E.O./2 decided shortly after the end of the fiscal year, where the

court ruled that a misstatement in an application for broker-dealer

registration as to the identity of the owners of the business is not a

"minor" point. The decision also held that the offer or sale of any

part of an issue of securities to a nonresident is sufficient to deprive

the entire issue of the benefit of the intrastate exemption from registration; that an industrial loan company, though organized under a

Banking Statute and subject to supervision by a State Banking

Commissioner, is not a banking institution within the meaning of the

Securities Act; that the failure of the Commission to take action as

to an earlier violation does not mean that it passed upon or approved

any transaction; and that the Commission and its agents may not

"waive" violations of Federal law, nor may estoppel be raised against

the Commission.

In Gearhart &: Otis, Inc. v. S.E.O.,la the court held that objections

which were not raised before the Commission could not be raised upon

review, even though the objections in question could only have been

raised by a petition for rehearing. However, the court added, with

respect to one of the objections, that a Commissioner could participate

in a decision even though he was appointed and took office subsequent

to oral argument before the Commission.

In Tager v, S.E.O.,l4. the court refused to modify the sanctions imposed by the Commission, stating that courts should not "substitute

their untutored views as to what sanctions will best accord with the

regulatory powers of the Commission." In disposing of the petitioner's argument that his manipulation caused little harm to investors,

the court observed: "The injury inflicted on the public, the market

price inflation accomplished through the rigging, and the amount of

profit realized by the broker are not immutable guides to an appropriate sanction as these factors are largely dependent upon market

conditions and chance."

In this ,case as well as in the Gearhart and Oapital Funde cases the

courts reaffirmed their consistent holdings that willfulness, within the

meaning of Section 15 (b) of the Securities Exchange Act, means

merely that a person intentionally commits the act which constitutes

the violation and does not mean that he must know he is breaking the

law.

In Nasseu Securities Service v. S.E.O.,l5 the court sustained Commission action affirming a fine imposed by the National Association

12348F.2d582 (C.A.8, 1965).

1.348 F.2d 798 (C.A.D.C., 1965) .

.. 344 F. 2d 5 (C.A. 2, 1964).

IS 348 F .2d 133 (C.A. 2, 1965) .
THIRTY-FIRST ANNUAL REPORT 129

of Securities Dealers on the petitioner. The court rejected an attack

on the make-up of the Association's tribunals because of their possible

lack of disinterestedness, pointing out that disciplinary action taken

by the Association is subject to full review IOfthe Commission. The

court also ruled that while it was "puzzled by the imposition of a

$1,000 forfeiture, the maximum fine in the NASD arsenal of remedies,

for a breach of contract involving a sum less than one-third as large,"

it could not say that the Commision exceeded its discretion in upholding the Association's assessment.

In Blas» v, Maw Factor & 00.,16 the Court of Appeals for the Ninth

Circuit held that an exchange of Max Factor common stock for

Class A stock did not constitute a "purchase" of the Class A stock

within the meaning of Section 16(b) of the Exchange Act. The

common was exchangeable for Class A at any time, and the only

difference between the two classes was that the board of directors had

the power to declare lesser dividends on the common than on the

Class A. In holding that there was no purchase, the court distinguished Park &1 Tilford, 1M. v. 8ahulte,17 where a conversion of convertible preferred into common was held to be a purchase. The court

noted that unlike the Max Factor exchange, the preferred and common

exchanged in Park &1 Tilford involved significantly different investment risks.

The plaintiff had challenged the validity of Rule 16b-9, under which

the transactions involved were exempt from the operation of Section

16(b), including its retroactive application to the facts of this case,

and the Commisison had filed an amicus ouriae brief urging that the

rule be upheld. In view of its conclusion that there was no purchase,

the court found it unnecessary to determine the validity of the rule.

In accordance with a request from the Court of Appeals for the

Third Circuit, the Commission participated amicus curiae in a reargument en bane in Heli-Ooil Corporation v. Webster.1s This is an appeal

from a district court decision holding appellant, a director of Hell-Coil

Corporation, liable under Section 16 (b) for profits allegedly realized

by him from short term dealings in the convertible debentures and

common stock of the company. The Commission took the position

that the court below correctly held that a voluntary conversion of

debentures into common stock constituted a sale of the debentures

and a purchase of the common stock within the meaning of Section

16(b), that the stock acquired upon conversion was not exempt from

Section 16 (b) as a security "acquired ingood faith in connection with

a debt previously contracted" and that a conversion was not exempt

ie 342 F.2d 304 (1965).

17160 F.2d 984 (C.A. 2, 1947).

1B No. 14,809.

791-46f<.-65--10
130 SECURITIES AND EXCHANGE COMMISSION

from Section 16(b) as an arbitrage transaction. The Commission

urged, however, that since under the circumstances of this case no

profit was realized by appellant from the disposition of the debentures

upon conversion, the judgment against him should have been limited

to the profits realized from the sale of the common stock within 6

months of the conversion.

In Western Auto Supply 00. v. Gamble-Skogmo, Inc./9 the court,

as urged by the Commission in an amicus curiae brief filed during the

fiscal year, held (1) that the issuer's cause of action under Section

16(b), as a matter of Federal law, survived a subsequent merger by

the issuer with another corporation and assignment by the latter of

its interest in the issuer to a third corporation ; and (2) that shares of

stock are fungible so that the purchase of a particular block cannot

be matched against a transfer of most of that block to the purchaser's

employee pension trust at the purchase price and thus make it unavailable for matching against a subsequent sale of other shares at a higher

price within 6 months of the purchase of that block.

Particularly in view of the number of new companies that will be

required to file reports with the Commission, increased enforcement of

the filing requirements is being emphasized. In Securities and Exchamqe Oommission. v, S & P National Corporation; et al./o a mandatory injunction was obtained directing the corporation and two named

officersto file specified reports within 15 days of the date of the decree.

The court further enjoined the defendants from failing to file or cause

to be filed future reports which would become due. When the defendants failed to comply with the terms of the mandatory injunction the

Commission filed a Petition for Adjudication of Civil Contempt. Pursuant thereto and with defendants' consent, an order was entered providing that the corporation and the officers "shall be in civil contempt

of court" unless the required certified financial statements were filed

by a specified day.

In Securities and Eechanqe Commission: v. Higashi, 21 the United

States District Court for the District of Hawaii held, in a subpoena

enforcement action, that the sequestration provisions of Rule 7(b) of

the Commission's Rules Relating to Investigations could not be applied

to prevent a director of a corporation which was the subject of the

Commission's investigation from being represented by the same counsel

as that for the corporation. The Commission has appealed to the

United States Court of Appeals for the Ninth Circuit, where the case

is now pending.

19 348 F.2d 736 (C.A. 8, 1965).

20 S.D.N.Y., No. 65 Civ. 844.

21 Civil No. 2350, March 24, 1965.
THIRTY-FIRST ANNUAL REPORT 131

CRIMINAL PROCEEDINGS

The statutes administered by the Commission provide that the Commission may transmit evidence of violations of any provisions of these

statutes to the Attorney General, who in turn may institute criminal

proceedings. Where facts ascertained as a result of an investigation by

a regional officeof the Commission or at times its headquarters office

appear to warrant criminal prosecution, a detailed report is prepared.

After careful review by the General Counsel's Office,the recommendations of the regional office and the General Counsel's Office are considered by the Commission, and if the Commission believes criminal

prosecution is appropriate 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 52 cases were referred to the Department

of Justice for prosecution." As a result of these and prior referrals,

34 indictments were returned against 208 defendants. The year also

saw 106 convictions in 35 cases and the affirmance of 9 cases. Appeals

were still pending in 12 other criminal cases at the close of the year.

Of 9 defendants involved in 6 criminal contempt cases handled during

the year, 1 was convicted, and 5 cases involving 8 defendants are still

pending. From 1934, when the Commission was established, until

June 30,1965,3,616 defendants have been indicted in the U.S. district

courts in 845 cases developed by the Commission and 1,880 convictions

have been obtained."

As in prior years, the majority of the criminal cases prosecuted

involved the offer and sale of securities by fraudulent representations,

and other fraudulent practices. Itis obviously not feasible to describe

individually each of the many criminal matters pending during the

fiscal year; only a few of the more noteworthy ones can be singled

out for discussion.

The substantial sentences imposed in two criminal prosecutions involving violations of the registration provisions of the Securities

Act of 1933 are significant. On September 17, 1964, Joseph Abrams,

who had been found guilty by a jury of violating those provisions

by offering and selling the unregistered stock of Automatic 1Vasher

Company, was sentenced to a prison term of 5 years. On February 16, 1965, Sidney Albert, who had been convicted of the same

charges, was sentenced to 3 years in prison. Abrams and Albert have

appealed; these appeals are presently pending in the Court of Ap22 This figure includes three criminal contempt actions .

.. This figure does not include convictions in criminal contempt actions.
132 SECURITIES AND EXCHANGE COMMISSION

peals for the Second Circuit. Their convictions and the substantial

sentences imposed on them should serve as a warning to unscrupulous

promoters that they can not evade the registration requirements of

the Securities Act by spurious reliance on exemptions from those

requirements, and thereby deprive the investing public of full disclosure concerning the affairs of the issuer and its management.

The conviction of John C. Doyle of delivering unregistered securities of Canadian Javelin, Inc. to the public after sale is also significant. Doyle and three other defendants had been indicted in July

1962, for violating and conspiring to violate the registration and

anti-fraud provisions of the Securities Act in connection with the offer

and sale of Canadian Javelin. The indictment was initially sealed

because two defendants were outside the United States and it was

feared that disclosure of the indictment would prevent their return.

In August 1962, Doyle represented to the Department of Justice that

he had a commitment from an agent of the Oommission that he would

not be prosecuted. The Department of Justice rejected the claim

and the indictment was made public in August 1963.

Thereafter all the defendants moved to dismiss the indictment,

claiming that the prosecution was barred by the 5-year statute of limitations and that they had been denied the right to a speedy trial

because of the delay in making the indictment public. The district

court dismissed the indictment as to the three other defendants because

of unnecessary post-indictment delay, but denied Doyle's motion because "the continued sealing was materially contributed to and caused

by [Doyle's] own efforts."

On February 3, 1965, in the midst of a hearing, Doyle abandoned

his commitment claim and pleaded guilty to a violation of the registration provisions of the Securities Act. He was later sentenced to

3 years imprisonment, with execution suspended as to 33 months, and

was fined $5,000. In imposing sentence the district court referred

to a massive distribution of unregistered stock and said: "It is not

a question of 50 shares of stock alone the court has considered. The

lack of registration is the important and paramount factor."

Doyle appealed his sentence to the Court of Appeals for the Second

Circuit which affirmed the judgment and sentence saying: "Although

Doyle's trial counsel chose to call the failure to register a technical

violation, counsel can hardly be unaware of the close connection between a wilful failure to register securities and their fraudulent

sale.... " 2i The court emphasized that the prison sentence "must

be conceded to be modest compared with the 5 year maximum allowed

by 15 U.S.C. 77x." The court of appeals further ordered its mandate to issue in 5 days because "sentence has already been too long

.. Doyle v. tieuea States, 238 F. 2d 715 (C.A. 2, 1965).

~
THIRTY-FIRST ANNUAL REPORT 133

delayed." On July 12, 1965, Justice Harlan denied Doyle's application for bail pending his petition for certiorari. On July 15, 1965,

Doyle fled to Canada to avoid serving the prison sentence.

In April 1965, Paul R. Oasavina and Horace J. Parisi were convicted in the United States District Court for New Jersey of violating Sections 5 and 17 of the Securities Act and the Mail Fraud Statute.

Casavina was sentenced to 8 years imprisonment and Parisi received

a suspended sentence and was placed on probation for 2 years. Evidence adduced during the trial showed that in excess of 600,000 shares

of stock of Casavan Industries, Iric., a corporation controlled by

Oasavina, were sold by or through him by means of false and fraudulent representations. To justify the issuance of stock to Casavina and

also to increase Casavan's purported assets from $100,000 to approximately $5 million, Casavina caused the corporation to acquire assets

of little or no value from a number of other corporations. In this

manner over 1.5 million shares of Casavan stock were issued, Casavina

receiving more than 1 million of these shares, for which he paid no

consideration.

During the fiscal year, 17 convictions were affirmed by appellate

courts in 9 cases. In United States v, McDaniel,25 the conviction of

Paul E. McDaniel was affirmed by the Court of Appeals for the Fifth

Circuit. McDaniel was convicted in 1963 for violating and 'conspiring to violate the registration and anti-fraud provisions of the Securities Act in connection with the offer and sale of the stock of Ambrosia

Minerals, Inc. Together with George A. Mellon (presently a fugitive), he had arranged to have the stock of Ambrosia listed on the

San Francisco Mining Exchange and had caused large blocks to be

issued in the names of nominees. McDaniel and Mellon had manipulated the price of the stock on the exchange so that it rose from $1

to over $6 per share and had then proceeded to distribute approximately $1 million worth of stock in the over-the-counter market

during 1956 and 1957. They had not only issued false and misleading

information to the public and :filed false and misleading materials

with the exchange and the Commission, but had also caused Ambrosia

to pay two dividends in late 1956 and early 1957, although it never

had any earnings. McDaniel was sentenced to serve 18 months in

prison and to pay a :fine of $14,100.

On appeal McDaniel contended that he was not shown to have used

the mails and thac the mails were not used until after the sales had

been made. In passing on this contention the court said:

"It may not have been clearly shown that appellant knew that

the confirmations and stock certificates were to be mailed. but

the mailings were such an integral part of the transactions that

.. 343 F. 2d 785 (a.A. 5, 1965).
134 SECURITIES AND EXCHANGE COMMISSION

the use of the mails for the delivery should have been foreseen

and contemplated. The evil at which the Securities Act is directed is the fraud in the sale of securities. . .. In other words, a

scheme to defraud in relation to a sale of securities and the use

of the mails in consummation thereof is the gist of the crime.

The use of the mails need not be central to the scheme to defraud."

The court further stated that:

"[i]t matters not whether McDaniel himself did the mailing; the

use of the mails by his broker must have been fully contemplated

by him and attributed to him."

On October 27,1964, the Court of Appeals for the Seventh Circuit

affirmed the convictions of Walter E. Herr and William Gillentine for

violating the Securities Act and the Mail Fraud Statute.26 The defendants made fraudulent sales of "inactive" distributorships to some

72 investors from March 1960, through February 1961. American

Sales Training Research Association, Inc., of which the defendants

were the promoters, was allegedly in the business of selling sales training material such as phonograph records, projectors and film. The

defendants represented to investors that they could become "inactive"

distributors by purchasing sales training material which, in turn,

would be disposed of by a sales force maintained by the corporation.

After a deduction for expenses, the "inactive" distributors were to

receive the remaining profits, which the defendants represented to

be as high as 6 percent a month.

On appeal the defendants contended that the distributorships were

not "securities" within the meaning of the 1933 Act, and that only

sales of merchandise were involved. In rejecting this contention,

the court said:

"we construe it to be an investment contract. . .. [T]he facts

here show that it was not the intention of either the defendants

or the investors that the latter, themselves, were to actually

resell the merchandise. . .. They [the investors] were led to

believe that they could expect profits solely from the efforts of

others."

Shortly after the close of the fiscal year the Court of Appeals for

the Second Circuit affirmed the convictions of Roy B. Kelly and

Cecil Y. Hagen for violating and conspiring to violate the anti-fraud

and registration provisions of the Securities Act and the Mail Fraud

Statute in connection with the offer and sale to the public of Gulf

Coast Leaseholds, Inc. stock, as well as conspiring to commit fraud

upon the Commission in its function of protecting the investing

.. United States v. Herr, 338 F.2d 607 (C.A. 7, 1964).
THIRTY-FIRST ANNUAL REPORT 135

public." Kelly and Hagen had each been sentenced to 3 years in

prison. The court, however, reversed the conviction of Milton J.

Shuck. At the outset of its opinion the court noted:

"It is a sad commentary upon the morals of our stock market

places in general, and the over-the-counter market in particular,

that at this late date in the history of federal securities regulation

we are called upon once again to 'memorialize the rapacity of the

perpetrators and gullibility, and perhaps also the cupidity of

the victims'."

In a lengthy statement of facts the court noted that the Commission's insistence on full and accurate disclosure prevented Gulf Coast

Leaseholds from obtaining a listing on the American Stock Exchange

after the Board of Governors of that Exchange had approved the

listing and certified such action to the Commission. Noting the impact on the market of the false information about the company

disseminated by the conspirators, the court said:

"But not even this stream of false information could budge the

SEC into approving Gulf Coast's application for listing on the

American Stock Exchange."

The court also complimented the prosecution team, which included

Commission personnel, for its handling of the case.

COMPLAINTS AND INVESTIGATIONS

Each of the Acts administered by the Commission specifically

authorizes investigations to determine whether violations of the Federal securities laws have occurred.

The nine regional officesof the Commission, with the assistance of

their respective branch offices,are chiefly responsible for the conduct

of investigations. In addition, the Office of Enforcement of the Division of Trading and Markets of the Commission's headquarters

office conducts investigations dealing with matters of particular

interest or urgency, either independently or assisting the regional

offices. The Office of Enforcement also exercises general supervision

over and coordinates the investigative activities of the regional offices

and recommends appropriate action to the Commission.

There are availa:ble to the Commission several sources of information concerning possible violations of the provisions of the Federal

securities laws. The primary source of information is complaints by

members of the general public concerning the activities of certain

persons in securities transactions, The Division of Trading and

1I1 United States v. Kelly, et at; 349 F.2d 720 (1965). See the 30th Annual

Report, pp. 133--134,for further details regarding the violations involved and

the mammoth nature of the case.
136 SECURITIES AND EXCHANGE COMMISSION

Markets and the regional offices give careful consideration to such

complaints and, if it appears that violations of the Federal securities

laws may have occurred, an investigation is commenced. Other

sources of information which are of assistance to the Commission in

carrying out its enforcement responsibilities are the national securities

exchanges, the National Association of Securities Dealers, Inc.,

brokerage firms, state and Canadian securities authorities, better

business bureaus, and various law enforcement agencies.

It is the Commission's general policy to conduct its investigations on

a confidential basis. Such a policy is necessary to effective law enforcement and to protect persons against whom unfounded or unconfirmed charges might be made. The Commission investigates many

complaints where no violation is ultimately found to have occurred.

To conduct such investigations publicly would ordinarily result in

hardship or embarrassment to many interested persons and might

affect the market for the securities in question, resulting in injury to

investors with no countervailing public benefits. Moreover, members

of the public would tend to be reluctant to furnish information concerning violations if they thought their personal affairs would be made

public. Another advantage of confidential investigations is that persons suspected of violations are not made aware that their activities are

under surveillance, since such awareness might result in frustration or

obstruction of the investigation. Accordingly, the Commission does

not generally divulge the result of a non-public investigation unless it

is made a matter of public record in proceedings brought before the

Commission or in the courts.

When it appears that a serious violation of the Federal securities

laws has occurred or is occurring, a "case" is opened and a full investigation is conducted. Under certain circumstances it becomes necessary for the Commission to issue a formal order of investigation which

appoints members of its staff as officers to issue subpoenas, to take

testimony under oath and to require the production of documents.

Usually this procedure is resorted to only when the subjects of the investigation and others involved are uncooperative and it becomes

necessary to invoke the subpoena power to complete the investigation.

During the fiscal year ended June 30, 1965, the following formal

orders were issued by the Commission upon recommendation of the

staff divisions indicated:

Division of Trading and Markets______________________________________ 146

Division of Corporation ~nance______________________________________ 26

Division of Corporate Regulation______________________________________ 14

When an investigation has reached the stage at which enforcement

action appears appropriate, the Commission may proceed in one of

several ways, although the use of one procedure may not necessarily

preclude the use of another. The Commission may: (1) refer the case
TEITRTY-FLRST~AL REPORT 137

to the Department of Justice or appropriate local enforcement authorities for criminal prosecution, (2) institute through its own staff, in the

appropriate U.S. district court, civil proceedings for injunctive relief

to halt further violations of law, and, (3) institute administrative proceedings if the case is one where it has the power to do so.

The following table reflects in summarized form the investigative

activities of the Commission during fiscal 1965:

Investigations of possible violations of the Acts administered by the Commission

Total

Pending June 30, 1964_ ________________________________________ 927

New cases____ _____ __________ ___________________________ 442

Total__________________________________________________ 1,369

cnosed_______________________________________________________ 536

Pending June 30, 1965 833

ENFORCEMENT PROBLEMS WITH RESPECf TO FOREIGN

SECURITIES

The unlawful offer and sale of Canadian securities in the United

States remained at a fairly low level in fiscal 1965. The cooperation of

Canadian officials and segments of the Canadian securities industry

with the Commission has been very good. The Commission assisted

the Ontario Royal Commission on Windfall Oils and Mines Limited

in its exhaustive investigation into the wild gyrations of Windfall

shares on the Toronto Stock Exchange.

The most serious foreign securities problem confronting the Commission continues to 'be the increase in fraudulent promotions from

countries other than Canada, particularly the Bahamas. In dealing

with many of these promotions, the Commission is experiencing considerable success with the new, simplified procedures for obtaining

foreign postal fraud orders, with the continuing cooperation of the

Post Office Department. In addition to obtaining injunctive relief

against a Bahamian bank, the Commission issued a public warning

release in June of 1965, concerning the public offering of unregistered

time deposit certificates and other securities by various organizations

holding bank charters in the Bahamas. Although the named organizations designate themselves as "banks", they do not carry on normal

banking operations. In its warning release, the Commission pointed

out that these so-called "banks" should not be confused with the recognized banks and .financial institutions conducting business in the

Bahamas."

.. Securities Act Release No. 4785 (June 16, 1965).

-
138 SECURITIES AND EXCHANGE COMMlSSION

During the fiscal year, the Commission continued to maintain its

Canadian Restricted List, consisting of Canadian companies whose

securities the Commission had reason to believe were being, or recently

had been, distributed in the United States in violation of the registration requirements of the Securities Act of 1933. Seven supplements

to the list were issued. In line with the trend of the past few years,

it was necessary to add only 4 names to the list during the year, compared with 2 in fiscal 1964,7 in fiscal 1963,9 in fiscal 1962,47 in fiscal

1961 and 82 in fiscal 1960. A total of 36 names was deleted following

compliance with established procedures. As of June 30, 1965, 107

companies were on the list, the smallest number since the list was

established in 1951.

Following the end of the fiscal year, the Commission announced the

issuance of a revised list, to be known as the "Foreign Restricted List,"

replacing the Canadian Restricted List. 29 The new list will include

the names not only of Canadian issuers but also those of other

countries whose securities may be the subject of unlawful distributions

in this country. As before, the current list and supplements thereto

will be issued to and published by the press, and copies will be mailed

to all registered broker-dealers and be made available to the public.

As a practical matter, most United States broker-dealers refuse to

execute transactions in securities on the restricted list.

As of September 23, 1965,the list contained the names of 56Canadian

companies (representing the addition of 1 company and the deletion of

52 others) and 13 Bahamian organizations, as follows:

FOREIGN RESTRICTED LIST

Oanadian issuers

Abblcan Mines, Ltd.

Alaska Highway Beryllium Venture

Anuwon Uranium Mines, Ltd

Associated Livestock Growers of Ontario

Autofab, Ltd.

Bayonne Mine, Ltd.

Bonwitha Mining Co., Ltd

Canol Metal Mines, Ltd.

Canford Explorations, Ltd.

Consolidated Exploration & Mining

Co., Ltd.

Consolidated Woodgreen Mines, Ltd.

Crusade Petroleum Corp., Ltd.

Day jon Explorers, Ltd.

Devonshire Mining Co., Ltd.

Fairmont Prospecting Syndicate

The Fort Hope Grubstake

Guardian Explorations, Ltd.

Haitian Copper MIning Corp., Ltd.

International Claim Brokers, Ltd.

Ironco Mining & Smelting Co., Ltd.

Jack Haynes Syndicate

Jaylac Mines, Ltd.

Keele Industrial Developments, Ltd.

Kenilworth Mines, Ltd.

Kennament Development Corp., Ltd.

Ladysmith Explorations, Ltd.

Leader Mining Corp., Ltd.

Mack Lake Mining Oorp., Ltd.

Maple Leaf Investing Corp., Ltd.

March Minerals, Ltd.

Merrican International Mines, Ltd.

Mid-National Developments, Ltd.

Milldale Minerals, Ltd.

Natto Mining Co., Ltd

.. Securities Act Release No. 4802 (September 23,1965).

•
THIRTY-FLRST ANNUAL REPORT 139

Canadian issuers-Continued

New Mallen Red Lake Mines, Ltd. St. Stephen Nickel Mines, Ltd.

Norart Minerals Limited Sastex Oil & Gas, Ltd.

Norbank Explorations, Ltd. Sinclair Prospecting Syndicate

North West Pacific Developments, Ltd. Success Mines, Ltd.

Nu-Gord Mines, Ltd. Sudbay Beryllium Mines, Ltd.

Nu-World Uranium Mines, Ltd. Trans-Oceanic Hotels Corp., Ltd.

Old Smoky Oil & Gas, Ltd. Turbenn Minerals, Ltd.

Outlook Explorations, Ltd. Tyndall Explorations, Ltd.

Paracanusa Coffee Growers, Ltd. Vimy Explorations, Ltd.

St. Lawrence Industrial Development Western Allenbee Oil & Gas Oo.,Ltd.

Corp. Wingdam & Lightning Creek Mining

Ste, Sophie Development Corp. Co., Ltd.

Bahamian issuers

British Colonial Bank of Commerce

(Bahamas) Ltd.

Lords Bank and Trust Company, Ltd.

Bankers International Investment

Corporation

Transworld Investment Bank, Ltd.

Commons Bank and Trust Company,

Ltd.

Whitechapel Bank, Ltd.

Parliament Bank and Trust, Ltd.

Investment Bankers of Bahamas, Ltd.

The Bank of World Commerce, Ltd.

New Zealand Bank and Trust Company (Bahamas) Ltd. now known

as

Marlboro Bank and Trust Company

Jomur Trust Company, Ltd.

Essex Bank and Trust Company. Ltd.

Investments and Trust Company. Ltd.

SECTION OF SECURITIES VIOLATIONS

A Section of Securities Violations is maintained by the Commission

as a part of its enforcement program to provide a further means of

detecting and preventing fraud in securities transactions. The Section maintains files which provide a clearinghouse for other enforcement agencies for information concerning persons who have been

charged with or found in violation of various Federal and state securities statutes. Considerable information is also available concerning

violators resident in the Provinces of Canada. The specialized information in these files is kept current through the cooperation of various

governmental and non-governmental agencies. At the end of the fiscal

year, the files contained information concerning 71,488 persons and

firms. Included in the data processed by the Section during the year

was information received from several states, Canada and Puerto Rico

respecting 134 criminal actions, 55 injunctive actions, 238 cease and

desist type orders and 68 other administrative orders, such as denials,

suspensions and revocations.

Altogether during the fiscal year, the Section received and disposed

of 4,206 "securities violations" letters and dispatched 835 communications to cooperating agencies. It added to the Commission's files information respecting 6,853 persons or firms, including information on

2,632 persons or firms not previously identified, and deleted the

names of 2,884 persons or firms as to whom information was believed

to be obsolete,
140 SECURITIES AND EXCHANGE COMMISSION

APPUCATIONS FOR NONDISCLOSURE OF INFORMATION

The Commission is authorized under the various Acts administered

by it to grant requests for nondisclosure of certain types of information which would otherwise be disclosed to the public in applications,

reports or other documents filed pursuant to these statutes. Thus,

under paragraph (30) of Schedule A of the Securities Act of 1933,

disclosure of any portion of a material contract is not required if the

Commission determines that such disclosure would impair the value of

the contract and is not necessary for the protection of investors. Under

Section 24 (a) of the Securities Exchange Act of 1934,trade secrets or

processes need not be disclosed in any material filed with the Commission. Under Section 24(b) of that Act, written objection to public

disclosure of information contained in any material filed with the

Commission may be made to the Commission which is then authorized

to make public disclosure of such information only if in its judgment

such disclosure is in the public interest. Similar provisions are contained in Section 22 of the Public Utility Holding Company Act of

1935 and in Section 45 of the Investment Company Act of 1940. These

statutory provisions have been implemented by rules specifying the

procedure to be followed by applicants for a determination that public

disclosure is not necessary in a particular case.

The number of applications granted, denied or otherwise acted upon

during the year are set forth in the following table:

Applications for nondisclosure during 1965 fiscal year

-- Number Number Number pending Number Number demed y:;nding July I, received granted or with- une30,

1964 drawn 1965

--- --- --- --- curitles Act of 1933 (filed under Rule 485)•.......•• 2 34 Z7 6 4 ecurities Exchange Act of 1934 (filed under Rule 24b-2) •••••••••••••••••••••••••••.•• ••••. o 3 62 23 5 27 vestment Company Act of 1940 (filed under Rule 453-1) ___._ ..... _............... _.•... _............ 3 15 16 2 ---------- --- --- --- --- --- Totals ....... __........... __. _... _............. 8 101 66 12 31

Be

S

In

A<:.rIVITIES OF THE COMMISSION IN ACCOUNTING AND AUDITING

The several Acts administered by the Commission recognize the

importance of dependable informative financial statements which disclose the financial status and earnings history of a corporation or other

commercial entity. These statements, whether filed in compliance with

the requirements under those statutes or included in other material

available to stockholders or prospective investors, are indispensable to

investors as a basis for investment decisions. The Congress, cognizant

of the fact that such statements lend themselves readily to misleading

inferences or even deception, whether or not intended, included express

provisions in the various Acts with respect to financial information

_ •••• __ ••
THIRTY-FIRST ANNUAL REPORT 141

required to be disclosed. Thus, for example, the Securities Act requires the inclusion in the prospectus of balance sheets and profit and

loss statements "in such form as the Commission shall prescribe" 80and

authorizes the Commission to prescribe the "items or details to be

shown in the balance sheet and earnings statement, and the methods

to be followed in the preparation of accounts .... " 81 Similar authority is contained in the Securities Exchange Act,82 and even more

comprehensive power is embodied in the Investment Company Act 88

and the Public Utility Holding Company Act.84

Pursuant to the broad rulemaking power thus conferred with respect

to the preparation and presentation of financial statements, the Commission has prescribed uniform systems of accounts for companies

subject to the Holding Company Act; 85has adopted rules under the

Securities Exchange Act governing accounting for and auditing of

securities brokers and dealers; 86and has promulgated rules contained

in a single comprehensive regulation, identified as Regulation S-X,81

which governs the form and content of financial statements filed in

compliance with the several Acts. This regulation is supplemented

by the Commission's Accounting Series Releases, of which 101 have

so far been issued." These releases were inaugurated in 1937 and

were designed as a program for making public from time to time opinions on accounting principles for the purpose of contributing to the

development of uniform standards and practice in major accounting

questions. The rules and regulations thus established, except for the

uniform systems of accounts which are regulatory reports, prescribe

accounting principles to be followed only in certain limited areas. In

the large area of financial reporting not covered by such rules, the

Commission's principal means of protecting investors from inadequate

financial reporting, fraudulent practices and overreaching by manageJO Sections 7 and 10(a) (Schedule A, pars. 25, 26).

S1 Section 19(a) .

.. Section 13(b) .

.. Sections 30, 31.

.. Sections 14, 15.

.. Uniform System of Accounts for Mutual Service Companies and Subsidiary

Service Companies (effective August 1, 1936) ; Uniform System of Accounts for

Public Utility Holding Companies (effective January 1, 1937; amended effective

January 1, 1943; revised November 24, 1959). (Accounting Series Release No.

84.)

.. Rule 17a-5 and Form X-17A-5 thereunder.

8'1 Adopted February 21, 1940 (Accounting Series Release No. 12) ; revised December 20, 1950 (Accounting Series Release No. 70).

18 Releases 100 and 101 were issued during the year, the former announcing the

adoption of Article 7A and RUle 12-31 of Regulation S-X governing the form and

content of financial statements and related schedules to be filed by life insurance

companies and the latter an order readmitting an accountant to practice before

the Commission.
142 SECURITIES AND EXCHANGE COMMISSION

ment is by requiring a certificate of an independent public accountant,

based on an audit performed in accordance with generally accepted

auditing standards, which expresses an opinion as to whether the financial statements are presented fairly in conformity with accounting

principles and practices which are recognized as sound and which have

attained general acceptance.

The Securities Act provides that the financial statements required

to be made available to the public through filing with the Commission

shall be certified by "an independent public or certified accountant." 89

The other three statutes permit the Commission to require that such

statements be accompanied by a certificate of an independent public

accountant," and the Commission's rules require, with minor exceptions, that they be so certified. The value of certification by qualified

accountants has been conceded for many years, but the requirement as

to independence, long recognized and adhered to by some individual

accountants, was for the first time authoritatively and explicitly introduced into law in 1933. Under the Commission's rules, an accountant

who is qualified to practice in his own state is qualified to practice before the Commission unless he has entered into disqualifying relationships with a particular client, such as becoming a promoter,

underwriter, voting trustee, director, officer, employee, Or stockholder; 41 has demonstrated incompetence or subservience to management; or has engaged in unethical or improper professional conduct."

The Commission endeavors to encourage and foster the independence

of the accountant in his relationships with his client so that he may

better be able to perform the service to the public contemplated by the

Congress in the various Acts administered by the Commission. Because of his special status and responsibility, the accountant has a

unique opportunity to be a leader in raising standards of investor protection. The financial statements provide the key information both

in the distribution and trading of securities. The work of the accountant in their preparation and publication is vital. Independent

accountants lend authority to management's representations by their

opinions as experts, and they operate as a check on management in

assuring that the financial data are fairly presented in accordance

with generally accepted accounting principles.

The Commission is vigilant in its efforts to assure itself that the

audits which it requires are performed by independent accountants;

that the information contained in the financial reports represents full

a. Sections 7 and 10 (a) (Schedule A, pars. 25, 26) .

•• Securities Exchange Act, Section 13(a) (2) ; Investment Company Act, Section 30 (e) ; Holding Company Act, Section 14.

.. See, for example, Rule 2--01of Regulation S-X .

.. See Rule 2 (e) of Rules of Practice.
THIRTY-FIRST ANNUAL REPORT 143

and fair disclosure; and that appropriate auditing and accounting

practices and standards have been followed in their preparation. In

addition, it recognizes that changes and new developments in financial

and economic conditions affect the operations and financial status of

the several thousand commercial and industrial companies required

to file statements with the Commission and that accounting and auditing procedures cannot remain static and continue to serve well a dynamic economy. The Commission's accounting staff, therefore, studies

the changes and new developments for the purpose of establishing and

maintaining appropriate accounting and auditing policies, procedures

and practices for the protection of investors. The primary responsibility for this program rests with the Chief Accountant of the Commission, who has general supervision with respect to accounting and

auditing policies and their application.

Progress in these activities requires continuing contact and consultation between the staff and accountants both individually and through

such representative groups as, among others, the American Accounting

Association, the American Institute of Certified Public Accountants,

the American Petroleum Institute, the Financial Analysts Federation,

the Financial Executives Institute, and the National Association of

Railroad and Utilities Commissioners, as well as many Government

agencies. Recognizing the importance of cooperation in the formulation of accounting principles and practices, adequate disclosure and

auditing procedures which will best serve the interests of investors, the

American Institute of Certified Public Accountants, the Financial Analysts Federation, and the Financial Executives Institute appoint

committees which maintain liaison with the Commission's staff.

The Commission on its part authorized its Chief Accountant to continue to serve during the year as a member of an advisory committee to

the Accounting Principles Board of the American Institute of Certified Public Accountants. This committee served as adviser to the

Institute's Director of Research while he was engaged in making an

inventory of generally accepted accounting principles and practices

recognized by the accounting profession and currently in use. The

results or this work, which will be useful to laymen as well as to

accountants, can be found in an accounting research study published

by the Institute entitled "Inventory of Generally Accepted Accounting

Principles for Business Enterprises," by Paul Grady.

In addition to this formal participation the Chief Accountant's

Officehas furnished suggestions to the Institute's Director of Research

and to the Accounting Principles Board who are now revising and

bringing up to date prior pronouncements made by the Institute's

Committee on Accounting Procedure and preparing for publication

opinions of the Accounting Principles Board. These opinions are
144 SECURITIES AND EXCHANGE COMMISSION

based on studies made by the research staff of the Institute and by other

persons selected to make the required studies.

The many daily decisions to be made which require the attention of

members of the Chief Accountant's staff include questions raised by the

operating divisions of the Commission, the regional offices, and the

Commission itself. As a result of this day-to-day activity and the need

to keep abreast of current accounting problems, the Chief Accountant's

staff continually reexamines accounting and auditing principles and

practices. From time to time members of the staff are called upon to

assist in field investigations, to participate in hearings and to review

Commission opinions insofar as they pertain to accounting matters.

Prefiling and other conferences with officials of corporations, practicing accountants and others are also an important part of the work

of the staff. Resolution of questions and problems in this manner saves

registrants and their representatives both time and expense. The 1964

amendments to the securities acts bring into contact with the Commission many heretofore "unregulated" companies. In many cases, the

independent accountant has been a primary bridge between the issuer

and the Commission. Registrants falling into this category and the

accountants who will certify the financial statements for them have

been assisted by members of the Commission and its staff who have

lectured and participated in institutes and symposiums sponsored by

various groups in different parts of the country, where the provisions

of the 1964 amendments were explained.

Many specific accounting and auditing problems are found in the

examination of financial statements required to be filed with the Commission. Where examination reveals that the rules and regulations of

the Commission have not been complied with or that applicable generally accepted accounting principles have not been adhered to, the

examining division usually notifies the registrant by an informal

letter of comment. These letters of comment and the correspondence

or conferences that follow continue to be a most convenient and satisfactory method of effecting corrections and improvements in financial

statements, both to registrants and to the Commission's staff. Where

particularly difficult or novel questions arise which cannot be settled

by the accounting staff of the divisions and by the Chief Accountant,

they are referred to the Commission for consideration and decision.

The staff of the Chief Accountant's Office and the staff of the Office

of Policy Research conferred several times during fiscal 1965 with

representatives of the New York Stock Exchange and its accounting

consultants, Price Waterhouse & Co., for the purpose of implementing

the recommendation set forth in the Special Study with respect to obtaining the necessary information for a clearer understanding of the

Stock Exchange's commission rate structure and level and the odd-lot

differentials. As a result of these conferences the income and expense
THIRTY-FIRST ANNUAL REPORT 145

report developed by the Exchange for the annual reporting of member firms doing a public commission business was modified and expanded, thus becoming a more useful source of information for

additional studies which will be made by the Commission and the Exchange. A financial reporting form comparable to the Exchange's income and expense report was developed for use by the major New

York Stock Exchange odd-lot member firms when filing their annual

reports.

The proposed revision of Form X-17A-5, the annual report of financial condition required to be filed by certain brokers and dealers

pursuant to Section 17 of the Securities Exchange Act of 1934,mentioned in last year's annual report of the Commission," is progressing through the required rulemaking process. This form and the related minimum audit requirements are being revised to meet changing

conditions and practices in the securities industry.v

The Chief Accountant and his staff cooperated with the staff of the

Federal Reserve System and the Federal Deposit Insurance Corporation in the preparation of rules and regulations under the Securities

Acts Amendments of 1964 which now govern the reports banks are required to file with the Federal Reserve Board and the Federal Deposit

Insurance Corporation.

INTERNATIONAL BANK FOR RECONSTRUcrION AND DEVEWPMENT

Section 15 of the Bretton Woods Agreements Act, as amended, exempts from registration under both the Securities Act of 1933 and the

Securities Exchange Act of 1934 securities issued, or guaranteed as

to both principal and interest, by the International Bank for Reconstruction and Development. The Bank is required to file with the

Commission such annual and other reports with respect to such

securities as the Commission determines to be appropriate in view of

the special character of the Bank and its operations, and necessary in

the public interest or for the protection of investors. The Commission has, pursuant to the above authority, adopted rules requiring the

Bank to file 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.

"Page 148.

.. On August 23, 1965, the Commission announced that it had under consideration proposed amendments to Form X-17A-5 and the minimum audit requirements. Securities Exchange Act Release No. 7683.
146 SECURITIES AND EXCHANGE COMMISSION

The Bank reported a net income of $136.9million for the fiscal year

ending June 30, 1965. This compared with net income of $97.5 million in the fiscal year 1964. The difference between the two figures results mainly from the fact that since July 1, 1964, the Bank has discontinued treating a portion of loan receipts as commission to be

credited to the Special Reserve and, with a few minor exceptions, all

income £rom loans is considered as regular income.

On July 29, 1965, the Executive Directors allocated $61.9 million

from the year's net income to the Supplemental Reserve against

losses on loans and guarantees, increasing it to $667.5 million. This

increased the Bank's total reserves, including the Special Reserve, to

$956.5 million. The Executive Directors recommended to the Board

of Governors that the remaining $75 million of the year's net income

be transferred to the Bank's affiliate, the International Development

Association.

During the year, the Bank made 38 loans totaling $1,023.3million,

compared with a total of $809.9 million last year. The loans were

made in Brazil (2 loans) , Chile, the Republic of China (2 loans) , Finland (2 loans), Gabon, Honduras, India (3 loans), Iran (2 loans),

Italy, Jamaica, Japan (3 loans), Malaysia, Mexico, Morocco, Nigeria,

Paraguay, Peru (2 loans), Philippines (2 loans), Portugal, Rhodesia

and Zambia, Sierra Leone, Spain, Thailand (2 loans), Uruguay,

Venezuela (2 loans) and Yugoslavia. This brought the total number

of loans to 424 in 77 countries and territories and raised the gross total

of commitments to $8,954.6million. 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

$5,966.8million.

During the year the Bank sold or agreed to sell $106.2million principal amounts of loans, compared with sales of $173.3 million last

year. On June 30, the total of such sales was $1,884.7 million, of

which all except $69 million had been made without the Bank's

guarantee.

On June 30, the outstanding funded debt of the Bank was $2.724

million, reflecting a net increase of $232.2 million in the past year.

During the year the funded debt was increased through the private

placement of bonds and notes totaling $198 million and DM 400

million (equivalent US$100 million) and the public sale of bonds

as follows: Can$25 million (US$23.1 million), DM 250 million

(US$62.5 million), Sw F 60 million (US$14 million), and US$200

million, of which $17.9 million were sold under delayed delivery arrangements. The debt was decreased through the retirement of bonds

and notes totaling US$248 million, Sw F 33 million (US$7.8 million),

DM 200 million (US$50 million), Can$11.5 million (US$10.6 mil-
THIRTY-FIRST ANNUAL REPORT 147

lion), and by net sinking and purchase fund transactions amounting

to $31.1million.

During the year eight countries increased their capital subscriptions

to the Bank: the Dominican Republic by $5.3 million, the United

Arab Republic by $35.5 million, Honduras by $2 million, Costa Rica

by $2.'7million, Italy by $306 million, Malaysia by $83.3 million, Panama by $8.6 million and Sudan by $40 million. Thus on June 30,

1965,the subscribed capital of the Bank amounted to $21,669.4million.

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 by

the Bank similar to that provided for securities of the International

Bank for Reconstruction and Development. Acting pursuant to this

authority, the Commission adopted Regulation lA, which requires the

Bank to file with the Commission substantially the same information,

documents and reports as are required from the International Bank

for Reconstruction and Development. The Bank is also required

to file a report with the Commission prior to the sale of any of its

primary obligations to the public in the United States.

During the year ended June 30,1965, the Bank made 26 loans total.

ing the equivalent of $182,806,242from its ordinary capital resources,

bringing the gross total of loan commitments outstanding at June 30,

to 115, aggregating $583,695,165. During the year, the Bank sold or

agreed to sell $4,702,476 in participations in the aforesaid 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, El Salvador, Nicaragua, Peru, Uruguay, and Venezuela.

During the year the Bank also made 1'7loans totaling the equivalent of $65,832,689from its Fund for Special Operations, bringing the

gross total of loan commitments outstanding at June 30, to 56, aggregating $192,354,268. In addition, the Bank made 31 loans aggregating $99,587,000 from the Social Progress Trust Fund, which

it administers under an Agreement with the United States, bringing

the gross total of loan commitments outstanding at June 30, to 112,

aggregating $482,433,534.

On June 30,1965, the outstanding funded debt of the ordinary capital resources of the Bank was the equivalent of $285,093,548,reflecting an increase during the year of the equivalent of $135,900,000.

This increase consisted of two public bond issues, including a $100

million U.S. dollar issue and a German mark issue in the amount of

DM 60 million ($15 million) ; the private placement of an issue in the

United Kingdom in the amount of £ 3 million ($8.4 million), and the
148 SECURITIES AND EXCHANGE COMMISSION

borrowing of $12.5 million from an agency of the Government of

Spain.

The subscribed ordinary capital of the Bank on June 30, 1965, was

the equivalent of $1,284,985,000, of which $903,405,000 represented

callable capital. .

STATISTICS AND SPECIAL STUDIES

The work and personnel of the Office of Statistical Studies were

transferred during the past fiscal year, in part to the Officeof Policy

Research and in part to the Officeof Regulation, Division of Trading

and Markets. The regular statistical activities of the Commission and

the overall Government statistical program under the direction of

the Office of Statistical Standards, Bureau of the Budget, have been

continued in these Offices. The statistical series described below are

published in the Commission's monthly Statistical Bulletin. Inaddition, current figures and analyses of the data are published quarterly

on new securities offerings, individuals' savings, 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 1935-65 are

given in Appendix Table 1 and detailed statistics for the fiscal year

1965appear in Appendix Table 2.

New Securities Offerings

Monthly and quarterly data are compiled covering all new corporate

and non-corporate issues offered for cash sale in the United States.

The series includes not only issues publicly offered but also issues privately placed, as well as other issues exempt from registration under

the Securities Act such as intrastate offerings and offerings of railroad securities. The offerings series includes only securities actually

offered for cash sale, and only issues offered for account of issuers.

Estimates of the net cash flow through securities transactions are

prepared quarterly and are derived by deducting from the amount

of estimated gross proceeds received by corporations through the

sale of securities the amount of estimated gross payments by corporations to investors for securities retired. Data on gross issues, retirements and net change in securities outstanding are presented for all

corporations and for the principal industry groups.

Individuals' Savings

The Commission compiles quarterly estimates of the volume and

composition of individuals' savings in the United States. The series

represents net increases in individuals' financial assets less net increases

in debt. The study shows the aggregate amount of savings and the
THIRTY-FIRST ANNUAL REPORT 149

form in which they occurred, such as investment in securities, expansion of bank deposits, increases in insurance and pension reserves, etc. A reconciliation of the Commission's estimates with the

personal savings estimates of the Department of Commerce, derived

in connection with its national income series, is published annually

by the Department of Oommerce as well as in the Securities and

Exchange Commission Statistical Bulletin.

Private Pension Funds

An annual survey is published of private pension plans other than

those administered by insurance companies, showing the flow of money

into these funds, the types of assets in which the funds are invested

and the principal items of income and expenditures. Data on stock

transactions of pension funds and property and casualty insurance

companies are also collected quarterly and it is anticipated that these

will be published in the near future.

Financial Position of Corporations

The series on the working capital position of all United States

corporations, excluding banks, insurance companies and savings and

loan associations, shows the principal components of current assets

and liabilities, and also contains an abbreviated analysis of the sources

and uses of corporate funds.

The Commission, jointly with the Federal Trade Commission, compiles a quarterly financial report of all United States manufacturing

concerns. This report gives complete balance sheet data and an

abbreviated income account, data being classified by industry and size

of company.

Plant and Equipment Expenditures

The Commission, together with the Department of Commerce, conducts quarterly and annual surveys of actual and anticipated plant

and equipment expenditures of all United States business, exclusive

of agriculture. After the close of each quarter, data are released

on actual capital expenditures of that quarter and anticipated expenditures for the next two quarters. In addition, a survey is made at the

beginning of each year of the plans for business expansion during

that year.

Directory of Registered Companies

The Commission annually publishes a listing of companies required

to file annual reports under the Securities Exchange Act of 1934. In

addition to an alphabetical listing, there is a listing of companies by

industry group classified according to The Standard Industrial Classification Manual.

Stock Market Data

The Commission regularly compiles statistics on the market value

and volume of sales on registered and exempted securities exchanges,
150 SECURITIES AND EXCHANGE COM:MlSSION

round-lot stock transactions on the New York exchanges for account

of members and non-members, odd-lot stock transactions on the New

York exchanges and block distributions of exchange stocks. Publication of odd-lot transactions in 75 selected stocks on the New York

Stock Exchange was begun in the fall of 1964. Since January 1965,

the Commission has also been compiling statistics on volume of overthe-counter trading in common stocks listed on national securities

exchanges based on reports filed under Rule 17a-9 of the Securities

Exchange Act dealing with the "third market."

Data on round-lot and odd-lot trading on the New York exchanges

are released weekly. The other stock market data mentioned above,

as well as these weekly series, are published regularly in the Commission's Statistical Bulletin.

OPINIONS OF THE COMMISSION

Formal administrative proceedings under the statutes administered

by the Commission generally culminate in the issuance of an opinion

and order. Under a procedure adopted during the 1964 fiscal year,

applicable to proceedings initiated on or after August 1, 1964, a hearing officermakes an initial decision following a hearing at which he

has presided, unless such decision is waived by the parties. 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 final

and an order pursuant to it is issued by the Commission.

In those instances where it prepares its own decision, upon review

or waiver of an initial decision or where the record has been stipulated

by the parties, 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."

DISSEMINATION OF INFORMATION

As the discussion in prior sections of this Report has shown, most

large corporations in which there is a substantial investor interest

now have registration applications or statements on file with the Commission and are required to file annual and other periodic reports with
THIRTY-FIRST ANNUAL REPORT 151

it. Much of the vital financial and other information included in these

documents receives widespread dissemination through the medium

of securities manuals and other financial publications and thus becomes

available to public investors, broker-dealer and investment adviser

firms, trust departments and other financial institutions.

Various activities of the Commission serve to facilitate public dissemination of corporate and other information. .Among these is the

publication of a daily "News Digest" which contains a resume of each

proposal for the public offering of securities for which a registration

statement is filed. The News Digest also lists new registrations by

companies as well as filings of interim reports reflecting significant corporate developments. Inaddition, it includes an informative discussion of all important orders of the Commission and of each decision

issued or rule adopted by the Commission, as well as a brief report on

court actions which are part of the Commission's law enforcement

program. Thus, over 1,200 registration statements, 875 orders, decisions and rules, and 288 court enforcement actions were reported in

the News Digest during the year.

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 2,500 investors, securities firms, practicing lawyers and others. In addition, the Commission maintains

mailing lists for the distribution of the full text of its orders, decisions,

rules and rule proposals.

During the year, individual members of the Commission and numerous staff officers addressed various professional, business and other

groups and participated in panel discussions of the laws administered

by the Commission, the rules and regulations thereunder, and the policies, procedures and practices of the Commission. These speeches and

discussions are helpful in promoting a better understanding of the

functions and activities of the Commission and thus facilitating compliance with the laws and rules. In addition, they stimulate public

discussion of ways and means of improving the administrative process.

Infonnation Available {or Public Inspection

The many thousands of registration statements, applications, declarations and annual and other periodic reports filed with the Commission each year are available for public inspection at the Commission's

principal office in Washington, D.C. In addition, copies of recent

reports filed by companies having securities listed on exchanges other

than the New York Stock Exchange and the American Stock

Exchange, and copies of current reports of many non-listed companies

which have registered securities for public offering under the Securities Act, may be examined in the Commission's New York Regional

Office. Recent reports filed by companies whose securities are listed
152 SECURITIES AND EXCHANGE COMMISSION

on the New York and American Stock Exchanges may be examined

in the Commission's Chicago Regional Office. Moreover, there are

available for examination in all regional offices copies of prospectuses

relating to recent public offerings of securities registered under the

Securities Act; and all regional offices have copies of broker-dealer

annual financial reports and Regulation A letters of notification filed

in their respective regions.

Reports of companies whose securities are listed on the various

exchanges may be seen at the respective exchange offices. Inaddition,

the registration statements filed pursuant to the new Section 12(g)

of the Securities Exchange Act of 1934 are available for public

inspection in the principal office in Washington, D.C., the New York,

Chicago and San Francisco Regional Offices, and the regional office

nearest the home address of the registrant.

In order to facilitate wider dissemination of financial and other

information contained in corporate reports filed with the Commission

under the Federal securities laws (an objective strongly urged by

the Special Study Report), the Commission has arranged to take

standing orders, on an experimental basis, for photocopies of annual

reports filed on Form 10-K. This service may be extended later to

other reports, depending upon public reception and the experience

gained in supplying copies of annual reports.

Under the existing contract with a printing company for the reproduction of material in the Commission's public files in response to

requests of members of the public, photocopies may be obtained at

a cost of 7.6 cents per page for pages not exceeding 8~" x 14" in size.

The detailed per page prices are given in Release No. 34-7640, which

may be obtained from the Publications Unit of the Commission.

The charge for each certification of any document by the Commission

is $2.

In order to make corporate reports more readily available for

examination by interested members of the public, the Commission

has also made arrangements for the Form 10-K annual reports and

Form 10 registration statements to be placed on open shelves in the

public area of its Public Reference Room in Washington, D.C., thus

making these reports available for immediate inspection. There are

presently four coin-operated photocopiers in the Public Reference

Room to enable visitors to make immediate reproductions of reports

at a cost of 25 cents per page. (The New York Regional Officehas

a similar machine.)

Each year many thousands of requests for photocopies of and information from the public files of the Commission are received in the

Public Reference Room in Washington, D.C. During the year 5,472
TEITRTY-TIRST ANNUAL REPORT 153

persons examined material on file in the Washington, D.C. office, and

several thousand others examined files in the New York and Chicago

regional offices. More than 15,900 searches were made for individuals

requesting information and approximately 2,134 letters were written

with respect to information required.

PUBLICATIONS

In additional to the daily News Digest, and releases concerning Commission action under the Acts administered by it and litigation involving securities violations, the Commission issues a number of other

publications, including the following:

Weekly:

Weekly Trading Data on New York Exchanges: Round-lot and odd-lot transactions effected on the New York and American Stock Exchanges (information is also included in the Statistical Bulletin).

Monthly:

Statistical Bulletin.a

Official Summary of Securities Transactions and Holdings of Officers,

Directors and Principal Stoekholders,«

Quarterly:

Financial Report, U..s. Manufacturing Corporations (jointly with ,the Federal

Trade Commission).a (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.

Annually:

Annual Report of the Oommlsslon.v

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

Corporate Pension Funds.

Directory of Companies Filing Annual Reports,v

Other Publications:

Decisions and Reports of the Oommtsslon.«

Judicial Decisions.a

A Study of Mutual Funds (by The Wharton School).a

Report of Special Study of Securities Markets.a

Accounting Series Releases-Compilation of 1-89.<>

Securities and Exchange Commission-Its Functions and Activities.

is Must be ordered from the Superintendent of Documents, Government Printing Office,Washington, D.C., 20402.

bThis document is available in photocopy form, at a current cost of $9.80, plus

postage. Purchasers are billed by the printing company which prepares the

photocopies.
154 SECURITIES AND EXCHANGE COMMISSION

ORGANIZATION

During the fiscal year certain organizational changes were effected

in accordance with the Commission's policy of continuing review of its

organization and functional alignments:

Reference has already been made to the reallocation of certain

functions relating to investment companies from the Division of Corporation Finance to the Division of Corporate Regulation. The

change was designed to concentrate responsibility in the latter division

for administration of the securities laws as they apply to investment

companies, and to ena:ble the Division of Corporation Finance better to

assume and discharge its increased responsibilities under the Securities Acts Amendments of 1964. In related action, two new branches

and an Assistant Director were added to the Division of Corporate

Regulation to assist in handling the increased duties resulting from

the assumption of its additional functions and from the increased

responsibilities in recent years in administering the regulatory provisions of the Investment Company Act.

In addition, several new branches were created in the Division of

Trading and Markets, and certain statistical activities were transferred from that Division to the Office of Policy Research.

PERSONNEL AND FINANCIAL MANAGEMENT

An important development in the Commission's personnel management program in fiscal 1965 was the adoption of a Management Intern

Program under a formal training agreement approved by the Civil

Service Commission. The main objective of this program is to recruit

and train persons of proven ability and high potential for top level

supervisory and administrative positions.

Candidates are selected from lists of eligibles established by the

Civil Service Commission as a result of the written and oral Management Intern Examination. The academic training and backgrounds

of persons chosen vary according to the long-range needs of the Commission and include law, finance and other disciplines in addition to

public administration.

The first intern under this new program was appointed on Ap:ril12,

1965. Following 12 to 15 months of specialized management training, he will be assigned to one of the operating divisions of the

Commission.

During fiscal 1965, within-grade salary increases in recognition of

high quality performance were granted to 92 employees. These

awards are authorized by Section 702 of the Classification Act of 1949,

as amended by the Salary Reform Act of 1962. Also during fiscal

1965, cash awards totaling $960 were made to 18 employees for adopted

suggestions, and cash awards for superior performance amounting

to $4,000 were presented to 24 employees.
THIRTY-FIRST ANNUAL REPORT 155

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156 SECURITIES AND EX~GE COMMISSION

The following comparative table shows the personnel strength of

the Commission as of June 30, 1964 and 1965:

June 30, 1965 1=630, 1964

Commlss1oners__________________________________________________________ 5 4

Staff: Headquarters office____________________________________________________ 876 848 R6g:Ionaloffices________________________________________________________ 539 5'l:l

Total staff_________________________________________________________ 1,415 1,375

Grand totaL ______________________________________________________ 1,420 1,379

The table on page 157 shows the status of the Commission's budget

estimates for the fiscal years 1961 to 1966, from the initial submission

to the Bureau of the Budget to final enactment of the annual

appropriation.

The Commission is required by law to collect fees for registration

of securities issued, qualification of trust indentures, registration of

exchanges, and sale of copies of documents filed with the Commission.45

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 1963, 1964 and 1965.

Percentage of

fees collected N6t cost of

Year Appropriation Fees collected to total CommIss1on

ap~rlatlon operations cent)

1963____________________________________ $13, 261, 700 $2,533,986 19 $10, 7'l:l,714 1964 13,937,500 3,106,213 22 10,831,287 1965__________________________________'_ 15,442,000 3,300,165 21 12,141,835

.. Principal rates in effect during the fiscal year were (1) *00 af 1 percent of

the maximum aggregate price af securities proposed to be offered but not less than

$25; (2) ;(;00 of 1 percent of the aggregate dollar amount af stock transactions.

Fees for other services are only nominal. See Part II of this report with respect

to the increase in the rate as to (1).

______________• __• __________________
- 

Sermtitiea and aschange Ommiaai

Action, taken on Budget estimates and appropdatiw frm fiscal 

- 

Fisol 1WJ Fiscal lm 

ACTION 

~oney Pasi- Money 

tiom 

1,280 $11,450.~0 1,671 ~$14,618.sUO 

-30 -435,WO -01 -716.603 

1, 2M 11.01Q 000 1,580 13.800. COO 

........ -U,W -47 -SW,OW 

ll,W, MM 1,633 I3,WW 

......................

11.450,WO l,M3 13,3W,000 

-- --- 

-37.5W -2 -503.W 

Annual Approprlstion, .................. 8,01%,8W 1,318 ll,412,&3I 1,481 1Z8W.W 

Suppiemental npproprlatlon far ~tatutory .............................. 461.7W 

psy inc.rem9 ........... -............... 

11,412.5W 1,481 13,281,703 

Ir~eludesr supplements1request for J4W.W. d Includns a su~p

Includes a supplemelltal request for $lw,000. 1 1nolndes su~~

~ncindcsa supplemental request for ~~U,WO I he tnuears of for the speciai study of the ~eouritias 

Markets. in Wsshinyton,D.C
158 SECURITIES AND EXCHANGE COMMISSION

NEW BUILDING AND ELECTRONIC DATA.PROCESSING EQUIPMENT

In the Commission's budget for fiscal 1966 the Congress appropriated funds for relocation of officesin Washington, D.C. Shortly after

the end of the 1965 fiscal year, the General Services Administration

signed a lease for a new eight story officebuilding on North Capitol

Street, a location near Union Station and easily accessible to the public. This building will house all of the Commission's Washington

activities, including the Washington Regional Office.

After the relocation of offices,a computer system and related equipment will be installed in the new building. This electronic dataprocessing equipment will initially be used for record keeping and

agency administrative functions. Later, it will also be employed in

the Commission's regulatory work, including economic studies and

surveillance of the markets.
PART XI

APPENDIX

STATISTICAL TABLES

TABLE 1.-A $1-year record of registrabions efleotivs nmdw the Securities Act 

of 19.93-fiscal years 1955-1965 


[~moun~
 In millions of dollars1 

For OBBh S&lB hrBCa)lmt OfiSSUerS 

Number 

FIS~ ended ~une30 of ill regisments 

state-1 

trations 


..I 
 .... . 

tad notes 

1835 c........................ 2% $913 1
 $585 $490 $28 $168 


4, 8-36 3 153 252 a1 


1837........................... 840 4 851 


1836.................. 688 2:426 406 802 


1Bw..................... ..... 412 2:101 1,349 566 209 414 


1839........................... 344 2, 579 1, 593 108 318 


1, 787 1, 112 110 210 


1841........................... 313 2, 611 2, a91 1 121 

263
 1842......................... 193 2.W 1, 465 1:~l 182 


1840....1...................... 306 154 lE4 


1 W.......................... 659 485 316 52 137 


In221 1, 760 1, 347 132 343 Zn 


1945........................... 340 3, 225 2, 715 1, 331 


1W........................... 1,851 407 456 


18(6........................... €51 7, 073 5, 424 3, 102 gQl 


1817........................... 483 6, 732 4, 814 2, 937 781 1150 


1848........................... 2.796 326 1,093
 435 6.405 5.032 2, 811 637 1:678 


1919........................... 128 5, 333 4. 204 458 1785
 1950........................... 487 5, 307 4.381 Z127 


1951............ 487 6, 469 5, 168 2.P-38 427 1:m4 


3, 346 851 3, 332 


1Bw........................... 693 4: 240 531 2510
 1BY1.......................... 631 9.174 7, 391 


1832........................... 3093 424 2.808 


195L......................... 778 10,SW 8, 277 3, 951 162 ; 3 : ~ 


1966.......................... 906 13, 085 9.206 4, 1Z 539 4.544 


1951........................... 875 14, 624 12, 018 5, 689 472 5, 858 


1968.......................... 313 16, 480 13, 281 6, 857 427 5.a8 


1969........................... I. 070 Is, 657 12.096 5.265 443 


IYM........................... 1.425 14, 357 11.738 4, 224 ?63 


1.560 19.070 16,260 6,1e2 248 9, 850 


I~BZ.......................... 1.841 19, 547 16,aSB 270 7: 227 


1961......................... 4512 253 11 521 


IS63........................... 1, 157 14.790 11 8W 4:372 


........................... 1, 121 16,W 14:184 4,554 224 10.006
 I 19, 437 14, 655 3.710 307 10, 638 
 1865........................... 1.m 


I statemPn~re@Steriqq h~ioan ~~~o~itsry ~eeeipts 
 against outstandingforeign wcuritiesas provided

by F- 6-12 are included. 
 iFW10 months ended Juoe 30,1935. 161 

162 SECURITIES AND EXCHANGE COMMISSION

TABLE 2.-Registrations effectiveunder the Securities Act of 1933, fiscal year ended

June 30, 1965

PART I.-DISTRIBUTION BY MONTHS

[Amounts In thousands of dollars I]

All registrations Proposed for sale for account of Issuers

Totals , Corporate Year and month Number Number of state- of Amount

ments Issues Numbers Number of Amount of Amount Issues • Issues •

1961, July ______________________ 98 114 $1,579,166 93 $1,080,502 44 $338,609 August ___________________ 82 98 1,014, 521 83 599,351 38 205,020 September _______________ 82 95 823,099 82 769,941 53 459,037 October __________________ 85 100 719,985 86 540,120 50 312,389 November _______________ 69 81 589,268 66 523,913 32 86,223 December ________________ 108 138 2,156,451 114 1,939,405 57 381,918

1965 January 84 91 1,744, 441 77 818,091 32 219,234 February 77 85 1,431,737 74 1,189,059 43 473,M5 March. _____. ____________ 134 1M 2,805,293 114 1,658,644 41 658,835 April, ____________________ 187 203 2,624, 437 173 2,386,039 57 660,579 May _____________________ 141 161 2,169,509 131 1,854,765 71 1,183,452 June _____________________ 119 143 1,778,859 117 1,296,065 49 472,958

Total, fiscal year 1965______________ '1,266 1,463 19,436,768 1,210 14, 655, 896 567 5,346,799

PART 2.-PURPOSE OF REGISTRATION AND TYPE OF SECURITY

[Amounts In thousands of dollars I]

Type of security

Purpose of registration All types

Bonds, de- Preferred Common

bentures, stock stock' and notes I

All regrstranons (estimated value) __________________ $19,436,768 $3,905,688 $596,968 $14, 934, 111 For account of issuer for cash sale ______________ 14,655,896 3,710,441 307,335 10,638,119 For Immediate oflermg 5,650,151 3,457,274 300,201 1,892,676 Corporate 5,346,799 3,153,922 300,201 1,892,676 Offered to: General public 3,770,133 2,724,074 243,426 802,632 Security holders ________________ 1,465,702 412,774 55,775 997,153 Other special groups ___________ 110,964 17,074 1,000 92,890 Foreign governments ___________________ 303,352 303,352 For extended cash sale and other Issues' ___ 9,005,744 253,167 7,134° 8,745,443° For account of Issuer for other than cash sale ___ 1,990,046 186,180 286,083 1,517,784 For account of other than Issuer ________________ 2,790,826 9,068 3,550 2,778,208 For cash sale _______________________________ 1,836,539 2,760 2,650 1,831,129 Other 954, 288 6,308 900 947,080

See footnotes at end of part 4 of table.

•

•

•

•________________•

_____ • __________

•___________________ ___________• _____________• ____

__• ______________

_____• ________________________________
Tm 2.-Reo(at~ation8 eflective under the Bemritiea Act of 183.9, psca

PABT&-PURPOSE OF R~ISTRATlONAND INDUST

IAmounts Ln tbousaods of dollars 11 

I T

Purposeatregistration 


Numlrr of statements............................ za 49 79 

Numb 0flrs0esz................................ ?E 275 62 33 

AU reg3stratIons (estimatadvalue)................$18,~6,788 $4,886,814 $a& m $1,781,866 $784,

For eooount ofissuer......................... 16,&5.'242 '4 M2,234 219,322 1,774,567 788,

FO~ULF~d e............................. 896 140,805 71& 

14,BS~, I.bx),816 1, 719,103 

For Lmmediata offsing............... 6, €40, I61 1,460,816 140,808 1.719.103 718,

Corpornte........................ 5,W,7W 1,150,816 140,805 1,719,108 118,

~oreimEOV-ts ............. 31~1,352...............................................

For ertendedsale .................... 8, 006,744 ................................................

Investment companies v..~ ....... 6,355,038 ............................................

Employeesaving planeartLBcate8. 797,334 ..............................................

SBNlltles for smployee staek 

opti~pl- .................... 1 583,536 ................................................

Other10.......................... '269 733 ............................................

Forotherthancashde .................. 1,md~8 1,051,418 

78,514 m,4M 60,4

Exchange tr-ctions 11.............. 876 466 374,437 19,650 50,4

Hemmed for conversion.............. l,m2, 781 627.7W 

Other................................ 80,188 49,214 

For account of other than lrsuu.............. 2 790 826 2 393 @30 4 182 10,288 16,4

Foreash We.......................... 1:336: 539 518146 3.91ti 6.484 1Q4

Other.................................... 984,288 874,831 1,267 3,804 4IL

6ee fmtnotes st end of part 4 or table 
164 SECURITIES AND EXCHANGE COMMISSION

~~~g~~~~~O~

~-~-~-t--:'~f~-g-cO&f

e-.-I f;ClQ'O

<h

~~~~~~gH2~~~

g~r~oi'8~t!~~~:i

... ""'~QOC'Q

- _ ... <h

~ _
THIRTY-FIRST AWNUAL REPORT 165 

TABLE 3.-Brokers and dealers registered under the Beaurities B~ohanre Act of 

19.94'--effecti.ve registrations a8 of June JO,, 1965,olaagified by tupe of organi- 

.zation and by location of prtnoipal ofioe 

/ Numberofreg~atrants INumber oiproprietors, wtners, 063~er8.8tC.~ 

166 SECURITIES AND EXCHANGE COMMISSION

TABLE 4.-Number of issuers and security issues on e:cchanges

PART l.-UNDUPLICATED NUMBER OF STOCK AND BOND ISSUES ADMITTED TO

TRADING ON EXCHANGES AND THE NUMBER OF ISSUERS INVOLVED, AS OF

JUNE 30, 1965

Total Issuers

Status under the Act I Stocks Bonds stocks Involved

and bonds

Registered pursuant to Section 12 (b), (c), and (d) _____ 2,913 1,214 4, 127 2,522 'I'ernporarily exempted from registration by Commis- ston rule _____________________________________._. 9 7 16 6

Admitted to unlisted trading priVIleges on registered exchanges pursuant to Section 12(1)_ ••• 119 17 136 105

Listed on exempted exchanges under exemption orders of the Oommlssron ____ _________________________ 57 6 63 45 Admitted to unlisted trading privrleges on exempted exchanges under exemption orders ofthe Commission. 13 0 13 13

TotaL ._. 3,111 1,244 4,355 2,691

I Registered: Section 12(b) of the Act provides that a security may be registered on a national securities

exchange by the Issuer filmg an application with the exchange and with the COII11ll1SSioncontaining certain

types ofspecified inrormatton. Section 12(c) authorizes the Commission to require the submission ofinformation of a comparable character IfIIIIts Judgment Information specified under Section 12(b) Is Inapplicable to any specified class or classes ofIssuers. Section 12(d) provides that If the exchange authonnes certify to the Commlssion that the secunty has been approved by the exchange for listing and registration, the regis. tratlon shall become effectrve 30days after the receipt ofsuch certification by the Commlssion or wrthin such

shorter perrod oftime as the Cornmissron may determine.

Temporarily exempted: These are stocks of certain banks and other securities resulting from mergers,

consolidations, eto., which the Commlssron has by published rules exempted from registration under speci- fied conditions and for stated periods. Adnutted to un1Jsted trading prrvileges: Section 12(0, as amended, provides, in effect, that securities which were admitted to unlisted tradmg prlvileges (l.e., WIthout applieatrons for listing filed by the Issuers) before

July I, 1964may continue such status. Ad ditlonal secunties may be granted unlisted trading privileges on exchanges only 1f they are listed and registered on another exchange. Listed on exempted exchanges' Certain exchanges were exempted from full registration under Section 6

of the Act because ofthe lnnited volume oftransactions. The COII11ll1SSion's exemption order specifies that

securities which were listed on the exchange at the date ofsuch order may continue to be listed thereon, and

that thereafter no addrtional secunties may be listed except upon compliance WIth Section 12(b), (c), and (d). Unlisted on exempt exchanges' The Comnussion's exemption order specifies that securities wluch were admitted to unlisted trading prrvileges thereon at the date of snch order may continue such privileges, and

that no addrnonal securities may be admitted to unlisted trading privileges except upon compliance with

Section 12(0.

PART2.-NUMBER OF STOCK AND BOND ISSUES ON EACH EXCHANGE AND NUMBER

OF ISSUERS INVOLVED, AS OF JUNE 30, 1965

Stocks Bonds

Issuers

Exchanges

R X U XL XU Total R X U XL Total

--- ---------------------- American ._ 997 909 1 134 1,044 76 .. 18 94 Boston 414 52 369 421 9 .. ... 9

Chicago Board of Trade '_ 9 6 3 9 ._--j- ----_ ... Cincinnati. ._ 164 33 135 169 10 11

Colorado Springs. 11 11 11 ... .. ... Detroit- ._ 292 98 200 ---«- ---ia- 298 ... _----- ... --_ ... _- Honolulu ._ 48 --jiS- 57 6 6 MIdwest _. ._ 435 351 1 ------ ------ 477 13 ------ ------ --..--- 13 Natlonal 10 11 ------ ------ ------ ------ 11 'j;ii7- .---7- ------ ------ Tj24 New York 1,417 1,625 2 --228- .. 1,627 Pacific Coast , , , 550 387 1 616 25 1 26

P~~~~=~~-_. 597 175 5 501 681 52 .. -----. 52

Pittsburgh _________._ 110 35 81 ---is- 116 1 .. .._- 1 Richmond 15 ------- ------ .---a- ------ 25 ------- ------ ---_ ...- ------ ------ Salt Lake 65 63 ------ ------ ------ 66 ------- ------ ------ ------ ------ San Francisco MIning. 31 31 ------ 31 ------- ... _--- --_ ...-- --- ......... --_ ........ Spokane 25 22 6 28 ... ... --_ ... .. ...

Symbols: R-reglstered: X-temporarlly exempted; U-admitted to unlisted trading privileges; XLlisted on an exempted exchange; XU-admitted to unlisted trading prrvilegea on an exempted exchange.

NOTE.-Issues exempted under Section 3(a)(12) of the Act, such as obligations oI the U.S. Government,

the states and CIties,are not Included in this table.

-____

••• ___________

___• • •

______•• ________•____•• ____ ____________•

___________ ------ ------ - ---- ------ ________________ ------ ------ ------ - ---- ------ -----

_____________ ------ ------ ------ ------ ------ _________ ------ ------ ------ ------ ------ ____ ------- ------ ------ ------ - ---- --- -- ------ ------ _•___•______ ------ _ ---- ------ ------ ________•__ ------- ------ ------ ------ _______•__ ____•______•__ ____________ -- --- ------ ------ ------ ____ __ ------ ------ ------ ------

------ ------ _ ---- ------ • ------ ------ _ - ------ ------ ___•________ _____•_______

_ ______________ ------ ------ ------ ------ ------ ------ ------ _ ---- -- --- _ ------
TEITRTY-FIRST ANNUAL REPORT

TABLE 5.-VaZU6 of stocks on 6i1JCnangcs (in biZUons of dollars)

167

New York American Exclusrvely December 31 Stock Stock on other Total I

Exchange Exchange exchanges

1936____________________________________________ $59.9 $14.8 -------------- $74. 7 1937____________________________________________ 38.9 10.2 -------------- 49. 1 1938____________________________________________ 47. 5 10 8 -------------- 58 3 1939____________________________________________ 46.5 10. 1 -------------- 56.6 1940____________________________________________ 41.9 8.6 -------------- 50.5 194L ___________________________________________ 35.8 7 4 -------------- 43. 2 1942____________________________________________ 38 8 7 8 -------------- 46.6 1943____________________________________________ 47.6 9.9 -------------- 57.5 1944____________________________________________ 55.5 1l.2 -------------- 66.7 1945____________________________________________ 73.8 14. 4 -------------- 88. 2 1946 68.6 13.2 -------------- 81.8 1947____________________________________________ 68 3 12. 1 -------------- 80.4 1948____________________________________________ 67.0 n, 9 $3.0 81.9 1949____________________________________________ 76 3 12. 2 3. 1 91.6 1950____________________________________________ 93.8 13.9 3 3 111.0 1951 -_ -_ 109.5 16.5 3.2 129.2 1952____________________________________________ 120 5 16.9 3. 1 140.5 1953____________________________________________ 117.3 15.3 2.8 135.4 1954____________________________________________ 169 1 22. 1 3.6 194. 8 1955. ___________________________________________ 207. 7 27. 1 4.0 238.8 1956____________________________________________ 219.2 31 0 3.8 254. 0 1957____________________________________________ 195 6 25.5 3.1 224. 2 1958____________________________________________ 276.7 31. 7 4.3 312. 7 1959____________________________________________ 307. 7 26.4 4.2 338.4 1960____________________________________________ 307.0 24. 2 4. 1 335.3 196L ___________________________________________ 387.8 33.0 5.3 426.2 1962____________________________________________ 345.8 24. 4 4.0 374. 2 1963__________________________________________-_ 411.3 26. 1 4.3 441. 7 1964____________________________________________ 474. 3 28. 2 4.3 506.8

1Total values 1936-47 inclusive are for the New York Stock Exchange and the American Stock Exchange

only.

____________________________________- _- _____

__________________________ - _______- _____
168 SECURITIES AND EXCHANGE COMMISSION

TABLE 6.-Dollar volume and, share volume 01 sales effected, on securities ee- ohanges in the calendar year 1964 and, the 6-month period end,ed,June 30,

1965

[Amounts in thousands]

PART 1.-12 MONTHS ENDED DEC. 31, 1964

Bonds Stocks Rights and

warrants Total Exchanges dollar

volume Dollar Principal Dollar Share Dollar Num- volume amount volume volume volume ber of

units

--- Registered exchanges _____ 75,327,654 2,882,478 2,640,742 72,147,177 2,0«.711 297,999 80,672

.American __________________ --- 6,225,980 98,743 97,475 5,921,233 396,887 206,003 14, 563 Boston. ____________________ 310,690 0 0 310,107 5,926 583 278 Chicago Board of Trade ____ 0 0 0 0 0 0 0 Cinclnnati _________________ 46,388 74 04 46,306 830 7 3 Detrolt _____________________ MIdwest 481,421 0 0 481,320 11,539 101 49 ___________________ 2,288,263 1 1 2, 286, 202 50,585 2,060 1,072 NationaL __________________ 645 0 0 645 633 0 0 New York _________________ 63,284,034 2,782,805 2,542,261 60,424, 052 1,482,257 77,177 60,116 Pacific CoasL 1,800,172 131 128 1,790,447 52,781 9,504 3,436 Plnla.-Balt.- Wash __________ 831,122 724 784 827,925 18,619 2,473 1,155 Pittsburgh _________________ 45,305 0 0 45,305 1,063 0 0 Salt Lake 3,649 0 0 3,649 8,849 0 0 San Francisco ______________ 567 0 0 567 6,574 0 0 Spokane_. _________________ 9,420 0 0 9,420 8,178 0 0

Exempted exchanges _____ 16,633 60 53 16,574 992 0 0

--- Colorado Springs ___________ 96 0 0 96 365 0 0 Honolulu __________________ 15,163 60 63 15,104 588 0 0 Rlchmond _________________ Wheeling 1,054 0 0 1,054 25 0 0 ,__________________ 320 0 0 320 13 0 0

PART 2.~ MONTHS ENDED JUNE 30,1965

Bonds Stocks Rights and

warrants Total

Exchanges dollar

volume Dollar Principal Dollar Share Dollar Num- volume amount volume volume volume berof

units

--- Registered exchanges., ___ 41,370,302 1,547,361 1,442,457 39,673,333 1,161,589 149,608 54,927

Amerlcan __________________ 3,507,301 74,338 68,500 3,319,156 250,259 113,807 9,512 Boston _____________________ 174, 634 0 0 174,633 3,185 1 10 Chicago Board of Trade. ___ 0 0 0 0 0 0 0 Cincinnati 37,765 30 39 37,732 645 2 3 Detroit.; ___________________333,605 0 0 333,474 7,506 130 160 Midwest_ 1,407,132 5 5 1,406,935 32,295 192 237 National ___________________ 104 0 0 194 162 0 0 New York _________________ 34,385,179 1,472,935 1,373,861 32,880,567 815,422 31,677 43,014 Pacific Coast _______________ 1,020,105 28 27 1,016,391 28,598 3,686 1,796 Phlla.-Balt .•Wash _______.-_ 474, 271 25 25 474, 134 10,216 112 196 Plttsburgh _________________ 23,017 0 0 23,017 540 0 0 Salt Lake __________________ 2,729 0 0 2,729 5,930 0 0 San Francisco Minmg 630 0 0 630 2,884 0 0 Spokane 3,741 0 0 3,741 3,946 0 0

--- Exempted exchanges _____ 10,716 6 3 10,702 776 7 34

--- Colorado Springs ___________ 104 0 0 104 385 0 0 Honolulu __________________ 8,456 6 3 8,443 340 7 34 Richmond;

Wheeling 1,996 0 0 1,996 41 0 0 t,_________________ 159 0 0 159 9 0 0

, The Wheeling Stock Exchange dissolved and terminated Its exemption from registration as a national

securities exchange effective April 30, 1965.

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 Securities 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 which are not subject to the fee. Comparable data are also supplied by the exempted exchanges.

Reports of most exchanges for a given month cover transactions cleared during the calendar month. Clearances generally occur on the fourth busmess day after that on which the trade was effected. FIgures are rounded and will not necessarily add to the totals as shown.

__________• __

_____• _____• ______

•• _______________

• _________________

_____• ____• _______________

_______•_____•__
TIDRTY-FIRST ANNUAL REPORT

TABLE 7.-0omparative share sales and doUar volumes on eechanae«

169

Year Share sales NYS AMS MSE PCS PBS BSE DSE PIT CIN Other

% % % % % % % % % %

-- -- -- -- -- -- -- -- -- 1935__________ 681,970, 500 73.13 12.42 1 91 2.69 0.76 0.96 0.85 0.34 0.03 6.91 1936__________ 962, 135,940 73 02 16.43 2.18 2.96 .69 .72 .74 .32 .04 2.90 1937__________ 838. 469, 889 73 19 14.75 1.79 3.23 .70 .83 .59 .38 .03 4.51 1938__________ 543,331, 878 78.08 10.55 2.27 2.67 .79 1.03 .75 .25 .04 3.57 1939_____. ____ 468,330,340 78.23 11.39 2.26 2.35 .93 1.18 76 .25 .05 2.60 1940__________ 377,896,572 75.44 13.20 2.11 2.78 1.02 1.19 .82 .31 .08 2.05 1941. ________ 311, 150,395 73.96 12.73 2.72 2.69 1.24 1.50 .87 .36 .14 3.79 1942__________ 221,159,616 76.49 11.64 2.70 2.62 1.08 1.39 .90 .29 .12 2.77 1943__________ 486,290,926 74.58 16.72 220 1.92 .85 .76 .64 .20 .07 206 1944__________ 465,523,183 73.40 1687 2.07 240 _79 .81 86 .26 .06 2.48 1945__________ 769,018, 138 65.87 21.31 1.77 2.98 .66 .66 79 .40 .05 5.51 1946__________ 803,076,532 66.07 19.37 1. 74 3.51 .68 .84 .68 .28 .05 6.83 1947__________ 513,274,867 69.82 16.98 1.67 4.22 .90 1.05 .66 .19 .08 4.43 1948__________ 571,107,842 72.42 15.07 1.68 3.95 .87 .76 .68 .18 .08 4.36 1949__________ 516,408,706 73.51 14.49 1.67 3.72 1.21 .93 73 .18 .09 3.47 1950___. ______ 893, 320,458 76.32 13.54 2.16 3.11 .79 .65 .55 .18 .09 2.61 1951.. ________ 863,918,401 74. 40 14.60 2.10 3.54 .76 .70 .58 .16 08 3.08 1952__________ 732,400,451 71.21 16.08 2.43 3.85 .85 .73 .55 .16 09 405 1953. _________ 716,732,406 72.64 15.85 2.28 3.90 .83 .81 .55 .15 .11 2.88 1954__________ I, 053,841,443 71.04 16.87 2.00 3.24 .88 .50 .53 .13 .07 474 1955_. ________ I, 321,400,711 68.85 19.19 2.09 3.08 .75 .48 .39 .10 .05 5.02 1956__________ I, 182,487,085 66.31 21.01 2.32 3.25 .72 .47 .49 .11 .05 527 1957. _________ 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 1959. _________ 1,699,696,619 65.59 24.50 2.00 2.81 .90 .37 .31 07 .04 3.41 1960__________ 1,441,047,564 68.48 22.27 2.20 3.11 .89 .39 .34 .06 .05 2.21 1961__________ 2, 142,523,490 64.99 25.58 2.22 3.42 .79 31 .31 .05 .04 2.29 1962. _________ 1,711,945,297 71. 32 20,12 2.34 295 .87 .31 .36 .05 .05 1.63 1968__________ 1,880,798,423 72.94 18.84 2.33 2.83 .84 .29 .47 .04 .04 1.38 1964. ___. _____ 2, 126,373,821 72.54 19.35 2.43 2.64 .93 .29 .54 .05 .04 1.19

SIXmonths

to June 30, 1965________ 1,217,325,141 70.52 21.34 2.67 2.50 .86 .26 .63 .04 .05 1.13

Dollar volume (in thousands)

1935 $15,396, 139 86.64 783 1.32 1.39 .68 1.34 .40 .20 .04 .16 1936_________. 23,640,431 86.24 8.69 1.39 1.33 .62 1.05 .31 .20 .03 .14 1937__________ 21,023,865 87.85 7.56 1.06 125 .60 1.10 .24 .20 .03 .11 1938. ___. _____ 12,345,419 89.24 5.57 1.03 1 27 .72 1. 51 .37 .18 .04 .07 1939_. ________ 11,434,528 87.20 656 1. 70 1.37 .82 1. 70 .34 .18 .06 .07 1940... _______ 8,419,772 85.17 7.68 2.07 1. 52 .92 1. 91 .36 .19 09 .09 1941.. ________ 6,248,055 84.14 7.45 2.59 1. 67 1.10 2.27 33 21 .12 .12 1942__. _______ 4,314,294 85.16 660 243 1.71 .96 2.33 34 .23 .13 .11 1943__________ 9,033,907 84.93 8.90 2.02 1.43 .80 1.30 .30 .16 .07 .09 1944__________ 9,810,149 84.14 9.30 2.11 1. 70 .79 1.29 .34 .15 .07 .11 1945__________ 16,284,552 82.75 10.81 2.00 1.78 .82 1.16 .35 .14 .06 .13 1946__________ 18,828,477 82.65 10.73 2.00 1.87 .79 1.23 .33 .16 .07 .17 1947__________ 11,596,806 84. 01 8.77 1.82 2.26 .91 1.51 .36 .14 .11 .11 1948. _. ___. ___ 12,911,665 84 67 8.07 1.85 2.53 .88 1.33 .34 .14 .10 .09 1949._________ 10,746,935 83.85 8.44 1. 95 2.49 1.11 1.43 .39 .13 .12 .09 1950__________ 21,808,284 85.91 6.85 235 2.19 .92 1.12 .39 .11 .11 .05 1951. _________ 21,306.087 85.48 7.56 2.30 2.06 .89 106 .36 .11 .11 .07 1952__________ 17,394,395 84.86 7.39 2.67 2.20 .99 1.11 .43 .15 .12 .08 1953__________ 16,715,533 85.25 6.79 2.84 2.20 1.06 1.04 .46 .16 .13 .07 1954_. ________ 28,140,117 86.23 679 2.42 2.02 .94 .89 .39 .14 .10 .08 1955__________ 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 2.08 .96 .80 .42 .12 .08 .07 1957__________ 32,214,846 85.51 7.33 269 2.02 1.00 .76 42 .12 .08 .07 1958__________ 38,419,560 85.42 7.45 2.71 2.11 1.01 .71 .37 09 .08 .05 1959. _________ 52,001,255 83.66 953 267 1.94 1.01 .66 .33 .08 .07 .05 1960._________ 45,306,603 83 81 9.35 2.73 1.95 1.04 .60 34 .06 .08 .04 1961.. ________ 64,on, 623 8244 10.71 2.75 2.00 1.04 .50 .37 .06 .07 .06 1962__________ 54,855,894 86.32 6.81 276 2.00 1.05 .46 .42 .06 .07 .05 1968__________ 64,438,073 85.19 7.52 2.73 2.39 1.07 .42 .52 .05 .06 .05 1964__________ 72,461,750 8349 8.46 3.16 2.48 1.15 .43 .66 .06 .06 .05

Six months

to June 30, 1985________ 39,833,651 82.62 8.62 353 2.56 1.19 .44 84 .06 .09 .05

Note.-Annual sales, Including stocks, warrants and rights, as reported by all US. exchanges to the Commtssion. Figures for merged exchanges are included In those of the exchanges mto which they were

merged.

Symbols -NYS, New York Stock Exchange; AMS, American Stock Exchange, MSE, Midwest Stock

Exchange; PCS, Paeitlo Coast Stock Exchange; PBS, Phlladelplua-Baltimore- Washington Stock Exchange;

BSE, Boston Stock Exchange; DSE, Detroit Stock Exchange; PIT. Pittsburgh Stock Exchange; CIN.

Cincinnati Stock Exchange.

__- _______
170 SECURITIES AND EXCHANGE COMMlSSION

TABLE S.-Block di8tribution8 of stock« reported by e:cckange8

IValue In thousands of dollars]

Special offerings Exchange distributions Secondary dlstrlbutions

Year Num- Shares Value Num- Shares Value Num- Shares Value

bar sold ber sold bar sold

1942_____________ 79 812,390 22,694 -------- ------------ ------.- 116 2,397,454 82,840 1943_____________ 80 1,097,338 31,054 81 4,270,580 127,462 1944 87 1,053,667 32,454 ------- ------------ -------- 94 4,097,298 135,760 1945_____________ 79 947,231 29,878 ------------ -------- 115 9,457,358 191,961 1946 23 308,134 11,002 -------- ------------ -------- 100 6,481,291 232,398 1947.. ___________ 24 314,270 9,133 ------------ 73 3,961,572 124,671 1948 21 238,879 5,466 -------- ------------ -------- 95 7,302,420 175,991 1949_____________ 32 500,211 10,956 -------- ------------ -------- 86 3,737,249 104,062 1950_____________ 20 150,308 4,940 -------- ----.-._---- -------- 77 4,280,681 88,743 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 -------- ----705;7Si- -24;664- 68 6,906,017 108,229 1954_____________ 14 189,772 6,670 57 84 5,738,359 218,490 1955_____________ 9 161,850 7,223 19 258,348 10,211 116 6,756,767 344,871 1956_____________ 8 131,755 4,557 17 156,481 4,645 146 11,696,174 520,966 1957_____________ 5 63,408 1,845 33 390,832 15,855 99 9,324, 599 339,062 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 1,504 33 1,127,266 58,072 130 19,910,013 926,514 1962_____________ 2 48,200 588 41 2,345,076 65,459 59 12,143,656 658,780 1963_____________ 0 0 0 72 2,892,233 107,498 100 18,937,935 814, 984 1964_____________ 0 0 0 68 2,553,237 97,711 110 19,462,343 909,821

NOTE.-The first special offering plan was made effective Feb. 14, 1942; the plan of exchange dlstrlbution was made effective Aug. 21, 1953, secondary dlstnbutions are not made pursuant to any plan but generally

exchanges require members to obtain approval of the exchange to participate In a secondary dIstribution

and a report on such distribunon IS filed WIth this Commlssion.

_____________ -------- ------------ --------

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THIRTY-FIRST ANNUAL REPORT 171

TABLE 9.-UnZi8ted stocks on ellJohanges1

PART I-NUMBER OF STOCKS ON THE EXCHANGES IN THE VARIOUS UNLISTED

CATEGORIES AS OF JUNE 30, 1965 2

Unlisted only 3 LISted and registered on another exchange

Exchanges

Clause 1 Clause 3 Clause 1 Clause 2 Clause 3'

American ________________________ 113 2 15 3 1 Boston __________________________ 0 0 121 248 0 Chicago Board of Trade _________ 0 0 3 0 0 Omemnati, ______________________ 0 0 0 136 0 Detroit __________________________ 0 0 13 187 0 Honolnlu ________________________ 13 0 0 0 0 Midwest. _______________________ 0 0 0 125 0 Paoiflc Coast. ___________________ 1 0 55 171 0 Phlls, -Balt, -Washington _______ 2 0 201 297 0 Pittsburgh ______________________ 0 0 16 65 0 Salt Lake ________________________ 2 0 0 0 1 Spokane _________________________ 3 0 1 2 0 Wheelmg , ______________________ 0 0 0 0 0

Total. ____________________ 134 2 425 1,234 2

PART 2-UNLISTED SHARE VOLUME ON THE EXCHANGES- CALENDAR YEAR 1964

Unlisted only a Listed and registered on another exchange

Exchanges

Clause 1 Clause 3 Clause 1 Clause 2 Clause 3 4

American ________________________ 23,574,054 16,940 5,466,660 4,032,000 27,510 Boston __________________________ 0 0 2,190,933 2,221,728 0 Chicago Board of Trade _________ 0 0 0 0 0 Clneinnan _______________________ 0 0 0 602,531 0 Detroit. _________________________ 0 0 548,802 7,331,663 0 Honolnlu ________________________ 65,180 0 0 0 0 Midwest. _______________________ 0 0 0 16,400,855 0 Paerfle Coast ____________________ 23,429 0 5,543,927 10,344,890 0 Plnla. -Balt, Wash 0 0 6,010,126 6,585,884 0 Pittsburgh ______________________ 0 0 243,426 304,469 0 Salt Lake ________________________ 406 0 0 0 0 Spokane _________________________ Wheellng 841,300 0 9,937 60,513 0 , ______________________ 0 0 0 991 0

TotaL _____________________ 24,504,369 16,940 20,013,811 47,885,524 27,510

I Refer to text under heading "Unlisted Trading Privileges On Exchanges." Volumes are as reported

by the stock exchanges or other reporting agencies and are exclusive of those In short-term rights. 2 The estegones used reflect Clauses I, 2 and 3 of Section 12(0 of the Beeurrties Exchange Act, as In effect

prior to the 1964 amendments. Begmmng WIth the next annual report, difierent classifications, reflecting those In the amended Section 12(0. will be used.

3 None of these Issues has any listed status on any domestic exchange.

These Issues became listed and registered on other exchanges subsequent to their admlssion to unlisted trading on the exchanges as shown.

, The Wheellng Stock Exchange dissolved and terminated its exemption from registration as a national

seourittes exchange effective AprIl 30, 1965

Duplication of Issues among exchanges brings the figures to more than the actual number of Issues

involved.

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172 SECURITIES AND EXCHANGE COMMISSION

TABLE IO.-Summary of criminal cases developed by the Commission. which were

pending at June 30, 1965

I Number of such defendants

Number as to whom cases are still

Number of such pending and reasons therePending, referred to Department of of de- defendants for

Justice In the fiscal year Cases fendants as to whom

In such cases have

cases been com- Not yet Awaiting Awaiting

pleted appre- trIal appeal'

hended

I I --- 1957 __________________________________ 3 30 0 0 30 0 1958__________________________________ 1 4 0 0 4 0 1959 __________________________________ 7 79 7 22 50 4 1960__________________________________ 6 39 4 7 28 1 1961__________________________________ 14 116 6 34 76 1 1962 __________________________________ 9 4ll 34 1 13 U 1963 __________________________________ 13 78 54 0 24 6 1964- _________________________________ 18 154 50 0 104 6 1965__________________________________ 12 51 3 0 48 0

---- --- --- TotaL __________________________ 83 599 158 64 377 18

SUMMARY Total cases pending' .______________________________________________ ____ 136 Total defendants '_ _ ___ __ _____ ___ 804

Total defendants as to whom cases are pending ,____________________________________________________ 646

The figures In this column represent defendants who have been convicted and whose appeals are pending

These defendants are also Included In the figures In column 3. , As of the close of the fiscal year, Indictmeuts had not yet been returned as to 205 proposed defendants In 53 cases referred to the Department of Justice, These are reflected only in the recapitulauon of totals at

the bottom of the table. The figure for total cases pending Includes 22 cases In a Suspense Category.

TABLE ll.-Summary of cases instituted in the courts by the Oommission unde1'

the Securities Act 01 1933, the Securities Ea;change Act 01 1934, the Public

Utility Holding Oompany Act 01 1935, the Investment Oompany Act 01 1940,

and the Investment Advisers Act 01 1940

Total Total Cases Cases Cases Total Cases

cases cases pending pending instituted cases closed

instituted closed at end at end during pending dUring

up to end up to end of 1965 of 1964 1965 during 1965

of 1965 ofl965 fiscal fiscal fiscal 1965 fiscai

fiscal fiscal year year year fiscal year year year year

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

1,420 1,349 71 96 72 168 97

102 96 6 5 4 9 3

Types of cases

Acttons to enjoin violations of the above Acts

Actions to enforce subpoenas

under the Securities Act and

the Securities Exchange Aet.;

Actions to carry out voluntary

plans to comply with section 11(b) of the Holding Com- pany AcL___________________ 148 148 0 6 2 8 8

Miscellaneous Actlons__________ 57 57 0 11 0 11 11

Total --1-,727 ~1---7-7 ,-rn ---7-8 ~I-m

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TEITRTY-FIRST ANNUAL REPORT 173

TABLE 12.-Summarll of actions instituted against the Commission, petitions for

review of Commission orders, cases in which the Commission participated us

intervenor or amicus curiae, and reorganization cases usuler Chapter X in

which the Commission participated on appeal

Total Total Cases Cases Cases Total Cases

cases cases pendmg pending mstituted cases closed instituted closed at end at end during pendmg dnring

Types of cases up to end up to end of 1965 of 1964 1965 dunng 1965 of 1965 of 1965 1lsca1 fiscal fiscal 1965 fiscal fiscal fiscal year year year fiscal year

year year year

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

Actions to enjoin enforcement

of Securities Act, Beeunties

Exchange Act and Public

Uttlity Holding Company

Act with the exception of subpoenas issued by the Oommtssion _________________ 72 66 6 6 6 12

Actions to enjoin enforcement of or compliance WIth subpoenas ISSued by the Com12 10 2 0 2 2 101SSlon______________________

Petitions for review by conrts

of appeals of Commlssion

orders under the various

Acts administered by the Oommtssion _________________ 280 272 8 5 16 21 13 Miseellaneous actions against the Commission or officers

of the Oomnussion and cases 10 which the Commission

participated as intervenor or amICus curz.ae_________________ 280 262 18 24 7 31 13 Appellate proceedmgs under

Oh, X 10 which the Com- mission participated __________ 204 196 8 12 5 17 9

TotaL ____________________---- ---- ---- ---- ------------ 848 806 42 47 36 83 41
174 SECURITIES AND EXCHANGE COMMISSION

TABLE l3.-A. 32-year summary of criminal cases aevelopea by the Oommission-«

193-'1through 1965 by fiscal year 1

[See table 14 for classification of defendants as broker-dealers, etc.]

Number Number of persons Number of these Number as to of such Number defend- Number of cases whom cases In of de- Number Number ants as to of these

referred prosecu- WhICh fendants of these of these whom pro- defend- to Dept. tlon was Indrot- Indicted defend- defend- eeedmgs ants as to FIscal year of Justrce recom- ments m sueh ants con- ants ac- have been whom

in each mended have cases victed quitted dismissed cases are year meach been on motion pending' year obtained of Umted

States

Attys.

-------- ---- 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 00 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 1951. 29 42 24 48 37 5 6 0 1952 14 26 13 24 17 4 3 0 1953 . 18 32 15 33 20 7 6 0 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 10 30 1958. 15 51 14 37 17 5 11 4 1959 45 217 39 234 116 20 26 72 1000 . 53 281 44 207 113 11 48 35 1001. 42 240 42 276 132 22 12 110 1002. . ._ 60 191 51 152 80 10 48 14 1963 48 168 38 115 64 7 20 24 1964_ 48 164 33 157 39 3 11 104 1965. '49 167 14 51 3 0 0 48

---- ---- TotaL .. 1,041 3,761 6845 3,616 1,880 375 °920 441

IThe flures 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 the Department of Justice during the year specified. For

example, convictions obtained in fiscal 1005 with respect to cases referred durmg fiscal 1964 are included

under fiscal 1964. While the table shows only 3 convtcnons under 1965, the total number of convictions

for cases referred during that year and prior years was 106, as noted in tne text of this report

The number of defendants in a case is sometimes increased by the Department 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 10 for breakdown of pending cases . Thirty-five of these references mvolving 116 proposed defendants, and 18 prior references involving 89

proposed defendants, were still being processed by the Department of Justice as of the close ofthe fiscal year.

6779 of these cases have been completed as to 1 or more defendants. Convictions have been obtained in 629 or 81 percent of such cases. Only 150 or 19 percent of such cases have resulted inacquittals or dlsnussals

as to all defendants; this includes numerous cases in which indtctments were diSIIllSSCd without trial because

of the death of defendants or for other adtnlulstrative reasous. See note 5, Infra.

'Includes 80 defendants who dted after mdictment.

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______ __________

_________________

_________________

___ ______ ______ __• ________ _____

______________ __• ______ _______

_________________

__________ ___• __ _____ ___________

__• ____ _________ _______ _________

__________• __ ___

________ _____ _________________

________________

_________________

_____________ ___

_____ _________

____ __________

__• ____________ _______________

________________

_________________

______ __________

________________

_________ ____ _________________

•• ______________

________________

---- ---- ---- ______

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THIRTY-FIRST ANNUAL REPORT 175

TABLE 14.-A 32-year summary classifying all defendants in criminal cases

developed by the Commi8sion-1934 to June 30, 1965

Number as to whom Number as Number Number Number cases were to whom

indicted convicted acquitted dismissed cases are on motion pendmg of U.S.

Attorneys

Registered broker-dealers! (Including prln- cipals ofsuch firms) ______________________ 582 328 43 134 77 Employees of such registered broker- dealers _________. ___________. ____________ 331 130 19 63 119 Persons in general securities business but not as registered broker-dealers (includes principals and employees) ________________ 847 428 66 304 49 All others 1,856 994 247 419 196

TotaL _______________________________ 3,616 1,880 375 920 441

IIncludes persons registered at or prior to time of indictment. 2 The persons referred to in tills column, while not engaged In a general securities busmess, were almost

WIthout exception prosecuted for vlolanons of law involving securities transactions.

' _________•______________________
176 SECURITIES AND EXCHANGE COMMISSION

TABLE15.-.4 32-year summary of an injunction cases instituted, by the Oommission-1934 to June 30, 1965, by calendar year

Number of cases instituted Number of cases in which by the Oommission and injunctrons were granted

the number of defend- and the number of de- Calendar year ants involved fendants enjoined 1

Cases Defendants Cases Defendants

1934

1935 7 24 2 4 36 242 17 56 1936 42 116 36 108 1937 96 240 91 211 1938 70 152 73 153 1939 57 1M 61 165 1940

194L 40 100 42 99

1942 40 112 36 90

1943 21 73 20 54 19 81 18 72 1944 18 80 14 35 1945 21 74 21 57 1946 21 45 15 34 1947 20 40 20 47 1943 19 44 15 26 1949 25 59 24 55 1950 27 73 26 7l 195L 22 67 17 43 1952 27 103 18 50 1953 20 41 23 68 1954. 22 59 22 62 1955 23 54 19 43 1956 53 122 42 89 1957 68 192 32 93 1968 7l 408 51 168 1959 68 206 71 179 1960 99 270 84 222 196L 84 368 85 272 1962 99 403 82 229 1963 91 358 98 363 1964 76 276 88 352

1965 (to June 30) 38 180 32 122

Total 1,420 4, 816 • 1,295 3,682

SUMMARY

Cases Defendants

Actions instituted 1,420 4,816 Injunctions obtalned Actions 1,269 3,682 pending 29 226 Other dispositions' 122 908

Total 1,420 4, 816

I These columns show disposition of cases by year of disposition and do not necessarlly reflect the disposition of the cases shown es having been Instituted in the same years.

, Includes 26 cases which were counted twice in this column because injunctions agalnst different defendants in the same cases were granted in different years

Includes 31 defendants in 8 cases in which Injunetions have been obtained as to 36 co-defendants . Includes (a) actions dlsmlssed (as to 798 defendants); (b) actions discontinued, abated, abandoned,

stipulllted or settled (as to 67 defendants); (c) actions in which judgment was denied (as to 39 defendants);

(d) actions in which prosecution was stayed on snpulation to discontinue misconduct charged (as to 4 defendants).

U.S GOVERNMENT PRINTING OFFICi 1t66

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