Table of Contents

Chairman's Transmittal Letter v

Enforcement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 1

Key Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 1

Enforcement Authority. New Remedies. Enforcement Activities

International Enforcement. Violations Relating to Financial

Institutions. Penny Stock Cases. Market Manipulation. Insider

Trading. Financial Disclosure. Corporate Control. Securities

Offering Cases. Broker-Dealer Violations. Investment Adviser

Violations. Investment Company Violations. Sources for Further

Inquiry

International Affairs 20

Key Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Arrangements for Mutual Assistance and Exchanges of Information.

Trilateral Communique. Technical Assistance. International

Organizations. International Requests for Assistance

Regulation of the Securities Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 25

Key Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 25

Securities Markets, Facilities, and Trading. Options and Other

Derivative Products. Regulation of Brokers, Dealers, Municipal

Securities Dealers, and Transfer Agents. Report to Congress on

Proposed Amendment to Section 11(a) of the Exchange Act. Financial

Responsibility Rules. Lost and Stolen Securities. Oversight of

Self-Regulatory Organizations

Investment Companies and Advisers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 47

Key Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

Reexamination of the Regulation of Investment Companies. EDGAR

Filings .Regulatory Policy. Significant Applications and Interpretations

Full Disclosure 56

Key Results. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56

Review of Filings. Rulemaking, Interpretive, and Legislative Matters

Conferences

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Accounting and Auditing Matters 6.1

Key Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64

Mark-to-Market Accounting" Accounting-Related Rules and

Interpretations" Oversight of Private Sector Standard-Setting ..

Oversight of the Accounting Profession's Initiatives" International

Accounting and Auditing Standards" Independence

EDGAR ............................................................• 70

Key Results. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 70

Pilot System .. Operational System .. Rulemaking

Other Litigation and Legal Activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 73

Key Results. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 73

Litigation" Significant Administrative Decisions ..

Significant Legislative Developments" Corporate

Reorganizations

Economic Research and Analysis 93

Key Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93

Management and Program Support 95

Key Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95

Office of the Secretary .. Office of Legislative Affairs" Office

of Public Affairs" Office of the Executive Director ..

Administrative Support

Commission Members and Principal Staff Officers .... . . . . . . . . . . . . . . . .. 102

Biographies of Commission Members. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 105

Richard C. Breeden" Edward H. Fleischman"

Mary L. Schapiro" Philip R. Lochner" Richard Y. Roberts

Regional and Branch Offices and Administrators " 109

Endnotes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 112

Appendix 126

Unconsolidated Financial Information for Broker-Dealers ..

Unconsolidated Annual Revenues and Expenses for BrokerDealers Doing a Public Business" Unconsolidated Balance

Sheet for Broker-Dealers Doing a Public Business" Securities

Industry Dollar in 1989 for Carrying and Clearing Firms ..

ii
Unconsolidated Revenues and Expenses for Carrying/

Clearing Broker-Dealers" Unconsolidated Balance Sheet for

Carrying/Clearing Broker-Dealers" Consolidated Financial

Information of Self-Regulatory Organizations .. Self-Regulatory Organizations--Clearing Corporations 1989 Revenues and

Expenses" Self-Regulatory Organizations-Depositories,

1989 Revenues and Expenses" Market Value of Equity /

Options Sales on U.S. Securities Exchanges .. Volume of

Equity /Options Sales on U.S. Securities Exchanges .. Share

Volume by Exchanges .. Dollar Volume by Exchanges"

Securities Listed on Exchanges" Value of Stocks Listed on

Exchanges" Certificate Immobilization Trends" Types of

Proceedings" Enforcement Cases Initiated by the Commission During Fiscal Year 1990 in Various Program Areas ..

Investigations of Possible Violations of the Acts Administered

by the Commission" Administrative Proceedings Instituted

During Fiscal Year Ending September 30,1990" Injunctive Actions" Foreign Restricted List" Enforcement Cases

Listed by Program Area" Reorganization Proceedings Under

Chapter 11 of the Bankruptcy Code in Which the Commission

Entered Appearance" Appropriated Funds vs. Fees Collected .. Budget Estimates and Appropriations ..

Organization Chart

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THE CHAIRMAN

UNITED STATES

SECURmES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

The Honorable Dan Quayle

President of the Senate

Washington, D.C. 20510

Gentlemen:

The Honorable Thomas S. Foley

Speaker of the House

Washington, D.C. 20515

I am honored to transmit the Securities and Exchange Commission's

annual report for fiscal year 1990. The activities and accomplishments

identified in the report once again reflect the Commission's long

tradition of fiscal responsibility, hard work, and high achievement.

The 1990 fiscal year was highlighted by a number of remarkable

achievements. In particular, the Commission:

collected $232 million in fee revenue, which represents 139

percent of its annual funding level;

obtained court orders requiring defendants to return illicit

profits in a record amount of approximately $601.5 million,

which consisted of disgorgement orders of $589 million and

civil penalties of $12.5 million;

supervised closely the liquidation of Drexel Burnham Lambert

Group and its broker-dealer subsidiary, without any cost to

the American public or the federal budget outside of normal

agency resources;

reached a settlement with Michael R. Milken, who was ordered

to pay $400 million in civil disgorgement and sentenced to ten

years imprisonment, three years probation, and community

service after pleading guilty to six felony counts, and who

consented to pay an additional $200 million in criminal fines

and penalties;

helped to maintain market stability in the wake of the sharp

market decline in October 1989;

responded to the interruption of trading on the Pacific Stock

Exchange (PSE) caused by the October 17, 1989 earthquake in

northern California, by moving operations to the American

Stock Exchange, Chicago Board Options Exchange, New York Stock

Exchange, and Philadelphia Stock Exchange to allow for the

trading of PSE options on their respective exchanges for two

days; and

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entered into new agreements with five countries providing for

exchange of investigative information, technical assistance,

and other matters.

Law Enforcement

On October 15, 1990, the Securities Enforcement Remedies and

Penny Stock Reform Act of 1990 was enacted to increase significantly

the Commission's enforcement authority. Among other things, this

legislation authorizes the Commission to seek penalties in both civil

and administrative proceedings and to enter cease-and-desist orders.

A total of 304 enforcement actions were initiated by the

Commission involving insider trading, financial disclosure, market

manipulation, corporate control, securities offerings, brokerdealer and investment company violations, and other matters. Also,

the Commission obtained court orders requiring defendants to return

illicit profits in a record amount of approximately $601.5 million.

This consisted of disgorgement orders of $579.8 million in noninsider trading cases and $9.2 million in insider trading cases, and

civil penalties of approximately $12.5 million.

The Commission maintained its relentless pursuit of fraud, which

included one of the most significant actions in the Commission's

history. In fiscal year 1990, a settlement was reached with Michael

R. Milken, a defendant in SECv. Drexel BurnhamLambert Inc. The order

entered against Milken enjoined him and required him to pay $400

million in civil disgorgement. The order further provided that Milken

would cooperate in the Commission's continuing investigation and

would be barred in administrative proceedings. The order was entered

simultaneously with Milken's guilty plea to six felony counts. In

connection with his guilty plea, Milken consented to pay an additional

$200 million in criminal fines and penalties. In November 1990,

Milken was sentenced on his guilty plea to ten years imprisonment,

three years probation, and community service.

The Commission focused increased attention on the problem of

fraudulent activity connected with financial institutions. Through

contacts with the federal financial supervisory agencies and law

enforcement authorities, the Commission has helped to sensitize

financial institutions to the need for compliance with the federal

securities laws.

Internationalization Affairs

The Commission entered into its two most comprehensive

agreements on cooperation to date during fiscal year 1990. The

Commission and the Ministry of Finance of the Netherlands, on behalf

of their respective governments, signed an agreement on Mutual

Administrative Assistance in the Exchange of Information in

Securities Matters; and the Commission and its counterpart in France,

the Commission des Operations de Bourse (COB), signed an Administrative

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Agreement. Both of these agreements provide for comprehensive

assistance in securities matters. The Commission also signed an

Understanding with the COB, which provides for consultation about

matters of common interest to coordinate market oversight and resolve

possible differences between regulatory systems. The Commission also

signed Understandings with the Institut Monetairs Luxembourgeois of

Luxembourg (IML) and the Comision Nacional de Valores (CNV) of Mexico.

The Understanding with the IML provides for the exchange of

information relating to trades cleared through a foreign clearance

organization for the PORTAL trading system. The Understanding with

the CNV is broad in scope, encompasses assistance in enforcement

matters and the provision of technical assistance, and contemplates

consultations about all matters relating to the operation of the

securities markets in the United States and Mexico.

Other activities in the international area included the signing

of a technical assistance agreement with the Republic of Hungary's

State Securities Supervision and the Budapest Stock Exchange. The

Commission also hosted the first joint meeting with the regulatory

authorities for the securities markets of the United States, Japan

and United Kingdom, which together represent approximately twothirds of aggregate global equity market capitalization.

Regulation of the Securities Markets

The Commission pursued many initiatives to enhance the stability

and integrity of the nation's securities markets. However, the most

significant event was the work associated with passing the Market

Reform Act of 1990, which requires that the Commission monitor

securities markets, including (1) tracking the trading activities of

large traders, to address the effects of extreme price movements and

(2) assessing the risks to broker-dealers of the financial activities

of their parent holding companies and other unregistered affiliates.

Collectively, this Act and the Remedies Act represent the most

significant changes to the securities laws in decades.

During fiscal year 1990, the Commission supervised closely the

liquidation of Drexel Burnham Lambert Group and its broker-dealer

subsidiary, which had more than 30,000 public customer accounts,

holding approximately $5 billion in securities. The active role of

the Commission in the liquidation of this $28 billion firm, working

closely with the Federal Reserve and other agencies, was instrumental

in preventing losses to investors and the Securities Investor

Protection Corporation. Ultimately, the market was protected against

instability without any cost to the American public or the federal

budget outside of normal agency resources.

The staff conducted 22 inspections of the trading market

facilities, market surveillance, and clearance programs of selfregulatory organizations. In the broker-dealer examination area, the

staff completed 371 member oversight and 176 cause examinations. The

number of cause examinations increased by 19 percent over 1989 to

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cover sales practices more extensively, particularly in light of

abuses encountered in the penny stock market. As a result of an

examination by the Commission, previously undetected massive capital

and other violations were detected in Stotler Group, Inc., leading

to the eventual closure of this firm, which had been one of the

nation's top 10 futures brokerage firms, and two of its chief

subsidiaries.

Investment Companies and Advisers

The Commission began a comprehensive review of the Investment

Company Act to determine whether any changes in this statute would

be appropriate in light of market developments over the past 50 years.

This review is expected to lead to legislative recommendations

affecting the nation's $1.2 trillion in investment company assets.

The Division of Investment Management also conducted 2,249 examinations

of investment companies and advisers, an increase of 14 percent from

fiscal year 1989.

Full Disclosure

The Commission devoted significant efforts to issues of

international importance, such as cross-border and global offerings.

For example, the Commission adopted Regulation S to streamline the

procedures for offering securities offshore, and Rule 144A to provide

a safe harbor exemption from the registration provisions of the

Securities Act of 1933 for resales of restricted securities to

institutional investors. In addition, a task group in the Division

of Corporation Finance completed reviews of the financial statements,

management's discussion and analysis, and other related disclosures

of 191 financial institutions. As a result of these reviews, 30

matters were referred to the Division of Enforcement for further

inquiry or investigation.

Accounting and Auditing Matters

The Commission provided policy direction to the accounting

profession to move toward using appropriate market-based measures in

accounting for financial institutions. The Commission also continued

to devote significant resources to initiatives involving international

accounting, auditing, and independence requirements.

Litigation and Legal Services

The Office of the General Counsel represented the Commission in

29 appeals before the Supreme Court and the United States Courts of

Appeals. Of these, the Commission received adverse rulings in only

seven matters. The staff also litigated 39 cases in the United States

district courts, bankruptcy courts, and administrative tribunals.

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Economic Research and Analysis

The economics staff developed or maintained seven monitoring

programs to study the implementation of major rules, new trading

facilities, and developments in the domestic and international

securities markets. The staff also completed studies concerning the

performance of circuit breaker mechanisms during the October 1987

market decline, and the effects of share turnover and margin credit

on stock market volatility.

Management and Program Support

The Commission testified before Congress 19 times regarding

issues such as the reform of securities and banking laws. The agency

collected revenue of $232 million compared to a final appropriations

level of $167 million-a $65 million net gain to the U.S. Treasury.

I look forward to working with the Congress in dealing with the

complex issues facing the securities industry. The work associated

with internationalization, maintaining market stability, restructuring

of the United States financial system, and the ongoing battle against

market manipulation and other forms of fraud against investors will

require both cooperation and continued hard work to achieve the most

successful results.

Sincerely,

'---CZ~Oc~!lRichard C. Breeden

Chairman

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Enforcement

The Commission's enforcement program is designed to preserve the integrity, fairness and efficiency of the securities markets, and thereby to protect

investors and foster investor confidence in the markets. To meet these goals,

the Commission hasfocused increased attention on particular problem areas,

including penny stock fraud and violations involving financial institutions,

while maintaining a strong presence in all other areas within its jurisdiction.

Key 1990 Results

The growth of the securities markets, both in size and sophistication, has

resulted in the allocation of significant enforcement resources to the investigation

and litigation of complex cases. The increasing globalization of the securities

markets also places demands on Commission resources for prompt and effective

action when suspect trading has a foreign component. Nonetheless, the total

number of Commission cases in fiscal year 1990 remained high in comparison to

other recent years.

In fiscal year 1990,the Commission obtained court orders requiring defendants

to disgorge illicitprofits in a record amount of approximately $589million. Included

are disgorgement orders in insider trading cases requiring the payment of

approximately $9million. Civil penalties under the Insider Trading Sanctions Act

of 1984 (ITSA) were imposed by orders requiring the payment of approximately

$12.5 million. In some instances, the payment of disgorgement and/or civil

penalties pursuant to a court order was waived based upon the defendant's

demonstrated inability to pay.

An estimated 151 criminal indictments or informations and 83 convictions

were obtained by criminal authorities during fiscal year 1990 in Commissionrelated cases. The Commission granted access to its files to federal and state

prosecutorial authorities in 134cases.

Total Enforcement Actions Initiated

FY'86 FY'87 FY'88 FY'89 FY'90

Total 312 303 252 310 304

Civil Injunctive Actions 162 144 125 140 186

Administrative Proceedings 136 146 109 155 111

Civil & Criminal Contempt Proceedings 14 13 17 15 7

Reports of Investigation 0 0 1 0 0

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Enforcement Authority

The Commission has broad authority to investigate possible violations of the

federal securities laws and to obtain appropriate remedies through litigation.

Enforcement actions initiated by the Commission generally are preceded by an

examination pursuant to the Commission's inspection powers or by an investigation.

Under its inspection powers, the Commission is authorized to conduct examinations

of regulated entities, including broker-dealers, municipal securities dealers,

investment advisers, investment companies, transfer agents, and self-regulatory

organizations (SROs). The Commission's investigations may be conducted either

informally or formally. Informal investigations are conducted on a voluntary basis,

with the Commission requesting persons with relevant information to cooperate by

providing documents and testifying before Commission staff. The federal securities

laws also empower the Commission to conduct formal investigations, in which the

Commission has the authority to issue subpoenas that compel the production of

books and records and the appearance of witnesses to testify. Both types of

investigations are generally conducted on a confidential, non public basis.

The Commission's primary enforcement mechanism for addressing violative

conduct is the injunctive action filed in federal court. In these civil actions, the

Commission is authorized to seek temporary restraining orders and preliminary

injunctions as well as permanent injunctions against any person who is violating or

about to violate any provision of the federal securities laws. A federal court

injunction will prohibit future violations, and, once an injunction has been imposed,

conduct that violates the injunction will be punishable by either civil or criminal

contempt, and violators will be subject to fines or imprisonment. In addition to

seeking such orders, the Commission often seeks other equitable relief such as an

accounting and disgorgement of illegal profits, rescission, or restitution. Also,

when seeking temporary restraining orders, the Commission often requests a freeze

order to prevent concealment of assets or dissipation of the proceeds of illegal

conduct. The Commission is specifically authorized to seek civil penalties in

connection with insider trading violations, pursuant to ITSA, as amended by the

Insider Trading and Securities Fraud Enforcement Act of 1988.

Several types of administrative proceedings may be instituted by the

Commission. The Commission may institute administrative proceedings against

regulated entities, in which the sanctions that may be imposed include censures,

limitations on activities, and suspension or revocation of registration. The

Commission may impose similar sanctions on persons associated with such entities

and persons affiliated with investment companies.

Administrative proceedings may be instituted against issuers as well. For

example, Section 8(d) of the Securities Act of 1933 (Securities Act) enables the

Commission to institute proceedings to suspend the effectiveness of a registration

statement that contains false and misleading statements. Administrative proceedings

pursuant to Section 15(c)(4)of the Securities Exchange Act of 1934(Exchange Act)

may be instituted against any person who fails to comply, and any person who is a

cause of failure to comply, with reporting, beneficial ownership, proxy, and tender

offer requirements. Respondents may be ordered to comply or effect compliance

with the relevant provisions. Pursuant to Rule 2(e) of the Commission's Rules of

Practice, administrative proceedings may be instituted against persons who appear

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or practice before the Commission, such as accountants and attomeys; the sanctions

that may be imposed in these proceedings include suspensions and bars.

The Commission also is authorized to refer matters to other federal, state or

local authorities or SROs such as the New York Stock Exchange or the National

Association of Securities Dealers (NASD). The staff often provides substantial

assistance to criminal authorities, such as the Department ofJustice, for the criminal

prosecution of securities violations.

New Remedies

The Securities Enforcement Remedies and Penny Stock Reform Act of 1990,

Pub. L. No. 101-429,which was signed into law on October 15, 1990,adds significantly

to the Commission's enforcement authority. This legislation authorizes the

Commission to seek, and the courts to impose, fines for any violations of the federal

securities laws (with the exception of insider trading violations for which civil

penalties continue to be available under ITSA). The Commission also is authorized

to impose penalties in its administrative proceedings against regulated entities,

such as brokers and dealers, and persons associated with regulated entities. The

legislation authorizes the Commission to order an accounting and require

disgorgement of illegal profits in such administrative proceedings.

In addition, the Commission for the first time is authorized to institute

administrative proceedings in which it can issue cease-and-desist orders. Permanent

cease-and-desist orders can be entered against any person violating the federal

securities laws, and disgorgement of illegal profits may be required. The Commission

is authorized to issue temporary cease-and -desist orders (if necessary, on an ex parte

basis) against regulated entities and persons associated with regulated entities, if

the Commission determines that the violation or threatened violation is likely to

result in significant dissipation or conversion of assets, significant harm to investors,

or substantial harm to the public interest prior to completion of proceedings. The

legislation also affirms the existing equitable authority of the federal courts to bar

or suspend individuals from serving as corporate officers or directors. The penny

stock provisions of the legislation, in addition to enhancing the Commission's

power to provide an effective regulatory response to penny stock fraud, authorize

the Commission to sanction individuals associated with a broker or dealer by

barring or suspending them from participating (e.g., as finders or consultants) in an

offering of penny stock.

Enforcement Activities

The Commission maintained an aggressive enforcement presence in each area

within its jurisdiction and strengthened its enforcement activities in critical areas.

In December 1989,for example, the Commission announced the formation of a new

enforcement unit devoted primarily to detecting, investigating, and prosecuting

securities fraud in the banking and thrift industries. The Commission's Penny Stock

Task Force also continued its highly successful campaign against fraud in the

issuance, offer, and sale of penny stocks.

Unless otherwise noted in the discussion below, defendants or respondents

who consented to settlement of actions did so without admitting or denying the

factual allegations contained in the complaint or order instituting proceedings. See

Table 22 for a listing of enforcement actions instituted in fiscal year 1990.

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International Enforcement

A substantial number of investigations have international aspects, and {he

staff took depositions in and obtained information from a number of foreign

countries. In conjunction with the Office of International Affairs, the staff prepared

more than 160 requests to obtain such information from foreign authorities, pursuant

to formal or informal agreements and understandings. Such requests for assistance

generally require detailed submissions describing the investigation and setting

forth the need for the requested information.

The staff worked on a substantial number of requests for assistance from

agencies of foreign nations. Some of these requests involved extensive inquiries or

investigations in order to collect the requested information. Pursuant to authority

granted by the Insider Trading and Securities Fraud Enforcement Act of 1988,

subpoena power was used in certain investigations conducted at the request of

foreign securities authorities.

As part of its increasing emphasis on international coordination and

cooperation, the staff has provided a number of training and education opportunities.

For example, representatives from over 25 foreign securities agencies attended the

1990Enforcement Training Program at the invitation of the Division of Enforcement.

With the increasing globalization of the securities markets, the Commission

has continued to pursue swift and aggressive action to deal with suspect trading in

the United States that originates from abroad or otherwise involves transactions by

or through foreign accounts. Recent Commission enforcement actions demonstrate

that the Commission's efforts to detect and remedy violations cannot be evaded

through the use of overseas accounts.

The Commission brought three actions for emergency relief to freeze trading

accounts with securities firms in the United States when suspicious trading,

originating abroad, occurred in those accounts shortly before the announcement of

material corporate transactions. These cases involved considerable discovery and

numerous proceedings to gather evidence both in the United States and abroad. In

SEC v.Finacor Anstalt,1 the Commission filed an action against a Liechtenstein-based

entity and other purchasers of call option contracts for the common stock of

Combustion Engineering, Inc., a Swedish-Swiss company, shortly before the

announcement of an offer for 80 percent of its outstanding common stock. The

complaint alleged that on certain trading days, Finacor accounted for 70 percent of

the trading in one series of options, and approximately 97 percent of the market in

another series; and nearly 100percent of the market in both series on another trading

day. The Commission sought, and the court granted, a temporary restraining order

and an order freezing assets. Thereafter, the court granted an application for

preliminary injunctive relief. As of September 30,1990, the case was still pending.

As a result of market surveillance by the Commission and the SROs, the

Commission staff learned that a number of unknown individuals had traded

heavily in the shares of Contel Corporation through Swiss and German financial

institutions just prior to an acquisition offer for the company. Within one day of the

public announcement of the acquisition offer, the Commission obtained a temporary

restraining order and, ten days later, a preliminary injunction and a court order

freezing more than $3 million in assets. Motions by defendants to dismiss the

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complaint were pending at the close of the fiscal year (SEC v. Certain Purchasers of

Common Stock and Call Option Contracts for the Common Stock of Con tel Corporation').

The Commission also obtained an emergency temporary restraining order

and a freeze of assets in SEC v. Fondation Hai? This case involved massive overseas

trading in the stock of a United States company prior to the announcement of a

proposed merger. Two of the foreign defendants appealed preliminary injunctions

and freeze orders entered against them. On appeal, the court upheld the freeze

orders, with modifications, but set aside the preliminary injunction. One defendant

consented to the entry of a permanent injunction and agreed to pay $1.4 million in

disgorgement. As of September 30,1990, the case was pending against the other

defendants.

Violations Relating to Financial Institutions

The Commission recently has focused increased attention on the problem of

fraud connected with financial institutions. Since its inception in December 1989,

the special unit within the Division of Enforcement dedicated to investigating

financial institutions and their officers, directors, and other persons associated with

their business has been investigating financial fraud encompassing false financial

statements and misleading disclosures in filings by publicly held institutions and

holding companies, as well as the full range of other potential securities violations

by persons associated with financial institutions, including insider trading.

Since January 1990,the Commission has brought four cases involving financial

institutions and associated persons. In SEC v. Jason M. Chapnick.: the Commission

filed a complaint against former officers, directors, and/or affiliates of

Commonwealth Savings and Loan Association of Florida. The complaint charged

the individuals with insider trading, fraud in the offer, purchase and sale of

securities, and false and misleading financial statements. At the close of the fiscal

year, the proceeding was still pending.

The Commission also filed an action, SEC v. Security National Bancorp Inc. and

Wesley Godfrey, Jr.,5 alleging that Security National Bancorp (SNBI) and Wesley

Godfrey, Jr., the chairman of the board and president of SNBI, failed to disclose in

the Form lO-Kfiled bySNBI for fiscal year 1988, among other things, material action

taken by the Office of the Comptroller of the Currency; the resignation of SNBI's

auditors; and the alteration of an auditor's report filed with the annual report. The

defendants consented to the entry of injunctions. Godfrey, personally, was ordered

to comply with his filing obligations under Sections 13(d) and 16(a) of the Exchange

Act and Rules 13d-l and 16a-l thereunder by filing with the Commission a Schedule

130, a Form 3, and a Form 4 disclosing his beneficial ownership of SNBI stock.

Additionally, SNBI was ordered to file, and Godfrey was ordered to cause SNBI to

file, a corrected annual report on Form 10-K for 1988 and delinquent current reports

onForm8-K.

Other cases include SEC v. John E.Parigianf which involved the adequacy and

timing of loan loss reserves of Capital Bancorporation in the second and third

quarters of 1986. The defendant, a former officer and director of Capital

Bancorporation, consented to the entry of a permanent injunction. In SEC v. [iro

Yamazaki and Ikuko Sekiguchi- Yamazaki,7Jiro Yamazaki, a former bank employee, and

his wife were charged with trading securities while in possession of material

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nonpublic information, obtained by Yamazaki in the course of his employment,

concerning a proposed tender offer. The defendants consented to the entry of an

injunction and an order requiring them to pay about $100,000 in disgorgement,

prejudgment interest, and civil penalties.

The new unit devoted to bank and thrift cases in the Division of Enforcement

also serves as a liaison, both within the Commission and with the banking regulatory

authorities, regarding securities law issues involving financial institutions. Through

contacts with the federal financial supervisory agencies and law enforcement

authorities, the Commission has sensitized the agencies to its enforcement concerns

and the need for compliance with the federal securities laws. This has facilitated

referrals of possible securities law violations to the Division of Enforcement and

grants of access to information in the Commission's nonpublic files to other law

enforcement and bank regulatory agencies, as well as the development of training

programs in the staff's areas of expertise. In addition, the Commission is a member

of the National Interagency Bank Fraud Working Group, sponsored by the

Department of Justice.

Penny Stock Cases

Penny stock cases constituted a significant part of the Commission's

enforcement effort. Eighty-six of the Commission's enforcement actions were

penny stock cases.

In SEC v. Power Securities Corporations the Commission filed an injunctive

action against two broker-dealers, Power Securities Corporation and Allied Capital

Group, Inc., fifteen individual defendants, and five nominal defendants. The

Commission's complaint alleges that various defendants violated Section 17(a) of

the Securities Act, Sections 1O(b)and 15(c) of the Exchange Act, and Rules 10b-5 and

15c1-2 thereunder. Among other things, the Commission's complaint alleges that

Power, Allied, and other defendants violated the antifraud provisions by engaging

in a fraudulent scheme of simultaneously recommending to customers both the sale

of one security and the purchase of another for the purpose of increasing commissions.

The defendants in Power also allegedly charged more than $9.4 million in

unlawful excessive mark-ups on the securities of six issuers and obtained illegal

profits exceeding $10 million from the market manipulation of two securities. The

Commission's complaint alleges that certain defendants engaged in insider trading

that resulted in unlawful profits in excess of $1 million, for which the Commission

is seeking disgorgement as well as $3 million in penalties under ITSA. The

Commission's complaint further alleges that Power and Allied maintained a secret

working relationship, such that Allied was controlled by Power, or alternatively,

such that the two firms were under common control, in violation of Section 15(b)(2)

of the Exchange Act and Rule 15b3-1. The complaint also charges that one

defendant, Henry Fong, engaged in prohibited securities transactions with or

involving Equitex, Inc., a nominal defendant in the action, in violation of Sections

57(a)(1) and 57(a)(4) of the Investment Company Act of 1940 and Rule 17d-1. As of

September 30,1990, the Commission was in litigation with the defendants.

In SEC v. Blinder, Robinson & Co., Inc " the Commission filed an injunctive

action against Blinder, its president, Meyer Blinder, and the firm's parent company,

Intercontinental Enterprises, alleging that the defendants engaged in a fraudulent

6
scheme to distribute and sell over one billion penny stock shares of 12 shell

companies that had been the subjects of "blank check" public securities offerings.

The Commission further alleged that, through fraudulent, high-pressure sales

tactics, Blinder illegally distributed and sold these securities at prices that included

undisclosed mark-ups ranging up to 140percent, and that, as a result, the defendants

realized illegal profits of more than $20 million. At the end of the fiscal year,

litigation in this case was pending.

In SEC v. Wellshire Securities, Inc.,1Othe Commission filed an injunctive action

against Wellshire, a major penny stock broker-dealer, several of its principals and

employees, and two penny stock issuers and their principals. The complaint alleged

that Wellshire was operating a penny stock boiler room that engaged in abusive and

manipulative sales and trading practices. The Commission alleged that two penny

stock issuers provided false and misleading information to Wellshire concerning

their operational and financial condition, and that Wellshire disseminated this

information to the public. A temporary restraining order and asset freeze were

granted against Wellshire, its two principals and a salesman, and a preliminary

injunction was subsequently entered against Wellshire, its two principals, other

individuals, and one of the issuers. The other penny stock issuer and its chief

executive officer consented to permanent injunctive relief. Based on the court's

findings, the NASD canceled Wellshire's membership, putting the firm out of

business.

SEC v. Leonard M. Tucker" involved a major penny stock dealer, F. D. Roberts

Securities, Inc., that had been enjoined in a previous Commission action. On

November 20, 1989, the Commission filed an action against several of F.D. Roberts'

principals and sales managers who allegedly engaged in market manipulation,

induced aftermarket purchases during an initial public offering, and refused to

execute customer sell orders. Three of the defendants had consented to preliminary

injunctions and one defendant had consented to a permanent injunction as of the

end of the fiscal year. Several defendants entered guilty pleas in related criminal

cases brought by the United States Attorney in New Jersey.

The Commission brought an injunctive action against a public company, five

individuals, and four trusts in SEC v. Lifeline Healthcare Group, Ltd.J2 for fraud in the

sale of $100 million of Lifeline stock. The individual defendants were charged with

creating an active over-the-counter (OTC) market for Lifeline stock by filing false

and misleading reports with the Commission and issuing false reports to the public

concerning the company's financial condition, business prospects, and the identities

and holdings of major shareholders. A receiver was appointed by the court to take

control of the company. One of the individual defendants, a former director of

Lifeline, consented to a permanent injunction and disgorgement after the end of the

fiscal year. At the time of his settlement, the litigation was pending against the other

defendants.

In a follow-up to SEC v. Arnold Kimmes P a major penny stock case filed during

fiscal year 1989, the Commission obtained a permanent consent injunction against

defendant Suzanne Bosworth, a former registered representative." Bosworth

allegedly opened nominee accounts to be used in an initial public offering, falsified

brokerage accounts to hide true beneficial ownership, and participated in causing

the issuers' common stock to trade at artificially high prices.

7
SEC v. San Marino Securities, Inc.Is was the first injunctive action authorized

under Exchange Act Rule lSc2-6, the Commission's new cold call rule, which,

among other things, requires brokers and dealers to approve each customer's

account for transactions in penny stocks by making and providing a written

determination that penny stocks are suitable for the customer. The rule also requires

the broker or dealer to obtain the customer' s written agreement to initial penny stock

purchases. The Commission alleged that San Marino failed to approve customer

accounts for penny stock transactions, failed to receive written agreements from

customers concerning such transactions, and lacked supervisory procedures to

ensure compliance. San Marino consented to the entry of an injunction. The

settlement of the case included a court ordered offer of rescission by San Marino for

all transactions in which a Rule 15c2-6 violation occurred. Separate administrative

proceedings against the firm and its president also were instituted and settled; the

firm was ordered not to deal in designated securities for a 9D-day period, and the

president was suspended for a period of 30 days for his failure to supervise.

The Commission also filed an injunctive action against a now defunct penny

stock broker-dealer, Monmouth Securities, Inc., and several of its former principals

and employees for their alleged participation in a scheme with an issuer, Beres

Industries, to take the company public in return for excessive and undisclosed

underwriter's compensation. The Commission's complaint alleged that Monmouth

was provided with large amounts of the Rule 144 stock owned by Beres' chairman

during aftermarket trading at a 50 percent discount and that the firm immediately

resold the stock to clients and thereby obtained a profit of $3million. The complaint

also alleged that Monmouth and its principals manipulated the market for Beres,

engaged in boiler room sales efforts, and that one salesman engaged in particularly

abusive sales practices (SEC v. Beres Industries, Inc.16). These proceedings were

pending as of September 30,1990.

Market Manipulation

The Commission is charged with ensuring the integrity of trading on the

national securities exchanges and in the OTC markets. The Commission staff, the

exchanges, and the NASD engage in surveillance of these markets.

In April 1990, after protracted settlement negotiations, the Commission

announced a settlement reached with Michael R. Milken, a defendant in SEC v.

Drexel Burnham Lambert Inc.J7 The Commission's injunctive action against Drexel,

Milken, and others was filed in September 1988 and alleged that the defendants had

devised and carried out a scheme involving stock manipulation, fraud on the

broker-dealer's own clients, failure to make required disclosures regarding the

beneficial ownership of securities, insider trading, and numerous other securities

law violations. The order entered against Milken enjoined him and required him to

pay $400million in civil disgorgement into a claims fund for the benefit of defrauded

investors and other injured persons. IS The order further provided that Milken

would cooperate in the Commission's continuing investigation and would be

barred in administrative proceedings. The order was entered simultaneously with

Milken's guilty plea to six felony counts including conspiracy, securities fraud,

aiding and abetting the filing of a false document with the Commission, and aiding

and abetting the failure to file a truthful and accurate Schedule 13D. In connection

8
with his guilty pleas, Milken consented to pay an additional $200 million in criminal

fines and penalties. InNovember 1990,Milken was sentenced on his guilty pleas to

ten years imprisonment, three years probation, and community service.

Two enforcement actions involved dealings with Boyd L. Jefferies, former

owner of Jefferies & Co., a broker-dealer. In 1987, Jefferies consented to an

injunction and a bar from the securities industry based on Commission allegations

of market manipulation and the "parking" of securities. InSEC v. Salim B. Lewis,19

the Commission alleged that the defendant, the managing partner of a brokerdealer, entered into an agreement with Jefferies to manipulate the price of Fireman's

Fund Corporation stock on the day American Express was to price an offering of

Fireman's Fund securities. Pursuant to the agreement, Jefferies & Co. purchased

Fireman's Fund common stock at the close, thereby causing the price to increase

one-eighth of a point to close at $38. Lewis allegedly aided and abetted the making

and keeping of inaccurate broker-dealer records in order to conceal the manipulation

and the reimbursement of losses sustained by Jefferies & Co. as a result of its

purchases. Lewis consented to the entry of an injunction and an order requiring him

to disgorge $475,000. In related administrative proceedings, Lewis consented to the

entry of a bar order.

In SEC v. GAF Corporation and James T. Shenoin." the Commission alleged that

GAFCorporation and its vice chairman had entered into an agreement withJ efferies

by which Jefferies & Co. would close the price of Union Carbide common stock at

$22 or higher. At the time, GAF was negotiating to sell a block of Union Carbide

stock, and bids for the block were to be based on the market price. As part of the

alleged agreement, the defendants promised to pay Jefferies & Co. for any losses

sustained as a result of its manipulative activities. The defendants consented to be

enjoined and GAF was ordered to disgorge $1,250,000, plus prejudgment interest.

Inrelated administrative proceedings, a Jefferies & Co. employee who participated

in the Union Carbide manipulation consented to a six-month suspension (In the

Matter of James T. Melton 21).

In SEC v. Michael Kaufman, 22 the Commission alleged that the defendant, the

majority shareholder, secretary, and chairman of ATI Medical, Inc. manipulated the

market for ATI's stock. The defendant effected numerous purchases and sales of

ATI stock through many brokerage accounts in his own name and in the names of

four nominees to create the appearance of active trading. Kaufman consented to the

entry of an injunction and agreed to disgorge $180,331.05.

In SEC v. Novaferon Labe, Inc.,n the Commission alleged that increases in the

price of the common stock of Novaferon Labs occurred as a result of a manipulation

accomplished through the filing and dissemination of numerous fraudulent reports

with theComrnission and press releases to the public. The reports and press releases

allegedly provided false and misleading information concerning, among other

things, the company' sfinancial condition, business prospects, and the identities and

holding of major shareholders. At the end of the fiscal year, the litigation in this case

was pending.

Insider Trading

Insider trading refers generally to abuses of nonpublic information in the

securities markets. It encompasses more than trading and tipping by traditional

9
insiders, such as officers and directors, who are subject to a duty to disclose any

material, nonpublic information or abstain from trading in the securities of their

own company. Insider trading also includes the unlawful transmission or use of

material, nonpublic information by persons in a variety of other positions of trust

and confidence and by those who misappropriate such information. Insider trading

cases are varied and, over the years, Commission actions have included as defendants

investment bankers, risk arbitrageurs, attorneys, law firm employees, accountants,

bank officers, brokers, financial reporters, and even a psychiatrist. Most insider

trading cases are brought under the general antifraud provisions of the securities

laws--particularly Section 1O(b)of the Exchange Act and Rule 10b-5 thereunder.

Exchange Act Rule 14e-3,promulgated under the Williams Act, separately proscribes

most trading by persons possessing material, nonpublic information concerning a

tender offer.

The Commission ordinarily seeks permanent injunctions and anciIlary relief,

including disgorgement of any profits gained or losses avoided, against alleged

violators. The penalty provisions of the Insider Trading Sanctions Act of 1984, as

amended by the Insider Trading and Securities Fraud Enforcement Act of 1988 and

now codified in Section 21A of the Exchange Act, authorize the Commission to seek

a civil penalty, payable to the United States, of up to three times the profit gained or

loss avoided, against persons who unlawfully trade in securities while in possession

of material, nonpublic information, or who unlawfully communicate material,

nonpublic information to others who trade. Civil penalties also can be imposed

upon persons who control insider traders.

Each year, the Commission devotes considerable staff resources to detecting,

investigating, and litigating insider trading cases. During the fiscal year, the

Commission brought 38 civil and administrative actions alleging insider trading

violations.

Several of the cases brought by the Commission alleged abuse of material,

nonpublic information by attorneys. InSEC v. Steven L. Glauberman " the Commission

alleged that an associate in a major New York law firm sold information to a

registered representative concerning approximately 29 actual or proposed corporate

transactions such as mergers and acquisitions. The Commission alleged that the

representative traded for his own account, for customer accounts, and in a special

account for Glauberman. By the end of the fiscal year, most of the defendants had

consented to injunctions and agreed to disgorge a total of $1,773,092.70. Three

participants also consented to bars in administrative proceedings under Section

15(b)(6) of the Exchange Act. At the end of the fiscal year, the injunctive action was

pending as to other defendants.

The Commission also brought a case entitled SEC v. Saul Bluestone,25 alleging

that several members of a Detroit law firm sold Zenith stock while they possessed

material, non public information concerning a loan default and impending

bankruptcy petition. Bluestone allegedly learned the information as a member of

Zenith's board of directors and disclosed that information to several of his law

partners, all of whom sold Zenith stock. Three of the attorneys consented to

injunctions and disgorged a total of $64,582.29, plus prejudgment interest and

penalties. The litigation against two other partners was continuing at the close of the

fiscal year.

10
In SEC v. James H. O'Hagan,26 the Commission alleged that O'Hagan, then a

partner in a prominent Minneapolis law firm, traded in the securities of The

Pillsbury Company while he possessed material, nonpublic information concerning

a hostile tender offer for Pillsbury. O'Hagan's firm served as local counsel for the

offeror. The complaint alleged that O'Hagan discussed the impending offer with

another partner and that O'Hagan purchased Pillsbury options and stock after he

learned of the offer. Following the announcement, O'Hagan sold the securities,

realizing a profit of approximately $4.3 million. The district court denied a motion

for summary judgment by O'Hagan, and the Commission litigation against O'Hagan

was continuing at the close of the fiscal year.

The Commission also continued to initiate actions arising out of mergers and

acquisitions. In June, for example, the Commission filed SEC v. Alan C. Goulding.27

The complaint alleged that Goulding, formerly a senior officer of A&P, learned that

the company was preparing to make several major acquisitions, and that he tipped

several friends and business associates concerning the acquisitions and an impending

favorable earnings announcement by A&P. When the action was filed, the defendants

consented to the entry of injunctions. They also agreed to disgorge profits of

$513,881.23 and interest in the amount of $189,879.97. In addition, they agreed to

pay ITSA penalties totalling $1,300,131.25.

Financial Disclosure

Actions involving false and misleading disclosures concerning the financial

condition of companies and the issuance of false financial statements are often

complex and require more resources than other types of cases, but their effective

prosecution is essential to preserving the integrity of the disclosure system. The

Commission brought 24 cases containing significant allegations of financial disclosure

violations against issuers, regulated entities, or their employees. Many of these

cases included alleged violations of the accounting provisions of the Foreign

Corrupt Practices Act. The Commission also brought 11 cases alleging misconduct

by accounting firms or their partners or employees.

A number of cases involved the improper recognition of revenue or income.

In SEC v. Richard H. Towle,28 the Commission filed a complaint alleging that the

defendants engaged in activities that resulted in Thortec International, Inc. filing

materially false and misleading financial statements with the Commission. The

defendants, all former executive officers of Thorte, allegedly recorded unsupported

adjustments to the amount of revenue reported by Thortec's regional offices during

the process of preparing the company's financial statements and periodic reports.

Thus, the financial statements filed with the Commission materially overstated

revenue and earnings. The proceeding was still pending at the close of the fiscal

year.

In SEC v. Barry J. Minkow,29 the Commission filed an injunctive action against

14 defendants with regard to their fraudulent conduct in connection with

misrepresentations contained in financial statements and registration statements

filed with the Commission in October and November 1986 by ZZZZ Best, Inc., to

facilitate a public offering ofstock in which $15million was obtained from investors.

With the exception of two defendants, each of the defendants has consented to entry

of an order permanently enjoining him from the violations of the Securities Act and

11
Exchange Act. The case against the other two defendants was pending as of the close

of the fiscal year. Minkow also was criminally convicted of 57 counts for crimes he

committed while chairman, president, and chief executive officer of the company.

He is serving a sentence of 25 years.

Numerous other actions brought by the Commission involved alleged

fraudulent misrepresentations or omissions in financial statements that were filed

by issuers with the Commission or otherwise disseminated to the public (SEC v.

Fluid Corporations" SEC v. Raiio P. Mehta;31 SEC v. Crowell & Co., Inc.;32 and SEC v.

Malibu Capital Corporation 33).

A number of accountants were suspended from practicing before the

Commission in Rule 2(e) proceedings based on allegations of significant audit

failures (In the Matter of Stephen L.Hochberg, CPA;34In the Matter of Charles C. Lehman,

Jr., CPA;35 In the Matter of William G. Gaede, Jr., CPA;36 and In the Matter of Georgia

McCarley3"). Accountants enjoined for allegedly aiding and abetting violations of

the registration and antifraud provisions by their preparation and audit of financial

statements in connection with securities offerings also were the subject of suspension

orders (In the Matter of Bruce T. Anderson, CPNB and In the Matter of Charles V. Moore,

CPN9).

Corporate Control

The Commission's enforcement program also scrutinizes corporate mergers,

takeovers and other corporate control transactions, and the adequacy of disclosures

made by acquiring persons and entities and their targets. The Commission recently

has brought cases involving Sections 13 and 14 of the Exchange Act, which govern

securities acquisition, proxy, and tender offer disclosure. Increasingly, the

Commission seeks orders requiring violators to disgorge any profits obtained from

the violation.

The Commission was active in pursuing cases alleging tardy or inadequate

disclosure under Section 13(d). In one case, SEC v. Nortek, Inc.,40 the Commission

filed an injunctive action against Nortek, Inc. and three of its officers under both

Sections 13(d) and 1O(b)of the Exchange Act and Rules lOb-5 and 13d-1 thereunder.

According to the complaint, Nortek filed a late and misleading Schedule 130

concerning its accumulation of five percent of the outstanding stock of Rexham

Corp. Notwithstanding its obligation to file a Schedule 130, Nortek continued to

accumulate Rexham stock, buying an additional 62,000 shares after the filing

obligation accrued. The complaint alleged that Nortek purchased while it withheld

from the market required information about its five percent accumulation. The

defendants consented to injunctions against future violations. In addition, Nortek

agreed to disgorge $503,000 in profits from its Rexham purchases.

In SEC v. Edward P. Evans,41 the Commission filed an action against present or

former senior officers of Macmillan, Inc. According to the complaint, the defendants

developed a plan to recapitalize Macmillan in anticipation of a possible hostile

takeover. The proposal called for Macmillan's employee stock option plan to buy

more than five percent of the company's shares. The Schedule 130 allegedly failed

to disclose that a purpose of the acquisition was to further a recapitalization planned

or proposed by the defendants. The defendants consented to the entry of a final

judgment of permanent injunction against them.

1?
In SEC v. Alan E. Cloref? the Commission alleged that an investor failed to

update previous disclosures to reflect his intent to take a company private. Clore,

formerly the chairman of Kaisertech Ltd., and foreign corporations that he controlled

accumulated a control block of Kaisertech without amending statements made in a

previously filed Schedule 13D to disclose plans Clore allegedly had made to try to

take the company private. The complaint also alleged that Clore failed to make

disclosures concerning his purchases and sales on Form 4 as required by Section

16(a) of the Exchange Act and Rule 16a-l thereunder. The defendant consented to

the entry of an injunction.

In SEC v. Thomas Lee Oakes,43 the Commission alleged violations of the proxy

solicitation rules. According to the complaint, Oakes solicited proxies from

shareholders of North Atlantic fisheries in violation of the Commission's rules. The

complaint alleged that Oakes failed to file his proxy materials with the Commission;

misrepresented, among other matters, that he was the company's chief financial

officer; and failed to comply with various rules prescribing the form of the proxies.

Oakes consented to a permanent injunction.

The Commission also makes use of other provisions of the securities laws to

police acquisition-related conduct. For example, in SEC v. Mesa Limited Partnership

and T. Boone Pickens, Jr.,44the Commission filed an action alleging that Pickens and

Mesa violated Sections 17(a)(2) and 17(a)(3) of the Securities Act through sales of

stock and options of Homestake Mining. The complaint alleged that Mesa had

publicly announced an offer to acquire Homestake in a negotiated transaction. The

announcement disclosed that Mesa had acquired 3,540,000 shares of Homestake, or

3.8 percent of Homestake's outstanding common stock, and that Mesa was offering

to acquire all of Homestake's remaining stock. According to the complaint, Mesa

and Pickens decided to sell a substantial part of Mesa' s holdings of Homestake stock

and, after the release of the news announcement, began selling Homestake stock

and options. The complaint alleged that Mesa failed to issue a release correcting or

updating the initial release by disclosing Mesa's intention to sell Homestake

securities. Mesa and Pickens consented to final judgments enjoining them from

future violations and requiring Mesa to disgorge $2.3 million in profits.

Securities Offering Cases

Securities offering cases represent a significant portion of the Commission's

enforcement activities. These cases involve the offer and sale of securities in

violation of the registration provisions of the Securities Act. In some cases, the

issuers attempt to rely on exemptions to registration requirements that are not

available. Offering cases frequently involve material misrepresentations concerning,

among other things, use of proceeds, risks associated with investments, disciplinary

history of promoters or control persons, business prospects, promised returns,

success of prior offerings, and the financial condition of issuers.

In SEC v. American Assurance Underwriters Group, Inc.,45 the Commission

alleged that the defendants sold unregistered OTC securities, raising approximately

$6 million. The issuer inflated its financial statements by recording at face value a

note from a related party with no ability to pay. Four defendants consented to

injunctions, a default final judgment was entered against another defendant, and,

at the end of the fiscal year, the Commission was litigating against the remaining

13
three defendants. The company, which filed for bankruptcy, consented to an

injunction through its bankruptcy trustee.

The Commission's complaint in SEC v. Charles A. Oglebay46 alleged that from

May 1983 through November 1987 eight defendants fraudulently offered and sold

$57 million of unregistered securities to 800 investors. The securities were marketed

as small equipment leases, investment pools for leases, and notes purportedly

backed by leases. The leases were supposed to generate rental income that would

be remitted to the investors. Defendants allegedly made materially misleading

statements as to, among other things, title and assignment of collateral, the existence

of cash reserves and insurance, the default rate of the leases, the nature of the

investments, the degree of risk, and the receipt of commissions. As of September 30,

1990, the Commission was in litigation with the defendants.

The Commission filed an injunctive action, SEC v. RL Kotrozo, Inc.,47 against a

registered investment adviser/broker-dealer and its two principals, alleging that

from 1985 through at least July 1989 the defendants engaged in the fraudulent offer

and sale of securities in the form of promissory notes and interests in a non-existent

mutual fund. The Commission alleged that, besides misrepresenting the existence

of the mutual fund, the defendants misrepresented their financial condition, the

risks of the investment, and the actual use of the funds. The Commission also

alleged that investor funds were commingled with the personal funds of the

principals and used to pay their personal expenses, as well as to repay earlier

investors. The defendants consented to injunctions and agreed to disgorge $977,976.

The Commission filed an injunctive action against seven defendants in SEC v.

Donald Bader" for raising approximately $9 million from 450 investors through the

sale of unregistered securities in the form of investment contracts and promissory

notes between May 1985 and May 1988. The Commission alleged that numerous

material misrepresentations were made to investors concerning, among other

things, the use of investor proceeds, the identity of control persons of the company,

the existence of a state investigation, and the existence of substantial losses from

uncollectible accounts. The defendants consented to injunctions. At the end of the

fiscal year, the issue of disgorgement remained before the court.

In SEC v. AUC COrp.,49the Commission brought an injunctive action against

ALIC Corp. and its four principal officers alleging registration and antifraud

violations in the sale of investment contracts, debentures that were represented to

be certificates of deposit, preferred stock, and single premium annuities. Defendants

raised over $17 million from over 1,000 investors, mostly senior citizens, and

allegedly misrepresented the risks and returns of the securities, the guaranteed

nature of the securities, and the financial condition of ALIC Corp. A receiver for

ALIC Corp. was appointed by the court. At the close of the fiscal year, the

Commission was engaged in discovery and litigation with the defendants.

The Commission brought several actions against individuals and entities

allegedly involved in the unregistered and fraudulent sale of interests in oil and gas

wells, fractional undivided working interests, and limited partnership interests.

Some of these actions include SEC v. William A. Thornei" SEC v. Profit Enterprises,

Inc.;51 SEC v. Transwestern Oil and Gas Co., Inc.;52 and SEC v. Thomas Hydrocarbons,

Inc.53

14
Broker-Dealer Violations

The Commission filed a series of enforcement actions against broker-dealers.

Broker-dealer cases generally involve fraudulent sales practices, net capital and

customer protection violations, as well as violations of the books and records

provisions.

The Commission continued to devote extensive resources to the litigation In

the Matter of The Stuart-James Co., Inc.,54which was instituted in fiscal year 1989. The

case was brought against one of the nation's largest penny stock broker-dealers and

involves allegations of excessive undisclosed mark-ups on the first day of aftermarket

trading in the securities of two issuers for which Stuart-James acted as sole

underwriter; alleged abusive sales practices, including fraudulent telephone scripts,

tie-in sales, planned cross trades, and undisclosed "no net selling" policies; and

alleged failures to supervise.

The Commission filed an action against Thomas James Associates, Inc., a

broker-dealer, the two registered principals and owners of the firm, and the firm's

head trader. The Commission's complaint alleged that, in connection with Thomas

James' underwriting of the initial public offerings for four issuers, the defendants

engaged in a scheme by which the firm's undisclosed domination and control of the

market and fraudulent and high pressure sales tactics created an artificially large

demand for the issuers' shares. Clients of the firm also were allegedly charged

excessive undisclosed mark-ups. Brian Thomas, the registered principal, president,

and 50 percent owner of the firm, consented to the entry of an injunction that

included a bar from employment in the securities industry. In connection with the

court's final order in this case, the Commission obtained a $1.5 million order for

disgorgement to be paid by various defendants (SEC v. Thomas James Associates,

Inc.55). In connection with the same violative conduct, the Commission instituted

administrative proceedings against the former head trader at Thomas [ames." As

of the end of the fiscal year, those proceedings were pending.

Several actions were brought by the Commission alleging misappropriation of

customer funds. InSEC v. Oscar Ayala,57 the Commission obtained an injunction

against a registered representative who allegedly engaged in unauthorized trading

and misappropriated at least $2.4 million of customer funds for his personal use. At

the end of the fiscal year, the issue of disgorgement was being litigated. The

Commission issued a bar order against a registered representative who allegedly

misappropriated in excess of $1 million from customers for his personal use and

who had been previously enjoined for such conduct (In the Matter of Walter F. Kusay,

Jr.SS). An injunction was entered against a broker-dealer and its president and sole

owner who sold customer securities and allegedly misappropriated at least $825,000,

as well as violated net capital and broker-dealer books and records provisions (SEC

v. H.A. Kenning Investments, Inc. and Harry A. Kenning, Jr.59). Administrative

proceedings against H.A. Kenning, the president, resulted in a bar order (In the

Matter of Harry A. Kenning, Jr.(0). An injunction was also obtained by the Commission

against a registered representative who allegedly misappropriated approximately

$2,028,407 from customers and obtained approximately $300,000 through the

fraudulent sale of unregistered securities (SEC v. Bruce Black").

The Commission also pursued broker-dealers and registered representatives

for material misrepresentations and omissions made to customers in the offer and

1!i
sale of securities. An injunction was obtained by the Commission against a

registered representative of a broker-dealer for alleged misrepresentations he made

in the offer and sale of notes issued by Phoenix Aviation, Inc. concerning, among

other things, the business opportunities of the issuer and its financial and operating

condition (SEC v. Phoenix Aviation, Inc.62). The Commission instituted administrative

proceedings against the registered representative, which were pending as of the end

of the fiscal year (In the Matter of Alan R. Asker63). Injunctions were entered against

a broker-dealer and its president and sole owner based on their offer and sale of

unregistered securities and their alleged misrepresentations to investors of the risks

associated with the investment, the return on the investment, and the uses to which

investors' funds would be put. In addition to entry of the injunctions, the firm's

broker-dealer registration was revoked and the president was barred (SEC v. Jeffers

Investments Corporaiion'" and In the Matter of David K. Jeffers and Jeffers Investments

Corporation 65). Administrative proceedings were instituted against a broker-dealer

and its principal for allegedly selling unregistered securities through the use of

materially false and misleading statements concerning the ownership, financial

condition, and business prospects of the issuer (In the Matter ofV.F. Minton Securities,

Inc. and Vernon F.Minton66). These proceedings were pending at the end of the fiscal

year.

An injunction was entered against a government securities broker-dealer for

the firm's alleged failure to maintain sufficient net capital, comply with recordkeeping

requirements relating to net capital computations, prepare and file financial reports

with the Commission, comply with telegraphic notice requirements, and become a

member of a national securities exchange registered under Exchange Act Section 6

or a securities association registered with the Commission under Exchange Act

Section 15A (SECv. Frank Clarke and Co., Inc'"). In addition to entry of the injunction,

the broker-dealer's registration was revoked (In the Matter of Frank Clarke and Co.,

Inc.68). Another government securities broker-dealer's registration was revoked by

the Commission (In the Matter of Stotler and CO.69)based on allegations that Stotler

effected transactions in government securities without becoming a member of a

national securities exchange or the NASD; and failed to comply with regulations

promulgated by the Department of the Treasury with respect to: (l) the maintenance

of net capital; (2)the deposit of customer funds in a special reserve bank account; (3)

recordkeeping; (4) the filing of financial reports with the Commission; and (5) the

provision of telegraphic notice to the Commission of its net capital deficiency.

The Commission brought administrative proceedings against Donaldson,

Lufkin & Jenrette Securities Corp. and a managing director for alleged practices in

which the firm, from 1982 through April 1989, used its customers' margin securities

in hundreds of transactions for its own benefit and without the customers' knowledge

or consent. The managing director supervised the division that engaged in the

practices, which generated $5.9 million in revenues for the firm. The Commission

censured the firm and ordered that it comply with undertakings that included

review of its practices and procedures in connection with the handling of customer

securities, preparation and implementation of policies and procedures to effect

compliance with the federal securities laws, and establishment of a fund of $5.6

million, plus prejudgment interest, for the repayment of customers. The managing

director was suspended from association with a regulated entity for 45 days and

16
from supervisory responsibilities for 18months (In the Matter of Donaldson, Lufkin &

Jenrette Securities Corporation 70).

The Commission also instituted administrative proceedings against registered

broker-dealers, their principals and other firm personnel for failure to reasonably

supervise individuals subject to their supervision in order to prevent violations of

the securities laws. In In the Matter of Gary W. Chambers." the Commission

suspended a broker-dealer's senior vice president for compliance and operations

for allegedly failing to supervise two registered representatives who engaged in

excessive and unsuitable trading in customer accounts. The Commission also

censured a broker-dealer in In the Matter of Goodrich Securities, Inc.72 and ordered the

firm to review its supervisory and compliance procedures and to revise such

procedures in order to ensure adequate supervision.

Investment Adviser Violations

The Commission instituted several significant enforcement actions involving

investment advisers. These cases included abusive sales practices and misappropriation of client funds.

In SEC v. Michael S. Douglas/? the Commission alleged that an unregistered

investment adviser made material misrepresentations in connection with the offer

and sale of interests in three unregistered investment companies controlled by the

adviser. The Commission obtained a temporary restraining order enjoining further

antifraud violations, freezing the defendant's assets, and appointing a receiver to

take control and account for at least $21 million of investor funds.

An injunction was obtained against another registered investment adviser

and its principal for allegedly engaging in a scheme to hide trading losses from an

investment advisory client by sending false account statements reporting fictitious

securities transactions to hide commodity trading losses of about $149,000 (SEC v.

Gregory D. Gooan'"). In a related administrative proceeding, the adviser's registration

was revoked and the principal barred (In the Matter of Liberty Securities Group, Inc.

and Gregory D. Govan75).

In SEC v. U.S. General Corporation." the Commission brought an emergency

trading suspension and injunctive action against a registered investment company

and six individuals for allegedly grossly overvaluing the fund's assets in Commission

filings and promotional materials distributed to the public. A substantial number

of shares were sold based upon the false information. Two of the individual

defendants have disgorged $20,304.90 to the Commission.

Administrative proceedings were brought against two investment advisers

for the dissemination of impermissible performance advertisements. One investment

adviser allegedly made material misrepresentations concerning the profitability of

its recommendations and trades, and the other investment adviser allegedly made

misrepresentations in a $10 million advertising campaign that attracted $1billion of

new investor funds (In the Matter of Blue Chip Market Advisor, Inc. and James Paul

Azzalino 77 and In the Matter of Fred Alger Management, Inc.,78 respectively). Both

advisers were censured and ordered to comply with certain remedial undertakings.

In another advertisement case, an investment adviser allegedly promoted a

company's common stock through the use of materially false and misleading

advertisements and newsletters, traded in the securities, and obtained illegal

17
extensions of credit from brokers and dealers (SEC v. William P. Dillon 79). The

adviser consented to the entry ofthe injunction and was ordered to make restitution

of $350,000.

Proceedings instituted against two advisers involved application of the

Commission's 1986 interpretive release concerning the scope of Exchange Act

Section28(e),which provides a safe harbor for money managers who use commissions

generated by account transactions to pay for research and brokerage services

(referred to as soft dollars). Among other things, the release clarified the

Commission's interpretation of Section 28(e), expressed the Commission's views

regarding the best execution obligations of fiduciaries for client transactions, and

discussed various disclosure obligations. In the Matter of Patterson Capital Corporation

and Joseph P. Pattereon'" involved a registered investment adviser and two principals

who allegedly made secret use of their clients' commissions to purchase various

marketing services for the sole benefit of the adviser, in breach of their fiduciary

duties. Similarly, another investment adviser allegedly engaged in an undisclosed

brokerage allocation practice which involved obtaining client referrals for its

advisory business through the use of its mutual fund client's brokerage commissions

(In the Matter of Stein Roe & Farnham Incorporated 81). The respondents in both

proceedings consented to the findings of the violative conduct, censures, and

remedial undertakings.

An investment adviser which allegedly failed to disclose multimillion dollar

benefits it was earning on client funds and inadequately disclosed arrangements

that permitted itto earn multiple advisory fees was the subject of an administrative

proceeding. The adviser was censured and ordered to comply with certain

undertakings (In the Matter of Thomson McKinnon Asset Management L.P. 82). In SEC

v. R.E.C. Investors, Inc.,83 the Commission obtained an injunction and instituted

proceedings against an investment adviser and its principal for allegedly engaging

in a free-riding scheme, purchasing $150 million in securities in violation of the

margin rules, and earning profits of $2.65million. The defendants consented to the

injunction and were ordered to make disgorgement. In related administrative

proceedings, they were censured and ordered to comply with certain undertakings.

Investment Company Violations

In a significant action involving a registered investment company, SEC v.

Municipal Lease Securities Fund Inc.,84the Commission obtained emergency injunctive

and ancillary relief against four defendants, a control person, a broker-dealer, an

investment adviser, and an investment company. The Commission's complaint

alleged antifraud, pricing, and books and records violations of the Investment

Company Act. This case primarily involved selling and redeeming the registered

investment company's shares during a period in which it was not calculating its net

asset value on a daily basis. The court entered an order restraining sales,redemptions

and repurchases of the fund's shares, freezing the fund's assets, enjoining the

destruction of the fund's books and records, and appointing a receiver to determine

the future operation of the fund.

A permanent injunction was entered against Dart Group Corporation for

allegedly acting as an unregistered investment company. Dart Group engaged in

the business of investing, reinvesting, and trading in securities of several public

1A
companies that it had announced an intention to acquire. The defendants consented

to the injunction and undertook to report to the Commission for a three-year period

information concerning their investments and income derived from those

investments (SEC v. Dart Group Corporation 85).

The Commission brought an injunctive action against Fluid Corporation, a

business development company regulated by both the Commission and the Small

Business Administration. Fluid Corporation, among other things, allegedly made

misleading disclosures in an annual report concerning its financial condition and

omitted information regarding its subsidiary's capital impairment and reissued

audit opinion (SEC v. Fluid Corporationr). Fluid consented to the entry of an order

by which the registration of its common stock under the Exchange Act and its

election to operate as a business development company under the Investment

Company Act were revoked. At the end of the fiscal year, the action against the

remaining defendant was pending.

Sources for Further Inquiry

The Commission publishes the SEC Docket, which includes announcements

regarding enforcement actions. The Commission's litigation releases describe civil

injunctive actions and also report certain criminal proceedings involving securitiesrelated violations. These releases typically report the identity of the defendants, the

nature of the alleged violative conduct, the disposition or status of the case, as well

as other information. The SEC Docket also contains Commission orders instituting

administrative proceedings, orders making findings and imposing sanctions in

those proceedings, and the initial decisions of Administrative Law Judges in

Commission proceedings.

19
Office of International Affairs

In December 1989, Chairman RicJuzrdBreeden announced the creation

of the Commission's Office ofInternational Affairs (OIA). OIA has primary

responsibility for the negotiation and implementation of information-sJuzring

agreements and for developing legislative and other initiatives to facilitate

international cooperation. OIA coordinates and assists in making requests

for assistance to, and responding to requests for assistance from, foreign

authorities. OIA also addresses other international issues thai arise in

litigated matters such as effecting service of process abroad and gathering

foreign-based evidence using various international conventions, freezing

assets located abroad, and enforcing judgments obtained by the Commission

in the United States against foreign parties. In addition, OIA operates in a

consultative role regarding the significant ongoing international programs

and initiatives of the Commission's other divisions and offices.

Key 1990 Results

The Commission entered into its two most comprehensive agreements on

cooperation during fiscal year 1990. The Commission and the Ministry of Finance

of the Netherlands, on behalf of their respective governments, signed an agreement

on Mutual Administrative Assistance in the Exchange of Information in Securities

Matters (Netherlands Agreement); and the Commission and its counterpart in

France, the Commission des Operations de Bourse (COB),signed an Administrative

Agreement (French Agreement). Both of those agreements provide for

comprehensive assistance in securities matters. The Commission also signed an

understanding with the COB (French Understanding) in which the parties agreed

to consult about matters of common interest to coordinate market oversight and

resolve possible differences between their regulatory systems.

The Commission entered into an understanding with the Institute Monetaire

Luxembourgeois of Luxembourg (Luxembourg MOU), which provides for the

signatories to exchange information relating to trades cleared through a foreign

clearing organization for the PORTAL trading system. The Commission entered

into its first technical assistance understanding with the Republic of Hungary State

Securities Supervision and the BUdapest Stock Exchange (Hungary Understanding)

which lays the groundwork for the Commission's providing technical assistance to

Hungary regarding the development of Hungary's securities markets. At the

conclusion of the first Trilateral Meeting, hosted by the Commission, a precedent

setting communique was issued in which the parties (the United Kingdom .'

Department of Trade and Industry and Securities and Investments Board, and the '

20
Securities Bureau of the Ministry of Finance of Japan) stated their agreement about

several important regulatory matters and their commitment to consult and coordinate

with each other about matters of mutual concern.

Arrangements for Mutual Assistance and Exchanges of Information

The increasing internationalization of the world's securities markets has

raised many new and complex issues that impact upon the Commission's ability to

enforce the United States federal securities laws. For example, a central problem the

Commission now faces is collecting information located abroad. The Commission

has attempted to resolve this problem by developing information-sharing

arrangements on a bilateral basis with various foreign authorities.

The information-sharing arrangements allow the Commission to obtain

evidence located abroad while avoiding the conflicts that may result from differences

in legal systems. The Commission has entered into various arrangements with

foreign authorities in Switzerland, Japan, the United Kingdom, three provincial

authorities in Canada, Brazil, Italy, the Netherlands, France, and Luxembourg.

These arrangements have proven to be effective means for obtaining information

and developing cooperative arrangements between regulators. In addition, the

staff coordinates closely with the regulators with whom it has information-sharing

arrangements to develop ways to implement and improve the arrangements. The

Commission also cooperates on an informal basis with foreign regulators with

whom it does not have explicit information-sharing arrangements.

On December 11, 1989, the Commission and the Ministry of Finance of the

Netherlands, on behalf of their respective governments, signed the Netherlands

Agreement, which provides for comprehensive assistance in securities matters. The

comprehensive assistance provisions of the Netherlands Agreement are implemented

for the Commission by the amendments contained in Section 6 of the Insider

Trading and Securities Fraud Enforcement Act of 1988 (ITSFEA). Unlike the

Commission's previous Memoranda of Understanding (MOU), the Netherlands

Agreement is a binding agreement under international law as opposed to a

statement of intent to cooperate.

On December 14, 1989, the Commission and the COB signed the French

Agreement, which is similar to the Netherlands Agreement both in its comprehensive

scope and in its status as a binding agreement. The French Agreement provides that

the Commission and the COB may utilize their respective compulsory powers to

assist each other in matters within the scope of the MOU, as authorized, respectively,

by ITSFEA and by the French Law of August 2,1989.

Contemporaneously with the signing of the French Agreement, the Commission

and the COB signed the French Understanding, which goes well beyond the

provisions of the French Agreement and represents a significant new step in

international cooperation in securities matters. The French Understanding reflects

the agreement of the Commission and the COB to engage in mutual consultations

about subjects of common interest in order to coordinate market oversight and to

resolve differences that may exist between their respective regulatory systems. The

French Understanding is the first formal understanding between the Commission

and a foreign securities authority on matters beyond the enforcement of the

securities laws. It provides a framework for the two authorities to take proactive

21

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steps to address a wide range of issues concerning the stability and integrity of the

United States and French securities markets.

On May 23,1990, the Commission signed the Luxembourg MOU with the

Institut Monetaire Luxembourgeois (IML), which provides for the exchange of

information between the' Commission and the IML relating to trades cleared

through Centrale de Livraison de Valeurs Mobilieres, S.A. Luxembourg for the

PORTAL trading system.

The Commission entered into a MOU with the Comision Nacional de Valores

(CNV) on October 18, 1990. The MOU with the CNV is broad in scope, and it

encompasses not only assistance in enforcement matters, but also the provision of

technical assistance. The MOU also contemplates consultations about all matters

relating to the operation of the securities markets in the United States and Mexico.

Trilateral Communique

On September 21,1990, the Commission and the United Kingdom Department

of Trade and Industry and Securities and Investments Board, and the Securities

Bureau of the Ministry of Finance ofJapan, met for the first time on a trilateral basis

to consider issues of importance to the world's three largest securities markets. At

the conclusion of their meetings, the parties issued a trilateral communique in which

they stated their:

intention to continue to coordinate their efforts to maintain safe and

sound securities markets;

agreement that there is a need to maintain balance between the stock and

derivative markets to avoid adverse effects on the stability of the stock

markets, and their belief that margin levels and derivative instruments

should reflect the public interest in safe and resilient markets;

intention to encourage cross-border business between their markets by

pursuing mutual recognition of regulatory systems;

agreement on the desirability of regularly exchanging information to

facilitate the monitoring of multinational firms with operations in their

respective capital markets;

intention to utilize fully their domestic powers to assist each

other in the oversight of their respective domestic markets and the

enforcement of their respective securities laws; and

intention to meet regularly on a trilateral basis to continue discussions

about matters of mutual interest.

Technical Assistance

The Commission is actively involved in providing technical assistance to

other countries concerning the development and regulation of their securities

markets. On May 25,1990, Chairman Richard Breeden announced the establishment

of the Commission's Emerging Markets Advisory Committee (EMAC) to advise the

Commission on how best to utilize its resources for assisting foreign regulators, and

to provide technical and other assistance to the Commission regarding requests

from governmental authorities for assistance in developing securities and other sfinancial markets. The EMAC is intended to ensure that the United States is in a

position to provide strong and effective leadership to emerging markets. The first

22

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•

•

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•

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meeting of the EMAC took place on June 12, 1990.

On June 22, 1990, the Commission entered into an understanding with the

Republic of Hungary State Securities Supervision and the Budapest Stock Exchange

regarding the provision of technical assistance for the development of the Hungarian

securities markets in which the Commission formally states its willingness to

provide technical assistance to Hungary "with a view to establishing and

implementing an ongoing technical assistance program for the development,

administration, and operation of the Hungarian securities markets." The signatories

also expressed their intention to use their best efforts to assist each other in the

administration and enforcement of their respective securities laws and regulations.

The Commission also has created the International Institute for Securities

Market Development (Institute) to provide training for foreign government officials

that are responsible for the development or regulation of emerging securities

markets. The Institute is intended to further market development, capital formation,

and the building ofsound regulatory structures in countries engaged in such efforts.

The Institute's first seminar and consultation program will be held in the spring of

1991. The faculty of the Institute will consist of senior Commission officials, experts

from self-regulatory organizations, and members of the EMAC.

International Organizations

During 1990, the Commission participated in the following international

organizations.

The International Organization of Securities Commissions (lOSCO). The

Commission is an active participant in the work of IOSCO. In fiscal year 1990, the

Commission chaired laSCO's Executive Committee and prepared a strategic

assessment of IOSCO's Technical Committee, which reviewed both the structure

and operation of that committee and made recommendations for how it should

operate in the future. The strategic assessment was adopted by IOSCO and the

Commission was elected to chair the Technical Committee for fiscal year 1991.

The Organization for Economic Cooperation and Development (DECD). The

Commission staff participated in discussions at the OECD regarding the

establishment of international standards governing foreign corrupt practices; the

OECD Codes relating to securities matters; and accounting issues.

The Group of Negotiations on Services to the General Agreements on Tariff

and Trade (GAIT). The Commission is an active participant in the effort, through

the Uruguay Round of theGA TT, to establish a multilateral framework of principles

and rules for trade in financial services. The Commission also consulted with the

Office of the United States Trade Representative and other United States government

agencies in connection with the negotiation of other international trade and

investment agreements.

The Wilton Park Group. This organization is sponsored by the United

Kingdom Department of Trade and Industry. The staff participated in extensive

discussions to facilitate methods for enhancing the exchange of information among

securities regulators.

The Commission also has been involved with other United States governmental

agencies in reviewing the plans and directives of the European Economic Community,

which is working toward achieving an internal market among its twelve-member

23
countries by December 31,1992 (referred to as EC 92). The Commission has been

involved in several different studies, and provided assistance to other United States

government agencies, including the Department of the Treasury, inconnection with

the impact of EC 92 on the United States financial services markets.

International Requests for Assistance

The table below summarizes the international requests for assistance made

and received by the Commission. 87

?4

1988

1989

1990

SEC Requests to

Foreign Governments

84

101

17788

Foreign Requests

to the SEC

81

150

13089
Regulation of the Securities Markets

The Division of Market Regulation, together with regional office examination staff, oversees the operations of the nation's securities markets and

market professionals. In fiscal year 1990, over 10,000 broker-dealers, 9 active

securities exchanges, the over-the-counter (OTC) markets, and 15 clearing

agencies were subject to the Commission's oversight.

Key 1990 Results

Market Value of Equity and Options Sales on U.S. Exchanges

(billions)

FY'86 FY'87 FY'88 FY'89 FY'90

$1,735 $2,367 $1,907 $2,040 $1,845

Broker-Dealer Oversight Examinations

FY'86 FY'87 FY'88 FY'89 FY'90

481 452 421 328 371

Broker-Dealer Cause Examinations

FY'86 FY'87 FY'88 FY'89 FY'90

69 56 89 148 176

Surveillance and Regulatory Compliance Inspections of SROs

FY'86 FY'87 FY'88 FY'89 FY'90

22 23 21 22 22

self-Regulatory Organization Final Disciplinary Actions

FY'86 FY'87 FY'88 FY'89 FY'90

845 991 1,336 1,508 1,605

25
In fiscal year 1990, the Commission continued. to direct its attention towards:

market reforms, including a major legislative program, that address problems

resulting from the 1987market break'? and subsequent episodes of extreme market

volatility; enhancement of regulation and oversight of broker-dealers to combat

"penny-stock" fraud and to maintain the financial integrity of firms servicing public

investors; internationalization of markets, a trend which has had a marked impact

on virtually all of the Commission's market supervision activities; and assuring that

other fundamental changes in the markets, e.g., in terms of the growth in size and

diversity of firms and products, proceed in a sound and orderly way and without

unnecessary regulatory restraints on industry innovation or competition.

Securities Markets, Facilities, and Trading

Market Refonn Initiatives

The nation's securities markets continued. to experience periodic episodes of

large price and volume volatility. These events demonstrated that the episodes of

intense volatility encountered during and shortly after the October 1987 market

break were not isolated occurrences. As a result, the Commission continued to

pursue many of the market reform initiatives begun in 1988 in order to enhance the

stability and integrity of the nation's securities markets.

On September 25,1990, Congress enacted the Market Reform Act of 1990 to

enhance the efficiency and fairness of the United States capital markets and to help

avoid precipitous market declines." The legislation, largely proposed by the

Commission in 1988, covers several problem areas identified by the October 1987

market break. First, it authorizes the Commission to establish rules regarding

information reporting by broker-dealer holding companies for purposes of risk

assessment. Second, it enables the Commission to promulgate rules providing for

large trader reporting. Third, it authorizes the Commission to facilitate development of coordinated clearance and settlement systems. Fourth, it empowers the

Commission to promulgate uniform rules, preempting state law, concerning the

transfer and pledge of securities to facilitate the efficient and safe operation of the

national clearance and settlement system. Fifth, it provides the Commission, subject

to disapproval by the President, with the emergency authority to halt trading in

securities markets. Sixth, it grants the Commission authority to limit trading

practices that contribute significantly to extraordinary volatility.

The Division of Market Regulation prepared a report on the trading and price

volatility experienced on October 13 and 16,1989.92 The report, which is summarized below, analyzed the impact of program trading and related. stock index

futures and options strategies on market volatility during this period.

In addition, the Commission approved rule changes to continue the coordinated circuit breaker programs of the American Stock Exchange (Amex), Boston

Stock Exchange (BSE),Chicago Board Options Exchange (CBOE), Cincinnati Stock

Exchange (CSE),Midwest Stock Exchange (MSE), National Association of Securities

Dealers, Inc. (NASD), New York Stock Exchange (NYSE), Philadelphia Stock

Exchange (Phlx), and Pacific Stock Exchange (PSE).93These rule changes provide for

a one-hour temporary trading halt if the Dow Jones Industrial Average (DJIA) falls

more than 250 points on a single day, and two hours if more than 400 points. The

26
Commodity Futures Trading Commission (CFTC) had approved analogous rule

changes submitted by futures exchanges with respect to halts in the trading of stock

index futures and options on those futures. In addition, the Commission approved

a NYSE proposal to require that index arbitrage equity trades only be effected on

stabilizing ticks when the DJIA moves 50 points from the previous day's close.

The Commission continued its discussions with the Group of Thirty subsequent to the Group's report on global clearance and settlement systems. The United

States Working Committee of the Group of Thirty has been studying ways to

implement recommendations concerning same-day funds settlement of securities

transactions and reducing the settlement period from five to three days after the

trade (from T+5 to T+3). The Commission staff has contributed to the efforts of the

United States Working Committee. The Commission staff also consulted extensively with an American Bar Association (ABA) committee examining possible

federal and state legal impediments to efficient and safe clearance and settlement of

securities transactions.

Finally, the Commission issued its Automation Review Policy?' to request that

the exchanges and the NASD establish comprehensive systems capacity, security,

and contingency planning programs, and obtain independent annual reviews of

these programs. The Office of Automation and International Markets in the Division

of Market Regulation was created to monitor the SROs' progress in this area.

The National Market System

The Commission approved the NASD's electronic Bulletin Board Service for

a one-year pilot program. The bulletin board is designed to disseminate, on behalf

ofNASD members acting as market makers in OTC securities that are neither listed

on a national securities exchange nor included in the NASDAQ system, quotations

and unpriced indications of interest in those securities." As of September 1990, the

service included 216 registered market makers with 10,653 positions in 4,352

securities.

The NASD's PORTAL system established a new marketplace for secondary

trading of unregistered securities in transactions exempt from the registration

requirements of the Securities Act of 1933 (Securities Act), pursuant to Rule 144A.96

The PORTAL market is comprised of computer and communication facilities that,

in addition to supporting primary placements and resale trading, provide for the

clearance and settlement of domestic and foreign debt and equity securities through

designated PORTAL clearing and depository organizations. PORTAL began operation on June IS, 1990 with 20 United States and European securities firms as

subscribers and four financial institutions approved as qualified institutional

buyers. As of September 19, 1990, there were 14 issues listed on PORTAL, 23

approved dealers, and 9 approved brokers. NASD Market Services, Inc., a NASD

subsidiary involved in the operation of the PORTAL system, was granted a

temporary exemption from registration as a securities information processor under

Section llA of the Securities Exchange Act of 1934 (Exchange Act).97

In June 1990, the Commission approved a joint industry plan filed with the

Commission by the NASD and the American, Boston, Midwest, and Philadelphia

Stock Exchanges that governs the collection, consolidation, and dissemination of

quotation and transaction information for NASDAQ/National Market System

')7
(NASDAQ/NMS) securities listed or traded on an exchange pursuant to a grant of

unlisted trading privileges (OTC/UTP).98 The Commission had conditioned the

granting of OTC/UTP to exchanges on the submission and approval of the Joint

Industry Plan.

Following the Commission's adoption of Rule 19c-5eliminating barriers to the

competitive trading of options on equity securities in multiple markets," the

Commission staff has been working with the exchanges that trade options in their

efforts to develop an options market linkage to accommodate multiple trading of

options. Several exchange working groups have met to proceed with necessary

design and programming work to implement the linkage. One significant area of

disagreement among the exchanges remains: the Phlx continues to urge the Commission to require that order execution be based on time priority, so that each order

is directed to the exchange that is first to display the best bid or offer, rather than

permitting the exchanges that first receive the order to match that price. On October

17, 1990,Chairman Breeden requested that each exchange extend its earlier commitment voluntarily to refrain from listing any options that were traded on another

options exchange before January 22,1990 until February 1, 1991.11)0 The exchanges

submitted a joint industry plan for an options market linkage on December 4,1990.

National System for Clearance and Settlement

The Commission continued to work with clearing agencies, banks, brokerdealers, and other federal regulators to enhance all components of the National

System for Clearance and Settlement (National System). For example, the Commission approved: (1) rule changes that fully implemented next-day comparison of

exchange and OTC corporate securities trades'?' and automated the resolution of

uncompared trades;102(2) cleanng agency proposals expanding Securities Clearance Group (SCG) membership to include Boston Stock Exchange Clearing Corporation, Government Securities Clearing Corporation (GSCC), and MBS Clearing

Corporation (MBSCC); (3) a proposal by the Depository Trust Company (DTC) to

add certain commercial paper transactions to its same-day funds settlement system,

on a temporary basis, for a period of 18months.'?' (4) clearing agency proposals that

enhanced safe and efficient processing of transactions in United States government

and agency securities.'?' and (5) proposals by the International Securities Clearing

Corporation and DTC to provide clearing and depository functions for the PORTAL

marketplace. lOS

The Commission also extended the approval of the Participants Trust Company (PTC) and MBSCC for another year. 106 PTC provides depository services, and

MBSCC provides trade comparison and netting services for mortgage-backed

securities.

Internationalization

During fiscal year 1990, the Commission continued its oversight of international linkages between markets and other securities related organizations. For

example, in connection with the approval of the PORTAL system, discussed above,

the International Securities Clearing Corporation (ISCC) received approval of a rule

filing that would enable the ISCC to be a PORTAL clearing organization. 107As such,

the ISCC's responsibilities are to act as a data communications vehicle for PORTAL

28
participants, the NASD, PORTAL depository organizations, and the Institutional

Delivery System operated by the DTe. The ISCC also received a no-action letter

concerning a link between the ISCC and CEDEL, an international clearance and

settlement organization headquartered in Luxembourg, that would establish CEDEL

as a PORTAL depository organization. lOS As such, CEDEL will offer depository

services for foreign securities traded in the PORTAL system. The ISCC's various

functions are intended to enable settlements of PORTAL transactions to take place

safely, efficiently, and accurately using existing automated systems for clearance

and settlement. In connection with the PORTAL link between the ISCC and CEDEL,

the Commission and the Luxembourg Monetary Institute, CEDEL's regulator,

entered into a Memorandum of Understanding concerning the sharing of information about transactions taking place through the PORTAL accounts.P?

The Commission also authorized the extension for a six-month period of the

NASD's operation of its pilot program with the Stock Exchange of Singapore

Limited (SES). The pilot program currently consists of an interchange of closing

prices and volume data on 27 NASDAQ securities that also are traded through the

SES's facilities. The end-of-day information being exchanged under this program

primarily assists the establishment of opening prices for the following business day.

The Commission's approval of the extension permits continuation of the pilot

through May 12, 1991.110

Several significant NYSE rule changes with an international effect were approved by the Commission in fiscal year 1990. For example, the Commission

approved:

a NYSE rule that waived certain listing standards for non-United States

companies when the foreign company's procedure is not prohibited by the

laws of its home country:'!'

a NYSE rule that established a modified Series 7 examination for United

Kingdom representatives registered with The Securities Association, a

United Kingdom self-regulatory organization.'P and

a NYSE rule that codified general language that authorizes the exchange

to enter into bilateral information-sharing agreements for regulatory

purposes with domestic and foreign exchanges and associations.!"

The Commission staff issued a no-action letter to ISCC concerning a clearance

and settlement link with the International Stock Exchange of the United Kingdom

and the Republic of Ireland, Ltd. The letter covers transactions of United States and

United Kingdom brokers that are being settled in the United Kingdom through the

facilities of the exchange and transactions being settled in the United States at the

National Securities Clearing Corporation (NSCC) and DTC, through ISCC-sponsored accounts.l" The Commission staff also issued a no-action letter to NSCC concerning its link with the Canadian Depository for Securities (CDS) that expands

NSCC's existing link with CDS to include a direct input capability for trades on the

Toronto Stock Exchange in NSCC-eligible issues between CDS participants and

NSCC members.!"

Several new internationally based derivative product proposals were approved by the Commission during the fiscal year. First, the Commission approved

several exchanges' proposals to trade index warrants. Index warrants are direct obligations of their issuer subject to cash settlement during their term. The holder of

29

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•
an index warrant structured as a "put" option receives payment in United States

dollars to the extent that the index has declined below a pre-stated cash-settlement

value; the holder of a warrant structured as a "call" option receives payment in

United States dollars to the extent that the index has increased above the pre-stated

cash-settlement value. The Commission approved several important requirements

attendant to the listing and trading of index warrants, including, among other

things, that: (1) the warrant issuer must conform to the exchange's listing guidelines;

(2) the exchange's options suitability standards apply to recommendations regarding index warrants; and (3) each exchange must have an adequate mechanism to

surveil trading in the warrant and the index's component stocks. In this connection,

the Commission approved a proposal submitted by the Amex to trade warrants

based on the Nikkei Stock Average (Nikkei), an internationally recognized, priceweighted index consisting of 225 actively-traded stocks on the Tokyo Stock Exchange (TSE).116The Commission also approved proposals by the Amex, the NYSE,

and the PSE to trade warrants based on the Financial Times-Stock Exchange 100

Index (FT-SE 100), an internationally recognized capitalization-weighted stock

index based on the prices of 100 of the most highly capitalized British stocks traded

on the International Stock Exchange of the United Kingdom and the Republic of

Ireland (ISE).117

Further, the Commission received several proposals to list and trade CAC-40

Index warrants.'!" First, the exchanges proposed to list index warrants based on the

CAC-40, an internationally recognized, capitalization-weighted index consisting of

40 leading stocks listed and traded on the Paris Bourse and calculated by the Societe

des Bourses Francaises (SBF).The SBF operates under the direction of the Council

des Bourses de Valeurs or Stock Exchange Council, a regulatory organization

similar to a self-regulatory organization (SRO) in the United States. Among other

things, the SBF implements decisions made by the Stock Exchange Council, monitors and supervises the French stock market, and provides investors with comprehensive information on market activities. To facilitate the surveillance of this

product, on September 18,1990 the Commission and the Commission des Operations de Bourse (COB) exchanged letters that provide a mechanism for the exchange

of information, including customer information, for transactions involving a derivative security or the stocks underlying such security when a derivative security

is traded in United States or French markets and the underlying securities are traded

in the other country's markets.!" The COB is an autonomous administrative body

patterned after the Commission. It functions as the French market regulator with

authority to undertake investigations, notify French judicial authorities, and levy

fines. These letters supplement surveillance sharing agreements between the exchanges and SBP. The exchange proposals were under review at year-end.

Second, the Commission approved a proposal submitted by the Amex to list

and trade standardized European-style options based on the Japan Index (Index),

a broad-based, price-weighted index developed by the Amex and comprised of 210

Japanese stocks traded on the TSE.120Although the Index is comprised of Japanese

stocks, it is valued in United States dollars. Options on the Index are governed by

Amex rules applicable to the trading of index options, including rules relating to

disclosure, account approval and suitability, position and exercise limits, margin,

30
and trading halts and suspensions. The Amex has developed a special surveillance

program for the options.

Third, the Division of Market Regulation issued a letter to the CFTC indicating that the division would not object if the CFTC staff took a no-action position to

allow the offer and sale to United States citizens of futures contracts overlying the

Ff-SE 100.121

In addition to specific regulatory actions, the staff participated in several

international securities working groups under the auspices of the Technical Committee of the International Organization of Securities Commissions (lOSCO). Those

working groups and their recent activities are listed below.

The Working Group on Principles of Ethical Conduct Issued a "Report on International Conduct of Business Principles," which identified seven non-exclusive

conduct of business principles to protect customer interests and market integrity.

This report was approved at the IOSCO meeting in November.

The Working Group on Clearance and Settlement issued a report that discussed

recommendations to improve the cross-border settlement process and long-term

goals for individual countries as well as for clearance and settlement linkages. This

report was approved at the last meeting of the Technical Committee in June 1990.

The Working Group on Futures Markets presented a "Report on Screen-Based

Trading Systems for Derivative Products" as well as "Suggested Principles for the

Oversight of Screen-Based Trading Systems," which the Technical Committee

released at the IOSCO meeting in November 1990. This report proposed several

non-exclusive principles related to common regulatory concerns affecting the

oversight of screen-based trading systems, including access to such systems.

The Working Group on Capital Adequacy prepared four papers for approval by

the Technical Committee with respect to non-bank securities firms on: (1) comparison of equity position risk requirements and scope for harmonization; (2) comparison of debt position risk requirements; (3) base requirement and the minimum requirement for capital; and (4) the definition of capital. The submission of the first

three papers was approved at the Technical Committee meeting in June.

The Commission received a significant number of requests from foreign government officials for technical assistance on securities matters. To assist the Commission in responding to these requests, on March 7, 1990 Chairman Breeden announced the Commission's intent to form the Emerging Markets Ad visory Committee (EMAC). EMAC's purpose is to advise the Commission on how the Commission

can best assist the development of securities markets in Eastern Europe and

elsewhere. The first EMAC meeting was held on June 12, 1990. At this meeting,

EMAC participants agreed to form working groups to gather information and

formulate approaches to the advisory group's mission.

Options and Other Derivative Products

During fiscal year 1990, the Commission approved several rule changes intended to address market volatility concerns. First, the Commission approved on a

one-year pilot basis a proposal filed by the NYSE to place conditions on index

arbitrage orders to buy or sell component stocks of the Standard & Poor's 500 Stock

Price Index (S&P 500 Index) when the DJIA advances or declines by 50 points or

more from its previous day's closing value (80A Conditionsl.P" Specifically, when

31
the DJIA advances 50 points, index arbitrage orders to buy or sell component stocks

of the S&P 500 Index must be entered with a "buy minus" instruction. Conversely,

when the DJIA declines 50 points, such orders must be entered with a "sell plus"

instruction. Once activated, the conditions remain in effect for the remainder of the

trading day unless the DJIA moves to within 25 points of its previous day's close,

when the restrictions are removed. They are reinstated if the DJIA again moves 50

points or more away from the previous day's close. In addition, the Commission

approved a NYSE proposal to exempt index arbitrage market-on-close orders from

the 80A Conditions on expiration Fridays in order to facilitate the liquidation of

stock positions previously established in connection with derivative index products.123

Second, the Commission approved rule changes submitted by the Amex, MSE,

NYSE, and the Phlx to extend the effectiveness of their circuit breaker procedures.P'

The BSE, CBOE, CSE, and PSE circuit breaker procedures previously had been

approved through October 1991. In general, the circuit breaker rules provide that

trading in all markets will halt for one hour if the DJIA declines 250 points or more

from its previous day's closing level and, thereafter, trading will halt for an

additional two hours if the DJIA declines 400 points from the previous day's close.

Third, the Commission approved a proposal by the NYSE to modify its

Individual Investor Express Delivery Service (IIEDS) to provide that market orders

of individual investors with up to 2,099 shares will have priority delivery to

specialists' posts through the exchange's Super Dot system ahead of all other orders

at all times.!" Prior to the rule change, IIEDS was available only on days when the

DJIA moved 25 points up or down from the previous day's close.

In addition, the Commission approved several rule changes relating to automation of the options exchanges. First, the Commission approved a PSE proposal to

implement the Pacific Options Exchange Trading System (POETS), a completely

automated trading system comprised of (1) an options order routing system (ORS)

that allows the PSE to accept, edit, and route market and limit orders electronically

submitted to the PSE; (2) an automatic and semi-automatic execution system (AutoEx); (3) an on-line limit order book system (Auto-Book) that allows the PSE to enter,

update, inquire, delete, cancel, and execute public customer orders on the limit

order book; and (4) an automatic quote update system (Auto-Quote) that allows

quotes to be generated systematically, using programmed theoretical models.!"

Second, the Commission approved a proposal submitted by the Phlx to permit

the use of the Automated Options Market (AUTOM) electronic order delivery

system for eligible day limit orders and to expand AUTOM, on a pilot basis, to

include an automatic execution feature for 12Phlx equity options and any multiplytraded option.!" The automatic execution feature of AUTOM is available only to

single customer market and marketable limit orders of up to 10 contracts relating to

near-term options series that are at-the-money and just out-of-the-money. Firm and

market maker orders are not eligible for automatic execution through AUTOM.

Once the automation execution feature is engaged, eligible orders are priced and

executed automatically at the displayed bid or offer, and the execution is reported

automatically to the Options Price Reporting Authority for public dissemination.

Third, the Commission approved on a pilot basis a CBOE proposal to amend

the eligibility standards for individuals and groups that participate in the CBOE's

3?
Retail Automatic Execution System (RAES)for options on the Standard & Poor's 100

Index (OEX).l28RAES is an electronic order routing and execution system for small

options orders. The CBOE limits RAES participation in OEX options to OEX and

Standard & Poor's 500 Index (SPXor NSX) market makers that meet certain trading

requirements; restricts the size of, and imposes obligations upon, group accounts

operating on RAES; and includes provisions designed to ensure adequate RAE5-

participation in OEX options. The Commission also approved CBOE proposals to

make the eligibility requirements for market makers participating in RAES, SPX/

NSX, and equity options permanent.!" Finally, the Commission approved a CBOE

proposal to increase the maximum size of RAES-eligible orders for equity options

from 10 to 20 contracts.P"

During fiscal year 1990, the Commission took steps to implement Rule 19c-5,

which authorizes the multiple trading of standardized options. The rule took effect

as to all newly-listed options on January 21,1990. As already noted, the Commission

requested that the exchanges delay the commencement of multiple trading in

options until February 1991 while they continue their work to develop a joint plan

for a market linkage facility.

The Commission approved several other important rule changes by the

options exchanges. First, the Commission approved a one-year pilot program

proposed by the PSE to require PSE trading crowds to provide a depth of 10

contracts for all non-broker-dealer customer orders in options series included in the

pilot program (Ten-Up requirementl.P' To satisfy the Ten-Up requirement, the

trading crowd must fill the customer orders at the disseminated market quote at the

time the orders are announced or displayed at a trading post.

Second, the Commission approved a PSE proposal to create a Lead Market

Maker (LMM) program designed to supplement the standard PSE options trading

pit and thereby enhance the exchange's options market-making quality.F" Specifically, a LMM, in addition to fulfilling general market maker obligations, must,

among other things, be present throughout every business day, assure that disseminated market quotations are accurate, assure that each disseminated market quotation shall be honored for a minimum of 10 contracts, and participate at all times in

any automated execution system that is operating. In exchange for assuming

additional responsibilities in their appointed options classes, the LMMs are allocated a 50 percent participation in transactions occurring in their appointed issues.l"

Third, in order to facilitate the continued trading of options listed on the PSE

after mechanical disruptions to the PSE options floor caused by the October 17, 1989

earthquake in northern California, the Commission approved proposals submitted

by the Amex, CBOE, NYSE, and Phlx to allow for the trading of PSE options on their

respective exchanges for two days, and a proposal by the PSE to accommodate this

transfer .134

Fourth, the Commission approved proposals submitted by the Amex, CBOE,

NYSE, and Phlx that provide hedge exemptions from options position and/or

exercise limits. Specifically, the Commission approved (1) six-month extensions of

pilot programs previously adopted by the Amex and the CBOE that exempt hedged

equity options positions from position limits.-" (2) a one-year pilot program

proposed by the Phlx to allow public customers to apply for a hedge exemption from

33
Utility Index Option position limits.P" and (3) on a pilot basis, a NYSE proposal to

exempt fully hedged equity options positions from position and exercise limits and

a proposal to allow public customers to apply for a hedge exemption from broadbased index option position limits.!" The Commission also approved a NYSE

proposal to modify the position and exercise limits applicable to options on its

broad-based stock index, the NYSE Composite Index.P" The NYSE modified its

rules to express the exchange's position and exercise limits in terms of the numbers

of contracts that a party may hold rather than in the dollar value of the contracts.

Specifically, the NYSE (1) set the aggregate position limit at 45,000 contracts on the

same side of the market, with no more than 25,000 contracts in the nearest term

series, and (2) established an exercise limit of 25,000 contracts (the same limit as the

nearest-term series position limit).

Regulation of Brokers, Dealers, Municipal Securities Dealers, and Transfer

Agents

Broker-Dealer Examination Program

The broker-dealer examination program's primary purpose is to provide

oversight of the SROs responsible for the routine examination of those brokerdealers conducting a public securities business. This oversight evaluation process

is accomplished primarily through the examination of broker-dealer firms recently

examined by a SRO. Additionally, cause examinations are conducted when the

Commission becomes aware of circumstances that warrant direct Commission

inquiry rather than a SRO review. In fiscal year 1990, 371 oversight examinations

and 176 cause examinations were completed, 43 more oversight and 28 more cause

examinations than were completed in fiscal year 1989.

The Commission continued to place a high priority on examinations of penny

stock broker-dealers. As a result of this special emphasis, nearly one-third of the 547

examinations completed during fiscal year 1990 were of broker-dealers engaged in

the penny stock business. The findings of these examinations have justified the

special emphasis placed on these firms. In this regard, the findings of 55 (33 percent)

of the 165 completed penny stock examinations were referred for enforcement

consideration. Additionally, referrals for enforcement consideration were made in

26 (7 percent) of the remaining 382 completed examinations.

The most significant accomplishment in the broker-dealer examination program occurred in March and April 1990. The Commission staff, along with the

NASD and Florida's Office of the Comptroller, Division of Securities, conducted an

examination sweep of 188 offices (including both main and branch offices) of 144

different penny stock firms primarily to assess the industry's compliance with new

Rule 15c2-6 (the penny stock "cold call" rule) under the Exchange Act. Rule 15c2-6

imposes specific sales practice requirements on broker-dealers who recommend

and sell low-priced non-NASDAQ OTC securities to investors who are not established customers of the broker-dealer. The Commission's examinations conducted

as part of the sweep resulted in 12 referrals for enforcement consideration and five

referrals to the NASD for its consideration. In all, 43 (23 percent) of these examinations revealed violations of the rule sufficiently serious to result in recommendations for possible investigation to the appropriate enforcement staff of the Comrnis34
sion, NASD, or Florida. As this data suggests, however, the examination sweep did

disclose that there was substantial compliance with the new rules by a large majority

of firms examined.

A review of broker-dealers engaged solely in a government securities business

was undertaken during fiscal year 1990. An examination of Stotler & Company, a

registered government securities dealer, resulted in revocation of the firm's registration on findings of net capital deficiencies ranging between $11 and $12 million,

and failure to become a member of a registered securities association, establish and

maintain current records, and prepare and file financial reports.

Cold Calling Rule Interpretations

The division worked with the NASD in developing a question-and-answer

"NASD Notice to Members" on Rule 15c2-6 under the Exchange Act, the Commission's "cold calling rule." The question-and-answer release covered a number of

frequently asked questions under the rule, which imposes suitability and customer

agreement requirements on broker-dealers recommending certain low priced stocks

to new customers. The division also worked with the NASD to prepare sample

customer forms for satisfying the rule's requirements. These forms were published

in a subsequent NASD Notice to Members.

Commission Dollar Practices

Section 28(e) of the Exchange Act provides a safe harbor for the use by money

managers of commission dollars of their advised accounts to obtain investment

research and related brokerage services.P? On July 25, 1990, the Commission

authorized the Division of Market Regulation to respond to a request of the

Department of Laborfor an interpretation of the safe harbor as applied to these "soft

dollar practices" involving employee benefit plans covered by the Employee

Retirement Income Security Act of 1974.140The division interpreted the scope of

Section 28(e) as not extending to transactions by a money manager effected with a

broker-dealer on a principal (including riskless principal) basis or to futures

transactions.!" The division indicated that the statutory exemption should not be

expanded by interpretation to encompass an area not clearly envisioned by Congress.

Foreign Broker-Dealers

In a series of no-action letters, the division adopted a flexible approach to

recent developments in the international capital markets while satisfying investor

protection and enforcement concerns. The division issued a no-action letter to the

International Stock Exchange of the United Kingdom and the Republic of Ireland,

Ltd. (lSE)l42permitting the ISE to establish a representative office in New York City

to familiarize certain broker-dealers and large financial institutions in the United

States with standardized United Kingdom equity and index options traded on the

ISE's London Traded Options Market (LTOM), without the ISE or LTOM registering as an exchange under Section 6,143LTOMmembers registering as broker-dealers

under Section 15(b),144or the London Options Clearing House registering as a

clearing agency under Section 17A of the Exchange Act.145The ISE agreed to adopt

rules requiring LTOM members to assure that United States customers (a) are

35
eligible broker-dealers or institutions under Rule 144A and Regulation S under the

Securities Act; (b) have actual experience in the United States options markets; and

(c) have received a LTOM disclosure document and an options disclosure document, as required by Rule 9b-l under the Exchange Act.

The division also took a no-action position'< with respect to the treatment of

unregistered firms that are members of the Association of International Bond

Dealers (AIBD) as broker-dealers, and not as" customers," for purposes of Rule lOb10 under the Exchange Act, thereby permitting registered broker-dealers that are

AIBD members to use the AIBD's confirmation procedures, instead of those

imposed by Rule 10b-10, solely with respect to transactions with other AIBD

members. In another interpretation of Rule lOb-10, the division took the position

that foreign banks acting as securities professionals also are not "customers."!"

The division extended indefinitely its temporary no-action position regarding

application of the broker-dealer registration requirements of Section 15(a) of the

Exchange Act to TOPIC Services, Inc. (TOPIC), a provider of quotation information,

the ISE, and market makers in securities listed in the ISE's Stock Exchange Automated Quotations system (SEAQ) that transmits quotations to subscribers ofTOPIC

terminals in the United States, provided there are no other substantial United States

contacts.l" In another interpretive letter, the division stated that foreign market

makers participating in a pilot program involving the exchange and dissemination

of quotations in the NASDAQ and SEAQ systems are exempt from the application

of Section 15(a) under Rule 15a-6, because the only United States recipients of

quotations would be qualifying NASDAQ registered market makers.v'? The division also extended indefinitely its no-action position under Section 15(a) regarding

the participation of the Stock Exchange of Singapore and its members in a pilot

program with the NASD, consisting of a daily interchange of static quotes compiled

at the close of each market day. ISO

International Offerings

During fiscal year 1990, the Commission took several actions with respect to

the application of Rules lOb-6, lOb-7, 10b-8, and 10b-13 under the Exchange Act to

transactions involving concurrent United States and foreign securities distributions, rights offerings, and tender offers. Rule lOb-6 proscribes certain conduct by

persons participating in a distribution to prevent such persons from artificially

conditioning the market for a security to facilitate the distribution. Rule 10b-7

governs market stabilization activities during an offering. Rule lOb-8 governs the

market activities of participants in a rights offering. Rule lOb-13 prohibits purchases

otherwise than pursuant to a tender offer or exchange offer from the time such offer

is publicly announced until the offer expires. The Commission granted relief under

these anti-manipulation rules for multinational offerings that permitted nonUnited States persons to continue certain customary market activities in foreign

jurisdictions during multinational transactions, subject to certain conditions designed to prevent a manipulative impact on the United States market.

For example, an exemption was granted to permit a United Kingdom market

maker affiliate of the dealer managers of concurrent United States and United

Kingdom tender offers to continue passive market making activities during the

tender offers.'!' Similarly, a United Kingdom market maker affiliated with a

36
distribution participant was permitted to continue its market making activity

during a concurrent United Kingdom and United States rights offering.152 In connection with sales in the United States offoreign securities pursuant to Securities Act

Rule 144A, exemptions were granted to Swedish.P' Finnish.P' and French 155 issuers

to permit the broker-dealers to engage in passive market making during the

distribution.

In October 1990, the Commission reproposed the Multijurisdictional Disclosure System, which included proposed no-action positions under Rules lOb-6 and

10b-13to permit participants in certain cross-border exchange and tender offers to

engage in certain activities permitted under Canadian law.l56

Short Sales

In April 1990, the Commission published a staff interpretation under Exchange Act Rule Hla-I, the short sale rule, clarifying an earlier staff letter.'? The

interpretation permits market participants to liquidate existing index arbitrage

positions consisting of long baskets of stock and short index futures or options

without aggregating long stock positions with short positions in those stocks in

certain other proprietary accounts, provided that those short positions are fully

hedged. The release emphasized, among other things, that the interpretation is

limited to the liquidation of index arbitrage positions established in compliance

with Rules 3b-3 and 10a-l under the Exchange Act.

Report to Congress on Proposed Amendment to Section l1(a) of the Exchange Act

Section Llta) of the Exchange Act provides generally that exchange members

and their associated persons are prohibited from effecting securities transactions on

the floor of an exchange of which they are members for their own accounts, accounts

of their associated persons, and accounts over which the members or their associated persons exercise investment discretion. The Commission transmitted to Congress a report of the Division of Market Regulation'< in response to a congressional

request for the Commission's view on a legislative proposal by Fidelity Management & Research Company (Fidelity) to amend Section 11(a).ls9The Commission

concurred in the conclusion of the division's report. Fidelity proposed excluding

from the prohibitions of Section 11(a) the execution by broker-dealers of trades for

accounts for which exchange members or their associated persons exercise investment discretion.

In the report, the division traced the developments in the industry that led to

the adoption of Section Tlfa), legislation reflecting Congress's concern with market

dislocations, trading advantages, and perceived conflicts of interest arising from the

combination of money management and brokerage functions. The division concluded that elimination of the managed account provision of Section 11(a) would

reduce costs for affiliated brokers executing orders for managed accounts, without

significantly changing the extent to which money managers would use affiliated

brokers. However, the division concluded that the compensation authorization and

annual disclosure requirements of Rule lla2-2(T) cause account managers to focus

on possible conflicts of interest. The division therefore recommended the elimination offhe managed account provision of Section l1(a), provided that the legislation

37
gives the Commission rulemaking authority to retain the managed account authorization and compensation disclosure requirements.

Financial Responsibility Rules

On August 15, 1990, the Commission proposed for comment amendments to

Rule 15c3-1 under the Exchange Act concerning the withdrawal of capital from a

broker or dealer.l'" The proposed amendments were a response, in part, to the

bankruptcies of the Drexel Burnham Lambert Group, Inc. and its registered brokerdealer subsidiary, Drexel Burnham Lambert, Inc., and are designed to address the

situation where a parent or affiliate of a broker-dealer withdraws capital from the

broker-dealer. The amendments are intended to improve the Commission's ability

to protect the customers and creditors of a broker or dealer in those circumstances

where a financial problem in a holding company or other affiliate leads to withdrawal of capital from the broker or dealer. The amendments would create a new

early warning level under the net capital rule that would prohibit brokers and

dealers from withdrawing capital at an earlier stage than is now permitted.

Additionally, the proposal would require brokers and dealers to notify the Commission in advance of certain significant withdrawals of capital. Finally, the amendments would establish procedures under which the Commission may, by order, halt

the withdrawal of capital from a broker or dealer when the Commission believes

that the withdrawal may be detrimental to the financial integrity of the firm.

On January 31,1990, the division issued a no-action letter to the NYSE and the

NASD in which it allowed brokers and dealers to treat certain options contracts not

listed on an exchange as listed options contracts for the purposes of the net capital

rule. 161The letter specifies the circumstances under which brokers and dealers may

take advantage of the more beneficial treatment accorded listed options contracts

under Rule 15c3-1.

On August 6, 1990, the division issued a no-action letter to the Securities

Industry Association'< stating that, for purposes of complying with the requirements of Rule 15c3-3a, the Formula for Determination of Reserve Requirement for

Brokers and Dealers Under Rule 15c3-3 (Reserve Formula), and the quarterly

securities count specified in Rule 17a-13, brokers and dealers may treat the actual

settlement date of certain foreign issued and settled securities as the settlement date

for purposes of these provisions. Ifthe settlement cycle is on a "seller's option basis,"

the settlement date must be a date no more than 30 days from the trade date. The

letter also permits brokers and dealers to include as debit items in their Reserve

Formula computations foreign issued and settled failed-to-deliver securities contracts outstanding less than 30 days past the customary settlement date that allocate

to either failed-to-receive contracts or other includable contracts. The letter sets forth

certain conditions that must be met for brokers and dealers to operate under its

provisions.

Lost and Stolen Securities

Rule 17f-1 under the Exchange Act sets forth participation, reporting, and

inquiry requirements for the Lost and Stolen Securities Program (Program). As of

September 31,1990,23,028 institutions were registered in the Program. Statistics for

calendar year 1989 (the most recent year available) reflect the Program's continuing

38
effectiveness. During that year, registered institutions reported as lost and stolen,

missing or counterfeit 866,306 certificates valued at $2,136,398,027. Those institutions also reported the recovery of 123,599 certifica tes valued at $589,785,817. At the

end of 1989, the aggregate value of securities contained in the Program's database

was $16,625,727,986. Program participants (e.g., banks and broker-dealers) made

inquiries concerning 2,861,196 certificates. Inquiries concerning 5,298 certificates

valued at $10,681,680 matched reports of lost, stolen or missing securities on file in

the database.

Oversight of Self-Regulatory Organizations

National Securities Exchanges

As of September 30, 1990, there were nine active securities exchanges registered with the Commission as national securities exchanges: the Amex, BSE,CBOE,

CSE, MSE, NYSE, Phlx, PSE, and SSE. During fiscal year 1990, the Commission

granted exchange applications to delist 106 debt and equity issues and nine options

issues, and granted applications by issuers requesting withdrawal from listing and

registration for 33 issues. In addition, the Commission granted 843 exchange

applications for unlisted trading privileges.

The exchanges submitted 107 proposed rule changes to the Commission

during fiscal year 1990. Many of these filings are described in the section above

entitled "Securities Markets, Facilities, and Trading." Among the most notable

other rule changes that were granted Commission approval were proposals by the

NYSEand CBOE to trade standardized baskets of 500 stocks at an aggregate price

in a single execution.F' Relatedly, the Commission also approved a MSE proposal

to establish a secondary trading session that would operate from 4:30 p.m. until 6:00

p.m. EST, for the execution of transactions in portfolios of securities through its

automated Portfolio Trading System.!"

The Commission also approved various proposed rule changes relating to the

evaluation of exchange specialists. The most significant of these proposals included

the Amex's revision of its specialist performance, allocation, and reallocation

procedures, including revisions of its specialist unit evaluation questionnaire.l" a

MSE proposal to revise its Co-Specialist Evaluation Questionnaire, which is completed periodically by floor brokers in order to assess the performance of MSE cospecialists.'w and NYSE proposals to revise and codify its procedures governing the

allocation of equity securities to specialist units,"? and to modify its Specialist

Performance Evaluation Questionnaire in order to establish a new rating scale and

a relative scoring methodology.t'"

With regard to the listing of securities on the exchanges, the Commission

approved proposals submitted by the Amex and NYSErelating to listing guidelines

for "hybrid" securities possessing both debt, equity, and/ or derivative characteristics;169proposals by the NYSE and MSE to list and trade contingent value rights.'?"

and a proposal by the CSE to upgrade its listing standards for common stock,

preferred stock, warrants, and bonds.!" Furthermore, the Commission partially

approved a NYSE proposal to adopt a voting rights listing standard that is designed

to guard against the potential disenfranchisement of existing common stock shareholders. I72This voting rights listing standard used the language and concepts of the

39
Commission's Rule 19c-4, which was ordered vacated by the D.C. Circuit Court

during fiscal year 1990.173

In addition, the Commission approved proposed rule changes submitted by

the MSE and PSEto allow such exchanges to exempt their governors from monetary

damages for breach of fiduciary duty to the exchange, limiting such exemption to

those situations not involving a violation of the federal securities laws.V! The

Commission also approved proposals by the MSE and PSE to reduce from 30

seconds to 15 seconds the exposure period for orders entered through their respective automated small order routing and execution systems.F' and, on a six-month

pilot basis, a MSE proposal whereby the guaranteed execution price of small agency

market orders received over the MSE Automatic Execution System are improved

automatically from the consolidated best bid or offer according to predefined

criteria. 176

An Amex proposal to adopt a new disciplinary fine system for general rule

violations and to amend the Amex's minor rule violation enforcement and reporting plan was approved by the Commission."? The Commission also approved the

addition of 19 rules to the list of NYSE rules that are covered by its minor rule

violation plan.!" In addition, the threshold for member reporting of certain judgements, settlements, or claims under NYSE Rule 351 was increased from $5,000 to

$15,000 for associated individuals and from $5,000 to $25,000 for member organizations."?

During fiscal year 1990, the Commission approved a NYSE proposal that, for

a one-year pilot period, would provide market-on-close (MOC) orders with the

closing price "whenever practicable," and to allow for the execution of matched

MOC orders entered by the same firm. 180The Commission also approved a modified

version of the General Securities Representative (Series 7) Examination developed

by the NYSE.181By obtaining a passing score on this modified examination, a

qualified registered representative can satisfy the requirements to become a registered representative with a NYSE member organization.

The PSE's proposal to establish an electronic access membership, the Automated System Access Privilege (ASAP), was approved by the Commission during

fiscal year 1990.182The ASAP system allows certain qualified broker-dealers who are

not regular PSE members to obtain access to the PSE's automated trading systems.

In addition, a CSE proposal to increase its minimum net capital requirement for

Designated Dealers to $100,000 was approved by the Commission.l"

The Commission approved two significant rule changes submitted by the

NYSE that revised its odd-lot pricing procedures. First, the Commission approved

the NYSE's proposal to establish the use of a "Best Pricing Quote" in order to provide

odd-lot customers with the best prices available in the national market system.P'

The Commission also approved the NYSE's proposal to establish a four-month,

three-firm pilot program that eliminates all odd-lot differentials and extends the

NYSE's current "no commission policy" to provide that no floor brokerage charges

shall be imposed on systematized odd-lot orders. ISS

Finally, several proposals submitted by the BSE to amend its Constitution

were approved by the Commission.v" These proposals included, among other

things, changes in the composition of the BSE's Board of Governors, modification of

certain constitutional provisions regarding BSE committees, clarification of the

40
BSE'smembership provisions, and changes in the composition of the BSE's Nominating Committee in order to provide for a greater diversity of representation

among member firms.

NASD

The NASD, the only national securities association registered with the Commission, has over 6,500member firms. In fiscal year 1990,the NASD reported a total

of 1,011 final disciplinary actions, consisting of 893 formal and summary disciplinary actions by its district committees and 118 formal and summary actions by its

NASDAQ and market surveillance committees.

In addition, in fiscal year 1990, the Commission received 64 filings of proposed

rule changes and approved 58 proposed rule changes. Among the significant rule

changes approved by the Commission, in addition to those discussed above in the

section on "Securities Markets, Facilities, and Trading," were: (a) proposals relating

to qualification standards for NASDAQ/NMS securities, and, in particular, requirements for shareholder approval of certain issuances of securities.l" and (2) a

proposal that prohibits NASDAQ market makers from entering agency orders into

the NASD's Small Order Execution system, while reiterating a market maker's

obligation to obtain best execution for its customer orders.l'" The Commission also

approved rule changes that prohibit the disenfranchisement of common stock

shareholders of issuers included in the NASD's NASDAQ/NMS system,"? and a

proposal that allows the NASD to institute expedited remedial action against a

NASDmember or associated person ifthe member or person has engaged, and there

is a reasonable likelihood that the member or person will again engage, insecurities

law violations.l?" Additionally, the Commission approved a NASD proposal that

requires NASD members to make reasonable efforts to obtain information from

customers concerning their financial status, tax status, investment objectives, and

such other information used or considered to be reasonable and necessary by the

member in making investment recommendations to the customer.'?'

Clearing Agencies

During fiscal year 1990, the Commission received 114 proposed rule changes

from registered clearing agencies. Ninety-two rule changes from those clearing

agencies were approved, and three were withdrawn. For example, the Commission

approved a proposed rule change by NSCC that limits the use of letters of credit to

meet a member's required clearing fund contribution to 70 percent of the member's

required deposit.l'" The Commission also approved NSCC's proposal to include in

NSCC's continuous net settlement system member transactions in book-entry-only

municipal securities.F'The Commission also approved, on a temporary basis, a rule

change by the Midwest Securities Trust Company that expanded participant

eligibility to include certain insurance and investment companies.l'" In addition,

the Commission approved MBSCC's proposal regarding its Settlement Balance

Order (SBO)system, which, among other things, introduces two-side reporting and

comparison of SBO trades, provides procedures for the resolution of uncompared

trades, and revises the SBO Cash Adjustment.!"

41
Municipal Securities Rulemaking Board 

The Commission received nine proposed rule changes from the Municipal 

Securities Rulemaking Board (MSRB) and approved 10 MSRB rule filings. At the 

close of fiscal year 1990, three MSRB rule filings were pending. 

Of particular noteamong theapproved rule filings was the adoption of MSRB 

Rule G-36,which requires underwriters to submit copies of final official statements 

and other documents to the MSRB for certain new-issue municipal ~ecurities."~ The 

proposal also established a public access facility for copying documents. 

Inspections of SRO Surveillance and Regulato y Compliance 

The Commission staff conducted an inspection of the NASD's Anti-Fraud 

Department,reviewing proceduresandcases pertaining toserious marketmanipulation and sales practice abuses. The inspection generally disclosed thorough 

investigations conducted by the NASD staff with a few minor deficiencies involving case resolution and documentation. The staff concluded that the Anti-Fraud 

Department administers an effective enforcement and regulatory program and, in 

particular, found that members' retail mark-ups on OTC securities were analyzed 

in a manner consistent with NASD guidelines and relevant Commission decisions. 

The staff also conducted an inspection of the NYSE Division of Enforcement, 

concentrating primarily on that division's procedures and cases originating from 

regulatory programs administered by the exchange. The inspection considered the 

adequacy of investigations and sanctions in cases opened by the exchange since 

1987 and closed in 1988 and 1989. The staff concluded that, overall, the exchange is 

enforcingits members' compliance with the federal securities laws and NYSE rules 

in a satisfactory manner. The staff also noted a significant improvement in the 

NYSE's enforcement program as a result of the implementation of a new and 

expanded management structure, increased staff, and revised case management 

procefures. The staff found that although the cases reviewed reflected thorough 

investigations and meaningful sanctions, some minor deficiencies existed in Enforcement'sdocumentationof investigations and processing of cases. Thus, the staff 

suggested that the NYSE's enforcement division continue to seek enhanced monitoring and development of future investigations. 

The staff conducted an inspection of the work of the NASD's National Business 

Conduct Committee (NBCC) to assess the organization and role of the NBCC and 

to evaluate the NBCC's exercise of authority in formal disciplinaly matters. In 

particular, the inspection focused on the NBCC's ability to ensure uniform application of NASD procedures and rules among the 14 NASD district offices. The staff 

concluded that, in general, the NASD's NBCC operates an effective and thorough 

program, and that the NBCC attains uniformity among the districts' disciplinary 

proceedings. Minor deficiencies in the program were found, including instances 

where the NBCC did not review cases in which the sanctions imposed by the local 

I:, committees were below the NASDGuidelines for ~eterminin~~;n~edial 

~anctions. 

The staff made pertinent recommendations to correct those deficiencies. 

4 The staff conducted an inspectionof the NYSE's Department of Arbitration to 

evaluate the effectiveness of the NYSE arbitration program in the processing and 

I resolution of disputes between NYSE members and their customers. In particular, 

the staff considered whether new rule changes, adopted by the NYSE in May 1989 I,I 
in response to Commission concerns regarding the rules and procedures governing

SROs sponsored by Arbitration, were successful in improving the documentation

and fairness of cases administered by the exchange. The staff also reviewed the

adequacy and thoroughness of case documentation, the efficiency of the case

management system, and the role of the Arbitration Department in processing

cases. While the inspection revealed substantial deficiencies in case administration

and file management, the staff concluded that the Arbitration Department generally

administers a fair and efficient program with improved case management occurring

after recent amendments to NYSE arbitration rules and procedures. The staff made

several recommendations to remedy the weaknesses.

The staff conducted an inspection of the Amex's Options Sales Practice Department and Enforcement Department, which are responsible for detecting options

sales practice abuses during broker-dealer examinations and investigations and

enforcing compliance with the federal securities laws and Amex rules. The staff

concluded that, overall, these departments conduct extensive and well-documented investigations and that the Amex had satisfactorily addressed the deficiencies noted in previous inspections conducted in 1986 and 1988. The staff noted,

however, that (1)sales practice examiners did not always conduct sufficient reviews

for all sales practice issues, such as suitability, and (2) that the Amex did not

adequately resolve all apparent violations. Thus, the staff recommended that the

Options Sales Practice Department revise its procedures to ensure adequate and

consistent determinations of all apparent violations. In addition, the staff found that

Enforcement Department investigations generally were thorough and sanctions

were appropriate; however, the staff recommended improved file maintenance to

address minor documentation deficiencies in a few cases.

The staff also reviewed the Amex Examinations Division's financial surveillance and broker-dealer examination programs for six members conducting business with public customers for which the Amex serves as designated examining

authority. The staff noted some minor deficiencies and recommended improved

workpaper documentation and review, expanded sales practice reviews and documentation, and improved analysis for compliance with the possession and control

requirements of Rule 15c3-3.

The Commission's nine regional offices conducted routine oversight inspections of regulatory programs administered by eight of the NASD's 14district offices.

These inspections included evaluations of the districts' broker-dealer examinations

and their financial surveillance and formal disciplinary programs, as well as

investigations of customer complaints, terminations of registered representatives

for cause, and members' notices of disciplinary action. Although these inspections

disclosed several deficiencies involving a variety of issues, most were characterized

as less serious in degree and magnitude. Overall, these inspections revealed that the

NASD districts were effectively meeting their regulatory responsibilities.

The staff also conducted an inspection of the surveillance, investigatory, and

disciplinary programs of the NYSE for trading in equity and index options. The staff

found that, overall, the NYSE programs were functioning adequately for the current

level of equity and index options trading on the exchange. The staff found, however,

that current staff resources for the Options and Special Product (OSP) unit were

barely sufficient to review NYSE options trading as well as program and related

43
stock index futures and options trading, an area where the unit also has responsibility. The staff found relatively lengthy completion times for options trading

investigations, including less difficult investigations such as for position limit, trade

adjustment, and audit trail reporting violations. As a result, the division recommended that the NYSE critically examine present staffing levels of the OSP unit to

determine whether the allocation of additional resources is warranted.

The staff also completed an inspection of the surveillance, investigatory, and

disciplinary programs of the NYSE for program trading and related trading in stock

index futures and options. The staff recommended that the NYSE develop automated quality check procedures to monitor the accuracy of the daily program

trading reports submitted to the NYSE by members, evaluate the feasibility of

accelerating the process of collecting program trading data for incorporation into

routine surveillance procedures and trading reconstructions, expand its collection

of program trading data, and more aggressively institute disciplinary actions

against members who repeatedly submit inaccurate or incomplete information. The

staff also conducted and completed special purpose inspections of the systems,

policies, and procedures designed to develop and monitor the production of options

audit trails of the two most active options exchanges, the Amex and the CBOE. The

staff found that, overall, while the Amex and CBOE options audit trails were

conceptually sound, the accuracy of the audit trails of both exchanges needed

continued improvement. The staff recommended that the exchanges take regulatory actions to improve compliance levels by floor members. The staff also recommended that the exchanges perform immediate audits to address systemic problems in floor reporting procedures and impose more stringent requirements for time

stamping of order tickets.

The staff also conducted and completed special purpose inspections of the

systems, policies, and procedures designed to develop and monitor equity audit

trails at the three primary equities markets- -the NYSE, Amex, and NASD. The staff

concluded that the equity audit trail systems at these three SROs generally were

sound. The staff found no major systemic flaws or weaknesses in the procedures to

reconstruct trading, although the report noted the need for improvements in both

completeness and accuracy.

Finally, the staff prepared a report on trading and price volatility experienced

in the securities markets on October 13 and 16, 1989. The report contained an

analysis of program trading and related stock index futures and options trading

strategies on market volatility during this period. In this report, the staff found that:

(l) futures selling was focused in speculative accounts, foreign accounts (which the

division identified as mostly short-term speculative trading accounts), options

market makers and major broker-dealers that were hedging large institutional

options put writing and (2) floor traders (locals) at the Chicago Mercantile Exchange, Inc. (CME), the largest market for stock index futures contracts, did not

provide net liquidity to the market. At critical times during the price declines on

October 13, locals were active sellers. When the decline began, selling by locals hit

a peak of 50.1 percent of the total S&P futures sell volume.

In addition, the staff found that, unlike the 1987 market break, stock index

futures selling was not dominated by institutions. Instead, at critical times during

the decline on October 13, institutions were net buyers. As in the case of the 1987

44
market break, however, the staff also concluded that index arbitrage and other

program selling significantly accelerated and exacerbated the market decline. A

number of these index arbitrage transactions were not executed contemporaneously but rather were "legged" in a manner that more closely resembled short-term

speculative trading. Finally, the imposition of the CME's 12-point price limit for the

S&P futures coincided with a sharp drop off in the level of program selling on the

NYSE and a reduction in the rate of the price decline in stocks. While a direct causal

relationship is difficult to establish, at a minimum, the staff's findings did not

indicate any harm to the markets attributable to the imposition of the circuit breaker

mechanisms.

Applications tor Re-entry

During fiscal year 1990, the Commission received 50 SRO applications to

permit persons subject to statutory disqualification, as defined in Section 3(a)(39) of

the Exchange Act, to become or remain associated with broker-dealers. The distribution of filings among the SROs was: NASD--39; NYSE--9; Amex--1; and MSE--1.

Of the total filings processed in 1990, including those received but not completed in

1989,one was subsequently withdrawn, forty-seven were completed, and two were

pending at year-end. No applications were denied.

SRO Final Disciplinary Actions

Section 19(d)(l) of the Exchange Act and Rule 19d-1 thereunder require all

SROs to file reports with the Commission of all final disciplinary actions. A Rule

19d-1 filing reports the facts about a completed action that may have been initiated

at any time during the previous years. The time needed to complete a SRO

disciplinary action frequently reflects the severity of the violationts) charged, the

number of respondents involved, and the complexity of the underlying facts. SROs

generally conclude cases involving minor or technical violations with a single

respondent in less than a year. Cases involving serious trading violations (e.g., price

manipulation, insider trading, frontrunning, etc.) require more time to complete

because of the necessity of demonstrating specific intent to the disciplinary panel

that acts as trier of fact. Consequently, the absolute volume of Rule 19d-1 notices

submitted by a SRO in a given year is not a precise measure of its proficiency in

market surveillance and compliance. Nevertheless, the number of actions reported

can be useful in assessing the regulatory effectiveness of different SROs over similar

time periods, and this information has proven useful in focusing inspections of SRO

regulatory programs.

In fiscal year 1990, the Amex filed 36 Rule 19d-1 reports; the BSEfiled one; the

CBOE filed 160; the MSE filed 5; the NYSE filed 230; the Phlx filed 125;the PSE filed

37; the registered clearing agencies, the Cincinnati and Spokane Stock Exchanges

filed none; and the NASD filed 1,011. 197

45
SRO Final Disciplinary Actions

1985 1986 1987 1988 1989 1990

Exchanges 530 419 382 624 639 594

NASD:

District Committees 348 252 415 542 794 893

NASDAQ and Market

Surveillance Committees 93 174 194 170 75 118

TOTALS 971 845 991 1,336 1,508 1,605

Securities Investor Protection Corporation (SIPC)

The SIPC Fund amounted to $557.4 million on September 30,1990, an increase

of $107.1 million from September 30,1989. Further financial support for the SIPC

program is available through a $500 million confirmed line of credit established by

SIPC with a consortium of banks. In addition, SIPC may borrow up to $1 billion from

the United States Treasury Department, through the Commission.

46
Investment Companies and Advisers

The Division of Investment Management oversees the regulation of

investment companies and investment advisers under two companion statutes,

the Investment Company Act of 1940 (Investment Company Act) and the

Investment Advisers Act of 1940 (Investment Advisers Act), and administers

the Public Utility Holding Company Act of 1935 (Holding Company Act).

Key 1990 Results

The tables below show the number and size in terms of assets of registered

Investment companies and investment advisers and the number of examinations of

those registrants performed over the last five years.

Number of Active Registrants

1986 -1990

(end of fiscal year)

%

FY '86 FY '87 FY '88 FY '89 FY '90 Increase

Investment Companies

Investment Advisers

2,912 3,305 3,499 3,544 3,535

11,707 12,690 14,120 16,239 17,386

Assets Under Management

1986 1990

(in billions)

21

49

Investment Companies

Investment Advisers

FY '86 FY '87 FY '88 FY '89 FY '90 Increase

$ 742 $1,205 $1,125 $1,200 $1,300 75

$1,400 $2,500 $3,400 $4,400 $4,900 250

Number of Inspections/Examinations of Companies and Advisers

1986 1990

0/0

FY'86 FY'87 FY'88 FY'89 FY'90 Increase

Investment Companies 643 739 799 786 988 54

Investment Advisers 1,337 1,294 1,374 1,150 1,257 (6)

Total Examinations 1,980 2,033 2,173 1,936 2,249 14

47

-

-
The number of registered. investment companies decreased by less than one

percent during fiscal year 1990. The lack of growth in the number of registered

investment companies may be attributed, in part, to the fact that many investment

companies combined several separate portfolios or investment series in one investment company registration statement. The Division of Investment Management

estimates that the fiscal year 1990registrant population consisted of 16,600 separate

portfolios or series of investment companies. Registered investment companies

added 630 new portfolios or series during fiscal year 1990, an increase of 3.9 percent.

The number of registered investment advisers grew by 7.1 percent and the assets

they manage increased by 11.4 percent.

During fiscal year 1990, the number of investment company examinations

completed increased by 25.7 percent over the prior year. Investment adviser examinations also increased by 9.3 percent during the same period.

Key 1990 results included the formation of a task force to reexamine the

regulation of investment companies and the publication of a concept release

requesting comments on issues identified by the task force. The Commission issued

proposed amendments to Rules 2a-7, 6c-9, and 31a-2 under the Investment Company Act. The Commission also adopted Rule 52 under the Public Utility Holding

Company Act to allow the issuance and sale of certain securities to proceed without

filing an application in certain circumstances and issued a notice requesting

comment on the need to eliminate or modify any of the conditions in Rule 52 as

adopted.

Reexamination of the Regulation of Investment Companies

In March 1990, the Commission formed a task force to reexamine the regulation of investment companies. The task force is expected to make recommendations

concerning legislation and rules to reform the regulatory structure of investment

companies. Issues examined by the task force include: (1) internationalization and

cross-border sales of investment company and investment advisory services; (2)

alternative structures for investment companies; (3) securitization of assets under

the Investment Company Act; (4) distribution of the shares of open-end investment

companies; (5) repurchase of shares by closed-end investment companies; (6)

advertising by open-end companies under the Securities Act of 1933 (Securities Act)

and the prospectus delivery requirements for unit investment trusts and open-end

companies; (7) reform of insurance product regulation; and (8) bank involvement

with investment companies. On June 15, 1990, the Commission issued a concept

release seeking comment on these and other issues.!"

EDGAR Filings

Nearly half of all active registered management investment companies are

now making electronic filings on Form N-SAR. The Division of Investment Management is working with the Office of Information Systems Management to develop an

efficient means to transfer the information contained in these filings to a database

that will permit automated analysis of the information. This database will be a

useful resource in the investment company inspection program and other Commis- .

sion activities.

48
Regulatory Policy

Significant Investment Company Act Developments

InJuly 1990, the Commission proposed for public comment amendments to

rules and forms affecting money market funds, including an amendment to Rule 2a7 under the Investment Company Act, which permits money market funds to

maintain a stable price of $1.00 per share."? The proposed amendments would

require prominent disclosure that fund shares are neither insured nor guaranteed

by the United States government and that there is no assurance that the fund will be

able to maintain a stable price per share. The proposed amendments would reduce

the dollar-weighted average portfolio maturity of money market funds from 120

days or less to 90 days or less and require that no money market fund portfolio

security have a maturity in excess of two years.

In addition, money market funds (other than tax-free money market funds)

would not be able to (1) invest more than five percent of fund assets in the securities

of anyone issuer, except the United States government, (2) invest more than one

percent of fund assets in the securities of an issuer carrying a rating from any

nationally recognized statistical rating organization (NRSRO) that is less than the

highest rating issued by the NRSRO, or(3) invest more than five percent of total fund

assets in securities having less than the highest rating of an NRSRO. A security

would have to be rated "high quality" by all NRSROs rating the security. The

proposed revisions also specify the actions that a fund must take ifit holds securities

that have gone into default or the ratings of which have been downgraded. Finally,

the rule would require that any fund holding itself out as a money market fund but

not relying on Rule 2a-7, meet the conditions of the rule relating to portfolio diversification, quality, and maturity.

During fiscal year 1990, the Commission proposed an amendment to Rule 6c9to expand the exemption from registration under the Investment Company Act to

include the offers and sales of equity securities by foreign banks. The proposed

amendment also would exempt the offers and sales of securities by foreign insurance companies, Canadian trust companies and loan companies, and foreign bank

and foreign insurance holding companies that meet certain requirements.P' The

proposed amendment would eliminate the need for these foreign entities to obtain

exemptive orders with respect to such offers and sales. The Commission also issued

an interpretive release stating its position that United States branches and agencies

of foreign banks, for the limited purpose of issuing securities in the United States,

will be considered banks under the Investment Company Act and exempted from

registration as investment companies.?"

The Commission proposed an amendment to Rule 31a-2 under the Investment

Company Act to clarify the location and language aspects of the recordkeeping

requirements for United States registered investment companies, particularly those

United States investment companies that invest in foreign securities.-" The proposed amendment requires that a set of those books and records forming the basis

for financial statements (required to be maintained by United States investment

companies under certain provisions of Rule 31a-1 under the Investment Company

Act) must be preserved in the United States, and that such books and records, if

created by the United States investment company, must be preserved in the English

language.

49
Significant Public Utility Holding Company Developments

As of June 30, 1990, 13 gas and electric public utility holding companies

were registered under the Public Utility Holding Company Act of 1935 (Holding

Company Act). This total is comprised of 67 electric or gas utility subsidiaries, 106

non-utility subsidiaries, and 39 inactive companies, for a total of 212 companies operating in 24 states (excluding seven power supply subsidiary companies). These

registered systems had aggregate assets of $93.1 billion as of June 30, 1990, an

increase of $900 million over June 30, 1989. Total operating revenues for the 12

months ended June 30,1990 were $35.4 billion, a $1.2 billion increase from the 12

months ended June 30,1989.

During fiscal year 1990, the Commission authorized the issuance of nearly $5

billion of senior securities and common stock financing for the 13registered systems

consisting of $3.9billion in long-term debt financing and $1.1 billion in common and

preferred stock. Long-term debt financing decreased by 2.5 percent from fiscal year

1989 primarily due to the volume of refinancing undertaken in prior years. Additionally, $262 million in pollution control financing and $4.6 billion in short-term

debt financing were approved. Pollution control financing increased 55 percent

from amounts authorized in fiscal year 1989. Short-term debt decreased 41 percent

from the previous fiscal year. The Commission also authorized $205 million of

investments in qualified cogeneration and small power production facilities and

energy management and audit systems. Total financing authorizations decreased

34.8 percent over 1989, from $15.5 billion to $10.1 billion. Finally, the Commission

authorized $340 million for nuclear fuel, and oil and gas development and exploration in fiscal year 1990.

The Commission audits service companies. It also reviews the fuel procurement activities, accounting policies, annual reports of registered holding company

subsidiary service companies and fuel procurement subsidiaries, and quarterly

reports by registered holding company non-utility subsidiaries. Electric utility

subsidiaries of registered holding companies were required to reduce the cost of

fuel billed to customers by the amount of revenues gained from (a) the sale of excess

oil and gas to non-associate companies and (b) subleasing and transloading of coal

and oil barges. Approximately $22.6 million in savings to consumers was realized

as a result of this requirement.

The Commission adopted one rule during fiscal year 1990. Rule 52 allows the

issuance and sale of certain securities by public utility subsidiary companies of

registered holding companies to proceed without filing an application, provided

certain conditions are met.203 The Commission adopted Rule 52 essentially as

proposed to permit the immediate realization of the rule's benefits. The Commission also issued a notice requesting comments on the need to further revise Rule 52

to eliminate or modify certain of the existing conditions. 2M

Significant Institutional Disclosure Program Developments

Section 13(£)(1)oftheSecurities Exchange Act of1934 (Exchange Act) and Rule

13f-1 require specified "institutional managers" to file quarterly reports on Form

13F. Under Rule 13f-2(T), these managers may file the report on Form 13F-E

through magnetic tape by using the Commission's pilot Electronic Data Gathering,

Analysis, and Retrieval (EDGAR) system. Managers filing these reports disclose

50
specified equity holdings of the accounts over which they exercise investment

discretion. For the quarter ended September 30,1990, Form 13F reports were filed

by 1,003managers for total holdings of $1.3 trillion. Sixty managers of this group

reported holdings over $90 billion.

Form 13F reports are available to the public at the Commission's Public

Reference Room promptly after filing. Two tabulations ofthe information contained

Inthese reports are available for inspection: (1) an alphabetical list of the individual

securities showing the number of shares held by the managers reporting the holding

and (2) a list with the total number of shares of a security reported by all reporting

managers. Both tabulations normally are available two weeks after the date on

which the reports must be filed.

Significant Applications and Interpretations

Investment Company Matters

On October 19,1990, the Commission sued a conditional order on an application filed by The SuperTrust Trust for Capital Market Shares, Inc.20s The order

granted applicants an exemption under Section 6(c) ofthe Investment Company Act

from Sections 4(2) and 22(d) of the Act and Rule 22c-l thereunder and approved an

offerof exchange under Sections 11(a) and 11(c) of the Act. The order permits a unit

investment trust to issue redeemable securities that are divisible into non-redeemable components, authorizes secondary market transactions in such redeemable

securities at negotiated prices, and approves the exchange of shares of an open-end

management company for units of beneficial interest in a unit investment trust.

In August 1990, the Commission granted an exemption from the Investment

Company Act to a public finance authority established by the State of Western

Australia to enable it to issue and sell debt securities in the United States.206 The

exemption will provide Western Australia with an alternate source of funding for

the operations of certain public authorities in Western Australia.

In February 1990, the Commission staff learned that Smith Barney, Harris

Upham & Co. was disqualified from serving investment companies in certain

capacities because it employed three registered representatives subject to injuncnons for securities-related offenses. After determining that these employees were

not involved in Smith Barney's investment company activities, the Commission

issued an order on May 21, 1990 permitting the company to continue its investment

company activities on the condition that it review and revise its compliance

procedures to avoid future violations of this sort.207 The publication of the Commission's order prompted similar applications and compliance reviews by other

financial services firms.

Enforcement action was not recommended by the staff where a fund complex

allowed shareholders to exchange fund shares automatically in and out of money

market funds when share prices of a non-money market fund move above or below

thresholds to be designated by the shareholder. Specifically, shareholders could

place orders to (1) redeem shares in a money market fund and buy shares in a nonmoney market fund at any specified price below the current net asset value of the

non-money market fund and (2) redeem shares of a non-money market fund and

fi1
buy shares of a money market fund at any specified price above the current net asset

value of the non-money market fund.208

The staff also declined to recommend enforcement action under Section 18(f)

of the Investment Company Act where a fund that writes a straddle (a hedging

strategy involving the use of both call and put options), under certain limited

conditions, segregates qualifying liquid assets in a certain manner. The staff also

stated that a segregated account would eliminate the potential senior security

problems arising from the writing of a "put" by an investment company only if that

segregated account consisted entirely of liquid assets other than the security or

instrument on which the "put" has been written.P"

Tender option bonds are long-term fixed rate bonds that have been coupled

with a third-party "put" permitting bondholders the option to tender their bonds to

the third-party at periodic intervals and receive the face value thereof. Outside

counsel represented that the third-party "put" and the payment of periodic tender

fees to the third-party would convert long-term fixed rate bonds to synthetic shortterm variable rate demand instruments. The staff stated that it would not recommend enforcement action if,in reliance on Rule 2a-7 under the Investment Company

Act, certain money market funds purchase tender option bonds and value the instruments at amortized cost. The staff conditioned no-action relief, in part, on representations that the funds would purchase the tender option bonds only under

certain conditions listed in the staff's response.i'?

The staff decided not to recommend enforcement action under Section 30(d)

of the Investment Company Act or Rule 30d-1 thereunder and Rule 14a-3(e) of the

Exchange Act if, under certain conditions, funds sent single copies of annual and

semi-annual reports to an address at which more than one registered shareholder

of a fund indicated mail is to be delivered.I"

The staff declined to grant no-action relief under Rules 482 of the Securities Act

and 34b-1 under the Investment Company Act where a mutual fund sought to

exclude performance results before a new adviser assumed management responsibilities for the fund.212 The staff indicated that because the president and a director

of the fund's previous adviser became the president of the new adviser, the

performance results of the previous adviser should not be excluded from calculations of average annual total return. The staff noted that Rule 482 requires fund

performance to be calculated for one-, five-, and ten-year periods; the only exception

to that requirement is when the performance results of the fund would include the

performance results of an unrelated previous adviser.

Investment Advisers Act Matters

The staff granted no-action relief under the Investment Advisers Act custody

rule where an adviser to a limited partnership (Partnership) made withdrawals of

its advisory fees or capital investment in the Partnership directly from the Partnership's account with an independent custodian. The granted relief required that an

attorney or independent certified public accountant for the Partnership authorize

the withdrawals.i"

The staff stated that it would not recommend enforcement action ifa registered

investment adviser collected performance-based fees from offshore funds that were

offered exclusively offshore to non-United States persons where certain conditions

52
were satisfied. Since the funds did not have to rely on the private investment

company exclusion to avoid registration under the Investment Company Act, the

staffindicated that they should not be deemed to be "private investment companies"

. within the meaning of Rule 205-3. This rule creates an exemption from the prohibition against compensation based on a share of capital gains upon, or the capital

appreciation of, the client's funds in Section 205(a)(l) of the Investment Advisers

Act.214

Holding Company Act Matters

The Commission authorized Entergy Corporation (Entergy), a registered

holding company, to form Entergy Power, Inc. (EPI) as a bulk power marketing

subsidiary that would acquire two electric generating facilities from an associate

company, Arkansas Power & Light Company (AP&L), an electric public utility

subsidiary of Entergy. The related power would be marketed wholesale to nonassociate companies.?" The Commission found that EPI's sale of power at wholesale to non-associate companies would result in economies and efficiencies that

would inure to the benefit of AP&L and the Entergy system generally. In taking this

action, the Commission denied requests for hearing filed by the Council of the City

ofNew Orleans, the Louisiana Public Service Commission, the Mississippi Attorney

General and the Arkansas Electric Energy Consumers (AEEC), an association of industrial and agricultural electric power customers of AP&L.

The Commission authorized Entergy to organize Entergy Operations, Inc.

(EOI)as a new wholly owned subsidiary service company that will manage and

operate all nuclear power facilities owned by Entergy system operating companies,

including AP&L.216 The Commission concluded that the organization of EOI as a

nuclear management service company for the purpose of consolidating the management and operations of the Entergy system's nuclear plants will benefit the integrated system by producing economies and efficiencies that could not be achieved

under separate management by the individual operating companies. The Commission denied the request for hearing filed by AEEC.

The Commission's order authorizing WPL Holdings, Inc. (WPL) to reorganize from an operating utility and holding company into a predominantly intrastate

public utility holding company-'? was remanded by the United States Court of

Appeals for the District ofColumbia Circuit. 218 On remand, the Commission issued

aSupplemental Memorandum Opinion and Order clarifying the finding in its initial

order that the proposed reorganization will serve the public interest by tending

toward the efficient and economical development of an integrated public utility

system."?

Northeast Utilities (Northeast) filed an application proposing the acquisition

ofPublic Service Company of New Hampshire (PSNH), an investor owned public

utility company. PSNH is currently a debtor-in-possession in reorganization proceedings under Chapter 11 of the United States Bankruptcy Code (Bankruptcy

Code), pursuant to a plan of reorganization (Plan) confirmed by the Bankruptcy

Court on April 20, 1990. The Plan places an aggregate valuation on PSNH of

approximately $2.3 billion, including PSNH's 35.6 percent undivided interest

in the Seabrook Nuclear Power Project which is valued at $700 million. The $2.3

billion is to be made available for distribution to PSNH's creditors and

53
54

shareholders. The Plan stipulates that, if all necessary regulatory approvals are

received by December 31, 1990, unless otherwise extended, the acquisition wJ11

proceed as a direct acquisition of PSNH; otherwise, the acquisition will be accomplished through a merger. A notice of the filing of the application has been issued

by the Commission.P'and dl requests for hearing have been filed, 20 of which were

subsequently withdrawn. Eight additional entities filed comments and notices of

appearance.

Eastern Utilities Associates (EUA), a registered holding company, filed an

application to acquire the outstanding common stock of Fitchburg Gas and Electnc

Light Company (Fitchburg), a Massachusetts public utility company, and UNITlL

Corporation, a New Hampshire exempt electric public utility holding company, by

cash tender offers of $36 and $40 per share, respectively. EUA estimates the cost of

its acquisition of Fitchburg and UNITIL at approximately $47.1 million and $31.9

million, respectively. A notice of the filing of the application was issued by the

Commission,"! and requests for hearing were filed by UNITlL and Fitchburg.

Subsequently, UNITlL and Fitchburg filed an application seeking authorization for UNITlL to acquire Fitchburg, which will become a wholly owned subsidiary of UNITlL. As a result of the transaction, UNITIL will become a registered

holding company under the Holding Company Act. A notice of the filing of the

application was issued by the Commission.F' and a request for hearing was filed by

EUA.

The Commission authorized the formation of CIPSCO Incorporated

(CIPSCO), an Illinois corporation, and CIPSCO's acquisition of Central Illinois

Public Service Company, an investor owned public utility company and an exempt

holding company under the Holding Company Act.223 Through this acquisition,

CIPSCO indirectly acquired 20 percent of the outstanding shares of common stock

of Electric Energy, a jointly owned company that operates a 1,000megawatt electnc

generating station. By this action, the Commission permitted a company that is both

an operating company and a holding company exempt from regulation under the

Holding Company Act to reorganize in order to facilitate diversification.

Insurance Products Matters

The staff issued a letter stating that it would not recommend any enforcement

action to the Commission for a per se violation of Section 17(a) of the Securities Act,

or Rule 156 thereunder, ifPacific Mutual Life Insurance Company furnished certain

"qualified institutional investors" (defined as non-natural persons having $100

million or more in assets) with individualized variable life illustrations having

hypothetical gross rates of return that may exceed 12 percent.P' The proposed

illustrations were to be used only as supplemental sales literature. The no-action

relief was based on representations that the illustrations would be furnished only

upon request to qualified institutional investors, and not used in connection with

employee benefit plans under which participants exercise investment discretion

with respect to assets allocated to accounts maintained on their behalf.

The staff determined that it would no longer respond to no-action requests :

from separate accounts and their depositors for permission to stop filing post- I

effective amendments and delivering updated prospectuses when (a) contracts are i

no longer being sold; (b) there is a relatively small number of existing contract I

I
owners; and (c) the sponsoring insurance company undertakes to provide contract

owners with certain information about the contract, the separate account, and the

underlying fund. 225 When the Commission adopted Forms N-3 and N-4, it declined

to consider a rule to exempt registrants from maintaining a current prospectus with

respect to discontinued variable annuity contracts but stated that the Commission

staffwould consider any requests for such relief on a case-by-case basis. 226 The staff

has considered numerous requests for relief from the continuous updating requirement since the Commission adopted Forms N-3 and N-4 and has described the

particular information that must be provided to variable contract owners as a

condition for no-action assurance. The staff believes that similarly situated registrants should be permitted to rely on those prior letters.

A letter was issued by the staff which stated that it would not recommend any

enforcement action to the Commission under Rule 22c-l of the Investment Company Act ifthe College Retirement Equities Fund (CREF) allocates initial premiums

to the money market account pending receipt of a completed application for certain

variable annuity contracts.P? This position was based on a determination that

neither CREF nor any affiliate stood to be enriched, through advisory fees or sales

charges, by retaining initial premiums for incomplete applications and allocating

them to the Money Market Fund. CREF's allocation procedures would be fully

disclosed in the prospectuses for CREF certificates, and applicants would be

required to acknowledge their understanding of the allocation practice in the CREF

applications.

55
Full Disclosure System

The full disclosure system is administered by the Division of Corporation

Finance (Division). The system is designed to provide investors with material

information, foster investor confidence, contribute to the maintenance of fair

and orderly markets, facilitate capital formation, and inhibit fraud in the

public offering, trading, voting, and tendering of securities.

Key 1990 Results

The decline in the number of registered offerings, acquisitions, and tender

offers filed with the Commission, which began following the October 1987 market

break, continued in fiscal year 1990. Registration statements filed with the Commission in fiscal year 1990totaled 2,784,representing approximately $226billion of debt

securities and approximately $99 billion of equity securities (exclusive of posteffective amendments and filings that become effective without staff action, including dividend reinvestment and employee benefit plans that registered approximately $52 billion of equity securities). This total was 11 percent less than the 3,139

registration statements filed in fiscal year 1989 (covering approximately $219 billion

of debt securities and $124 billion of equity securities). In addition, initial public

offerings (IPOs) registered with the Commission decreased approximately 32

percent from 1989and approximately 45 percent in dollar terms. The number ofIPO

registration statements filed on Form 5-18 declined 44 percent (588 in 1989 versus

327 in 1990), while the dollar amount declined approximately 48 percent ($2.3

billion in 1989 versus $1.2 billion in 1990). Finally, third party tender offer filings

(Schedules 14D-1) fell approximately 50 percent to a seven-year low, while merger /

going-private proxy statements dropped 15 percent from the prior year.

A task group of accountants was organized during the year to conduct comprehensive reviews of the financial statements, management's discussion and

analysis (MD&A), and other related disclosures in the Securities Exchange Act of

1934 (Exchange Act) reports of selected banks and savings and loan associations.

These reviews were in addition to those of financial institutions making transactional filings.

Regional offices continued to receive and review registration statements for

blank check offerings and post-effective amendments containing financial statements and descriptions of properties and businesses acquired with the proceeds of

these types of offerings. Of the 327 total IPO filings received in fiscal year 1990,

approximately 47 percent involved blank check offerings. Regional office staff also

referred approximately 100 matters for enforcement inquiry and investigation,

more than twice the number referred in fiscal year 1989.

In fiscal year 1990, the implications of increasing internationalization of the

securities markets continued to be a major focus of the full disclosure program. The

Commission took action to reduce the costs of capital by increasing the efficiency of

the private market with the adoption of Rule 144A, and by streamlining the procedures for offering securities offshore with the adoption of Regulation S. The

56
Commission also reproposed its multijurisdictional disclosure system with Canada, whereby companies will be able to use home country disclosure documents in

cross-border offerings. This proposed initiative will be used as a prototype for

similar efforts with other jurisdictions.

The Commission has focused increasingly on problems presented by rights

offerings and tender and exchange offers relating to such securities as a result of the

increase in United States investor holdings of foreign securities. Over the past year,

the Commission has sought in a variety of ways to address the problem of exclusion

or discriminatory treatment of United States shareholders in connection with

multinational cash tender and exchange offers. United States holders of foreign

securities not only can be deprived of the opportunity to realize significant value on

their investments by tendering into a favorable offshore offer, but they also may be

forced to decide whether to retain their securities or sell into the secondary markets

without the disclosure and procedural safeguards afforded by the regulations of

either the United States or the relevant foreign jurisdiction.

In addition to the multijurisdictional disclosure approach, the Commission is

exploring alternative solutions to these issues. One possible approach is to permit

offersto be made in the United States, where United States investors comprise such

a small portion of the company's securityholder base that a foreign bidder would

otherwise likely exclude them based on a determination that the cost of compliance

with United States laws and regulations outweighs the benefits of including United

States shareholders in the offer. The Commission also is seeking comment on a

number of specific issues relating to the manner in which such an approach might

be implemented, including the appropriate threshold of United States ownership

and whether certain protections should be present before the United States will

recognize the foreign regulatory scheme.

The Commission has sought to administer existing rules in a flexible manner

to accommodate foreign tender offer rules and practices in order to ensure the

participation of United States securityholders in multinational tender and exchange

offers. The key policies in tailoring such accommodations have been to provide to

the greatest extent possible for the equal treatment of shareholders, both United

States and foreign, and to afford United States investors the fundamental protections under the Williams Act.

The Commission issued an order in connection with the cash tender offer by

Ford Motor Company Limited for all shares of the British company Jaguar plc,

which served to reconcile conflicting United States and United Kingdom tender

offer provisions, thereby enabling Ford to open the offer to United States holders,

who in the aggregate held more than 25 percent of Jaguar's shares.i" The order

provided exemptive relief from the Commission's withdrawal rights requirements

in order to permit the United States and United Kingdom offerings to proceed

simultaneously in accordance with United Kingdom requirements.

The Commission granted relief from certain tender offer regulations to two

Swedish companies, Aktiebolaget Volvo and Procordia Aktiebolag, in connection

with their offers for another Swedish company, Pharmacia Aktiebolag.F' The relief

permitted the United States holders of target stock to be treated equally with foreign

holders, including use of a common proration pool, and allowed tender and

exchange offers to be extended simultaneously to United States security holders

57
pursuant to United States registration, tender offer, and going-private requirements.

In other activity, the Commission proposed revisions to Rule 431 regarding the

use of summary prospectuses, transmitted a report on the high-yield bond market

to the Senate Banking, Housing and Urban Affairs Committee, and adopted substantial revisions to the procedures for registering employee benefit plan securities.

The staff is actively involved in planning the transition from paper to electronic filing, and in developing the rules for the operational Electronic Data

Gathering, Analysis, and Retrieval (EDGAR) system. The conversion will begin

during 1991 and will continue for a period of 36 to 48 months. During the next fiscal

year, significant resources will be dedicated to EDGAR rulemaking, training,

planning, and coordination.

Review of Filings

The Division's financial institutions task group is conducting comprehensive

reviews of the financial statements, MD&A, and other related disclosures in the

Exchange Act reports of certain banks and savings and loan associations selected for

review on the basis of their financial condition. During the year, the task group

completed reviews of 191 financial institutions, with 30 issuers being referred to the

Division of Enforcement for further inquiry or investigation, in addition to the other

105 referrals made by the Division,

The Division also collected information on oil and gas, real estate, and other

industry limited partnership roll-up transactions undertaken since January I, 1985.

The background information is being used in the staff's ongoing review of the disclosure requirements and practices in the area to assess the need for change.

During fiscal year 1990, the staff reviewed 1,907 reporting issuers' financial

statements and related MD&A disclosures. Reporting issuers are registrants that

file reports under the Exchange Act. The reporting issuer reviews were accomplished through the full review of (1) 838 registration statements and post-effective

amendments to registration statements filed under the Securities Act of 1933

(Securities Act); (2) 1,129 annual and subsequent periodic reports; and (3) 240

merger and going-private proxy statements. Inaddition, the staff completed 292 full

financial reviews of annual reports. The Division was unable to achieve an adequate

level of accounting personnel until late in the year. As a result of the recruiting

difficulties, as well as the targeted MD&A and financial institution reviews, the

number of reporting issuer reviews fell approximately 30 percent from the prior

year.

The following table sets forth the number of selected filings reviewed during

the last five fiscal years. The decline in reviews of IPOs, tender offers, contested solicitations, and going-private transactions, which are not subject to selective review,

reflects the decline in the number of transactional filings in the home office and the

regions.

58
FULL DISCLOSURE REVIEWS

FY'86 FY '87 FY '88 FY '89 FY '90

Reporting Issuer

Reviews.

Major Filing Reviews

(Data not

Available) 1,729 3,097 2,734 1,907

Securities Act Registrations

New Issuers

Repeat Issuers

Post-Effective Amendments ••

1,775

807

695

1,949

775

707

1,444

640

1,045

1,177

604

929

895

635

708

Annual Reports

Full Reviews •••

Full Financial

Reviews

Tender Offers

(140-1 )••••

Going-Private Schedules

1,741

(Not Applicable)

146

210

1,389

60

201

230

2,166

567

254

276

1,949

388

188

176

1,129

292

95

108

Contested Proxy Solicitations

Merger/Going-Private

Proxy Statements

Other•••••

68 65

240 248

992 2,563

93

314

790

84

291

428

75

240

351

Reporting issuers reviewed includes those issuers filing Exchange Act reports

whose financial statements and MO&A disclosures were reviewed in Securities

Act and Exchange Act registration statements, annual reports, merger and

going-private proxy statements, and, for fiscal years beginning in 1988 when the

information became available, post-effective amendments to Securities Act

registration statements. It does not include issuers whose financial statements

were reviewed in tender offer filings.

•• In fiscal years 1987, 1988, 1989, and 1990, filings are included only if they

contain new financial statements.

•••I I nc udes reports reviewed in connection with other filings .

•••• Excludes limited partnership roll-Up transactions. In fiscal year 1990, there were

two roll-up transactions involving 16 limited partnerships .

••••• Excludes reviews of revised and additional preliminary proxy material.

59

•
Rulemaking, Interpretive, and Legislative Matters

Scope of Registration Requirements

The Commission adopted Regulation 5, a series of rules intended to clarify the

extraterritorial application of the registration provisions of the Securities Act.230

Regulation 5 consists of: (1) a general statement that the registration provisions do

not apply to offers and sales that occur outside the United States; and (2) two safe

harbor rules designed to protect against an indirect offering in the United States.

One safe harbor (the issuer safe harbor) applies to offers and sales by issuers,

securities professionals involved in the distribution process pursuant to contract,

their respective affiliates, and persons acting on behalf of any of the foregoing

persons. The other safe harbor (the resale safe harbor) applies to resales by all other

persons. Two general conditions apply to the safe harbors. First, the offer and sale

must be made in an "offshore transaction," and second, no directed selling efforts

can be made in the United States.

The issuer safe harbor includes three categories of offerings based upon such

factors as the location and manner of the offering, the nationality of the issuer, its

reporting status in the United States, and the degree of United States market interest

in the issuer's securities. The first category includes (1) foreign issuers with no

substantial United States market interest in their securities, (2) certain offerings by

a foreign or United States issuer directed at a single foreign country, (3) offerings

pursuant to certain employee benefit plans, and (4)securities backed by the full faith

and credit of a foreign government. Offerings within the first category may be made

with no restrictions other than the two general conditions. Offerings within the

second category of the issuer safe harbor, offerings of a reporting United States

issuer's securities and debt securities of foreign issuers with substantial United

States market interest, are subject to additional restrictions, including a 40-day

restricted period on offers and sales to United States persons. Offerings within the

third, residual category are subject to the most restrictions.

The resale safe harbor rule is available for resales of securities outside the

United States. That safe harbor applies restrictions other than the general conditions

only to dealers, other persons receiving remuneration in respect of the offered

securities, and certain affiliated officers and directors of an issuer or distributor.

Multijurisdictional Disclosure System

The Commission reproposed its multijurisdictional disclosure system with

Canada involving proposed rules, forms, and schedules intended to facilitate crossborder offerings of securities by specified Canadian issuers.P' The rules, forms, and

schedules would provide a foundation for a multijurisdictional disclosure system

that could be used for a wider class of issuers and in additional jurisdictions. The Canadian securities regulators in Ontario and Quebec concurrently worked on proposals that would facilitate offerings by United States issuers in Canada.

Resales to Institutional Investors

The Commission adopted Rule 144A, which provides non-exclusive safe

harbor exemptions from the registration provisions of the Securities Act for resales

of restricted securities to eligible institutions.P' The exemption provided by Rule

60
_ 144Ais available for offers and sales to IIqualified institutional buyers." With the exception of registered broker-dealers, a qualified institutional buyer must in the aggregate own and invest on a discretionary basis at least $100 million in securities of

issuers that are not affiliated with that qualified institutional buyer. A lower threshold, $10million in securities, applies to registered broker-dealers. A registered broi! ker-dealer may also purchase as riskless principal for an institution that is itself

eligible to purchase under the rule, or act as agent on a non-discretionary basis in a

sale to such an institution. In addition to meeting the $100 million in securities

requirement, banks and savings and loan associations must have a net worth of at

i least $25 million to be qualified institutional buyers. The Commission solicited

further public comment on this net worth test. Limited responses have been

received and commenters are divided on the necessity and appropriateness of the

test.

Restricted securities that, at the time of issuance, were not of a class listed on

a United States national securities exchange or quoted in the National Association

of Securities Dealers Automated Quotation system (NASDAQ) are eligible for

resale under Rule 144A.Convertible securities or warrants that may be exercised for

securities so listed or quoted are considered to be the same class as the listed or

quoted securities, unless additional requirements relating to exercise premium and,

in the case of warrants, expiration, are satisfied.

Additionally, under certain circumstances, the availability of the rule is conditioned on the holder of the security, and a prospective purchaser from the holder,

having the right to obtain from the issuer specified limited information about the

issuer, and on the purchaser having received such information from the issuer, the

seller, or a person acting on either of their behalf, upon request. This condition

applies where the issuer of the securities to be resold under the rule is neither a

reporting company under the Securities Act nor a foreign private issuer that is

exempt from reporting pursuant to Rule 12g3-2(b) under the Exchange Act, nor a

foreign government.

In the first months of the rule's effectiveness, primary transactions making use

ofthe rule's provisions were undertaken principally by foreign issuers placing both

debt and equity with United States institutional investors.

Change in Holding Period for Restricted Securities

Inthe same adopting release for Rule 144A, the Commission adopted amendments to the rules concerning the required holding period for public resale of

restricted securities.F'To sell securities under former Rules 144 and 145, a person

must have owned beneficially the securities for at least two years, no matter how

long a period has transpired since the issuer or any affiliate thereof originally sold

the securities. The amendments redefined the two-year holding period to commence on the date the securities were acquired from an issuer or affiliate, and to run

continuously from the date of the acquisition. This eliminated the-unnecessarily restrictive requirement that the securities be held for two years by each successive

holder before permitting public resales, without regard to the time elapsed from the

actual offering by the issuer or affiliate. A comparable change was made in the

calculation of the three-year period prescribed by Rule 144(k).

-

~

~
Regulation of Multinational Tender and Exchange Otters

The Commission issued a concept release soliciting comment on a proposed

approach to encouraging foreign bidders to extend multinational tender and exchange offers to United States holders of foreign target securities on the basis of

foreign disclosure, procedural and accounting requirements, where United States

investors own a small percentage of these securities.P' The Commission received

approximately 25 letters, including a number from foreign jurisdictions.

Summary Prospectuses

The Commission published for comment a release proposing revisions to Rule

431under the Securities Act regarding the use ofsummary prospectuses.i" As proposed, the amendments to Rule 431 would expand the class of issuers that may use

summary prospectuses and would conform the filing requirements for summary

prospectuses with the requirements for other Section 10 prospectuses. The release

also proposed requirements for the inclusion of additional information in summary

prospectuses.

High- Yield Bond Study

In March 1990,the Commission transmitted an extensive report on the condition of the high-yield bond market to the Senate Committee on Banking, Housing

and Urban Affairs. The report contains available data on the size and parameters of

the high-yield primary and secondary markets, and outlines Commission initiatives in examining the activities, potential exposure and disclosure of brokerdealers, investment companies, insurance companies, and other investors in this

area.

Form S-8

The Commission issued a release adopting major revisions to the procedures

for registering employee benefit plan securities on Form S-8.236 The amendments

primarily are intended to reduce registrant costs by eliminating the need to prepare

and file separate documents for federal securities law purposes that duplicate

information otherwise provided to plan participants, while assuring timely delivery of information necessary for participants to make informed investment decisions. Pursuant to the revisions, the plan information (excluding plan financial

statements) and a statement of documents available upon request by plan participants must be delivered to participants but are not included in the registration

statement and are not filed with the Commission. Plan information does not have

to be in the form of a customary prospectus; rather, it can be provided in one or

several documents prepared by registrants in the ordinary course of employee communications. Several other amendments also were adopted to facilitate the process

of registering and reporting on plan securities, as well as plan interests, which constitute separate securities.

62
Conferences

SEC Government-Business Forum on Small Business Capital Formation

The ninth annual SECGovernment-Business Forum on SmallBusiness Capital

Formation was held in Seattle, Washington and Atlanta, Georgia on September 14

and 17, 1990,respectively. Approximately 150small business executives, accountants, attorneys, government officials,and other small business representatives were

in attendance at each session. The format of the forum combined a brief panel

presentation by experts, followed by testimony from local representatives. Also,

discussion groups comprised of the panel members and forum attendees were

convened. Numerous recommendations were formulated with a view to eliminating unnecessary governmental impediments to small businesses' ability to raise

capital. A final report setting forth a list of recommendations for legislative and

regulatory changes approved by the forum participants will be prepared and

provided to interested persons, including Congress and regulatory agencies.

SECINASAA Conference under Section 19(c) of the Securities Act

On April 25, 1990, approximately 40 senior staff officials of the Commission

met with approximately 40 representatives of the North American Securities

Administrators Association (NASAA) in Washington, D.C. to discuss methods of

effecting greater uniformity in federal and state securities matters. After the conference, a final report summarizing the discussions was prepared and distributed to

interested persons.

63
Accounting and Auditing Matters

The Chief Accountant is the principal advisor to the Commission on

accounting and auditing matters arising from the administration of the

various securities laws. The primary Commission activities designed to

achieve compliance with the accounting and financial disclosure requirements of the federal securities laws include:

• rulemaking that supplements private sector accounting standards,

implements financial disclosure requirements, and establishes independence criteria for accountants;

• review and comment process for Commission filings directed to improving

disclosures in filings, identifying emerging accounting issues (which

may result in rulemaking or private sector standard-setting), and

identifying problems that may warrant enforcement actions;

• enforcement actions that impose sanctions and serve to deter improper

financial reporting by enhancing the care with which registrants and

their accountants analyze accounting issues; and

• oversight ofprivate sector efforts, principally by the Financial Accounting

Standards Board (FASB) and the American Institute of Certified Public

Accountants (AlepA) I which establish accounting and auditing standards designed to improve the quality of audit practice.

Key 1990 Results

Fiscal year 1990 was highlighted by a number of significant public and private

sector initiatives intended to enhance the reliability of financial reporting and to

ensure that the accounting profession meets its responsibilities under the federal

securities laws. In a key initiative, the Commission provided policy direction to the

accounting profession to move toward using appropriate market-based measures

in accounting for financial institutions. The Commission staff issued two Staff

Accounting Bulletins (SABs) to address certain accounting and financial disclosure

issues. The Commission also continued to devote significant resources to initiatives

involving international accounting, auditing, and independence requirements.

Mark-to-Market Accounting

In the annual report for fiscal year 1989, the Commission noted the FASB's

continuing project to address issues of improved accounting guidance for investments in financial instruments. As part of this project, the FASBis assessing whether

to expand the use of market value data in financial statements and related disclo- I

sures.i"

Chairman Breeden testified before the Senate Committee on Banking, Housing and Urban Affairs on September 10, 1990 on issues involving financial institutions and accounting principles. The testimony specifically notes that, because it is

64
inherently difficult to distinguish portfolio categories based on intent and ability,

particularly considering the dynamic market environment in which investment

decisions are made, serious consideration must be given to reporting investment

securities at market.P"

In May 1990, the Accounting Standards Executive Committee (AcSEC) proposed rules intended to provide guidance for evaluating the intent and ability of an

entity to hold securities to maturity. A substantial number of commenters criticized

this guidance as unworkable, and many suggested it would neither result in

consistent reporting nor would it deal with abuses such as gains trading. In view of

the comments received and after considering the views of the Commission and its

staff, AcSEC agreed to postpone issuing measurement guidance pending further

examination of the issues.

The FASB will consider market value accounting for investment securities by

accelerating a portion of its existing project on financial instruments. The Commission will closely monitor this project to ensure progress and to determine whether

additional Commission initiatives are necessary.

Accounting-Related Rules and Interpretations

The Commission's accounting-related rules and interpretations serve primarily to supplement private sector accounting standards, to implement financial

disclosure requirements, and to establish independence criteria for accountants.

The Commission's principal accounting requirements are embodied in Regulation

S-X,which sets forth requirements as to the form and content of financial statements

filed with the Commission.

SABs

The Commission staff periodically issues SABsto inform the financial community ofthe staff's views on accounting and disclosure issues. In fiscal year 1990,SABs

were issued to address accounting and financial disclosure issues related to insurance reserves and filings by foreign private issuers, respectively. The first of these

bulletins dealt with the appropriate disclosure by property and casualty insurance

companies with respect to certain uncertainties concerning loss reserves.P" The

second bulletin clarified the circumstances under which a foreign private issuer that

furnishes a reconciliation of financial measurements prepared under foreign accounting standards that differ from United States generally accepted accounting

principles (GAAP) need not present the disclosures required by United States

GAAP unless required to do so under the foreign accounting standards under

which the financial statements are prepared.i'"

Management Reports

The staff analyzed over 190 comments received on a 1988 rule proposal that,

if adopted, would require a company's report on Form lO-K and its annual report

to shareholders to include a report from management. The proposed report would

describe management's responsibilities for preparing financial statements and for

establishing and maintaining a system of internal control directly related to financial reporting. In addition, the report would provide management's assessment of

the effectiveness of that internal control system.i"

65
There was significant congressional interest in management reports. A bill

passed the House of Representatives that would have required Commission registrants to file management reports similar to those proposed by the Commission and

would have required a registrant's auditors to examine and report on management's assessment of the internal control system.s" The Commission did not take a

position on this bill, and it was not enacted.

Reviews by Auditors of Interim Information

Commission staff analyzed approximately 175 comments received in response to a concept release seeking comment on the costs and benefits of requiring

auditors to review quarterly financial data before it is filed with the Commission.i"

The comments reflected significant concerns about the cost-effectiveness of such a

requirement.

Oversight of Private Sector Standard-Setting

Through active oversight, the Commission monitors the structure, activity,

and decisions of the private sector standard-setting organizations.

FASB

The Commission and its staff work closely with the FASB and the Financial

Accounting Foundation (FAP) in an ongoing effort to examine ways to improve the

standard-setting process, including the need to respond to various regulatory,

legislative, and business changes in a timely and appropriate manner. As the

securities markets become increasingly globalized, the standard-setting process

must recognize that United States businesses no longer compete solely within the

United States. Therefore, issues regarding the relative costs and complexity of

United States financial reporting requirements, when compared with the standards

of other countries, must be considered by the standard-setters as they consider the

adoption of particular accounting standards that impact United States businesses.

At the request of Chairman Richard Breeden, Commissioner Philip Lochner

has been reviewing standard-setting issues with the FASBand other representatives

of the accounting profession with a view toward determining whether there are any

actions that the Commission could take to reduce the complexity and costs of United

States accounting rules, while maintaining the investor protection and disclosure

policies of the federal securities laws. The Commission staff is assisting in this effort

and has encouraged a group comprised of major accounting firms to conduct a

detailed cost comparison of certain key accounting issues in a number of capital

market countries. Such a review is ongoing.

The staff also has encouraged various private sector research projects, such as

that being conducted by the Financial Executives Institute's Research Foundation,

to explore the impact of differing national accounting requirements. This focus on

a comparative analysis ofstandards in different countries is not intended as an effort

to seek the lowest common denominator, but rather as an attempt to identify less

costly and complex approaches to accounting issues and to provide recognition of

the FASB's efforts to contribute to greater harmony in worldwide reporting requirements.

66
The private sector continued its efforts directed at improving the standardsetting process. For example, an oversight committee recently formed by the FAF to

monitor the FASB's operations on an ongoing basis is planning an extensive review

of the FASB/s systems and procedures for meeting the objectives of its mission

statement. The FAF trustees also determined to revise the FASB's voting procedures

to require, beginning in 1991/ a supermajority requirement to adopt or amend a

standard. Commission staff review of previously adopted FASB standards and an

analysis of the public comments on the proposed changes indicate that, while it has

not been established that the supermajority voting requirement will lead to an

improved perception of FASB standards, the change in procedure should not itself

undermine the FASB's ability to set reasonable and effective standards or significantly affect the timing of their adoption. The Commission will continue its active

oversight and monitor the effects of the FAF's action on the FASB's independence

and on future accounting standards.

Oversight of the Accounting Profession's Initiatives

In addition to oversight of the private sector process of setting accounting

standards, the Commission also oversees the process for setting auditing standards

and various other activities of the accounting profession.

AICPA

The AICPA conducts a number of activities that are overseen by the Commission. These include: the Auditing Standards Board (ASB),which establishes generally accepted auditing standards; the AcSEC, which provides guidance on specific

industry practices through its issuance of statements of position and practice

bulletins and prepares issue papers on accounting topics for consideration by the

FASB;and the SEC Practice Section (SECPS), which seeks to improve the quality of

audit practice by member accounting firms that audit public companies through

various requirements, including peer review.

ASB

The Commission continues to actively oversee the ASB's efforts to enhance the

effectiveness of the audit process. The Commission staff is monitoring projects on

(1) communications with management and the audit committee when an auditor

believes that unaudited interim financial information is probably materially misstated,244(2) the use of confirmations and internal auditors, and (3) audit report

language when there is substantial doubt about an entity's ability to continue as a

going concern.i"

The ASB is planning to continue its procedure-initially suggested by the

Commission' s Chief Accountant-of issuing Audit Risk Alerts to provide auditors

with an overview of recent economic, professional and regulatory developments

that may affect audits they perform, thereby enabling the AICPA to playa more

visible role in focusing auditor attention on high risk areas. A second series of annual

Audit Risk Alerts is planned for issuance in time for use as an aid in performing 1990

year-end audits.

67
SECPS

During fiscal year 1990,the AICP A took steps to expand the membership ofthe

SECPS and to identify and address in a timely fashion any quality control deficiencies in member firms. The Commission exercises oversight of the SECPS through

frequent contact with the Public Oversight Board (POB) and members of the

executive and peer review committees of the SECPS. In addition, the staff reviews

POB files and selected working papers of the peer reviewers. This oversight has

shown that the peer review process contributes significantly to improving the

quality control systems of member firms and, therefore, enhances the consistency

and quality of practice before the Commission. The SECPS, through its Quality

Control Inquiry Committee (QCIC), also reviews and makes inquiries regarding the

quality control implications of alleged audit failures involving public clients of

SECPS member firms. The staff of the Office of the Chief Accountant has noted

significant improvements in the quality of the documentation provided to it by the

QCIC. This improved documentation, along with discussions with the POB, allows

the staff to better understand the QCIC process. The Commission believes that the

process provides added assurances, as a supplement to the SECPS peer review

program, that major quality control deficiencies, if any, are identified and addressed

in a more timely fashion. Therefore, the Commission believes that the QCIC process

benefits the public interest. The Commission understands that additional improvements are being implemented, such as more frequent review of other work of the

engagement teams involved in matters reported to the QCIC and better documentation of the POB's oversight of QCIC. The Commission believes that ongoing

improvements such as these will provide even greater assurance of the efficacy of

the QCIC process.

AcSEC

The AcSEC has a key role in identifying accounting practices, particularly

those that impact specialized industries, such as financial institutions, health care,

and computer software. During fiscal year 1990, for example, the AcSEC issued a

practice bulletin to provide criteria consistent with an earlier Commission interpretive position in Financial Reporting Release No. 28246 for determining whether

collateral for a loan has been in-substance foreclosed.i"

International Accounting and Auditing Standards

Significant differences in accounting and auditing standards currently exist

between countries. These differences serve as an impediment to multinational

offerings of securities. The Commission, in cooperation with other members of the

International Organization of Securities Commissions (IOSCO), actively participated in initiatives by international bodies of professional accountants to establish

appropriate international standards that might be considered for use in multinational offerings. For example, the Commission staff worked with the International

Accounting Standards Committee (IASC), a body of accountants with membership

in 71 countries, to reduce accounting alternatives as an initial movement toward

appropriate international accounting standards. In 1990, the lASC decided that a

substantial number of alternative treatments should be eliminated.i" Issues of

completeness, lack of specificity, and adequate disclosure requirements in interna68
tional accounting standards still need to be addressed, and the IASC has commenced projects in these areas.

The Commission staff also continued working with the International Federation of Accountants (IFAC) to revise international auditing guidelines. Auditors in

different countries are subject to different independence standards, perform different procedures, gather varying amounts of evidence to support their conclusions,

and report the results of their work differently. The Commission staff, as part of an

lasCO working group, worked closely with IFAC to expand and revise international auditing guidelines to narrow these differences, and significant progress was

made. For example, in October 1990 IFAC revised International Auditing Guideline

No. 12 to require the performance of analytical review procedures in the planning

phase of an audit and as an overall review at the final stage of the audit.

Independence

The Commission staff is studying the various national and international

requirements for auditor independence. In this connection, the staff has received

detailed information about the nature and extent of such requirements in a number

ofmajor countries. IFAC issued a set of guidelines to be used by national standardsetters in developing independence requirements. Also, at the staff's request, IFAC

agreed to undertake a project to develop a set ofspecific independence requirements

that would apply to auditors of transnational issuers.

The staff is conducting a broad review of the Commission's own auditor

independence requirements. This review was prompted by three factors: (1) the

increasing globalization of the capital markets; (2) the changes in the size and

structure of certain accounting firms during the past decade; and (3) a petition filed

by the largest accounting firms seeking a reconsideration of the Commission's

views regarding the ability of accounting firms to engage in prime and subcontractor relationships with registrants that the firms concurrently audit. The staff review

is expected to be completed in fiscal year 1991.

69
The EDGAR Project

The primary purpose of the Electronic Data Gathering, Analysis, and

Retrieval (EDGAR) system is to increase the efficiency and fairness of the

securities markets for the benefit of investors, securities issuers, and the

economy. Under EDGAR, information currently submitted to the Commission on paper will be transmitted and stored electronically using electronic

communication and data management systems. Once the electronic filing is

accepted, public information will be available quickly to investors, the media,

and others on computer screens via the Commission's public reference rooms

and through electronic subscription services. When fully operational, EDGAR

will accelerate dramatically the filing, processing, dissemination, and analysis of time-sensitive corporate information filed with the Commission.

Key 1990 Results

The EDGAR pilot system completed its sixth full year of successful operation

on September 24, 1990. It has demonstrated dearly the feasibility of receiving,

processing, storing, and retrieving electronic filings. Since the pilot's beginning,

over 77,364 filings have been transmitted electronically to the Commission.

The Commission also continued with development of the operational EDGAR

system. Among the many important milestones achieved during fiscal year 1990

were:

substantial progress on designing and programming all portions of the

operational system;

delivering 477 workstations to staff users;

installing the local area network connecting the users' workstations and

providing services such as electronic mail;

constructing an on-site training room and commencing with staff

training;

constructing the first of two computer rooms and installation of the

primary hardware and operating software for the operational system;

convening two public meetings (November 1989 and June 1990) for filers

and other persons interested in the status of operational EDGAR;

negotiating a cost-reimbursement, no fee subcontract between BDM and

Bechtel Information Services for Commission microfiche and paper

reproduction services; and

executing a no-cost subcontract between BDM and CompuServe to

provide a broad range of electronic mail and bulletin board services.

Pilot System

The EDGAR pilot serves a group of volunteer companies whose filings are

processed by staff in the Office of Applications and Reports Services and Divisions

of Corporation Finance and Investment Management. At the end of fiscal year 1990,

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603 registrants had participated fully in the pilot. In addition, numerous other

registrants had participated partially in the pilot by submitting electronic filings of

certain forms. This group of partial participants included:

1,104 investment companies submitting annual and semi-annual reports

on Form N-SAR;

75 registered public utility holding company systems or subsidiaries

submitting forms required under the Public Utility Holding Company Act;

and

16 institutional investment managers submitting Form 13F-E to report

securities held in their managed accounts.

No enhancements have been or will be added to the EDGAR pilot since the

award of the operational system contract. The pilot system serves solely to permit

the already participating volunteer filers to continue to file and the staff to access

filings until the operational system is available in 1991. If the conversion to the

operational system is successful, the EDGAR pilot will not receive additional filings

after September 1991. However, the SEC will not dismantle the pilot until the end

of calendar 1991 in order to allow time for the transfer of data to the operational

system.

Operational System

The Commission is in the second year of an eight-year contract to design,

implement, and operate the EDGAR system. The Commission's current obligation

is approximately $63 million over the eight-year life of the contract; however, as

with any major development project of this size, it is reasonable to expect that the

total costs may increase prior to completion.

During 1990, the Commission and the contractors made substantial progress

on the design, programming, and implementation of the operational system. A twoday critical design review of the entire system took place in January 1990 at which

certain major issues were resolved and other issues were identified for later review

and resolution. With the assistance of several work groups comprised of representatives from the divisions and offices affected by EDGAR, the Office of EDGAR

Management satisfactorily resolved almost all issues. Any remaining major issues

will be resolved early in fiscal year 1991.Regrettably, the resolution of some of these

issues impacted the basic design of EDGAR so the resulting changes took more time

and resources than anticipated. This and other factors have delayed by approximately 14 months the projected conversion of the pilot filers to the operational

system. These same factors have delayed by approximately 20 months the phase-in

of the first group of mandated filers. It is expected that testing of the operational

system by pilot filers will begin in February 1991, and live filing will begin in August

1991.

The first visible fruits of the operational system were seen by Commission staff

as the first workstations, including both new furniture and computer equipment,

were delivered in October 1989 with a total of 477 delivered by September 1990. In

November 1989, the first training classes were held in the newly constructed

training room. A total of 175 classes were held and attended by 1,100 students. The

curriculum included classes on the OS/2 operating system, Presentation Manager,

WordPerfect (word processing), EXCEL (spreadsheet), cc.Mail (electronic mail),

71

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and use of the local area network (LAN). The LAN was implemented in the spring

of 1990 and connected to the EDGAR workstations thereby providing access to

electronic mail and other services.

BOM also completed construction of the first of the two computer rooms and

installation of two of four Stratus fault-tolerant computers necessary for the operational system.

Continuing its long-standing concern for the public interest in the EDGAR

system, the Commission staff convened public meetings in November 1989 and

June 1990 for filers, financial printers, and other persons interested in the status of

operational EDGAR. Nearly 300 people attended the meetings.

At the end of fiscal year 1990, BOM on behalf of the SEC completed two

additional significant subcontracts. The first is with Bechtel, already a subcontractor, and requires that Bechtel provide all Commission microfiche and paper reproduction requirements for both paper and electronic filings received by the Commission. The financial terms of the subcontract are cost-reimbursement with no fee. The

second subcontract is with CompuServe and requires that CompuServe provide a

broad range of electronic and bulletin board services for communication between

the Commission and filers. The subcontract is at no-cost to the Commission.

Rulemaking

The Rulemaking Coordination Work Group has identified issues that require

Commission rulemaking, including, among others: (1) phase-in (including voluntary filings); (2)hardship exemptions; (3)filing date adjustments; (4)fee verification;

(5) financial data tagging; (6)Williams Act filings; (7)signatures, filer identification

and password access; (8) correspondence filed electronically; (9) hours for receipt

and acceptance of filings; (10)exhibit files; (11)modular documents (formerly called

reference filings); (12) graphic and image material; (13) annual reports to securityholders; (14)amendments; and (15)confidential treatment requests. The initial rules

and phase-in schedule are expected to be released for comment during the first

quarter of calendar 1991.

72
Other Litigation and Legal Activities

The General Counsel represents the Commission in all litigation in the

United States Supreme Court, the courts of appeals and the district courts.

This litigation includes appeals of district court decisions in Commission

injunctive actions and petitions for review of Commission orders. The

General Counsel defends the Commission and its employees when sued,

prosecutes administrative disciplinary proceedings against securities

professionals, and appears amicus curiae on behalf of the Commission in

significant private litigation involving the federalsecurities laws. In addition,

under the supervision and direction of the General Counsel, the regional

officesrepresent the Commission in corporate reorganization casesunder the

Bankruptcy Code that have a substantial public investor interest. The

General Counsel also analyzes legislation that would amend the federal

securities laws or otherwise affect the Commission's work and prepares

legislative comments and congressional testimony. The General Counsel's

Office reviews proposed Commission action to ensure that enforcement and

regulatoryprograms are consistent with the Commission's statutory authority.

In addition, the General Counsel advises the Commission in the rendering of

its decisions in administrative proceedings under various statutes.

Key 1990 Results

The General Counsel represented the Commission in numerous litigated cases

in fiscal year 1990. These included 29 appeals before the Supreme Court and the

United States courts of appeals. Of these, the Commission received adverse rulings

in only seven. There were also 42 cases in the United States district courts,

bankruptcy courts, and administrative tribunals. The Commission prevailed in all

of the 22 actions brought in district court against the Commission. The General

Counsel also was successful in each of the 10 matters it litigated on behalf of the

Commission in the bankruptcy court.

FY'86 FY'87 FY'88 FY'89 FY'90

Wm Loss Other' Wm Loss Other' Wm Loss Other' Wm Loss Other' Wm Loss Other'

Supreme Court and

Appellate Courts 32 3 2 31 3 2 24 3 0 30 8 5 20 7 2

Dlstnct Court 21 0 1 14 3 0 16 2 5 16 2 2 22 0 0

Banknuptcy Court 13 3 0 4 7 1 8 3 1 2 0 2 10 0 1

Other" 4 1 0 3 0 0 2 1 1 5 0 3 5 1 0

, Issue not reached, split ceoson, etc .

.. State Courts and Admlnlstrabve Tnbunals

Inaddition to litigation, the General Counsel is involved. in significant legislative

and counseling work. Fiscal year 1990 was characterized by an unusually full

73
legislative agenda for the Commission. In the legislative area, the General Counsel

drafted and helped to secure passage of amendments to the securities laws that

dramatically strengthen the Commission's enforcement remedies. The office also

drafted legislation that enables the Commission to cooperate more effectively with

foreign securities authorities, thereby facilitating enforcement of the securities laws

in the context of increasingly global markets. The General Counsel drafted provisions

of the Market Reform Act, which enhances the Commission's ability to monitor

activities that may have significant market impact and permits it to take more

effective action in market emergencies. The General Counsel also prepared

congressional testimony on a wide range of topics, including accounting reform and

the regulation of financial institutions.

Another area in which the office has been significantly involved is the

Commission's Emerging Markets Advisory Committee. The Committee, which is

comprised of leading executives from brokerage firms, stock exchanges and other

institutions, advises the Commission in its efforts to assist other countries with

developing securities markets.

Litigation

Insider Trading

In United States v. Chesiman, 249 an appeal of insider trading criminal convictions,

the Commission filed an amicus curiae brief urging the United States Court of

Appeals for the Second Circuit, sitting en bane,to reject the reasoning of a prior panel

decision overturning Chestman's convictions for violating Section lO(b), Rule lOb5, Section 14(e), and Rule 14e-3 of the Securities Exchange Act of 1934 (Exchange

Act).

The panel majority had reasoned that Rule 14e-3 is invalid to the extent that it

prohibits conduct that does not involve a breach of duty. The majority came to this

conclusion by interpreting Section 14(e)'s grant of rulemaking authority to the

Commission in light of cases construing, among other things, the Commission's

rulemaking authority under Section 10(b). The Commission's brief argued, however,

that the Commission's rulemaking authority under Section 14(e) is broader than its

authority under Section 10(b). As to the Rule lOb-5 convictions, the Commission's

brief argued that the panel erred in requiring that a tippee have specific knowledge

that nonpublic information was passed along in breach of a confidential relationship.

Instead, the Commission argued that just as a person who has committed the

common law crime of receiving stolen property need not know the victim, the

circumstances of the theft, or the actual thief, it is sufficient to show that the tippee

knew or believed that the information was obtained or being conveyed in breach of

some duty. The Commission's brief also argued that the panel erred in requiring an

express acceptance of confidentiality by the tipper. Rather, the Commission's brief

took the position that an acceptance of such a duty can be implied from the

circumstances surrounding the relationship--in this case, a familial relationship.

In SEC v. Clark, 250 the United States Court of Appeals for the Ninth Circuit

affirmed a judgment in favor of the Commission based on the "misappropriation"

theory of insider trading, a matter of first impression in that Court. The Court held

that a person who trades on material nonpublic information, deceitfully stolen or

74
"misappropriated" in breach of a duty, violates Exchange Act Section 1O(b)and Rule

lOb-5. Clark was found by a jury to have stolen confidential information from his

employer about its corporate acquisition plans and to have used that information to

reap profits by buying stock of the target company in the securities market. The

Court of Appeals held that a fraud occurs where an employee steals and uses his

employer's material, nonpublic information despite his implicit representation to

his employer not to do so. Agreeing with the Commission, the Court also held, on

an issue of first impression, that Clark could be ordered to disgorge profits made by

a person he tipped even though that person was found not to have violated

Exchange Act antifraud provisions in his trading.

In SEC v. Unifund SAL, 251 the United States Court of Appeals for the Second

Circuit affirmed, with modifications, portions of preliminary injunctions obtained

by the Commission that froze assets held in the defendants' brokerage accounts, but

the Court vacated those portions of the injunctions prohibiting future violations of

the federal securities laws. In an action filed just two days after the public

announcement of a merger, the Commission alleged that the defendants, foreign

citizens residing overseas, had engaged in massive illegal trading in the securities

of one of the companies to the merger just before the public announcement. The

Commission obtained preliminary injunctions, pending further discovery, against

two of the defendants based largely on the suspicious pattern of trading in the

accounts. On appeal, the Court rejected the defendants' contention that the

Commission was required to make a "strong prima facie case" to obtain preliminary

relief and, instead, held that the Commission need establish no more than a

likelihood of success on the merits and need not establish irreparable injury as must

a private litigant. Although the Court determined that, under this standard, the

Commission was not entitled to an interim prohibition against future securities law

violations, it affirmed, with modifications, the distnct court's grant of the freeze

orders. The Court allowed the freeze of assets in an amount exceeding the profits

to secure not only a potential judgment of disgorgement but also for civil penalties.

The Court limited the duration of the freeze order, however, in light of what it

viewed as the weak evidence relating to the violation and the hardship to the

defendants. The Court noted that in future cases courts should assess all relevant

circumstances to determine the coverage, terms, and duration of such orders.

Definition of a Security

As the Commission urged in an amicus curiae brief in Reves v. Ernst & Young,252

the Supreme Court reversed a decision by the United States Court of Appeals for the

Eighth Circuit and held that interest-bearing demand notes that were widely

offered and sold to the public by an Arkansas farmers' cooperative are secUrities. In

so doing, the Court, as the Commission had urged, rejected application of the

investment contract test set forth in SEC v. w.J. Howey Co. 253 to notes and adopted

instead the "family resemblance" approach for determining whether a note is a

security. Under this approach, a note with a maturity of greater than nine months

is presumed to be a security unless it bears a strong resemblance to certain judicially

enumerated instruments that are outside the "investment market" regulated by the

federal securities laws (such as notes issued in consumer financing and notes

secured by home mortgages).

75
A majority of the Court also held, as the Commission had urged, that the notes

in this case did not fall within the exclusion in Exchange Act Section 3(a)(10) from

the definition of security for notes having a maturity "not exceeding nine months."

The Court stated that the maturity of a note payable on demand is ambiguous, since

it can be argued that the note matures either at the time of issuance or at the time

demand is actually made, which may be later than nine months from issuance.

Accordingly, the Court, relying on Congress's broad purpose of "ensuring that

investments of all descriptions be regulated to prevent fraud and abuse," resolved

the ambiguity in favor of investor protection.

Liability in Private Actions

The Commission continued to participate in cases raising the issue of the

appropriate statute of limitations for private actions under Exchange Act Section

1O(b). In Ceres Partners v. GEL Associates, 254 the Commission, as amicus curiae,

successfully urged the United States Court of Appeals for the Second Circuit to

abandon its traditional approach of looking to state law limitations periods to limit

claims under Section 1O(b)in favor of a uniform limitations period drawn from

federal law. The Court disagreed with the Commission, however, as to what federal

limitations period should govern. The Commission had taken the position that the

five-year period in Exchange Act Section 20A enacted in 1988--which codifies an

express private right of action for certain violations of Section 1O(b)in the nature of

insider trading--should be used. The Court instead chose another period governing

certain express causes of action under the federal securities laws--one year from

discovery of the facts constituting the violation and in no event more than three

years from the violation.

In Ceres, the Commission advanced the same position as to the appropriate

statute of limitations as had the Solicitor General, acting on the Commission's

behalf, in an amicus curiae brief expressing the view that certiorari should not be

granted in Lebman v. Aktiebolaget Electrolux. 255 Later, the Solicitor General, on behalf

of the Commission, filed a brief amicus curiae on the merits in Lamp! Pleva Lipkind

Prupis & Petigrow v. Gilbertson, 256 again advocating the adoption of Section 20A's

five-year period.

In Mendell v. Gollust, 257 the United States Court of Appeals for the Second

Circuit, in an opinion reflecting the position urged by the Commission in a brief filed

at the Court's request, held that a plaintiff may maintain a suit under Exchange Act

Section 16(b) on behalf of the issuer, to recover short-swing profits allegedly

obtained by the issuer's insiders in transactions involving the issuer's stock, even

after the plaintiff is involuntarily divested of his own shares of the issuer. The

plaintiff in this case owned common stock of the issuer at the time of the defendant's

short-swing transactions and at the time he filed suit, but was subsequently divested

of his shares as a result of a merger. The Commission argued, and the Court agreed,

that the remedial and deterrent purposes of Section 16(b) would be undercut if a

shareholder was deemed to lose his standing to sue by being involuntarily divested

of his shares through a business combination such as a merger.

76
Broker-Dealers and Market Professionals

In Hollinger v. Titan Capital Corp., 258 the United States Court of Appeals for the

Ninth Circuit, sitting en bane, issued an important opinion in the area of brokerdealer regulation, agreeing with the positions urged by the Commission as amicus

curiae, and overruling numerous of the Court's precedents. First, the Court held that

under Exchange Act Section 20(a), which makes a broker-dealer firm liable for the

fraud of persons it controls unless it can establish a "good faith" defense, a firm is

always a "controlling person" of salespersons who are associated with it. Second,

the Court decided that the firm cannot avoid its duty to supervise persons it controls

merely because those persons are independent contractors. Third, the Court held

that a plaintiff in a Section 20(a) case need not plead and prove that the firm was a

"culpable participant" in the violation committed by the controlled person. Fourth,

the Court held that the burden of proof in establishing the good faith defense under

Section 20(a) rests on the firm. A firm cannot satisfy that burden simply by showing

that it has a system of supervisory procedures in place; it must persuade the court

that the supervisory system is adequate and that the firm in fact reasonably

discharged its obligation of enforcing the system.

Finally, the Court held that controlling person liability does not supplant strict

liability under the federal securities laws based on the common law principle of

respondeat superior; under the latter doctrine, the firm is vicariously liable for the

damages caused by the fraudulent conduct of its agents and employees. In one

respect, the Court did not follow the Commission's position. For purposes of

defining "recklessness" which will satisfy the scienter requirement of Section 10(b)

and Rule 1Ob-5, the Court adopted a different standard of recklessness than the

common law fraud standard of "conscious indifference," which the Commission

had advocated.

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Self-Regulatory Organizations

.. In The Business Roundtable v. SEC, 259 the United States Court of Appeals for the

District of Columbia Circuit vacated Exchange Act Rule 19c-4,regarding shareholder

voting rights. That rule amended the rules of national securities exchanges and

associations to prohibit the listing or quoting of equity securities of any company

that nullifies, restricts, or reduces the per share voting rights of any outstanding

class of common stock. The Court held that the rule was beyond the Commission's

authority and impermissibly infringed upon the states' traditional authority to

charter and regulate corporations. The Commission had centered its discussion of

its authority to promulgate the rule on furthering the objective of Exchange Act

Section 14(a) of ensuring fair corporate suffrage. The Court decided in effect,

however, that the purpose of Section 14(a) was limited to improving shareholder

communication. A broader reading of the rule would, according to the Court,

permit the Commission to establish an entire body of federal corporate law. The

Court also rejected the Commission's argument that other sources of authority,

including the 1975 amendments to the securities laws, served to support the

adoption of the rule.

In Board of Trade of the City of Chicago v. SEC, 260 two futures exchanges

petitioned for review of (1) a 1989 Commission order granting Delta Government

Options Corporation (Delta) temporary registration as a clearing agency and (2) a

77

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no-action letter issued by the Commission's Division of Market Regulation stating

that the division would not recommend enforcement action should certain entities

operate the proprietary trading system (the System) of which Delta was a part,

without being registered as an exchange under Exchange Act Section 6. As to the

1989 order, the United States Court of Appeals for the Seventh Circuit determined

that the Commission's finding in the order that Delta was organized and had the

capacity to comply with the Exchange Act was defective for lack of a determination

with regard to the status of the System as an exchange. As to the no-action letter,

however, the Court agreed with the Commission that under the rationale of Heckler

v. Chaney, 261 the division's position that it would not recommend enforcement

action was not subject to judicial review. The Commission renoticed Delta's

application for clearing agency status, and, in 1990, issued another order which

granted Delta temporary registration and expressly determined that the System

does not constitute an exchange. The futures exchanges petitioned for review of this

order. The Court affirmed.P' essentially agreeing with the Commission's argument

that the Commission's analysis of the "exchange" issue is a reasonable, practicable

interpretation of the definition of that term in the Exchange Act, and that the

Commission, in making this analysis, was acting consistently with its congressional

mandate to interpret and implement the securities laws in an ever-changing,

technologically innovative environment. Rehearing was denied.

International Application of the Securities Laws

SEC v. International Swiss Investments COrp.,263concerned a boiler room

operated by persons in various Latin American countries using the telephone to sell

securities to Ll.S.residents. The Commission brought an action alleging violations

of the federal securities laws and served its complaint by hand in Mexico. As urged

by the Commission, the United States Court of Appeals for the Ninth Circuit rejected

the defendants' challenge to the service of process. First, the Court held that the

Commission was not required to serve process on the defendants through the InterAmerican Convention on Letters Rogatory since the convention had not been

ratified by the Senate at the time that service was made. Second, the Court

determined that the Commission complied with Rule 4 of the Federal Rules of Civil

Procedure and that the manner of service did not violate international law.

Actions Involving Other Agencies

The Solicitor General filed a brief on behalf of the Federal Energy Regulatory

Commission (PERC) as respondent and the Commission as amicus curiae in Arcadia,

Ohio v. Ohio PowerCompany, 264 a case involving the circumstances under which SEC

regulation under the Public Utility Holding Company Act (Holding Company Act)

precludes PERC regulation under the Federal Power Act (FPA). Specifically, the

case raised the question whether Section 318 of the FPA, which governs "conflict of

jurisdiction" between PERC and the Commission, precludes PERC jurisdiction

whenever PERC and the Commission have jurisdiction to regulate the same subject

matter, or only when there is an actual conflict between a requirement of PERC and

a requirement of the Commission. The brief filed on behalf of PERC and the

Commission took the position that Section 318's rule of precedence takes effect only

when regulations or orders adopted under the Holding Company Act and the FPA

78
created conflicting obligations for regulated entities. The brief did not address

whether there was an actual conflict in this case.

Inits decision, the Supreme Court concluded that Section318had no application

to this case. The Court interpreted Section 318 literally to limit the section's

application to circumstances where the subject matter in issue falls within four

enumerated categories set forth in Section 318. In the Court's view, it was not

possibleto identify any FERCrequirement in this case falling within these categories.

In FDIC v. Jenkins, 265 the United States Court of Appeals for the Eleventh

Circuit, agreeing with the arguments made by the Commission as amicus curiae,

reversed a district court injunction prohibiting shareholders of a bank holding

company from satisfying their Rule lOb-Sclaims against certain third parties from

those parties' assets until the Federal Deposit Insurance Corporation's (FDIC)

claimsagainst the same parties are satisfied. TheCourt agreed with the Commission

that the absolute priority rule (which requires in certain contexts that creditors'

claims against a corporation receive priority over the claims of its shareholders)

applies only to claims against an insolvent entity's assets and not, as the FDIC

asserted,to assets of third parties. Turning to issues not addressed by the Commission,

the Court further held that an absolute priority was not "implicit" in the Federal

Deposit Insurance Act and was unnecessary for the FDIC to fulfill its statutory

duties.

Actions Involving the Proxy Antifraud Provisions

In Virginia Bankshares,Inc. v. Sandberg, 266 the Solicitor General filed an amicus

curiae brief in the Supreme Court on behalf of the Commission and the FDIC

addressing issues ofmateriality and causation under the proxy antifraud provisions

ofthe Exchange Act. These two consolidated private damage actions arose from a

"freeze-out" merger in which the plaintiffs' shares were converted into a right to

receive a certain amount of cash. The plaintiffs alleged that the proxy statement

issued in connection with the merger was materially false and misleading, in

violation of Exchange Act Section 14 and an antifraud rule thereunder. The

plaintiffs obtained a jury verdict, which was affirmed by the Court of Appeals. In

the Supreme Court, the defendants argued that, as a matter of law, they could not

be liable for the types of misstatements alleged. The first issue they raised was

whether representations in a proxy statement concerning directors' reasons and

purposes for recommending approval of a particular transaction, and their

characterizations of matters discussed in the statement, by words such as

"independent," can be materially false or misleading. The government's brief

argued that such misrepresentations can be actionable. The second issue was

whether minority shareholders can establish that their injuries were caused by a

falseor misleading proxy statement when they lacked sufficient votes to block the

transaction on which the vote was taken. The government's brief argued that

causation may be established where minority shareholders are misled into voting

In favor of a transaction, thereby losing an appraisal remedy under state law, or

Whereminority shareholders have, by a false or misleading proxy statement, been

prevented from employing a variety of other methods to alter the transaction's

terms.

79
Litigation Involving Requests for Access to Commission Records

The Commission received approximately 2,000 requests under the Freedom of

Information Act (FOIA) for access to Commission records and approximately 3,200

requests for confidential treatment from persons who submitted information. There

were 61 appeals to the Commission's General Counsel from initial denials by the

FOIA Office of FOIA requests, and 11 appeals of denials of confidential treatment

requests. Only two requests resulted in court actions against the Commission.

One of the two court actions arose out of the Commission's denial of a

confidential treatment request. 267 However, after the Commission filed a motion for

summary judgment, the requester voluntarily dismissed the case. Inthe second, 268

the district court upheld, in all material respects, the Commission's denial of access

to documents from numerous investigative files. The unsuccessful requester

appealed that decision to the United States Court of Appeals for the District of

Columbia Circuit. The Commission has filed its brief urging the Court to uphold the

district court's finding that personal information in trading records, account

statements, and other records provided to the Commission during the investigations

are protected from release by FOIA Exemption 7(C), which exempts from disclosure

information, the release of which may result in an invasion of personal privacy. The

brief also argues that minutes of closed Commission meetings are not "final agency

decisions" as defined by the FOIA. The Court of Appeals for the District of

Columbia Circuit has heard oral argument and the case is under submission.

The Office of General Counsel also handled 117 subpoenas served by parties

in private litigation seeking Commission documents or investigative testimony. A

number of the subpoenas sought documents from active investigations which the

Commission declined to produce on grounds of the governmental law enforcement

privilege, as their release could impair ongoing proceedings. As a result, certain of

these subpoenas led to motions to compel, or Commission motions for protective

orders. The Commission was successful in each of these litigated motions.

Actions Under the Right to Financial Privacy Act

Eight actions were filed against the Commission under the Right to Financial

Privacy Act (RFPA), to block Commission subpoenas for customer information

from financial institutions. 269 One action was dismissed voluntarily by the movant

after the Commission filed its opposition. The remaining actions were dismissed

after the court found, in each case, the Commission was seeking the records for a

legitimate law enforcement inquiry, and the records were relevant to those

investigations. 270 Of particular note is In Re Securities and Exchange Commission

Private Investigation/Application of John Doe re Certain Subpoenas, 271 in which the

District Court for the Southern District of New York made several rulings which

should assist the Commission in litigating RFPA challenges. First, the Court

reaffirmed, over the movant's objection, the modest burden of proof on the agency

in a RFPA case, noting that an agency is not required to demonstrate that the records

sought "are" relevant to the investigation, but need only establish "a reasonable

belief that the records sought are relevant." Equally significant, the Court held that

the Commission met this burden upon demonstrating that the customer had control

over certain brokerage accounts in which suspect trading occurred: "Once a

person's connection to apparently illicit conduct has been shown, it is relevant to

80
j know whether that person's bank account contains evidence of such conduct."

Finally, the decision makes clear that the length of time covered by subpoenas to

banks challenged under the RFPA need not be limited in scope to the dates of the

alleged improper trading.

Actions Under the Equal Access to Justice Act

The office obtained favorable decisions in two actions under the Equal Access

toJustice Act. In one, SEC v. Comserv COrp.,272the United States Court of Appeals for

the Eighth Circuit reversed and vacated the district court's award of attorneys' fees

and expenses. The district court, after dismissing the Commission's action against

one defendant, found that the action was not "substantially justified" and awarded

fees, notwithstanding its acknowledgment that the award would not go to the

defendant, but to the insurer that provided defendant's liability coverage. As urged

by the Commission, the Court of Appeals reversed, holding that the defendant was

ineligible to recover under the Act because his insurer was contractually obligated

to pay his attorneys' fees.

Actions Against Commission and Staff

Six actions were filed against the Commission and individual staff members

seeking monetary damages and/or injunctive relief. The office defended successfully

each of these actions. In Hale v. McKenzie, 273 plaintiff Joseph H.Hale, who had been

prosecuted successfully for violations of the federal securities laws, sued the

Commission and three current or former Commission staff members, alleging

numerous common law and constitutional violations in connection with the

Commission's prosecution of the plaintiff.f" The United States District Court for the

Northern District of Georgia dismissed the plaintiff's unfounded claims against the

Commission on the grounds of sovereign immunity, and those against the staff on

the grounds of, among other things, official immunity - - as the actions of which he

complained were undertaken by the staff as part of their official responsibilities.

Similarly, in SEC v. American Assurance Underwriter Group, Inc.,275a Commission

injunctive action, defendant William A. Calvo, III,filed a counterclaim alleging staff

misconduct. The United States District Court for the Southern District of Florida

dismissed the claim, finding that it was barred by Section 21(g) of the Exchange Act,

which prohibits the consolidation of Commission injunctive actions with any

private action without the Commission's consent.

Motions to Vacate Injunctions

During the last fiscal year, the staff responded to three motions to vacate

injunctions. In SEC v. Belmont Reid and Company, 276 the United States District Court

for the Northern District of California denied a motion to vacate the consent

injunction obtained in a Commission enforcement action. In that action, the

Commission had alleged that defendants fraudulently sold unregistered securities

When they sold contracts for the future delivery of gold coins. Most of the

defendants consented to injunctions, but three continued to litigate. The District

Court ultimately ruled that the gold coin contracts were not securities."? In their

motion to vacate, nine of the consenting defendants argued that, because the District

Court had ruled that the gold coin contracts were not securities, the consent

81
judgment was void for lack of subject matter jurisdiction and the injunction was

unfair. The DistrictCourt agreed with the Commission, ruling that it had jurisdiction

to enter the consent decree, the motion was untimely, and the injunction did not

constitute grievous wrong resulting from unforeseen circumstances such as would

justify vacation of the injunction.

Actions Against Professionals Under Commission Rule 2(e)

In the spring of 1990,the Commission organized a new group within its Office

of the General Counsel to focus primarily on the litigation of administrative

disciplinary cases against professionals under Rule 2(e) of the Commission's Rules

of Practice. These cases are often large and complex. The outcome of such cases

against accountants may affect how reporting companies account for costs in filings

before the Commission. The creation of the new Rule 2(e) group reflects the

emphasis the Commission attaches to these important cases. During the year,

several RuIe 2(e)actions were concluded. InIn re Ernst & Whinney,2?8 Administrative

Law Judge Jerome Sofferfound that Ernst &Whinney (now Ernst & Young) and one

of its partners had engaged in improper professional conduct by violating generally

accepted auditing standards during the audit ofUSSurgical Corporation's 1980and

1981financial statements. Judge Soffer found that audit partners "all the way up to

the top level including the co-chairman" participated in the outcome of the audit

and that the auditors unduly relied upon representations of Surgical management

even after serious questions concerning management's integrity were raised during

the audit. Based on his findings, Judge Soffersuspended the New York region ofthe

firm from undertaking any new Commission engagement for a period of 45 days.

No appeal to the Commission was taken from the ruling.

In In re Calvo, 279 Administrative Law Judge Max Regensteiner found that the

public interest required attorney William Calvo to be suspended for two years.

Calvo had been permanently enjoined from violating antifraud provisions of the

federal securities laws in connection with his conduct, among other things, in

fraudulently extending a public offering beyond the period specified in the

prospectus.P' No appeal was taken from the ruling.

In In re Blonquist, 281 attorney Thomas Blonquist consented to a Commission

order under Rule 2(e) suspending his right to practice before the Commission for

five years. The suspension was based on a prior Commission action against

Blonquist, SEC v. Thomas,282 where the district court found that he had willfully

aided and abetted violations of antifraud provisions of the federal securities laws

and permanently enjoined Blonquist from further violations.

In In re Tepps and Goldstein i" attorneys Jerome Tepps and Michael Goldstein

consented to a Commission order suspending them from practicing before the

Commission for five years. The suspensions were based on a prior Commission

action against Tepps and Goldsteirr'" in which they were permanently enjoined

from violations of antifraud and reporting provisions of the federal securities laws.

The action arose from their conduct in preparing certain false and misleading filings

disseminated to the public by four blind pool issuers.

82
Significant Administrative Decisions

Broker-Dealers and Market Professionals

In F.J. Kaufman & Co. of Virginia and Frederick J. Kaufman, Jr.,285the Commission

affirmed disciplinary action taken by the NASD against a former member firm and

its general partner for violating the NASD's suitability rule. The Commission

found, as had the NASD, that Frederick Kaufman devised and recommended to

three sets of customers an options program, generally known as the "margined buywrite strategy." Under Kaufman's plan, customers sold call options and used the

premiums, together with other available funds, to purchase shares of the underlying

stock on margin. However, the Commission found that, when transaction costs

were taken into account, Kaufman's strategy was always inferior to a straight

purchase of the same stock, either for cash or on margin. Thus, the Commission

concluded that Kaufman's strategy was not suitable for any investor, a fact of which

Kaufman should have been aware.

In Investors Portfolio Management, Inc. (IPM),286the Commission revoked the

investment adviser registration of IPM, the adviser to a municipal bond fund. IPM

developed a program pursuant to which the fund bought municipal bonds in odd

lots and with "short settlement" dates (less than five business days after the date of

purchase). Its objective was to acquire bonds for the fund's portfolio that would not

be delivered by the settlement date, thereby becoming so-called "failed bonds."

Failed bonds accrue interest from the settlement date even though they need not be

paid for until they are delivered. Thus, when a bond "failed," the fund collected

interest until the date of delivery without any expenditure of capital. Moreover, in

the interim, IPM used the money that the fund would have paid out for the failed

bonds to purchase additional bonds for the fund. In this way, the fund was able to

collect two payments of interest on the same money. This practice produced

deceptively high temporary yield rates, and caused the fund to borrow beyond its

authorized ceiling when a large number of failed bonds were delivered at the same

time and the fund had to pay for them.

The Commission found that IPM violated antifraud provisions by advertising

the fund's high yields without disclosing that they were merely temporary, and the

Investment Company Act by causing the fund to exceed its borrowing limit.

Significant Legislative Developments

Enforcement Remedies

On October 15, 1990,the President signed into law the Securities Enforcement

Remedies and Penny Stock Reform Act of 1990.'lfJ1 This legislation, which substantially

increases the strength and flexibility of the Commission's enforcement remedies,

was based upon a Commission proposal submitted to Congress in January 1987and

introduced in the 101st Congress by Senators Dodd and Heinz and Congressman

Dingell. In February 1990,Chairman Breeden testified before the Subcommittee on

Securities of the Senate Committee on Banking, Housing and Urban Affairs,

recommending a number of changes to the legislation that were largely incorporated

into the final bill.

83
Provisions of the Act relating to penny stocks are based on H.R. 4497, the

Penny Stock Reform Act of 1990, which was introduced by Congressman Markey

in April 1990. Chairman Breeden testified on April 25 before the Subcommittee on

Telecommunications and Finance of the House Committee on Energy and Commerce

concerning these provisions.

The Act authorizes the Commission to seek civil money penalties (in addition

to disgorgement orders) in district court actions, and to impose money penalties in

administrative proceedings brought against broker-dealers, investment advisers,

and other regulated entities. In addition to penalties, the Commission is expressly

authorized to enter an order requiring an accounting and disgorgement, including

reasonable interest.

The legislation also includes provisions, first requested by Chairman Breeden

in his February 1,1990 testimony before the Senate Securities Subcommittee, that

authorize the Commission (following notice and opportunity for a hearing) to issue

cease and desist orders to enforce the requirements of the Securities Act of 1933

(Securities Act), the Exchange Act, the Investment Company Act, and the Investment

Advisers Act. The Commission also is empowered to order a respondent to

disgorge profits resulting from a violation or to take affirmative steps to ensure

compliance with the law. The Commission may not, however, impose civil

penalties in a cease and desist proceeding. Commission orders in cease and desist

proceedings are enforceable in federal district court and are subject to review by the

courts of appeals.

The Act expressly authorizes district courts to suspend or bar a defendant in

a Commission action from serving as an officer or director of a reporting company.

This express authority is limited to defendants who are found to have violated

Section 17(a)(l) of the Securities Act or Section 1O(b)of the Exchange Act. The court

also must find that the defendant's conduct demonstrates "substantial unfitness" to

serve as an officer or director.

With regard to penny stock reform, the Act contains a definition of penny

stocks as equity securities that do not fall within one of several excluded categories

(e.g., securities traded on a national securities exchange or quoted on NASDAQ).

The Commission has broad authority to exclude additional securities or classes of

securities. The Commission's sanctioning authority is expanded to enable it to bar

persons from "participating in an offering of penny stock."

Market Reform

Following the October 1987 market break, the Commission submitted to

Congress a number of legislative proposals that were designed to increase its ability

to monitor activities that may have significant market impact and to take effective

action in market emergencies. After some amendments to the Commission's

proposals, the House and Senate passed the Market Reform Act of 199()288in

September. The legislation was signed by the President on October 16, 1990. The

Act authorizes the Commission to suspend trading for up to 90 days if the

Commission deems it to be required in the public interest and for the protection of

investors. Before using this authority, the Commission must notify the President

and determine that he does not disapprove.

84
The Commission also is authorized to adopt rules that prescribe means

reasonably designed to prevent the manipulation of price levels of the equity

securities market or a substantial segment of that market, and that prohibit, during

periods of extreme market volatility, any trading practice that the Commission has

found to contribute significantly to extraordinary levels of volatility threatening the

maintenance of fair and orderly markets.

Two new provisions enhance the Commission's ability to monitor the securities

markets. First, large traders may be required to provide information to the

Commission concerning their identity and the accounts through which they effect

! transactions. Moreover, broker-dealers must maintain in their files and make

available to the Commission information concerning large traders and large

1 transactions. The second provision authorizes the Commission to require broker1 dealers to obtain information and keep records concerning their procedures for

:1 monitoring and controlling financial and operational risks resulting from the

activities of any of their associated persons (other than natural persons). The

i Commission may require that summary reports be filed with it and may obtain

{ immediate and more detailed risk assessment information if it reasonably concludes

that it has concerns regarding the financial or operational condition of the brokerdealer.

The Act directs the Commission to undertake a number of initiatives in the

area of clearance and settlement, including the establishment of a federal advisory

committee to assess the adequacy of state commercial laws, and authorizes the

Commission, upon making the necessary findings, to adopt rules concerning the

transfer and pledge of securities that would preempt state law. Moreover, the

Commission is directed to facilitate the establishment of a national system for

prompt and accurate securities clearance and settlement, and linked or coordinated

facilitiesfor the settlement of transactions in securities, securities options, contracts

ofsale for future delivery, and options on such contracts and commodity options.

Other Amendments to the Securities Laws

A number of other Commission legislative proposals were enacted during the

101stCongress as the Securities Acts Amendments of 1990.289 Title II of the Act, the

International Securities Enforcement Cooperation Act of 1990,substantially improves

the Commission's ability to cooperate with the securities regulators of other

countries. The amendments exempt certain documents obtained from foreign

regulators from the disclosure requirements of the FOIA. They also clarify the

Commission's authority to provide foreign and domestic securities officials with

nonpublic information and permit the Commission to obtain reimbursement from

a foreign authority for expenses incurred in providing assistance to that authority.

The Commission and the self-regulatory organizations are permitted to impose

sanctions on a securities professional found by a foreign court or securities authority

to have engaged in illegal or improper conduct.

Title III of the Act, the Shareholder Communications Improvement Act of

1990, eliminates an unintended gap in the statutory scheme governing

communications with shareholders. Section 14(b) of the Exchange Act is amended

to extend to mutual funds and other investment companies the benefits of the

Commission's shareholder communication rules. These rules, which require entities

85

~

~
with fiduciary responsibilities that hold securities in nominee name to deliver proxy

materials and annual reports to beneficial owners and to provide information

concerning such beneficial owners to issuers on request, are designed to facilitate

communication between investment companies and beneficial owners of investment

company securities held in street name. Broker-dealers and bank nominees also are

required to transmit information statements to beneficial owners of securities. An

issuer subject to the proxy provisions must transmit such statements to shareholders

of record when it holds a shareholder vote but does not solicit proxies. The

amendments require mutual funds and other investment companies to provide

such information statements under similar circumstances.

The Trust Indenture Reform Act of 1990 was enacted as Title IV of the Act. It

comprehensively modernizes the Trust Indenture Act of 1939 to accommodate its

requirements to the needs of contemporary financing and institutional trust practice

without undermining the purposes of the Act. The Trust Indenture Act requires that

non-exempt debt issued to the public must be issued under an indenture and

imposes certain requirements and limitations on the contract that governs the rights

and duties of the issuer, the debtholders, and the indenture trustee. The recent

amendments make mandatory indenture terms self-executing through operation of

law to make certain that such provisions are part of every indenture qualified under

the Act. The Commission's exemptive authority under the Act is broadened, and it

is permitted to allow foreign entities to serve as trustees under qualified indentures

in certain circumstances, In recognition of modem trust practice, technical conflicts

of interests are made irrelevant to a trustee's eligibility prior to a default.

Jurisdictional Proposal

In June 1990, the Department of the Treasury transmitted to Congress an

Administration legislative proposal, the Capital Markets Competition, Stability and

Fairness Act of 1990. The proposal would have transferred from the Commodity

Futures Trading Commission the authority to regulate stock index futures and

options on stock index futures by incorporating the Commodity Exchange Act

(CEA) into the Securities Exchange Act of1934 with respect to these products. Italso

would have subjected the futures exchanges' regulation of margins on stock index

futures and options to Securities and Exchange Commission oversight and would

have modified the exclusivity clause of the CEA to allow instruments with

characteristics of both futures and securities to trade in both commodity and

securities markets. The bill would have required the Securities and Exchange

Commission to report to Congress on additional modifications necessary for the

efficient regulation of the linked markets for stocks, stock options, and stock index

futures. The bill was introduced in the House as H.R. 5006 and in the Senate as S.

2814. Neither bill was reported out of committee.

Commission Testimony on Other Issues

The Office of the General Counsel prepared testimony presented on behalf of

the Commission on a wide range of issues under the federal securities laws during

the second session of the 101st Congress. On August 2,1990, the General Counsel

testified at a hearing before the House Telecommunications and Finance

Subcommittee on a draft legislative proposal sponsored by Congressman Wyden.

86
That proposal would have required each issuer to evaluate its internal control

structure and disclose the results of such assessments in its annual reports to

shareholders, along with a report by an independent public accountant on

management's assessment. The bill also specified certain procedures that must be

included in any audit of an issuer's financial statements required by the Exchange

Act and required that auditors confidentially report substantial, continuing, or

uncorrected illegalities directly to the Commission. Although these provisions

were added to the Comprehensive Crime bill by the House (H.R. 5269), the Senate

version of the bill did not include similar language. The auditor requirements were

not included in the crime bill ultimately agreed to by the Senate and House conferees

and enacted into law.

Chairman Breeden also testified on accounting reform. Before the Senate

Banking, Housing and Urban Affairs Committee on September 10, 1990, the

Chairman stressed that accounting reform, particularly a shift toward market value

accounting, is necessary to assure that meaningful financial information reaches the

public. Chairman Breeden had testified before the same committee on July 19,1990,

supporting a comprehensive reform of the U.S. system for regulating financial

institutions. The Commission took the position that Congress should undertake an

examination of the impediments to efficient operations of financial institutions and

stated that reform is necessary to reduce significantly the aggregate exposure of

taxpayers, to introduce market discipline, and to eliminate distortions to competition.

Substantially similar testimony was presented by Chairman Breeden on July 11,

1990before the Subcommittee on Telecommunications and Finance of the House

Committee on Energy and Commerce. Chairman Breeden also testified before the

House Banking, Finance and Urban Affairs Committee on November 14, 1989

concerning the collapse of Lincoln Savings and Loan and the related bankruptcy of

its holding company, American Continental Corporation. He noted that there is an

inherent risk of confusion when federally insured depository institutions are

permitted to sell uninsured securities to the public from the same offices where

insured deposits are accepted and called for legislation to protect unsuspecting

investors from potential exploitation.

Corporate Reorganizations

The Commission acts in a statutory advisor's role in reorganization cases

under Chapter 11 of the Bankruptcy Code to see thatthe interests of public investors

are adequately protected. In these cases a debtor generally is allowed to continue

business operations under court protection while it negotiates a plan to rehabilitate

the business and to pay the company's debts. Reorganization plans often provide

forthe issuance of new securities to creditors and shareholders in exchange for part

or all of their claims or interests in the debtor, under an exemption in the Bankruptcy

Code from registration under the Securities Act.

In fiscal year 1990, the Commission authorized a review of its Section 1109(a)

general statutory advisory role in Chapter 11 cases and of the adequacy of public

investor protections under Chapter 11 of the Bankruptcy Code. The goal of this

review is to provide an informed basis upon which to determine whether that role

should be modified and whether legislation is needed. In connection with the

review, the Commission has received, in response to a release issued in September

87
1989,290over 40 comments from the bench, bar, and others regarding the issues

raised in the release. The project also includes an assessment of active participation

by the Commission staff in six reorganization cases, which have been paired with

six other cases in which the Commission is not actively participating.

In its capacity as a special advisor, the Commission may raise or present its

views on any issue in a Chapter 11 case. Although the Commission may not initiate

an appeal, it frequently participates in appeals taken by others. While Chapter 11

relief is available to businesses of all sizes, the Commission generally limits its

participation to cases involving debtors that have publicly traded securities registered

under the Exchange Act. In fiscal year 1990, the Commission participated in

Chapter 11 cases on a variety of issues.

Committees

Official committees are empowered to negotiate with a debtor in possession

on the administration of a case and to participate in all aspects of the case, including

formulation of a reorganization plan. With court approval, an official committee is

permitted to employ, as a cost of administration, one or more attorneys, accountants,

or other professionals to assist the committee in performing its duties. Inaddition

to a committee representing creditors holding unsecured claims, the Bankruptcy

Code allows the court or a United States trustee to appoint additional committees

for stockholders and others where necessary to assure adequate representation of

their interests. During fiscal year 1990, the Commission moved or supported

motions for the appointment of committees to represent investors in two Chapter 11

cases.?"

In a case having practical significance for the representation of equity securityholders by official committees, In re The Worthington Company,292 the Commission

filed a memorandum in support of a petition for rehearing in the Court of Appeals

for the Sixth Circuit, taking the position that the Bankruptcy Code permits regular

reimbursement of actual, necessary expenses of members who serve on official

committees. The panel majority, which was the first court of appeals to address this

issue, had held that because there is no express provision in the Bankruptcy Code

permitting the payment of expenses incurred by members of an official creditors'

committee, such expenses cannot be paid from the estate. The Commission,

agreeing with the dissenting opinion, urged that the panel majority misinterpreted

Section S03(b) of the Code, which gives bankruptcy courts considerable flexibility

in deciding which expenses can be paid from the estate. After the close of the fiscal

year, the Sixth Circuit panel, agreeing with the Commission's position, reversed its

earlier decision and permitted the payment committee expenses.i"

Estate Administration

The Commission acts to protect the interests of public investors in reorganization

cases by participating on selected issues involving administration of the debtor's

estate that have a significant impact upon the rights of public investors.

In Grogan v. Garner/" in response to the Supreme Court's request for the

government's views, the Solicitor General filed an amicus curiae brief on behalf of the

Commission (and other interested federal departments and agencies) concerning

the standard of proof applicable in a proceeding to have a debt that is based on the

88
debtor's fraud excepted from the bankruptcy discharge. The United States Court of

Appeals for the Eighth Circuit295 had held that a clear and convincing evidence

standard (rather than the lesser standard of preponderance of the evidence) applied

in determining whether such fraud claims can be discharged under Section 523 of

the Bankruptcy Code.

The government's brief in the Supreme Court pointed out that the Circuit

Court had erroneously based its decision on a presumption that Congress was

aware when it enacted Section 523 that the "prevailing view" was that fraud had to

be proved by clear and convincing evidence. The brief demonstrated that there was

in fact no consistent pre-Code practice of requiring clear and convincing proof either

to establish fraud generally or to demonstrate in bankruptcy that a debt was

incurred by fraud. Inaddition, the brief argued that application of the clear and

convincing evidence standard would depart from the standard of proof in important

federal antifraud statutes such as the federal securities laws, the False Claims Act,

the CEA, the money penalty provisions of the Federal Deposit Insurance Act, and

RICO.

Moreover, application of the clear and convincing evidence standard in

Section 523 proceedings would mean that fraud victims who have successfully

litigated fraud claims under these antifraud statutes would have to litigate their

claims again, under a higher standard of proof, in the bankruptcy court. Finally, the

brief argued that the "fresh start" policy of the Bankruptcy Code was not inconsistent

with applying a lower standard of proof, since an innocent victim's interest in

obtaining compensation for fraud is at least as important as the defrauding debtor's

interest in obtaining a "fresh start" via the bankruptcy discharge. After the close of

the fiscal year, the Supreme Court, agreeing with the government's position, ruled

that the preponderance of the evidence standard was applicable under the Section

523of the Code.296

In In re Resorts International, Inc.297 the Commission, relying on In re BaldwinUnited, 43 o.R. 443 (S.D. Ohio 1984),filed a brief in the bankruptcy court urging that

indemnification of legal defense costs incurred by officers and directors may be

authorized as an administrative expense of the estate under Section 503(b)(l)(A) of

the Code if the court finds that their continued service is beneficial to the estate and

that the benefits to be derived from their continued service justify the amount of

advances for legal fees. Inthis case, because no adequate showing was made, the

Bankruptcy Court denied the debtor's request for such inderninification.

In In re Kaiser Steel Resources/" a case having major significance to the

brokerage industry, the Commission, in an appeal to the Tenth Circuit, addressed

the issue of liability under fraudulent conveyance laws for payments made in

connection with a leveraged buyout. Kaiser brought an adversary proceeding

naming 194 defendants-including financial intromediance such as brokerage

firms, banks, and trust companies as well as its former shareholders from whom

Kaiser is seeking to recover payments it made in a 1984leveraged buyout (LBO), on

the ground that the transaction was a fraudulent conveyance under California law,

and thus is subject to avoidance under the Bankruptcy Code. The Tenth Circuit in

a test case involving a discount brokerage firm defendant, held that the LBO

payments are securities "settlement payments" protected from avoidance under

Section 546(e) of the Code. The Tenth Circuit is now considering whether Section

89
546(e) applies to the remaining financial intermediaries' defendants and Kaiser's

former shareholders."? The Commission, in its brief to the Tenth Circuit, argued

that Section 546(e) on its face applies to payments made ''by or to" a stockbroker,

securities clearing agency, or financial institution, and that the Kaiser LBO payments

were all made by or to one of these entities. In addition, interpreting Section 546(e)

as applying to financial intermediaries and shareholders furthers the important

objectives of protecting the integrity of the securities clearance and settlement

system and promoting investor confidence in the securities markets.

In In re General Development Corp.,3°o the Commission filed a brief addressing

the scope of the bankruptcy court's authority to enjoin a Delaware state court action

seeking authority to nominate and solicit the election of an alternative slate of

candidates for the debtor's board of directors. The regular annual meeting had been

scheduled by the company's board of directors after the company filed its Chapter

11 petition. The Commission argued, consistently with the position urged by the

Commission and adopted by the Second Circuit in In re Johns-Manville COrp.,3°1 that

shareholders of debtor corporations do not lose their corporate governance rights

under state law, unless it is shown that there has been a "clear abuse" of such rights

that is likely to jeopardize the reorganization. The bankruptcy court, agreeing with

the Commission's position, concluded that the record did not support a finding of

clear abuse and allowed the Delaware action to continue.

During fiscal year 1990, the Commission reiterated its position (55th Annual

Report at 84-85, 54th Annual Report at 96, and 53rd Annual Report at 73) that class

claims are permissible in bankruptcy. The Commission believes that, under

principles of statutory construction, the well-recognized right to file class claims

outside of bankruptcy is equally available in bankruptcy cases. In In re LTV COrp.,3°2

the Commission filed a brief in the Second Circuit reiterating its view that class

claims are permissible in bankruptcy. In this case, the district court, relying on The

American Reserve3°3 and The Charter CO.304circuit court decisions, concluded that

permitting proofs of claim to be filed on behalf of a class is consistent with the broad

goals of the Bankruptcy Code.

In reversing the bankruptcy judge's decision, the court rejected a much-cited

1985 decision to the contrary in In re Johns-Manville,305 by the Chief Judge of the

Bankruptcy Court for the Southern District of New York. The appeal is pending.

Disclosure Statements/Plans of Reorganization

A disclosure statement is a combination proxy and offering statement used in

soliciting acceptances of a plan of reorganization. Such plans often provide for the

exchange of new securities for claims and interests of creditors and shareholders of

the debtor. The Bankruptcy Code provides that adequate disclosure is to be made

without regard to whether or not the information provided would otherwise

comply with the disclosure requirements of the federal securities laws. However,

in recognition of the Commission's special expertise on disclosure questions, the

Bankruptcy Code recognizes the Commission's right to be heard, distinct from its

special advisory role, on the adequacy of disclosure. For this reason, the Bankruptcy

Rules require service on the Commission of all disclosure statements.

During fiscal year 1990, the Commission received over 6,000 disclosure

statements filed in Chapter 11 cases involving both privately-held and publicly90
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held corporations. The staff limits its review to those disclosure statements filed in

casesinvolving a publicly-held company or a company likely to be publicly traded

as a consequence of the reorganization. During 1990, the staff reviewed 93

disclosure statements.

In its review of disclosure statements, the staff seeks to determine whether the

issuance of securities under a plan is consistent with the exemption from registration

in the Bankruptcy Code and otherwise in compliance with the federal securities

laws. The Commission also reviews statements to determine whether there is

adequate disclosure concerning the proposed plan. Generally, the Commission

seeksto resolve questions concerning bankruptcy disclosure through staff comments

to the plan proponent. If questions cannot be resolved through this process, the

Commission may object to the disclosure statement in the bankruptcy court. During

fiscal year 1990, the Commission commented on disclosure statements in 57 cases.

The vast majority of the Commission's comments were adopted by debtors. The

., Commission was compelled to object to disclosure statements in three cases.306 In

i In re American Medical Technology, Inc.307 and In re Saratoga Standardbreds, Inc.,308the

>i Commission filed objections to proposed plans of substantially assetless publiclyheld shell corporations. Both plans contemplated no business operations but 1 sought, contrary to Section 114l(d)(3) of the Bankruptcy Code, to employ the

discharge provisions of Chapter 11 to discharge claims of creditors. 1 In both cases the principal purpose of the plan was to emerge from Chapter 11 l as a publicly-traded company without assets or liabilities and to merge with

l operating businesses at some unspecified time in the future. In addition, the

Commission viewed the use of Chapter 11by corporate shells to cleanse themselves

< of liabilities as an abuse of the reorganization process. In American Medical, the

i bankruptcy court agreed with the Commission's position and sustained its objection.

In Saratoga, the bankruptcy court overruled the Commission's objection in light of

the debtor's showing that after reorganization it would have had sufficient funds to

meet its reporting obligations under the Exchange Act.

The Commission also objected in SIS Corp. to confirmation of the debtor's plan

of liquidation because it sought to discharge all claims of creditors. The debtor's

plan appeared to be structured in a manner that would enable the debtor to resurrect

its corporate shell after confirmation. In denying confirmation, the court agreed

with the Commission's position.

In In re Southmark COrp.309 and In re SIS COrp.,31O the Commission filed

objections to the confirmation of proposed plans, arguing, as it has on several other

occasions."! that the provisions of the plan that purported to discharge and release

non-debtor liability should be stricken or revised because such provisions are

beyond the confines of the Bankruptcy Code discharge of liability.

In Southmark, the provision also would have protected non-debtor third

parties from future Commission enforcement actions. Citing Underhill v. Royal, 769

F.2d 1426 (9th Cir. 1985), the Commission argued that Section 524(e) of the Code

does not empower a bankruptcy court to discharge the liabilities of non-debtors

pursuant to a plan of reorganization -- that is, a bankruptcy court can affect only the

relationships of debtors and creditors and cannot discharge the liabilities of a nondebtor. In Southmark, in response to the Commission's objection, the debtor

amended its plan both to exclude Commission enforcement proceedings from the

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operation of the discharge and release provision and also to exclude most public

investors. However, the bankruptcy court approved the plan containing the release

provision on the theory that it was consensual, since creditors were given ar

opportunity to, in effect, "opt out" of the scope of the release provision. InSIS Corp.,

following the court's oral statement that the release provision was "unacceptable,"

the debtor deleted the provision from its plan.

Compliance with the Registration Requirements of the Securities Act

Section 1145 of the Bankruptcy Code contains a limited exemption from

registration under the Securities Act for the distribution of securities by a debtor, or

an affiliate or successor to the debtor, pursuant to a plan of reorganization and in

exchange for claims against or securities of the debtor or such affiliate.

The issuance of securities pursuant to a plan is deemed to be a "public

offering," which means that there is no restriction on resale of such securities unless

the seller is an "underwriter" as specifically defined in Section 1145(b). During the

fiscal year, the staff had no occasion to file formal objections to a reorganization plan

on the basis of violations of Section 1145 of the Bankruptcy Code.

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Economic Research and Analysis

The Office of Economic Analysis (OEA) provides technical support and

analysis to assist in evaluating the economic aspects of the Commission's

regulatory program. The economics staff provides the Commission with

research and advice on rule proposals, policy initiatives, and enforcement

actions. The staff assists the Commission in making decisions affecting the

efficiency and structure of our nation's securities industry. In addition, the

staff monitors developments in capital markets around the world and major

program initiatives affecting the United States financial services industry,

markets, and investors.

Key 1990 Results

Application of new technology within the securities industry, increased

complexity of new financial products, and development of new trading strategies

have resulted in a more dynamic domestic securities market. The United States

securities industry has been a leader in financial innovation for many years. United

States securities markets continue to benefit from a regulatory structure that fosters

both competition and the protection of investors and, thereby, promotes both public

confidence and operational efficiency in the markets.

A comprehensive program of economic and policy analysis is provided by the

economics staff, focusing on issues related to corporate restructuring, stock price

volatility, mutual fund performance, disclosure, insider trading, and market

manipulation. The market decline of October 1989 renewed the debate over the

effectiveness and economic consequences of circuit breaker mechanisms. The wave

of going-private transactions and junk bond financings that took place during the

1980's continues to require the attention of the office. Concern in this area was

heightened by the failure of Drexel Burnham Lambert, the decline in the junk bond

market, and some highly publicized cases of financial difficulty following goingprivate transactions.

Continued discussion of proposals for comprehensive reform of financial

services regulation, including the possible repeal of the Glass-Steagall Act, requires

analysis of the economic implications of merging banking, insurance, and brokerdealer activities. The need for this analysis is made all the more critical by the

deepening concerns over our national system of deposit insurance. Along these

lines, OEA reported that an analysis of bank bond yield spreads and some direct

estimates of deposit insurance premiums (using the option pricing model) strongly

suggest that deposit insurance is currently underpriced and that the current practice

of flat-pricing for insurance does not recognize the wide variation of risk across

banks. In the investment company area, the proliferation of funds and fund types,

coupled with marketing techniques by investment companies, including the use of

12b-1fees, has resulted in complex disclosure issues that can benefit from economic

analysis.

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The staff reviewed rule proposals encompassing the full range of the

Commission's regulatory program. The staff also provided advice, technical

assistance, and empirical analyses of issues of concern to the Commission and its

operating divisions. The controversy surrounding the growth of the penny stock

market also has required increased attention by the economics office.Also, monitoring

programs were developed and maintained to study the impact of major rules, new

trading facilities, and market developments.

Key accomplishments include completion of studies on issues such as;

the performance of circuit breaker mechanisms during the October 1989

market decline;

the market's reaction to pension terminations and the relationship of such

termination to corporate takeovers; and

the effects of share turnover and margin credit on stock market volatility.

Substantial progress was made toward completion of ongoing studies of the

following issues:

post-offering price performance of blank check offerings and incidence of

securities laws violations;

going-private transactions;

the effects of institutional ownership on equity market liquidity and the

willingness of corporate management to invest in long-term projects;

the relationship between insider trading and share price movements

preceding significant corporate announcements;

the rule that permits mutual funds to use fund assets to pay for distributions;

the effects of cross-border listing and stock price volatility; and

deposit insurance pricing.

In addition, the staff provided technical advice and assistance to the

Commission's operating divisions on a wide variety of issues. OEA, for example,

furnished the Commission and divisions with a quarterly report on the financial

health of the securities industry. In the enforcement area, OEA worked on diversified

cases, including insider trading, disclosure violations, suitability, and market

manipulation. The staff also assisted the penny stock task force in monitoring the

impact of the task force efforts on the number of penny stock dealers. In the securities

market area, OEA examined the impact of Rule 1Ob-21(T) pertaining to short-selling

restrictions in connection with a public offering of securities, and monitored Rule

19c-3, which allows exchange members to make off-board markets in newly listed

stocks.

In the international area, the staff continued to monitor the extent and nature

of international trading in securities, foreign and United States portfolio investment

patterns, the growth of the international bond and equity markets, and restructuring

in overseas markets.

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Management and Program Support

Management and Program Support provides the Commission and

operating divisions with management and administrative services in support

of the Commission's objectives. Management support includes overseeing

the allocation and expenditure of agency funds, liaison with Congress,

disseminating information to the press, facilitating Commission meetings,

and developing and executing management policies. Administrative support

includes services such as accounting, data processing, staffing, and space

management.

Key 1990 Results

Fiscal year 1990 was highlighted by a number of significant activities. In particular, the Commission held 59 meetings and considered 277 matters. Two

significant pieces of legislation--the Market Reform Act of 1990 and the Securities

Enforcement Remedies and Penny Stock Reform Act--were enacted to increase the

Commission's ability to protect investors and strengthen the financial integrity of

the securities markets. A third law enacted, the International Securities Enforcement

Cooperation Act, will facilitate the flow of enforcement information domestically

and internationally, and enable the Commission to sanction United States violators

of foreign securities laws.

Among other significant accomplishments were the collection of fee revenue of

$232million, compared to an appropriation level of$167 million, and enactment of

theCommission' s authorization bill, the Securities Act Amendments of 1990, which

gives the Commission authority to enter into leases directly, exempt from General

Services Administration space management regulations or directives. In addition,

theCommission staff responded to 51,914 complaints and inquiries from investors.

Office of the Secretary

The Commission held 59 meetings in fiscal year 1990,during which it considered

277 matters including rule proposals, enforcement actions, and other items that

affectsignificantly the stability of the markets and the nation's economy. Significant

actions of the Commission included:

adopting Rule 144A to establish a non-exclusive safe harbor from registration requirements for resales of restricted securities under the Securities Act of 1933 to a specified class of institutional investors;

adopting Regulation S to clarify the extraterritorial application of the

registration requirements of the Securities Act of 1933;

issuing a release to solicit comments on reform of investment company

regulation under the Investment Company Act of 1940 and the Investment Advisers Act of 1940 and related statutes;

proposing amendments to Rule 2a-7 under the Investment Company Act

of 1940 to tighten requirements for portfolio quality, maturity, and diversity of money market funds; and

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issuing a concept release to solicit public comment on permitting foreign

tender offers to proceed in the United States based upon foreign law

documentation and procedures.

Office of Legislative Affairs

At the end of the fiscal year, Congress passed two significant pieces of legislation

that substantially increase the Commission's ability to regulate the securities

markets and give the Commission new enforcement powers. The Market Reform

Act of 1990 (Public Law 101-432)authorizes the Commission to adopt rules and

procedures to enhance financial oversight, efficient clearance and settlement, and

market stability and to deter fraud and manipulation in the securities markets. The

Securities Enforcement Remedies and Penny Stock Reform Act (Public Law 101-

429) expands the Commission's powers by, among other things, authorizing it to

seek court orders imposing civil monetary penalties for any securities law violation

and to impose such penalties in administrative proceedings against broker-dealers

and other regulated entities. A third major piece of legislation--the International

Securities Enforcement Cooperation Act-which was passed as part of the

Commission's authorization bill--will facilitate greater access to enforcement

information and permits the Commission to sanction United States violators of

foreign securities laws.

Congressional interest in the Commission's activities and initiatives continued

at a high level. As a result, the Office of Legislative Affairs increased its efforts to

track proposals and accommodate congressional requests for documents and

information. The office coordinated and drafted testimony for 19 congressional

hearings, including three confirmation hearings, during the course of the year.

Office of Public Affairs

The Officeof Public Affairs communicates information on Commission activities

to those interested in or affected by Commission actions, including the press, the

general public, regulated entities, and employees of the Commission through

ongoing programs and special projects. The office publishes the SEC News Digest

daily, which provides information on rule changes, enforcement actions against

individuals or corporate entities, acquisition reports, releases, decisions on requests

for exemptions, upcoming Commission meetings, and other events of interest. The

office publishes a regular newsletter and prepares a daily summary of news clips for

Commission employees. Special projects, such assupport for activities related to the

recently formed Emerging Markets Advisory Committee for Eastern Europe, were

undertaken in support of the Commission's mission. Information on Commission

activity also is disseminated through notices of administrative actions, litigation

releases, and other materials.

Another important function isthe coordination ofthe Commission's interaction

with the press. Many Commission actions are of nationwide and, increasingly,

international interest. When appropriate, these actions are drawn to the attention

of regional, national, and international press. The office also issues press releases

on upcoming events, Commission programs, and special projects. A total of 69news

releases were issued during the year.

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In addition, the office responded to approximately 87,000 requests for specific

information on the Commission or its activities. The office also coordinates the visits

of national and foreign officials to the Commission. In total, programs for 327

foreign visitors were coordinated in fiscal year 1990.

Office of the Executive Director

The Commission's management staff initiated or continued special projects,

such as coordinating the agency's effort to join the NASD's Central Registration

Depository system, and the agency's internal control and audit follow-up

responsibilities pursuant to the Inspector General Act Amendments of 1988. The

management staff worked closely with the Chairman and other senior officials in

formulating the agency's budget submissions for the Office of Management and

Budget and Congress.

Equal Employment Opportunity. The Executive Director's Office also implemented improvements to the Commission's Equal Employment Opportunity (EEO)

programs. These improvements included:

hiring two EEO specialists with specialized experience in developing

and implementing affirmative employment programs and processing

discrimination complaints;

selecting a Commission employee for the collateral duty position of Federal Women's Program (FWP) manager;

increasing membership by 100 percent on the Federal Women's Program

Committee;

publishing policy statements by Chairman Breeden on equal employment opportunity and affirmative employment, prevention of sexual

harassment, and the promotion of minority professionals;

completing the Affirmative Employment Plan for minorities and

women;

conducting off-site EEO training for 120 agency managers and supervisors, EEO counselors, and members of the Federal Women's Program;

developing EEO reference books for use by EEO collateral duty personnel and a new pamphlet on the prevention of sexual harassment;

improving the statistical reporting system for EEO reports to the Equal

Employment Opportunity Commission and the Office of Personnel

Management;

reducing substantially the number of informal and formal discrimination complaints through use of creative conflict resolution approaches to

problems; and

creating the Jeanne Gerber Hartford Award in the name of the former

FWP manager to be presented annually at the Women's History Month

Observance at the Commission.

The Commission continued to actively recruit minorities and women. At the

end of the fiscal year, women accounted for 48.6 percent of the total Commission

work force; blacks accounted for 27.5 percent; hispanics accounted for approximately

3 percent; Asian-Americans made up 1.4 percent; and American-Alaskan natives

made up .04 percent.

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Administrative Support

The administrative support offices provide the financial, data processing,

personnel, and facilities support necessary for the Commission to carry out its

mission. Under the direction of the Office of the Executive Director, these support

services are provided by the Offices of the Comptroller, Information Systems

Management, Personnel, Administrative Services, Consumer Affairs and

Information Services, and Applications and Reports Services.

Commission Operations. Infiscal year 1990,for the eighth consecutive year, the

Commission collected revenue for the United States Treasury in excess of its

appropriation. The Commission collected fee revenue of $232 million compared to

a final appropriations level of $167 million -- a $65 million net gain to the United

States Treasury. Fee revenue is collected from four basic sources: registrations

under the Securities Act of 1933 (comprising 61 percent of total fiscal year 1990 fee

revenue); transactions on securities exchanges (30percent); tender offer and merger

filings (6 percent); and miscellaneous filings (3 percent).

Financial Management. The agency completed its second year of operating the

new accounting system, the Federal Financial System (FFS). The FFS provided the

agency with significant automation improvements such as:

entering voucher and payment data directly into the system;

creating travel authorization and procurement documents;

providing decentralized data throughout the Commission;

accomplishing voucher research on-line; and

making management data more readily available.

The Commission continued to improve its automated collection and processing

of annual fee revenue through electronic funds transfer (EFT), and a Treasury

sponsored "lockbox" depository system. The Commission received over 43,000

separate fee payments of differing amounts for transactions of exchange listed

securities and required and elective reports from about 15,000 companies. The

Commission staff began reviewing the possibility of collecting fee payments by

credit card, and the redesign of an automated fee tracking, reporting, and accounts

receivable system was begun.

Information Systems Management. During fiscal year 1990, the Office of

Information Systems Management continued to modernize the Commission's

automated data processing and information management services. These efforts

included:

enhancing the Division of Enforcement's capacity to monitor market

activity by creating an automated tool that will "report out of range"

events;

completing a pilot test of the NASD's Central Registration Depository

system, which will allow the Commission to automatically receive

broker-dealer registration information;

completing a functional requirements analysis for the new Electronic

Filing Fee Collection system, which will consolidate information for

Commission filings and associated fees; and

implementing a Wide Area Network (WAN) by connecting both the

Denver and Boston regional offices' lo~al area networks through a dedicated communication line to headquarters.

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Throughout the year, improvements to office automation technologies and

networking capabilities helped improve staff productivity.

Personnel Management. The Office of Personnel revised regulations on

performance appraisals, the performance management and recognition system,

leave transfers, emergency dismissals, and position classification appeals in

accordance with governmentwide changes. In addition, the Commission's drugfreeworkplace plan was approved, and steps were begun toward full implementation

of that plan.

The number ofinternal and outside courses attended by Commission employees

increased by 68 percent from 2,200 courses attended in fiscal year 1989 to 3,700 in

fiscal year 1990. In response to continued Commission emphasis on information

systems automation, 1,145 employees were trained on computer systems and

applications. In addition, the office provided requested training to 700 staff

members to enhance or improve their on-the-job performance.

The Office of Personnel extended to all areas of the country its localized

employee assistance program contract services for staff and their families needing

special help, primarily for counseling and referral services. The employee assistance

counselors also support the Commission's drug-free workplace plan by providing

education, consultation, and referral services.

Due to a significantincrease in the agency's staffinglevel in 1990,the Commission

conducted its largest recruitment campaign in the last five years. Despite

noncompetitive salaries and high turnover, over 500 new employees were hired,

resulting in a net increase of over 250 employees. Emphasis was placed on the

recruitment of attorneys, accountants, securities compliance examiners, computer

specialists, and secretaries. The significant hiring was accomplished through

aggressive use of delegated examining authority, special OPM hiring programs,

and advertising and attendance at numerous OPM job fairs.

In cooperation with the Office ofEqual Employment Opportunity, the Office of

Personnel co-sponsored several activities, including a three-day conference to train

EEOprogram workers, supervisors, and executives from regional and headquarters

offices. In addition, the system to monitor and record employee compliance with the

Commission's rules of conduct was revised and expanded. To recognize employee

performance, the Commission awarded more than $1 million in incentive and

performance awards.

Facilities Management. The Commission requested and obtained independent

leasing authority from Congress in Its authorization bill that was enacted into law

on November 15, 1990. Provisions in the bill remove the Commission from

restrictions of General Services Administration (GSA)office leasing requirements.

Over time this will give the Commission the flexibility to provide more appropriate

working conditions for the staff. The new authority also will save both time and

money in the acquisition of space.

Earlier in the fiscal year, the Commission obtained temporary Delegated

Procurement Authority from the GSA for the acquisition of 21,000 square feet of

expansion space within the headquarters building. The Commission staff began

relocating the Denver, Chicago, Atlanta, and Miami field offices and will continue

this effort in fiscal year 1991.

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The Office of Administrative Services awarded contracts and purchase orders

in excess of $30 million during fiscal year 1990, an increase of approximately $12

million over the previous fiscal year. The total number of actions was 2,495, a 26

percent increase over 1989. A significant portion of the increase is attributed to

computer equipment, software, and service-related procurements. In other areas,

the office increased its printing production from 50.8 million units to 60.4 million;

incoming mail increased by approximately five percent over the preceding fiscal

year, while outgoing mail increased by approximately eight percent. The installation

of a new telephone answering system in the publications section improved the

Commission's response time to public requests for documents and forms.

Consumer Affairs and Information Services. The Office of Consumer Affairs

and Information Services is responsible for (1) responding to investor complaints

and inquiries; (2)screening information received to make referrals to SEC program

divisions, self-regulatory agencies, states, or other federal agencies; (3) collecting

and analyzing complaint information and trends to help target regulatory and

enforcement activities; and (4) preparing educational materials to assist investors in

protecting their interests. In addition, the office processes requests for information

under statutes such as the Freedom of Information Act (FOIA) and the Privacy Act

(PA).

The Commission's consumer affairs staff responded to a total of 51,914complaints

and inquiries from investors, an increase of 15 percent over those received in fiscal

year 1989. A total of 40,109 were complaints and 11,805 were inquiries. Of the total

received, complaints about program trading totaled 14,921 (37 percent) while 14,260

complaints involved broker-dealers (36 percent). Broker-dealer complaints declined

almost 17 percent from those received last fiscal year. High pressure or fraudulent

sales practices were identified as the most prevalent type of complaint against

broker-dealers. Complaints against penny stock broker-dealers declined from 3,863

in fiscal year 1989 to 2,023 in fiscal year 1990, accounting for approximately 14

percent of all broker-dealer complaints this fiscal year. The remainder of complaints

were divided primarily among issuers, mutual funds, banks, transfer agents, and

investment advisers.

In order to improve responsiveness to the public and support to the program

divisions, the office made substantial progress in the re-design and development of

a new Commission computerized complaint tracking system. This is a multi-year

effort begun in fiscal year 1989, and is scheduled to be implemented in mid-1991.

The new system will permit more thorough analysis of complaint information and

trends and increase the timeliness of Commission responses to investors and other

members of the public. Another mission of the Office of Consumer Affairs and

Information Services involves responding to a variety of information requests

pursuant to federal access laws, and processing requests for confidential treatment.

The office processed 2,232 FOIA requests and appeals, 30 PA requests and appeals,

57 Government in the Sunshine Act requests, 22 government referrals, and 3,352

requests and appeals for confidential treatment. Confidential treatment requests

are typically made in connection with proprietary corporate information and are

carefully evaluated in connection with access requests to prevent the unwarranted

disclosure of information exempt under the FOIA. A total of 96 percent of all FOIA/

PA requests were responded to within the statutory time frame. The remaining four

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percent of the requests involved voluminous records and were placed in a first-in/

first-out system for the actual review and production of records. In addition, the

FOIA/PA staff coordinated 1,014requests for Commission records from members

of Congress.

Public Reference. In a continuing interest to serve the public, the procedures in

the headquarters public reference room were enhanced to ensure expeditious

identification, location, and retrieval of documents and microfiche. The staff

answered questions and completed requests for documents from over 57,000

visitors to the headquarters public reference room. Nearly 288,000paper documents

and 335,353 microfiche records were added to the existing library of publicly

available information, which were maintained amid constant use by these visitors.

In addition, the staff processed over 500 formal requests for certifications of

Commission filings and responded to more than 40,000 requests for microfiche

records, about 5,100requests for paper filings, and over 123,000telephone inquiries

regarding filings.

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Commission Members and Principal Staff Officers

(As ot Non>mbcr I, 1l)Yll)

Richard C. Breeden, Chairman

Edward H. Fleischman

Mary L. Schapiro

Philip R. Lochner, Jr.

Richard Y. Roberts

Executive Assistant to the Chairman: Marianne K. Smythe

Principal Staff Officers

James M. McConnell, Executive DIrector

Kenneth A. Fogash, Deputy Executive Director

Linda C. Quinn, Director, Division of Corporation Finance

Elisse B. Walter, Deputy Director

Mary E. T. Beach, Associate Director

Ernestine M. R. Zipoy, Associate Director

Robert Bayless, Associate Director

Mauri L. Osheroff, Associate Director

William E. Morley, Associate Director

William R. McLucas, Director, Division of Enforcement

Bruce A. Hiler, Associate Director

Harry J. Weiss, Associate Director

Joseph I. Goldstein, Associate Director

Colleen P. Mahoney, Chief Counsel

Thomas C. Newkirk, Chief Litigation Counsel

Richard G. Ketchum, Director, Division of Market Regulation

Mark D. Fitterman, Associate Director

Brandon C. Becker, Associate Director

Larry E. Bergmann, Associate Director

VACANT, Director, Division of Investment Management

VACANT, Associate Director

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Term Expires

1993

1992

1994

1991

1995
Gene A. Gohlke, Associate Director

Mary S. Podesta, Associate Director

William C. Weeden, Assistant Director, Office of Public Utility

Regulation

James R. Doty, General Counsel

Paul Gonson, Solicitor

Jacob H. Stillman, Associate General Counsel

VACANT, Associate General Counsel

Phillip D. Parker, Associate General Counsel

William S. Stem, Associate General Counsel

Michael D. Mann, Director, Office of International Affairs

Edmund Coulson, Chief Accountant

Glen L. Davison, Deputy Chief Accountant

Kenneth Lehn, Chief Economist, Office of Economic Analysis

Jeffry L. Davis, Deputy Chief Economist

Terry M. Chuppe, Associate Chief Economist

David H. Malmquist, Associate Chief Economist

Jonathan G. Katz, Secretary

Margaret H. McFarland, Deputy Secretary

Mary M. McCue, Director, Office of Public Affairs

John D. Heine, Senior Public Affairs Specialist

Gary E. Fendler, Director of Communications

Warren E. Blair, Chief Administrative Law Judge

Lawrence H. Haynes, Comptroller

Henry I.Hoffman, Assistant Comptroller

Richard J. Kanyan, Director, Office of Administraiioe Services

David L. Coman, Deputy Director

VACANT, Director, Office of Personnel

William E. Ford, II, Assistant Director

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Wilson A. Butler, Jr., Director, Office of Applications and Reports Services

Marie B. Simpson, Deputy Director

Bonnie Westbrook, Director, Office of Consumer Affairs and Information Services

Gregory Jones, Sr., Director, Office of Information Systems Management

VACANT, Deputy Director

R. Mitchell Delk, Director, Office of Legislative Affairs

James A. Clarkson, III, Director of Regional Office Operations

VACANT, Manager, Equal Employment Opportunity

John O. Penhollow, Director, Office of EDGAR Management

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Biographies of Commission Melnbers

Chairman

Following his nomination by President Bush

and confirmation by the United States Senate, Richard C. Breeden was sworn in as the 24th Chairman of

the Commission on October 11, 1989. As one of the

youngest Chairmen in the agency's history, Mr.

Breeden isresponsible for leading the Commission in

the development of policy and for overall direction of

the Commission. Mr. Breeden also represents the

Commission to the Congress, the Administration,

the financial community, and the public at large. Mr.

Breeden serves as a member of the President's Working Group on Financial Markets. He was also appointed by President Bush to serve on the Council of the Administrative Conference

of the United States.

In the fall of 1990, Mr. Breeden was elected by his colleagues from the largest

securities markets in the world to serve as Chairman of the Technical Committee of

the International Organization of Securities Commissions (lasCO) for a two-year

term. In this capacity, Mr. Breeden is responsible for leading the efforts of securities

regulatory agencies worldwide in seeking to develop international regulatory standards for securities markets. Mr. Breeden also served as Chairman of the Executive

Committee of IOSCO from 1989-1990.

From the Inauguration of President Bush until he assumed the Chairmanship,

Mr. Breeden served in the White House as Assistant to the President for Issues

Analysis. In this capacity, Mr. Breeden was responsible for coordinating the development of Executive Branch policies concerning specific problems such as the

savings and loan industry crisis.

From 1982-1985, Mr. Breeden served as Deputy Counsel to then-Vice President Bush, working on a wide range of regulatory problems. In addition, he served

as Staff Director of the Vice President's Task Group on Regulation of Financial

Services, a cabinet level group established to recommend improvements in federal

financial regulatory programs. Blueprint for Refonn, the Task Group's final report,

authored by Mr. Breeden, was issued in November 1984. From 1981-1982, Mr.

Breeden served as Executive Assistant to the Undersecretary of Labor.

Mr. Breeden is a lawyer by training. From 1985-1989, he was a partner in the

Washington office of a major law firm, where his legal practice included financial

transactions and regulatory matters of all types. Prior to his original government

service, Mr. Breeden practiced law in New York City from 1976-1981, where he

handled securities underwriting, bank financing, and major domestic and international business transactions. This followed completion of an appointment to teach

constitutional law and federal jurisdiction at the University of Miami School of Law.

Mr. Breeden was educated at Stanford University (B.A. with honors in international relations, 1972) and Harvard Law School (l.D; 1975).

10fi
Commissioner

Edward H. Fleischman was sworn in as the 66th

-: Member of the Securities and Exchange Commission

on January 6,1986. His term expires in June 1992.

Mr. Fleischman was admitted to the New York

Bar in 1959 and to the bar of the UiS, Supreme Court

in 1980. He formerly practiced law with Beekman &

Bogue (a predecessor of the present Gaston & Snow

firm), where he specialized in securities and corporate law and related areas.

During his career, Mr. Fleischman has been

elected a member of the American Law Institute, the

American College of Investment Counsel (of which

he is currently President) and the American Society

of Corporate Secretaries, and has served as an Adjunct Professor of Law teaching securities regulation at the New York University Law School.

Mr. Fleischman was born in Cambridge, Massachusetts on June 25, 1932. He

received his undergraduate education at Harvard College, served in the Ll.S, Army

from 1952 to 1955, and obtained his LL.B degree from Columbia Law School.

Mr. Fleischman serves on the American Bar Association Section of Busmess

Law's Committee on Counsel Responsibility and chairs the Committee on Developments in Business Financing. He co-drafted that Committee's 1979 paper on resale

of institutional privately-placed debt and chaired its Subcommittees on Simplified

Indenture and on Annual Review of Developments. He also serves on the Committee on Federal Regulation of Securities, for which he chaired Subcommittees on Rule

144 and on Broker-Dealer Matters and co-drafted the Committee's 1973 letter on

utilization and dissemination of "inside" information. In addition, he serves on the

Committee on Futures Regulation and the Committee on Developments in Investment Services, and has been active in the Section on Administrative Law.

Mr. Fleischman is also a member of Committee E--Banking Law and of Committee Q--Issues and Trading in Securities of the International Bar Association

Section on Business Law. In the International Law Association (American Branch),

he has been appointed to membership on the Committee on International Regulation of Securities.

Commissioner

Mary L. Schapiro was sworn in as the 67th

Member of the Securities and Exchange Commission

on December 5, 1988. She was nominated to the Commission by President Reagan on December 22, 1988

in a recess appointment. Ms. Schapiro was renominated to the Commission by President Bush on

November 8, 1989 and confirmed by the Senate on

Novemberl8, 1989. Her term expires on june S, 1994.

Ms. Schapiro came to the Commission from the

Futures Industry Association, where she was General Counsel and Senior Vice President. While at the

106
PIA, her work included regulatory, tax and international issues, including extensive

liaison with foreign governmental officials.

Prior to her service at the PIA, Ms. Schapiro spent four years at the Commodity Futures Trading Commission. There, she served as Counsel and Executive Assistant to the Chairman of the Commodity Futures Trading Commission and was a

Trial Attorney in the Manipulation and Trade Practice Investigations Unit of the

Division of Enforcement. In the former position, Ms. Schapiro advised on all regulatory and adjudicatory matters pending before the Commission and on legislation.

She also represented the Chairman with federal and state officials, Congress, and

the futures industry, in addition to other duties.

A 1977 honors graduate of Franklin and Marshall College in Lancaster, Pennsylvania, Ms. Schapiro earned a Juris Doctor degree (with honors) from The

National Law Center of George Washington University in 1980. While in law

school, Ms. Schapiro completed internships in the Farm Credit Administration and

in the Executive Office of the President. She is a member of the District of Columbia Bar, the American Bar Association, and the Association of the Bar of the City of

New York. From 1986 to 1988,she served on the Executive Council of the Committee on Futures Regulation of the American Bar Association.

Commissioner

Philip R. Lochner, Jr. was sworn in as the 68th

Member of the Securities and Exchange Commission

on March 12, 1990by the Honorable Stanley Sporkin,

Judge of the United States District Court for the

District of Columbia. Mr. Lochner was nominated to

the Commission by President Bush in January 1990

for a term expiring in 1991.

Before being nominated to the Commission,

Mr. Lochner was General Counsel, Secretary, and

VicePresident for Time Warner Inc. He became General Counsel and Secretary in September 1988. He

was elected a Vice President of Time Warner Inc. in

October 1986, and also assumed responsibility for Corporate Human Resources that

year. From 1984 to 1986, he served as Senior Vice President and General Counsel

for the Time Warner Inc. Video Group. Prior to that, he was Corporate Associate

General Counsel for Time Warner Inc. for four years, having joined the company in

1978 as Associate General Counsel.

Before joining Time Warner Inc., Mr. Lochner was with the law firm of

Cravath, Swaine & Moore. He joined the law firm in 1973 after serving, from 1971

to 1973, as an Associate Dean and Assistant Professor of Law at State University of

New York in Amherst, New York.

Mr. Lochner earned a Ph.D. in political science from Stanford University in

1971.He also studied at the University of London from 1967 to 1968 as a Fulbright

Fellow. Mr. Lochner earned a LL.B. degree from Yale University in 1967,where he

was on the Board of Editors of the Yale Law Journal, and was a member of the Order

of the Coif. He earned a B.A. from Yale University in 1964 and was elected to Phi

Beta Kappa.

107
His professional activities include the New York State Bar Association, where

he served as Chairman of the Corporate Counsel Section, and has also served as a

member of the Committee on Corporation Law for the Banking, Corporation, and

Business Law Section of that Association. Mr. Lochner is a Fellow of the American

Bar Foundation and he served as a lecturer on securities law matters for the Practising Law Institute. Heisa member of the American, New York State, and City of New

York Bar Associations, and the American Law Institute.

Mr. Lochner was born in New Rochelle, New York on March 3, 1943. He and

his wife, Sally, have two children.

Commissioner

Richard Roberts was nominated to the Commission by President Bush and confirmed by the

Senate on September 27, 1990. He was sworn in as a

Commissioner on October I, 1990 by the Honorable

Stanley Sporkin, Judge for the United States District

Court of the District of Columbia. His term expires in

June 1995.

Before being nominated to the Commission,

Mr. Roberts was in the private practice of law with

the Washington office of Miller, Hamilton, Snider &

adorn. Before joining the law firm in April 1990,Mr.

Roberts was administrative assistant and legislative

director for Senator Richard Shelby (D., Ala.), a position he assumed in 1987. Prior

to that, Mr. Roberts was, for four years, in the private practice of law in Alabama.

From 1979 to 1982, Mr. Roberts was administrative assistant and legislative director for then-Congressman Shelby.

Mr. Roberts is a 1973 graduate of Aubum University and a 1976 graduate of

the University of Alabama School of Law. He also received a Master of Laws in

taxation from the George Washington University National Law Center in 1981. He

is admitted to the bar in the District of Columbia and Alabama. Mr. Roberts is a

member of the National Association of Bond Lawyers, the American Bar Association, the Alabama State Bar Association, and the District of Columbia Bar Association.

He and his wife, the former Peggy Frew, make their home in Fairfax, Virginia

with their son and two daughters.

Mr. Roberts was bom in Birmingham, Alabama on July 3, 1951.

108
Regional and Branch Offices and Administrators

REGION 1

REGION 2

REGION 3

REGION 4

Lawrence lason

NEW YORK REGIONAL OFFICE

75 Park Place, 14th Floor

New York, NY 10007

212/264-1636

Region: New York and New Jersey

Douglas Scarff

BOSTON REGIONAL OFFICE

John W. McCormack Post Office

and Courthouse Building, Suite 700

Boston, MA 02109

617/223-9900

Region: Maine, New Hampshire, Vermont,

Massachusetts, Rhode Island, and Connecticut

Richard P. Wessel

ATLANTA REGIONAL OFFICE

1375 Peachtree Street, NE, Suite 788

Atlanta, GA 30367

404/347-4768

Region: Tennessee, Virgin Islands, Puerto Rico,

North Carolina, South Carolina, Georgia, Alabama,

Mississippi, Florida, and Louisiana east of the

Atchafalaya River

Charles C. Harper

MIAMI BRANCH OFFICE

Dupont Plaza Center

300 Biscayne Boulevard Way, Suite 500

Miami, FL 33131

305/536-5765

William D. Goldsberry

CHICAGO REGIONAL OFFICE

Everett McKinley Dirksen Building

219 South Dearborn Street, Room 1204

Chicago, IL 60604

312/353-7390

Region: Michigan, Ohio, Kentucky, Wisconsin,

Indiana, Iowa, Illinois, Minnesota, and Missouri

109
REGION 5

REGION 6

REGION 7

110

T. Christopher Browne

FORT WORTH REGIONAL OFFICE

411 West Seventh Street, 8th Floor

Fort Worth, TX 76102

817/334-3821

Region: Oklahoma, Arkansas, Texas, Louisiana

west of the Atchafalaya River, and Kansas

Joseph C. Matta

HOUSTON BRANCH OFFICE

7500 San Felipe Street, Suite 550

Houston, TX 77063

713/266-3671

Robert H. Davenport

DENVER REGIONAL OFFICE

410 17th Street, Suite 700

Denver, CO 80202

303/844-2071

Region: North Dakota, South Dakota

Wyoming, Nebraska, Colorado,

New Mexico, and Utah

Donald M. Hoed

SALT LAKE BRANCH OFFICE

U.S. Post Office and Courthouse

350 South Main Street, Room 505

Salt Lake City, UT 84101

801/524-5796

James 1. Sanders

LOS ANGELES REGIONAL OFFICE

5757 Wilshire Boulevard, Suite 500 East

Los Angeles, CA 90036-3648

213/965-3998

Region: Nevada, Arizona, California, Hawaii, and

Guam

Cer Gladwyn Goins

SAN FRANCISCO BRANCH OFFICE

901 Market Street, Suite 470

San Francisco, CA 94103

415/744-3140
REGIONS

REGION 9

Jack H. Bookey

SEATILE REGIONAL OFFICE

3040 Jackson Federal Building

915 Second Avenue

Seattle, WA 98174

206/442-7990

Region: Montana, Idaho, Washington, Oregon,

and Alaska

James c. Kennedy

PHILADELPHIA REGIONAL OFFICE

The Curtis Center, Suite 1005 E.

601 Walnut Street

Philadelphia, PA 19106-3322

215/597-3100

Region: Pennsylvania, Delaware, Maryland,

Virginia, West Virginia, and

District of Columbia

111
Endnotes

lSEC v. Finacor Anstalt, Litigation Release No. 12296 (November 20,1989),44

SEC Docket 2231.

2SEC v. Certain Purchasers of Common Stock and Call Option Contracts for the

Common Stock of Can tel Corporation, Litigation Release No. 12542 (July 13, 1990),46

SEC Docket 1395.

3SEC v. Fondation Hai, Litigation Release No. 12353 (January 18, 1990),45 SEC

Docket 714.

4SEC v. Jason M. Chapnick, Litigation Release No. 12657 (October 4, 1990),47

SEC Docket 784.

5 SEC v. Security National Bancorp, Inc. and Wesley Godfrey, [r., Accounting and

Auditing Enforcement Release No. 253 (February 6,1990),45 SEC Docket 1046.

6SEC v. John E. Parigian, Accounting and Auditing Enforcement Release No.

257 (May 18, 1990), 46 SEC Docket 515.

7SECv. Jiro Yamazaki andIkuko Sekiguchi- Yamazaki, Litigation Release No. 12507

(June 11, 1990),46 SEC Docket 865.

BSEC v. Power Securities Corporation, Litigation Release No. 12605 (September

6,1990),46 SEC Docket 2073.

9SECv. Blinder, Robinson &Co.,Inc., Litigation Release No. 12539 (July 12, 1990),

46 SEC Docket 1242.

l°SECv. Wellshire Securities, Inc., Litigation Release No. 12411 (March 14, 1990),

45 SEC Docket 1477.

l1SEC v. Leonard M. Tucker, Litigation Release No. 12307 (November 27,1989),

44 SEC Docket 2364.

12SECv. Lifeline Healthcare Group, Ltd., Litigation Release No. 12300 (November

21,1989),44 SEC Docket 2236.

13SECv. Arnold Kimmes, Litigation Release No. 12210 (August 9,1989),44 SEC

Docket 507.

14SECv. Suzanne Bosworth, Litigation Release No. 12580 (August IS, 1990),46

SEC Docket 1780.

15SECv. San Marino Securities, Inc., Litigation Release No. 12644 (September 28,

1990),47 SEC Docket 772;see also In the Matter of San Marino Securities, Inc., Securities

Exchange Act Release No. 28486 (September 28,1990),47 SEC Docket 674.

16SECv. Beres Industries, Inc., Litigation Release No. 12575 (August 9, 1990),46

SEC Docket 1711.

17SEC v. Drexel Burnham Lambert, Inc., Litigation Release No. 11859 (September

7,1988),41 SEC Docket 1294.

112
18SECv. Michael R. Milken, Litigation Release No. 12454 (April 24, 1990),46 SEC

Docket 145.

19SEC v. Salim B. Lewis, Litigation Release No. 12569 (August 6,1990),46 SEC

Docket 1703.

20SEC v. GAF Corporation and James T. Sherwin, Litigation Release No. 12401

(March 8,1990),45 SEC Docket 1384.

21In the Matter of James T. Melton, Securities Exchange Act Release No. 28313

(August 6,1990),46 SEC Docket 1636.

22SEC v. Michael Kaufman, Litigation Release No. 12425 (March 27, 1990),45

SEC Docket 1731.

23SECv. Novaferon Labs, Inc., Litigation Release No. 12577 (August 14, 1990),46

SEC Docket 1774.

24SEC v. Steven L.Glauberman, Litigation Release No. 12574 (August 9, 1990),46

SEC Docket 1709.

25SEC v. Saul Bluestone, Litigation Release No. 12589 (August 22,1990),46 SEC

Docket 1865.

26SEC v. James H. O'Hagan, Litigation Release No. 12344 (January 10, 1990),45

SEC Docket 610.

27SEC v. Alan C. Goulding, Litigation Release No. 12500 (June 5,1990),46 SEC

Docket 799; see SEC v. Morton S. Neiman, Litigation Release No. 12455 (April 24,

1990),46 SEC Docket 153 (related case).

28SEC v. Richard H. Towle, Accounting and Auditing Enforcement Release No.

258 (May 24,1990),46 SEC Docket 519.

29SECv. Barry J.Minkow, Litigation Release No. 12579(August IS, 1990),46 SEC

Docket 1777.

30SEC v. Fluid Corporation, Litigation Release No. 12661 (October 9, 1990),47

SEC Docket 877.

31SECv. Rajiu P. Mehta, Accounting and Auditing Enforcement Release No. 271

(September 10, 1990),47 SEC Docket 188.

32SECv. Crowell & Co., Inc., Accounting and Auditing Enforcement Release No.

277 (September 28,1990),47 SEC Docket 771.

33SECv. Malibu Capital Corporation, Litigation Release No. 12635(September 26

1990),47 SEC Docket 651.

34In the Matter of Stephen L. Hochberg, CPA, Accounting and Auditing

Enforcement Release No. 251 (January 11, 1990),45 SEC Docket 565.

35In the Matter of Charles C. Lehman, [r., CPA, Accounting and Auditing

Enforcement Release No. 275 (September 28,1990),47 SEC Docket 665.

36In the Matter of William G. Gaede, [r., CPA, Accounting and Auditing

Enforcement Release No. 274 (September 26,1990),47 SEC Docket 582.

113
37In the Matter of Georgia McCarley, Accounting and Auditing Enforcement

Release No. 267 (August 1, 1990),46 SEC Docket 1534.

38Inthe Matter of Bruce T. Andersen, CPA, Accounting and Auditing Enforcement

Release No. 268 (August 31,1990),46 SEC Docket 2013.

38Inthe Matter of Charles V. Moore, CPA, Accounting and Auditing Enforcement

Release No. 264 (July 17, 1990), 46 SEC Docket 1276.

4fJSECv. Nortek, Inc., Litigation Release No. 12406 (March 12, 1990), 45 SEC

Docket 1471.

41SEC v. Edward P. Evans, Litigation Release No. 12315 (December 6,1989),45

SEC Docket 73.

42SEC v. Alan E. Clore, Litigation Release No. 12377 (February 13, 1990),45 SEC

Docket 1114.

43SECv. Thomas Lee Oakes, Litigation Release No. 12451 (Apri123, 1990), 46 SEC

Docket 140.

44SEC v. Mesa Limited Partnership and T. Boone Pickens, [r., Litigation Release No.

12637 (September 27,1990),47 SEC Docket 653.

45SEC v. American Assurance Underwriters Group, Inc., Litigation Release No.

12334 (January 4,1990),45 SEC Docket 508.

46SEC v. Charles A. Oglebay, Litigation Release No. 12615 (September 12, 1990),

47 SEC Docket 193.

47SEC v. RL Kotrozo, Inc., Litigation Release No. 12385 (February 22, 1990),45

SEC Docket 1175.

46SEC v. Donald Bader, Litigation Release No. 12584 (August 16,1990),46 SEC

Docket 1785.

49SEC v. AUC Corp., Litigation Release No. 12419 (March 22, 1990),45 SEC

Docket 1661.

50SECv. William A. Thorne, Litigation Release No. 12286 (October 27,1989),44

SEC Docket 1969.

51SEC v. Profit Enterprises Inc., Litigation Release No. 12588 (August 21,1990),

46 SEC Docket 1864.

52SEC v. Transwestern Oil & Gas Co., Inc., Litigation Release No. 12518 (June 20,

1990),46 SEC Docket 967.

53SECv. Thomas Hydrocarbons, Inc., Litigation Release No. 12524 (June 28, 1990),

46 SEC Docket 1075.

54Inthe Matter of The Stuart-James Co. Inc., Securities Exchange Act Release No.

26700 (AprilS, 1989),43 SEC Docket 966.

55SEC v. Thomas James Associates, Inc., Litigation Release No. 12431 (March 29,

1990),45 SEC Docket 1740.

56In the Matter of George Salloum, Securities Exchange Act Release No. 28489

(September 28, 1990),47 SEC Docket 685.

114
57SEC v. Oscar Ayala, Litigation Release No. 12494 (June 1, 1990),46 SEC Docket

793.

58Inthe Matter of Walter F. Kusay, Jr., Securities Exchange Act Release No. 27945

(April 25, 1990),46 SEC Docket 99.

59SEC v. H.A. Kenning Investments, Inc., and Harry A. Kenning, [r., Litigation

Release No. 12534 (July 6, 1990),46 SEC Docket 1237.

60In the Matter of Harry A. Kenning, Jr., Securities Exchange Act Release No.

28230 (July 18,1990),46 SEC Docket 1318.

61SECv.BruceBlack,LitigationReleaseNo.12511 (June 13, 1990),46 SEC Docket

869.

62SEC v. Phoenix Aviation, Inc., Litigation Release No. 12483 (May 22,1990),46

SEC Docket 518.

63In the Matter of Alan R. Asker, Securities Exchange Act Release No. 28483

(September 29,1990),47 SEC Docket 664.

64SECv.Jeffers Investments Corporation, Litigation Release No. 12365 (February

1, 1990),45 SEC Docket 915.

65In the Matter of David K. Jeffers and Jeffers Investments Corporation, Securities

Exchange Act Release No. 28135 (June 19,1990),46 SEC Docket 912.

66In the Matter of V.F. Minton Securities, Inc., and Vernon F. Minton, Securities

Exchange Act Release No. 28457 (September 21,1990),47 SEC Docket 552.

67SEC v. Frank Clarke and Co., Inc., Litigation Release No. 12505 (June 7, 1990),

46 SEC Docket 828.

68Inthe Matter of Frank Clarke and Co., Inc., Securities Exchange Act Release No.

28103 (June 11, 1990),46 SEC Docket 828.

69In the Matter of Stotler and Company, Securities Exchange Act Release No.

28360 (August 21, 1990),46 SEC Docket 1816.

7°In the Matter of Donaldson, Lufkin & Jenrette Securities Corporation, Securities

Exchange Act Release No. 27889 (April 11, 1990),45 SEC Docket 1826.

71Inthe Matter of Gary W. Chambers, Securities Exchange Act Release No. 27298

(September 27,1989),44 SEC Docket 1336.

72Inthe Matter of Goodrich Securities, Inc., Securities Exchange Act Release No.

28141 (June 25, 1990),46 SEC Docket 975.

73SECv. MIchael S. Douglas, Litigation Release No. 12303 (November 22,1989),

44 SEC Docket 2240.

74SEC v. Gregory D. Govan, Litigation Release No. 12322 (December 13, 1989),

45 SEC Docket 190.

75Inthe Matter of Liberty Securities Group, Inc. and Gregory D. Govan, Investment

Advisers Act Release No. 1232 (June 1, 1990),46 SEC Docket 789.

76SEC v. U.S. General Corporation, Litigation Release No. 12304 (November 22,

1989),44 SEC Docket 2241.

115
T7In the Matter of Blue Chip Market Advisor, Inc. and James Paul Azzalino,

Investment Advisers Act Release No. 1207 (October 25,1989),44 SEC Docket 1832.

78Inthe Matter of Fred Alger Management, Inc., Investment Advisers Act Release

No. 1222 (February 26, 1990),45 SEC Docket 1272.

79SEC v. William P. Dillon, Litigation Release No. 12531 (July 5, 1990),46 SEC

Docket 1181.

MIn the Matter of Patterson Capital Corp. and Joseph B. Patterson, Investment

Advisers Act Release No. 1235 (June 25, 1990),46 SEC Docket 1057.

81In the Matter of Stein Roe & Farnham Incorporated, Investment Advisers Act

Release No. 1217 (January 22,1990),45 SEC Docket 784.

82In the Matter of Thomson McKinnon Asset Management L. P., Investment

Advisers Act Release No. 1243 (July 26,1990),46 SEC Docket 1482.

83SEC v. R.E.C. Investors, Inc., Litigation Release No. 12622 (September 18,

1990),47 SEC Docket 537.

84SEC v. Municipal Lease Securities Fund, Inc., Litigation Release No. 12331

(December 26,1989),45 SEC Docket 420.

B5SECv. Dart Group Corporation, Litigation Release No. 12392 (February 28,

1990),45 SEC Docket 1288.

86SEC v. Fluid Corporation, Litigation Release No. 12661 (October 9, 1990),47

SEC Docket 877.

87pigures are approximate.

86'fhe1990total for SEC Requests to Foreign Governments is composed of: 173

Enforcement Assistance Requests; 2 Enforcement Referrals; and 2 Technical

Assistance Requests. Prior to 1990, separate totals for enforcement referrals and

technical assistance requests were not maintained.

86'fhe1990total for Foreign Requests to the SECis composed of: 89Enforcement

Assistance Requests; 2Enforcement Referrals; and 30Technical Assistance Requests.

Prior to 1990, separate totals for enforcement referrals and technical assistance

requests were not maintained.

90 See, e.g., SEC, Division of Market Regulation, The October 1987 Market Break

(February 1988).

91MarketReform Act of 1990, Pub. L. No. 101-432 (1990).

92Division of Market Regulation, SEC, Trading Analysis of October 13 and 16,

1989 (May 1990).

935ecuritiesExchange Act Release No. 27370 (October 23,1989),44 SEC Docket

1732.

84See Securities Exchange Act Release No. 27445 (November 16, 1989), 44 SEC

Docket 2037.

SSSecuritiesExchange Act Release No. 27975-A (May 30,1990), 46 SEC Docket

0543.

965ecurities Exchange Act Release No. 27956 (April 27, 1990),46 SEC Docket

0182.

97FileNo. SR-NASD-90-49; File No. SR-NASD-90-50.

116
98Securities Exchange Act Release No. 28146 (June 26, 1990),46 SEC Docket

0985.

99Securities Exchange Act Release No. 26870 (May 26, 1989),43 SEC Docket

1793.

l00See e-g-, letter from Richard C. Breeden, Chairman, Securities and Exchange

Commission, to Ivers W. Riley, Senior Executive Vice President, American Stock

Exchange, dated October 17, 1990.

101SecuritiesExchange Act Release Nos. 28285 (July 30,1990),46 SEC Docket

1517, and 27851 (March 27,1990),45 SEC Docket 1692.

102SecuritiesExchange Act Release Nos. 27598 (January 9, 1990),45 SEC Docket

554, and 277809 (March 16, 1990),45 SEC Docket 1502.

l03SecuritiesExchange Act Release No. 28518 (October 5, 1990),47 SEC Docket

805.

l04SecuritiesExchange Act Release No. 27902 (April 12, 1990),45 SEC Docket

1877.

10SSecuritiesExchange Act Release No. 27858 (March 28,1990),45 SEC Docket

1696.

l00securities Exchange Act Release Nos. 27958, 59 (April 27, 1990),46 SEC

Docket 192, 93.

107SecuritiesExchange Act Release No. 27959 (April 27, 1990),46 SEC Docket

193.

l08Letter from Jonathan Kallman, Assistant Director, Division of Market

Regulation, SEC, to Karen Saperstein, Associate General Counsel, ISCC, dated

September 13, 1988.

l09International Series Release No. 137 (August 8,1990),46 SEC Docket 1715.

110SecuritiesExchange Act Release No. 28609, International Series Release No.

189 (November 9, 1990),47 SEC Docket 1361.

lllSecurities Exchange Act Release No. 27554 (December 20, 1989), 45 SEC

Docket 213.

112SecuritiesExchange Act Release No. 27967 (May 1, 1990),46 SEC Docket 46.

113SecuritiesExchange Act Release No. 27877 (April 4, 1990),45 SEC Docket

1775.

114Letterfrom Jonathan Kallman, Assistant Director, Division of Market Regulation, SEC, to Karen L. Saperstein, Associate General Counsel, ISCC, dated March

12,1990.

115Letterfrom Jonathan Kallman, Assistant Director, Division of Market Regulation, SEC, to Karen L. Saperstein, Associate General Counsel, ISCC, dated August

14,1990.

11SSecuritiesExchange Act Release No. 27565 (December 22, 1989),45 SEC

Docket 300.

117SecuritiesExchange Act Release Nos. 27769 (March 6,1990),45 SEC Docket

1318,28399 (August 30, 1990),46 SECDocket 1907,and 28106 (June 12,1990), 46 SEC

Docket 0832.

11SSecurities Exchange Act Release No. 28544 (October 16, 1990),47 SEC Docket

909.

117
119Letterfrom Richard Ketchum, Director, Division of Market Regulation, SEC,

to Patrick Mordacq, Secretary General, COB, dated September 18, 1990; and Letter

from Patrick Mordacq, Secretary General, COB, to Richard Ketchum, Director,

Division of Market Regulation, SEC, dated September 18, 1990.

120SecuritiesExchange Act Release No. 28475 (September 27, 1990),47 SEC

Docket 0595.

121Letterfrom Richard G. Ketchum, Director, Division of Market Regulation,

SEC, to Joanne T. Medero, General Counsel, CFfC, dated January 8, 1990.

122SecuritiesExchange Act Release No. 28282 (July 30, 1990),46 SEC Docket

1509.

123SecuritiesExchange Act Release No. 28553 (October 18,1990),47 SEC Docket

0919.

124SecuritiesExchange Act Release No. 28580 (October 25,1990),47 SEC Docket

1078.

125SecuritiesExchange Act Release No. 27600 (January 9, 1990),45 SEC Docket

558.

12SSecuritiesExchange Act Relese No. 27633 (January 18, 1990), 45 SEC Docket

661.

127SecuritiesExchange Act Release No. 27599 (January 9,1990),45 SEC Docket

555.

128SecuritiesExchange Act Release No. 27378 (October 24,1989),44 SEC Docket

1746.

129SecuritiesExchange Act Release Nos. 28322 (August 9, 1990), 46 SEC Docket

1658, and 28088 (June 1, 1990), 46 SEC Docket 0709.

l30Securities Exchange Act Release No. 28411 (September 6, 1990),46 SEC

Docket 2038.

131SecuritiesExchange Act Release No. 26870 (May 26, 1989),43 SEC Docket

1793.

132SecuritiesExchange Act Release No. 28021 (May 16, 1990),46 SEC Docket

0389.

133SecuritiesExchange Act Release No. 27631 (January 17, 1990),45 SEC Docket

656.

134SecuritiesExchange Act Release No. 28160 (June 28,1990),46 SEC Docket

1015.

135SecuritiesExchange Act Release Nos. 27365 (October 25, 1989), 44 SEC

Docket 1643, and 27368 (October 19, 1989),44 SEC Docket 1647.

130SecuritiesExchange Act Release No. 27280 (September 29, 1989),44 SEC

Docket 1229.

137SecuritiesExchange Act Release No. 27786 (March 8,1990),45 SEC Docket

1341.

138SecuritiesExchange Act Release No. 27786 (March 8,1990),45 SEC Docket

1341.

13915U.S.c. 78bb(e). .

140pub.L. No. 93-406, 88 Stat. 832 (September 2,1974).

141Lefterfrom Richard G. Ketchum, Director, Division of Market Regulation,

SEC, to Charles Lerner, Director of Enforcement, DOL (July 25,1990).

118
142Letterfrom Richard G. Ketchum, Director, Division of Market Regulation,

SEC, to Richard B. Smith, Esq., Davis Polk & Wardwell, dated September 4,1990. 14315 U.S.c. 78f(a).

14415 U.S.c. 780(b). 14515 U.S.c. 78q-l(c).

'46Letterfrom John Polanin, [r., Branch Chief, Financial Institution Regulation,

Office of Chief Counsel, Division of Market Regulation, SEC, to Anthony J. Leitner,

Goldman, Sachs & Co., dated September 6,1990.

147Letterfrom John Polanin, [r., Branch Chief, Financial Institution Regulation,

Office of Chief Counsel, Division of Market Regulation, SEC, to George Brunelle, M.

c., Harrison & Company, dated September 6,1990.

148Letterfrom Robert L. D. Colby, Chief Counsel, Division of Market Regulation, SEC, to Richard B. Smith, Esq., Davis Polk & Wardwell (October 4, 1990).

149Letterfrom Robert L. D. Colby, Chief Counsel, Division of Market Regulation, SEC, to Frank J. Wilson, Executive Vice President, Law & Regulatory Policy,

NASD, dated December 5,1989.

lSOLetterfrom John Polanin, Jr., Special Counsel, Office of Chief Counsel,

Division of Market Regulation, SEC, to Frank J. Wilson, Executive Vice President,

Law & Regulatory Policy, NASD, dated August 16,1990.

15tLetterregarding Aktiebolaget Volvo and Procordia Aktiebolag dated April

20,1990.

'52Letterregarding Attwoods PLC dated June 26,1990.

153Letterregarding Atlas Copco AB dated May 22, 1990.

154Letterregarding Hutamaki Oy dated June 7, 1990.

tSSLetterregarding Compagnie General d'Electricite dated July 16,1990. See

also Letter regarding U.K. Water Privatization dated November 22,1989.

'SSSecuritiesExchange Act Release No. 28561 (October 16, 1990),47 SEC Docket

979.

t57SecuritiesExchange Act Release No. 27938 (April 23, 1990),46 SEC Docket

90.

158Letterfrom Jonathan G. Katz, Secretary, SEC, to the Hon. Christopher J.

Dodd, U.S. Senate (September 10, 1990), transmitting Report of the Division of

Market Regulation of the Securities and Exchange Commission on a Proposed

Industry Amendment to Section 11(a) of the Securities Exchange Act of 1934, dated

September 10, 1990. 15915 U.S.c. 78k(a).

'SOSecuritiesExchange Act Release No. 28347 (August 15, 1990),46 SEC Docket

1747.

t61Letterfrom Michael A. Macchiaroli, Assistant Director, Division of Market

Regulation, SEC, to Salvatore A. Pallante, Senior Vice President, New York Stock

Exchange, dated January 31,1990.

162Letterfrom Michael A. Macchiaroli, Assistant Director, Division of

Market Regulation, SEC, to Jeffrey C. Bernstein, Co-Chairman, Compliance

Committee, International Operation Association, Securities Industry Association, dated August 9, 1990.

163SecuritiesExchange Act Release Nos. 27382 (October 26, 1989), 44 SEC

Docket 1777, and 27383 (October 26,1989),44 SEC Docket 1789.

119
164SecuritiesExchange Act Release No. 27384 (October 26,1989),44 SEC Docket

1795.

lSSSecuritiesExchange Act Release No. 27455 (November 22, 1989),44 SEC

Docket 2170.

166SecuritiesExchange Act Release No. 27846 (March 26, 1990), 45 SEC Docket

1682.

167SecuritiesExchange Act Release No. 27803 (March 14, 1990),45 SEC

Docket 1431.

168SecuritiesExchange Act Release No. 27675 (February 5,1990),45 SEC Docket

964.

169SecuritiesExchange Act Release Nos. 27753 (March 1, 1990), 45 SEC Docket

1219, and 28217 (july 18, 1990),46 SEC Docket 1288.

17°Securities Exchange Act Release Nos. 28072 (May 30, 1990), 46 SEC

Docket 582, and 28143 (June 25,1990),46 SEC Docket 980.

171SecuritiesExchange Act Release No. 28293 (August 1, 1990),46 SEC Docket

1542.

172SecuritiesExchange Act Release No. 27554 (December 20, 1989),45 SEC

Docket 213.

173TheBusiness Roundtable v. Securities and Exchange Commission, Fed. Sec. L.

Rep. (CCH) 95, 291 (D.C. Cir. June 12, 1990).

174SecuritiesExchange Act Release Nos. 27625 (january 16, 1990), 45 SEC

Docket 642, and 27466 (November 22, 1989),44 SEC Docket 2183.

17SSecuritiesExchange Act Release No. 27727 (February 22, 1990), 45 SEC

Docket 1138.

176SecuritiesExchange Act Release No. 28014 (May 14, 1990),46 SEC Docket

374.

177SecuritiesExchange Act Release No. 27543 (December 15, 1989),45 SEC

Docket 197.

17SSecuritiesExchange Act Release Nos. 27878 (Apri14, 1990),45 SEC Docket

1776; 27702 (February 12, 1990), 45 SEC Docket 1058; and 28003 (May 8,1990),46

SEC Docket 318.

179SecuritiesExchange Act Release No. 27837 (March 22, 1990),45 SEC Docket

1565.

lSOSecuritiesExchange Act Release No. 28167 (june 29,1990), 46 SEC Docket

1084.

181SecuritiesExchange Act Release No. 27967 (May 1, 1990),46 SEC Docket 211.

182SecuritiesExchange Act Release No. 28335 (August 13, 1990),46 SEC Docket

1737.

183SecuritiesExchange Act Release No. 27561 (December 21, 1989),45 SEC

Docket 221.

184SecuritiesExchange Act Release No. 27981 (May 2, 1990),46 SEC Docket 240.

lSSSecuritiesExchange Act Release No. ,28040 (May 22,1990),46 SEC Docket

453.

186SecuritiesExchange Act Release Nos. 28001 (May 7,1990),46 SEC Docket

316; 28191 (july 10, 1990),46 SEC Docket 1192; and 28242 (luly 20, 1990),46 SEC

Docket 1415.

120
187Securities Exchange Act Release No. 27489 (November 30, 1989),44 SEC

Docket 2314.

188Securities Exchange Act Release No. 27732 (February 26, 1990), 45 SEC

Docket 1185.

l119Securities Exchange Act Release No. 28277 (July 27, 1990), 46 SEC Docket

1506.

l00securities Exchange Act Release No. 27502 (December 5, 1989), 45 SEC

Docket 26.

1915ecurities Exchange Act Release No. 27755 (March I, 1990),45 SEC Docket

1223.

1925ecurities Exchange Act Release No. 27664 (January 31,1990),45 SEC Docket

840.

1935ecurities Exchange Act Release No. 28307 (August 2,1990),46 SEC Docket

1552.

1945ecurities Exchange Act Release No. 27752 (March I, 1990),45 SEC Docket

1216.

'SSSecurities Exchange Act Release No. 28049 (May 24,1990),46 SEC Docket

467.

l00securities Exchange Act Release No. 28081 (June I, 1990),46 SEC Docket

0696.

197Rule 19d-l authorizes certain SROs to report certain technical violations

quarterly in chart form. In fiscal year 1990, the number of cases reported in this

abbreviated format was as follows: American Stock Exchange--e, New York Stock

Exchange--90, Pacific Stock Exchange--12, and the Philadelphia Stock Exchange--

108. These cases are included in the text discussion and chart.

198Investment Company Act Release No. 17534 (June 15, 1990),46 SEC Docket

875.

199Investment Company Act Release No. 17589 (July 17, 1990),46 SEC Docket

1247.

2OOInvestmentCompany Act Release No. 17682 (August 9, 1990),46 SEC Docket

1830.

201Investment Company Act Release No. 17681 (August 17, 1990), 46 SEC

Docket 1828.

202Investment Company Act Release No. 17769; International Series ReI. No.

160; File No. 5717-90 (October 1,1990),47 SEC Docket 0746.

203 Holding Company Act Release No. 25058 (March 19, 1990),45 SEC Docket

1577.

204 Holding Company Act Release No. 25059 (March 19, 1990),45 SEC Docket

1582.

205Investment Company Act Release No. 17613 (July 25,1990),46 SEC Docket

1466 (Notice); Investment Company Act Release No. 17809 (Oct. 19, 1990),47 SEC

Docket 1098 (Order).

206Investment Company Act Release No. 17617 (July 26,1990),46 SEC Docket

1476 (Notice); Investment Company Act Release No. 17673 (Aug. 14,1990),46 SEC

Docket 1765 (Order).

121
207Jnvestment Company Act Release No. 17404 (April 2, 1990), 45 SEC Docket

1784 {Notice and Temporary Order); Investment Company Act Release No. 17404A

{April 11, 1990),45 SEC Docket 1892 (Corrected Notice and Temporary Order);

Investment Company Act Release No. 17501 (May 21, 1990), 46 SEC Docket 49c

(Permanent Order).

208Capital Preservation Fund, Inc. (pub. avail. September II, 1990).

209Sanford C. Bernstein Fund, Inc. (pub. avail. June 25,1990).

21°Nuveen Advisory Corp. (pub. avail. September 4, 1990).

211Scudder Group of Funds (pub. avail. June 19, 1990).

212Zweig Series Trust (pub. avail. January 10, 1990).

213Bennett Management Co. (pub. avail. February 26, 1990).

214Rosenberg Institutional Equity Management (pub. avail. March 14, 1990).

215Holding Company Act Release No. 25136 {August 27, 1990),46 SEC Docket

1911.

216HoidingCompany Act Release No. 25100 {JuneS, 1990),46 SEC Docket 0737.

217Holding Company Act Release No. 24590 (February 26,1988) ,40 SEC Docket

634.

218Wisconsin'sEnvironmental Decade, Inc. v. SEC, 882 F.2d 523 (D.C. Cir. 1989).

219Holding Company Act Release No. 25096 {May 25,1990),46 SEC Docket

0586.

22OHoiding Company Act Release No. 25032 {February 2, 1990),45 SEC Docket

1004.

221Holding Company Act Release No. 24911 {June 29,1989),43 SEC Docket

2278.

222Holding Company Act Release No. 24911 (June 29, 1989), 43 SEC Docket

2278.

223Holding Company Act Release No. 25152 {September 18, 1990),47 SEC

Docket 0480.

224PacificMutual Life Insurance Company (pub. avail. August 31,1990).

225Great-West Life & Annuity Insurance Company (pub. avail. August 23,

1990).

226Registration Forms for Insurance Company Separate Accounts that Offer

Variable Annuity Contracts, Investment Company Act Release No. 14575 {June 25,

1985),33 SEC Docket 508.

227College Retirement Equities Fund (pub. avail. Mar. 2, 1990).

228Securities Exchange Act Release No. 27425 (November 7, 1989), 44 SEC

Docket 1982.

229Securities Exchange Act Release No. 27671 (February 2,1990) ,45 SEC Docket

925.

230Securities Act Release No. 6863 {April 24, 1990),46 SEC Docket 40.

231Securities Act Release No. 6879 {October 23, 1990),47 SEC Docket 979.

232Securities Act Release No. 6862 {April 23, 1990),46 SEC Docket 23.

233Securities Act Release No. 6862 (April 23, 1990),46 SEC Docket 23.

234Securities Exchange Act Release No. 28093 (June 6,1990) ,46 SEC Docket 655.

235Securities Act Release No. 6869 {June 22,1990),46 SEC Docket 892.

236Securities Act Release No. 6867 {June 6,1990),46 SEC Docket 659.

2371989Annual Report at p. 29.

122
238'festimony of Richard C. Breeden, Chairman, SEC, Concerning Issues

Involving Financial Institutions and Accounting Principles before the Senate

Committee on Banking, Housing and Urban Affairs, September 10, 1990 at 32.

23SStaffAccounting Bulletin No. 87 (December 12, 1989),45 SEC Docket 192

(Property-Casualty Insurance Reserves for Unpaid Claims Costs; Contingency

Disclosure).

240StaffAccounting Bulletin No. 88 (August 10, 1990),46 SEC Docket 1787

(Disclosures Required of Foreign Private Issuers to Comply with Item 17of Form 20-

p).

241SecuritiesExchange Act Release No. 33-6789 (July 19,1988),41 SEC Docket

681.

242H.R.5269, 101st Cong., 2d Sess. (1990).

243SecuritiesExchange Act Release No. 33-6837 (June 20, 1989) 43 SEC Docket

2080.

244Proposed Statement on Auditing Standards, Communication of Matters

about Interim Financial Information Filed or to be Filed with Specified Regulatory

Agencies (June 1990).

245ProposedStatement on Auditing Standards, Omnibus Statement on Auditing

Standards-1990 (July 1990).

246FinancialReporting Release No. 28 (December 1, 1986), 37 SEC Docket 194.

247practiceBulletin No.7, Criteria for Determining Whether Collateral for a

Loan Has Been In-Substance Foreclosed (April 1990).

246ASC Statement of Intent, Comparability of Financial Statements (July 1990)

249g03F.2d 75 (2d Clr.). rehearing en bane granted, [Current] Fed. Sec. L. Rep.

(CCH) cn95,439(2d Cir. 1990).

250g15F.2d 439 (9th Cir. 1990).

251910F.2d 1028 (2d Cir.), petition for rehearing denied, 917 F.2d 98 (2d Gr.

1990).

2521105.0. 945 (1990).

253328U.S. 293 (1946).

254918F.2d 349 (2d Cir. 1990).

255854 F.2d 1319 (5th Cir. 1988), eert. denied, 109 S.O. 3214 (1989).

256No.90-333 (S.Ct.).

257909 F.2d 724 (2d Cir. 1990), petition for eert. granted, 111 S.Ct. 669 (1991).

25t!g14F.2d 1564 (9th Cir, 1990), eert. denied, 111 S. Ct. 1621 (1991).

259905F.2d 406 (D.C. Cir. 1990).

260883 F.2d 525 (7th Cir. 1989).

261470U.S. 821 (1985).

262923F.2d 1270 (7th Cir. 1991).

263895 F.2d 1272 (9th Cir. 1990).

264111 S.O. 415 (1990).

265888 F.2d 1537 (Tlth Cir. 1989)

123
266No.89-1448 (S.Ct.).

267Price Waterhouse v. SEC, No. 90-0245 (D.D.C. 1990).

268Safecardv. SEC, No. 84-3073 (D.D.C. 1989) appeal pending, No. 89-5374 (D.C.

Cir.1990).

268PhoenixCentral and Arizona, General Partnership v. SEC, Docket No. M90-001

PHX RG5 (D. Ariz. March 1, 1990); Recorp Northwest Outer Loop Associates, F/K/A

Recorp Outer Loop Associates v. SEC, Docket No. M90-002 PHX CLH (D. Ariz. March

21, 1990); In the Matter of the U.S. Securities and Exchange Commission Private

Investigation / Application of John Doe in re Certain Subpoenas, Misc. No. MI8-304 (VLB)

(S.D.N.Y. March 14, 1990);In re Securities and Exchange Commission Private Investigation/Application of John Doe re Certain Subpoenas, Misc. No. M8-85 (MBM) [1990

Transfer Binder] Fed. Sec. L. Rep. (CCH) en 95,424 (S.D.N.Y. August 10,1990) (two

actions); and In the Matter of the U.S. Securities and Exchange Commission Private

Investigation/Application of David R. Yeaman re a Certain Subpoena, Misc. No. 90-M86W (D. Utah August 30,1990) (two actions).

27°Kemprowski v. SEC, c.A. No. 90-3831 (D.N.J.) (motion withdrawn October

24, 1990).

271Misc.No. M8-85 (MBM) [1990 Transfer Binder] Fed. Sec. L. Rep. (CCH) 'lI

95,424 (S.D.N.Y. August 10, 1990).

272SECv. Comserv Corp., Nos. 5063MN and 5064MN (8th Cir. July 24,1990); see

also Antonou v. SEC, Nos. 85-3384/88-1095 (8th Cir. August 14, 1989) (denying as

premature Antonou's application for attorney's fees after vacating and remanding

Commission order on review).

273Halev. McKenzie, No. 1:90-CV-ll05-GET (N.D. Ga. October 30,1990).

274SECv. World-Wide Coin Investments, Inc., 567 F. Supp. 724 (N.D. Ga. 1983).

275SECv. American Assurance Underwriter Group, Inc., No. 89-7016-CIV-PAINE

(S.D. Fla. March 30, 1990).

276SECv. Belmont Reid and Company, No. C-84-6366-JPV (N.D. Cal. November

2,1990).

277SECv.Belmont Reid and Company, No. C-84-6366 JPV (N.D. Cal. May 20, 1985),

affd, 794 F.2d 1388 (9th Cir. 1986).

27847SEC Docket 405 (September 25,1990).

279A.P.No. 3-7038 (September 20,1989).

280SECv. The Electronics Warehouse, Inc., 689 F. Supp. 53 (D. Conn. 1988).

281SecuritiesExchange Act Release No. 28262 (July 25,1990).

282Civ.No. 86-C-0313G (D. Utah).

283A.P.No. 3-7030 (October 25,1989).

284SECv. Porto, Civ. Action No. 88-C-0239 (N.D. Ill. 1988).

2855ecuritiesExchange Act Release No. 27535 (December 13, 1989),45 SEC

Docket 120.

286Investment Advisers Act Release No. 1236 (June 26,1990),46 SEC Docket

1062.

287pub.L. No. 101-429, 104 Stat. 931 (1990).

124
288pub. L. No. 101-432, 104 Stat. 978 (l990).

289pub. L. No. 101-550, 104 Stat. 2713 (l990).

290Requestfor Public Comments on the Role of the Securities and Exchange Commission in Reorganization Cases under Chapter 11 of the Bankruptcy Code, Corporate

Reorganization Release No. 384, Release No. 34-27300 (September 27,1989),54 Fed.

Reg. 40760 (October 3, 1989).

291Inre Amdura Corporation, Case No. 90-3811-E et. seq. (Bankr, Colo); In re

Sahlen & Associates, Inc., No. 89B 11234-44 (Bankr. S.D.N.Y.) (formal request made

to U.S. trustee).

292Inre The Worthington Company, No. 89-3279 and No. 89-3286 (6th Cit.).

293Inre The Worthington Company, No. 89-3279 and No. 89-3286 (6th Cit.

December 5,1990).

294Groganv. Garner, No. 89-1149 (S. Ct.).

295Groganv. Garner, 806 F.2d 829 (8th Cit. 1986).

296Groganv. Garner, 111 S. Ct. 654 (l991).

297Inre Resorts International, Inc., Nos. 89-10119, 89-10120, 89-10461, and 89-

10462 (Bankr. D. N. J.).

298KaiserSteel Corp. v. Charles Schwab & Co., 913 F.2d 846 (lOth Cit. 1990).

299KaiserSteel Resources, Inc. v. Action Traders, Inc., No. 90-1243 (lOth C ir.);

Kaiser Steel Resources, Inc. v. Pearl Brewing Co., No. 90-1245 (lOth Cir.).

300InreGeneral Development Corp., Case No. 90-1223-BKC-AJC (Bankr. S.D. PIa).

301Inre Johns-Mansville Corp., 801 F.2d 60 (2d Cit. 1986).

302Inre LTV Corp., 104 B.R.626 (S.D.N.Y. 1989), appeal pending, No. 89-5040 (2d

Cir.).

303Inre American Reserve, 840 F.2d 487 (7th Cit. 1988).

304Inre The Charter Co., 876 F.2d 866 (lIth Cit. 1989).

305Inre Johns-Manville, 53 B.R. 346,350-51 (Bankr, S.D.N.Y. 1985).

306Inre SIS Corp. and Sisters International Inc., Nos. B-89-o800, 8-89-081 (Bankr,

N.D. Ohio) (two objection filed); In re American Medical Technology, Inc., Case No.

89-0144 (Bankr. W.O. Tex.): and In re Saratoga Standardbreds, Inc., Case No. 88-11973

(JIM) (Bankr, N.D.N.Y.).

307InreAmerican Medical Technology, Inc., Case No. 89-30144 (Bankr, W.O. Tex.),

308Inre Saratoga Standardbreds, Inc., Case No. 88-11973 (JIM) (Bankr, N.D.N.Y.).

309Inre Southmark Corp., Case No. 389-36324-SAF-11 (Bankr, N.D. Tex.).

3l°Inre SIS Corp. and Sisters International, Inc., Bkey. Nos. B-89-0800, B-89-o81

(Bankr. N.D.O. hbo).

311Seee.g., , In re Custom Laboratories, Inc., 53rd Annual Report at 74 (objection

to disclosure statement); In re Energy Exchange Corp. and Vulcan Energy Corp. and

In reStorage Technology Corp., 53rd Annual Report at 74-75 (objection to confirmation

of reorganization plan).

125
Appendix

The Securities Industry

Revenue, Expenses, and Selected Balance Sheet Items

Broker-dealers that are registered with the Commission earned pre-tax

profits of $2.8billion in calendar year 1989, $700million less than 1988results. With

a pre-tax return on equity capital of 7.7%,1989 was the third year in a row of subpar profitability.

Broker-dealers produced revenues of $77.1 billion in 1989, 17% above the

1988 level. This increase resulted primarily from higher interest revenues and

modest improvements in the depressed brokerage business. In the aggregate, the

traditional dealer business-trading, investment, and underwriting-showed

little change.

Larger volumes of securities transactions resulted in a 15% increase in

revenues from the brokerage business. An increase in exchange volume contributed

to a $1.6 billion (13%) increase in brokerage commissions. Revenues from sales of

mutual funds increased $400 million (15%). Brokers' income from margin lending

rose $800 million (24%) due to higher levels of margin debt and a rise in interest

rates. While 1989revenues reflect an improvement over the depressed 1988results,

revenues from the brokerage business remain down from the highs in 1986 and

1987.

Revenues from the traditional principal business were stagnant for the

second year in a row. Gains from principal transactions fell $400 million (2%) in

1989. Profits from underwriting dropped by $1.1 billion (19%). The decline in

underwriting profits primarily reflects a sharp drop in the volume of new closedend funds. The volume of new equity issues in general remained down substantially

from the levels of earlier years.

The "all other revenues" category, which is dominated by interest income

from securities purchased under agreements to resell and fees from handling

private placements, mergers, and acquisitions, rose $9.7 billion (37%) in 1989.

These revenues accounted for 46% of total revenues in 1989, compared to 40% in

1988. Most of this increase represents higher interest income. Merger and

acquisition activity was down slightly in 1989, while the volume of private

placements was flat.

The growth in expenses paralleled that of revenues, increasing $11.6 billion

(19%). Interest expenses accounted for almost all of this increase, rising $10.4

billion (53%).

Assets rose by 20% to $654.6 billion, while liabilities increased 21% to $618.1

billion. Most of the growth in assets represented increased positions in government

securities, while that of liabilities was from repurchase agreements used to finance

these positions. Equity capital was stable at $36.5 billion.

126
Table 1

UNCONSOLIDATED FINANCIAL INFORMATION FOR BROKER-DEALERS

1985-1989 11

(Millions of Dollars)

1985 1988 1987 1988' 1989'

Revenues

1. secunnes cornrrusslons $10,966.0 $13,976.6 $16,674.1 $11,932.4 $13,484.6

2. Gains (losses) in trading and

Investment accounts 14,649.2 18,146.0 14,423.0 16,667.0 16,286.0

3. ProfIts (losses) from underwriting and selJing groups 4,986.7 6,742.6 6,719.4 6,606.8 4,636.6

4. Margin interest 2,746.0 3,021.6 3,493.3 3,164.6 3,910.1

6. Revenues from sale of investment company shares 2,763.6 4,640.3 4,069.3 2,644.0 3,038.1

6. All other revenues 13,863.8 17,997.8 21,826.3 26,096.6 36,821.0

7. Total revenues $49,844.3 $64,423.8 $66,104 4 $66,100.3 $77,0768

Expenses

8. Registered representatives'

compensation (Part II only) 2/ $ 8,184.0 $10,701 0 $11,0422 $ 9,004.4 $ 9,001.2

9. Other employee compensation

end benehts 8,149.0 11,0026 12,110.9 12,160.0 12,640.6

10. Compensation to partners end

voting stockholder officers 1,778.9 2,2327 2,4296 2,263.8 2,276.6

11. Comnussions and clearence paid

to other brokers 2,314.2 2,9946 3,662.6 2,803.8 3,084.2

12. Interest expenses 11,469.8 14,232.9 16,473.4 19,602.0 29,876.1

13. Regulatory fees and expenses 339.7 4166 432.4 490.0 682.1

14. All other expenses 2/ 11.106.4 14.6424 16.843.4 16,409.2 16,899.9

16. Total expenses $43,341.9 $66,1226 $62,894.6 $62,623.2 $74,260.5

Income and Profitability

16. Pre-tax income $ 6,502.4 $ 8,301.2 $ 3,209.9 $ 3,477.1 $2,8163

17. Pre-tax profrt margin 13.0 12.9 4.9 6.3 3.7

18. Pre-tax return on equity 26.7 268 9.4 96 7.7

Assets, liabilities and Capital

19. Total assets $452,463.3 $620,940.6 $477,442.4 $646,216 7 $664,642.7

20. Lrabthties

a. Unsubcrdmated liabilities 421,593.8 478,990.6 430,4983 495,706.6 602,726.3

b. Subordinated habrlitres 6,553.6 10,944.7 12,686.8 13,974.2 16,421.7

c. Total liabilities 428,147.4 489,936.3 443,186.1 609,6798 618,148.0

21. Ownership Equity $ 24,316.9 $ 31,006.2 $ 34,267.3 $ 36,636.9 $ 36,494.7

Number of firms 8,967 9,436 9,616 9,217 8,812

11 Calendar, rather than fiscal, year data IS reported In thrs table.

';,/ Registered representatives' compensation for firms that neither carry nor clear IS included In "otner

expenses' as this expense Item IS not reported separately on Part IIA 01 tne FOCUS Report.

FIgures may not sum due to rounding.

r=revised

p preliminary

Source: FOCUS Report

127

=
Table 2

UNCONSOLIDATED ANNUAL REVENUES AND EXPENSES FOR

BROKER-DEALERS DOING A PUBLIC BUSINESS

1985-19891/

(Millions of Dollars)

1985 1988 1987 1988' 1989'

Revenue.

1. Securities commissions $10,684.6 $13,613.2 $16,016.2 $11,616.3 $13,043.1

2. Gains (losses) in trading and

Investment accounts 13,086.4 16,363.2 12,393.4 16,296.3 15,066.9

3. Profits (losses) from underwriting and selling groups 4,986.0 6,739.0 6,718.6 6,606.6 4,636.4

4. Margin interest 2,730.9 3,006.8 3,467.0 3,135.5 3,860.6

6. Revenues from sale of investment

company shares 2,763.4 4,640.1 4,069.6 2,643.2 3,037.8

6. All other revenues 13,379.6 17,432.8 21,450.2 26,039.0 36,263.0

7. Total revenues $47,619.0 $61,684.0 $63,114.8 $64,234.9 $74,797.8

Expense.

8. Registered representanves'

compensation (Part II only) l/ $ 8,172.4 $10,676.4 $11,032.4 $ 8,993.3 $ 8,986.2

9. Other employee compensauon

and benefits 7,998.9 10,794.0 11,869.7 11,900.9 12,217.1

10. Compensation to partners and

voting stockholder officers 1,646.4 2,040.8 2,186.2 2,063.6 2,093.3

11. Commissions and clearance paid

to other brokers 2,186.7 2,781.6 3,356,8 2,641.0 2,882.6

12. Interest expenses 10,968.0 13,691.6 16,179.1 19,268.1 29,400.6

13. Regulatory fees and expenses 313.9 384.9 399.9 461.9 620.4

14. All other expenses l/ 10,761.8 14,024.1 16,284.1 16,968.3 16,386.0

15. Total expenses $42,038.1 $64,392.3 $61,3060 $61,287.0 $72,486.1

Income end Profitebility

16. Pre-tax Income $ 6,480.8 $ 7,191.7 $ 1,808.8 $ 2,947.9 $ 2,312.7

17. Pre-tax profit margin 11.6 11.7 2.9 4.6 3.1

18. Pre-tax return on equrtv 26.3 25.8 6.7 8.6 6.8

Number of firm. 6,902 6,236 6,307 6,006 6,745

1/ Calendar, rather than fiscal, year data is reported In this table.

l/ Registered representatives' compensation for firms that neither carry nor clear is included ,n "other

expenses. as thrs expense Item is not reported separately on Part IIA of the FOCUS Report.

Figures may not sum due to rounding.

r=revised

p preliminary

Source: FOCUS Report

128

=
Table 3

UNCONSOLIDATED BALANCE SHEET FOR BROKER-DEALERS

DOING A PUBLIC BUSINESS

YEAR-END,1985-19891/

(Millions of Dollars)

1985 1988 1987 1988' 1989'

Assets

1. Cash $ 6,641.3 $ 8,961.0 $ 7,638.9 $ 9,612.2 $ 9,838.2

2. Receivables from other

broker-dealers 64,384.2 66,407.4 61,963.1 67,6982 90,963.0

3. ReceIVables from customers 47,680.2 64,177.3 38,706.4 40,236.3 40,328.6

4. Receivables from non-customers 3,343.8 3,676.8 3,370.1 3,061.9 1,360.4

6. Long positions in sacurrtles

and commodities 162,267.8 166,748.6 118,160.2 130,768.1 211,471.8

6. Securities and Investments

not readily marketable 426.9 490.4 460.4 618.9 1,269.0

7. Securities purchased under agreements

to resell (Part II only) 2,1 142,606.9 187,668.9 213,936.0 268,034.6 267,688.6

8. Exchange membership 274.6 294.6 346.4 363.7 367.1

9. Other assets 2,1 16,161.3 20,328.8 21,339.1 23,424.1 26,410.0

10. Total assets $433,666.9 $606,562.7 $466,798.6 $633,707.9 $639,686.6

LiabiUties and Equity Capital

11. Bank loans payable $ 43,198.4 $ 38,494.3 $ 20,766.0 $ 22,963.6 $ 22,871.6

12. Payables to other broker-dealers 53,121.1 61,069.4 43,138.1 46,336.6 60,070.4

13. Payables to non-customers 3.406.3 3,427.1 4,173.1 4,143.7 4,576.6

14. Payablas to customers 31,863.6 40,747.2 34,328.7 39,312.9 47,260.4

16 Short posmons In secunnes

and commodities 79,167.3 76,972.8 73,726.8 92,414.4 93,786.7

16. Securities sold under repurchase

agreements (Part II only) 2,1 166,960.6 223,832.2 213,049.9 243,828.7 328,836.8

17 Other non-subordinated

liabilities 21 28,293.6 34,168.4 32,681.0 37,016.6 43,091.6

18. Subordinated liabilities 6,034.9 9,966.3 12,306.4 13,634.6 16,060.4

19. Total liabilities $412,036.6 $478,666.7 $434,168.9 $499,640.8 $606,642.4

20. Equity capital $ 21,630.4 $ 27,896.1 $ 31,639.6 $ 34,167.1 $ 34,144.2

Number of finns 6,902 6,236 6,307 6,006 6,746

11

2.1

Calendar, rather than fiscal, year data IS reported In this table.

Resale agreements end repurchase agreements for firms that neither carry nor clear IS included In

"othar assets" and "other non-subordinated liabilities" respectively as these items are not reported

separately on Part IIA of the FOCUS Report.

Figures may not sum due to rounding.

r=revlsed

p preliminary

Source: FOCUS Report

129

=
Securities Industry Dollar in 1989 for Carrying and Clearing Firms

Data for carrying and clearing firms that do a public business IS presented here to allow for more

detail as reporting requirements for firms that neither carry nor clear differ and data aggregation of

these two types of firms necessanly results in loss of detail. Carrying and clearing firms are those

firms that clear secunties transactions or maintain possession or control of customers' cash or

securities. Trns group produced 87% of the securities industry's total revenues in calendar year 1989.

Brokerage activity accounted for about 24 cents of each revenue dollar m 1989, no change

from the level In 1988. Securities commissions were the most important component, producing 15

cents of each dollar of revenue, while margin interest and revenues from mutual fund sales generated

SIX cents and three cents, respectively.

The dealer side produced 70 cents of each dollar of revenue. While this IS unchanged from 1988,

the distribution of the various sources of dealer revenues changed substantially. Twenty-one of these

cents came from trading and investments, down from 25 cents In 1988. Six cents came from

underwriting, down from nine cents in 1988. And 43 cents came from other securities-related

revenues, up from 36 cents In 1988. The latter IS comprised pnmarily of interest income from

securities purchased under agreements to resell and fees from handling private placements, mergers,

and acquisrtlons,

Total expenses consumed 98 cents of each revenue dollar, compared to 96 cents in 1988. The

result was a pre-tax profit margin of two cents per revenue dollar, compared to four cents in 1988.

Interest remained the most important expense category in 1989, consuming 44 cents of each

revenue dollar, compared to 33 cents in 1988. As a percent of revenues, employee-related expenses

(registered representatives' compensation and clerical and administrative employees' expenses) fell to

28 cents from 33 cents in 1988.

Total assets of broker-dealers carrying and clearing customer accounts rose by $105.6 billion

to $631.2 billion at year-end 1989. Proprietary positions in United States government secunties

accounted for the majonty of tms growth, Increasing by $72.7 billion to $136.3 billion. In

combination, United States government securities and resale agreements now account for 62% of

all assets. Other long positions rose $6.5 billion to $71.1 billion. Most of the remaining assets

represented receivables, either from customers or other broker-dealers.

Total liabilities increased $106.5 billion, or 22%, to $601.3 billion In 1989. Repurchase

agreements accounted for 80% of this increase. Owners' equity fell 2%. from $30.6 billion in 1988

to $29.9 billion in 1989.

130
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Table 5

UNCONSOLIDATED REVENUES AND EXPENSES FOR

CARRYING/CLEARING BROKER-DEALERS 1/

(Millions of Dollars)

1988r 1989P

Percent Percent Percent

of Total of Total Change

Dollars Revenues Dollars Revenues 1988-1989

Revenues

1 Securities commissions $ 8,974.1 15.6% $10,149.0 15.2% 13.1%

2. Gains (losses) in trading

and Investment accounts 14,412.1 25.1 14,050.8 210 (2.5)

3. Profits (losses) from underwriting and selling groups 5,320.4 9.3 4,262.5 6.4 (19.9)

4. Margin interest 3,135.5 5.5 3,860.6 5.8 23.1

5. Revenues from sale of

Investment company shares 1,881.7 3.3 2,071.4 3.1 10.1

6. Other secunnes related

revenues 20,492.8 35.7 28,744.0 43.0 40.3

7. All other revenues 3,128.5 5.5 3,738.4 5.6 19.5

8. Total revenues $57,345.1 100.0% $66,876.7 100.0% 16.6%

Expenses

9. Registered representatives'

compensation $ 8,993.3 15.7% $ 8,986.2 13.4% (0.1)%

10. Other employee

compensation and benefits 9,970.1 17.4 9,909.9 14.8 (0.6)

11. Compensation to partners and

voting stockholder ofticers 1,3997 2.4 1,414.6 2.1 1.1

12. Commissions and clearance

paid to other brokers 1,880.2 3.3 2,103.0 3.1 11.8

13. Communications 2,763.6 4.8 2,589.0 3.9 (6.3)

14. Occupancy and equipment

costs 3,325.3 5.8 3,460.7 5.2 4.1

15. Data processing costs 805.3 1.4 786.8 1.2 (2.3)

16. Interest expenses 19,123.9 33.3 29,186.9 43.6 52.6

17. Regulatory fees and expenses 384.0 0.7 452.8 0.7 17.9

18. Losses In error accounts and

bad debts 457.4 0.8 451.2 0.7 (1.4)

19. All other expenses 5,678.5 9.9 5,877.0 8.8 3.5

20. Total expenses $54,781.3 95.5% $65,218.1 97.5% 19.1%

Income and Profitability

21 Pre-tax Income $ 2,563.8 $1,658.6 (35.3)%

22 Pre-tax profit margin 4.5 2.5

23. Pre-tax return on equity 8.3 5.5

Number of firms 1,089 1,049

Figures may not sum due to rounding.

r-revised

p=prellminary

jj Calendar, rather than fiscal, year data IS reported In this table.

Note: Includes Information for firms dOing a public business that carry customer accounts or clear

securities transactions.

Source: FOCUS Report

132
Table 6

UNCONSOLIDATED BALANCE SHEET FOR

CARRYING/CLEARING BROKER-DEALERS 1/

(Millions of Dollars)

Year-end 1988' Year-end 1989P

Percent Percent Percent

of Total of Total Change

Dollars Revenues Dollars Revenues 1988-1989

Assets

1. Cash $ 8,9254 1.7% $ 9.282.4 1.5% 4.0%

2. Receivables from other

broker-dealers 66,264.8 126 89,855.9 14.2 35.6 a. SecurilJes failed to deliver 12,334 9 2.3 6,741.7 1.1 (45.3)

b. SecunlJes borrowed 45,961.5 8.7 69,5739 11 0 51.4 c Other 7,968.3 15 13,540.2 2.1 699

3. Receivables from customers 40,236.3 7.7 40,3285 64 0.2

4 Receivables from

non-customers 1,6477 0.3 1,124.1 0.2 (31.8) 5. LO~ posnions in secunties an commodities 127.896.8 244 207,109.7 328 619 a. Bankers acceptances,

cerllficates of depOSIt

and commercial paper 12,679.0 2.4 14,712.5 23 16.0

b. U.S. and Canadian

~overnment obhgalJons 63,581.2 12.1 136,253 0 216 114.3 c. tate and muniCIpal

~ovemment obligalJons 7.473.8 1.4 7,077.3 1 1 (5.3)

d. orporate obligalJons 27,126.3 5.2 30,222.7 48 11.4 e. StoCks and warrants 11,507.7 2.2 13,404.9 21 16.5

f. Options 657.2 0.1 828.3 0.1 26.0 ~. Arbitrage 3,147.9 0.6 2,705.7 04 (14,0l . Other securilJes 1,464.6 0.3 1,435.8 02 J2.0 I. Spot commodities 259.1 . 469.5 0.1 12

6 Securities and investments

not readily marketable 468.9 0.1 1,134.0 0.2 1418

7. Securmes purchased under

agreements to resell 258,034.5 49.1 257,688.6 40.8 (0.1)

8. EXchange membership 328.3 0.1 330.3 01 0.6

9. Other assets 21,642.1 4.1 24,359.6 3.9 12.6

10. Total assets $525.444.7 100.0% $631.2130 1000% 201%

Liabilities and EqUity Capital

11. Bank loans pa~able $22,922.0 4.4% $22,8017 3.6% (0.5)%

12. parbles to ot er bro er-dealers 45,817.5 8.7 49,349.2 7.8 7.7 a Sseuntles failed to receive 11,544.1 2.2 9,552.5 1.5 (17.3)

b. Sscunnes loaned 27,631.9 5.3 31,273.9 5.0 13.2 c. Other 6,641.5 13 8,522.7 1.3 28.3

13. Payables to non-customers 2,972.1 0.6 4,443.6 0.7 49.5

14. Payables to customers 39,312.9 75 47,260.4 7.5 20.2

15. Short poslnons In securines

and commodities 91,296.3 174 92,217.7 14.6 1.0

16. Secunties sold under

repurchase a~ements 243,828.7 46.4 328,836.8 52.1 34.9

17. Othernon-su rdmatsd

lIablhties 35,876.7 6.8 41.905.2 6.6 16.8

18. Subordinated liabilities 12,806.2 2.4 14,526.3 2.3 13.4

19. Total liabilities 494,832.6 94.1 601,340.8 952 21.5

20. EqUity capital $30,612.3 5.9% $29,8722 4.7% (2.4)%

Number of firms 1,089 1,049

Figures mal not sum due to rounding under .05Y.

r=revlSed

peprelmunary

j) Calendar, rather than fIScal,year data ISreported in thIStable

Note: Includes Infonnation for finns doIng a pubhcbusmsss that carry customer accounts or clear secunlles

transactions.

Source' FOCUS Report

133

•
Self-Regulatory Organizations: Expenses, Pre-tax Income, and Balance

Sheet Structure

In 1989 the total revenues of all self-regulatory organizations (SROs) with

marketplace jurisdiction rose approximately $42.2 million to $870.2 million, an

increase of 5.1 % from 1988 (1988 recognized a 7.8% decrease over 1987, 1987 a 15.2%

increase over 1986). The New York Stock Exchange (NYSE), National Association

of Securities Dealers (NASD), American Stock Exchange (Amex), and Chicago

Board Options Exchange (CBOE) accounted for 79.5% of all SRO total revenues,

down from 80.3% in 1988. The SROs' revenues are earned primarily from listing,

trading, and market data fees. The NYSE reported total revenues of $349.3 million,

up 8.0% from 1988, of which $187.9 million or 54% consisted of listing and trading

fees while $54.8 million or 16% consisted of market data fees. The Amex reported

total revenues of $109.7 million, up 6.7% from 1988. The CBOE reported total

revenues of $70.4 million, down 13.6% from the previous year. The NASD reported

an increase in total revenues of $6.7 million, or 4%, to $162.8 million. Other SROs

reporting revenue increases were the Boston Stock Exchange (BSE), which reported

a $.8 million increase, or 6.0%, to $13.3 million; the Cincinnati Stock Exchange (CSE),

which recorded a 23.9% increase, equating to a $.6 million increase in total revenues

to $3.3 million; the Philadelphia Stock Exchange (Phlx), which reported a $6.4

million increase, or 22.2%, to $35.2 million; and the Pacific Stock Exchange (PSE),

which reported a $7.0 million increase, or 18.7%, to $44.7 million. Other SROs that

reported a decrease in revenues were the Midwest Stock Exchange (MSE), which

reported a $.8 million decrease, or 1%, to $81.6 million; and the Spokane Stock

Exchange (SSE), which reported a 20.5% decrease in revenues. The largest percentage increase in total revenues, 23.9%, was experienced by the CSE. The largest

magnitude increase, $25.6 million, was recorded by the NYSE. The largest percentage decrease, 20.5%, was recorded by the SSE.

The total expenses of all marketplace SROs were $832.0 million in 1989, an

increase of $49.2 million (6.3%) over 1988. The NYSE incurred the largest magnitude

increase in expenses, $36.1 million, while the CSE experienced the largest percentage increase (16.9%). The CBOE recorded a 12.7% decrease from 1988 levels

representing a magnitude of $10.3 million. With aggregate total expenses increasing and aggregate total revenues also increasing but to a lesser extent than expenses,

pre-tax income of the SROs declined in 1989 by 22.8% from 1988 levels to $37.3

million. The NYSE experienced the largest magnitude decrease in pre-tax income,

$10.4 million, a percentage decrease of 50.8% from 1988. The CBOE recorded the

largest percentage decrease, 378.7%, representing a $.8 million drop in pre-tax

income for the year. The MSE recorded a decrease in pre-tax income of $2.5 million,

or -33%, NASD a decrease of $6.0 million, or -43%, and the SSE a decrease of $2,000,

or -6%. Increases in pre-tax income were reported by the Amex, the BSE, the CSE,

the Phlx, and the PSE. The Amex reported an increase of $3.3 million, or 9.5%. The

BSE reported an increase of $153,000, or 23.7%. The CSE experienced an increase of

$197,000, or 281.4%. The Phlx recorded an increase of $1.7 million, or 711.5%. The

PSE reported an increase of $3.3 million, or 221.1 %.

The total assets of all marketplace SROs were $1,285 million in 1989, an

increase of 20% from 1988. The largest percentage increase in total assets was

134
experienced at the CSE where total assets increased $775,000 (45.4%) from 1988 to

1989, while the largest magnitude increase occurred at the NYSE where total assets

increased $58.4 million. The total assets of Amex, BSE, and NASD also increased.

The largest decrease in total assets occurred at the MSE where total assets decreased

$354.8 million, or 62.1%. The total assets of the Phlx also decreased significantly

($38.2million, or 28.1%),while the CBOE, PSE, and SSEexperienced slight decreases

from 1988 levels.

The aggregate net worth of the marketplace SROs rose to $633.1 million in

1989,an increase of 10.2%.All the SROs except the SSEexperienced positive growth

in their net worth, with the Amex, the largest percentage gainer, at 43.8%. The

NYSE's net worth increased 2.7% from $229.4million to $235.7million. The SSE's net

worth decreased 45.3% from $75,000 to $41,000.

Clearing agency results have been presented in two charts by their respective

types; depositories and clearing corporations. Aggregate clearing agency service

revenue increased over 1%, or $3.9 million, in calendar year 1989 due to increases

in securities trading volume. All clearing agencies adjust fee structure and refunds

of fees to provide participants with attractively priced services, and to meet

expenses and provide the amount of earnings which they desire to retain.

The total of all depository revenues increased $18.8 million, $16.2 million by

the Participants Trust Company (PTC). PTe, organized to service the mortgagebacked securities industry, assumed the depository portion of the business formerly

managed by the MBS Clearing Corporation (MBSCC). Total depository pre-tax

income was down 26%, to $1.9 million. Again, the main factor was PTC's first year

loss of $644,000. The Midwest Securities Trust Company (MSTC) recorded a 67%

decrease in pre-tax income to $204,000.

The depositories continued to expand their base for service revenues by increasing the number of shares on deposit and the face value of debt securities in

custody. At the end of 1989, the total value of securities in the depository system

reached $4.3 trillion, of which the Depository Trust Company (DTC) alone held $4.0

trillion, including $1.8 trillion in certificates held by transfer agents as DTC's agent.

As in 1988, the movement of certificates into depositories was due to further

expansion of depository-eligible issues and the desire of participants to avail

themselves of depository services. The MSTC had 803,000eligible issues at year end,

up 12%, and DTC had 724,000, up 19%. Eligibility for all types of securities

increased, including an increase of 30% in municipal bond issues. Currently, more

than 85% of the principal amount of all municipal bonds currently outstanding in

the United States is in the depository system.

Service revenue of clearing corporations increased $13 million, or 10%, to

almost $140 million, largely as a result of increases of $3.3million at the Government

Securities Clearing Corporation (GSCC), $3.0 million at the National Securities

Clearing Corporation (NSCC), and $2.2million at the Options Clearing Corpora tion

(OCC). As a group, the clearing corporations recorded a net increase in pre-tax

income of almost $1.8 million. The consolidated result for NSCC was a pre-tax

earnings increase of $670,000; ISCC, a wholly owned subsidiary of NSCC, posted a

loss of $733,000, and GSCC, in which NSCC has a 19%equity interest, recorded a loss

of $272,000. Stock Clearing Corporation of Philadelphia reported a pre-tax profit of

$189,000 after having a loss of $170,000 in 1988.The MBSCC reported a decrease of

135
$680,000 in pre-tax income from continuing operations, down 19%, to almost $3

million.

The combined Pacific Clearing Corporation (PCC) and Pacific Securities Depository Trust Company (PSDTC) had a pre-tax gain of $3.1 million after a gain of

$420,000 in 1988. In April 1987, the PSE announced the closure of the clearance and

depository functions not essential to PSE's trading operations. The 1988 pre-tax

figure included a $1 million provision for loss due to costs of discontinued operations. In 1989, payments charged against this reserve were $732,000. The remaining

reserve, including an additional $50,000 reserved by the PSE in 1989, was valued at

almost $1.4 million at year end. The combined stockholders' equity of PCC and

PSDTC was $2.9 million at the end of 1989. PSE, which guarantees the liabilities of

PCC and PSDTC, reported members' equity totaled $19.6 million at the end of 1989.

The aggregate net worth of all clearing corporations and depositories rose to

a new high of $87 million. Participant clearing fund contributions increased by $385

million, or 43%, to almost $1.3billion. These funds provide protection to the clearing

agencies in the event of a participant default by means of a pro- rata charge against

the participants' fund.

136
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Table 9

SELF-REGULATORY ORGANIZATIONS DEPOSITORIES

1989 REVENUES AND EXPENSES 1/

(thousands of dollars)

Depository

services

Interest

Other

Total revenues 21

Depository

Trust

Company

12131/89

$120,603

127,199

247,802

Midwest

SecuntJes

Trust

Company

12131/89

$ 30,401

2,448

1,708

34.557

Philadelphia

ParliClpants

Trust

Company

12131/89

$13,662

2,591

16,253

Depository

Trust

Company

12131/89 Total

$ 7,584 $172,250

757 132,995

1,708

8.341 306.953

Employee costs 148,371

Data processing and

communicatJons costs 19.903

Occupancy costs 39,523

Contracted

services cost

12.427

2.377

4,378

4,383

4.439

5,859

2,948

3.616

1,143

378

168,853

29.282

47,227

4,383

NI other expenses 38.005

Total expenses 245,802

Excess of revenues

over expenses 3/ $ 2.000

Shareholders' Equrty $ 17,497

Parncpants Fund $471,760

10,789

34,353

$ 204

$ 4.064

$ 8.156

3.651

16,897

$ (644)

$14.337

$ 74,058

2,866 55,311

8,003 305,055

$ 338 $ 1,898

$ 1,483 $ 37.381

$ 504 $554,478

1/ Although efforts have been made to make the presentatJons comparable. any Single revenue or expense category may

not be completely comparable between any two c1eanngagenCIes because of (i) the varying classlf,catJonmethods

employed by the c1eanngagencies In reporling operating results and (II) the grouping methods employed by the Commission staff due to these varying classmcanon methods IndIVidualamounts are shown to the nearest thousand Totals are

the rounded result of the underlying amounts and may not be the anthmelJc sums of the parts

21 Revenues are net of refunds which have the effect of reducing a c1eanngagency's base fee rates

3/ This is the result of operatJonsand before the effect of Income taxes, which may Significantly Impact a cleanng agency's

net Income

139

-
Exemptions

Section 12(h) Exemptions

Section 12(h) of the Exchange Act authorizes the Commission to grant a

complete or partial exemption from the registration provisions of Section 12(g) or

from other disclosure or insider trading provisions of the Act where such exemption

is consistent with the public interest and the protection of investors. Fifty-five applications were pending at the beginning of fiscal year 1990, and 120applications were

filed during the year. During the year, 6 applications were granted and 17 were

withdrawn. In addition, approximately 35 issuers have informally advised the staff

that they intend to withdraw their applications.

Exemptions for Foreign Private Issuers

Rule 12g3-2 provides various exemptions from the registration provisions of

Section 12(g) of the Exchange Act for the securities of foreign private issuers. The

most significant of these exemptions is that contained in SUbparagraph (b), which

provides an exemption for certain foreign issuers that submit to the Commission on

a current basis the material specified in the rule. Such material includes that

information about which investors ought reasonably to be informed and which the

issuer: (1) has made public pursuant to the law of the country in which it is

incorporated or organized; (2) has filed with a foreign stock exchange on which its

securities are traded and which was made public by such exchange; or (3) has

distributed to its securityholders. Periodically, the Commission publishes a list of

those foreign issuers that appear to be current under the exemptive provision. The

most current list contains a total of 1,103 foreign issuers.

FINANCIAL INSTITUTIONS

There were 3,535 companies registered under the Investment Company Act of

1940 as of September 30,1990. New registrations totaled 249, with 116 registrations

being terminated during the fiscal year. This compares with fiscal year 1989 figures

of 3,544 total active registrants, 304 new registrations, and 157 terminations.

140
securities on Exchanges

Market Value and Share Volume

The market value of equity and option transactions (trading in stocks, options,

warrants, and rights) on registered exchanges totaled $2.0 trillion in 1989. Of this

total, $1.8 trillion, or 92%, represented the market value of transactions in stocks,

rights and warrants; $156billion, 8%,were options transactions (including exercises

of options on listed stocks).

The value of equity/option transactions on the New York Stock Exchange

(NYSE) was $1.6 trillion, up 15% from the previous year. The market value of such

transactions on the American Stock Exchange (Amex) jumped 35% to $79.8 billion

and by 31% to $342.8 billion on all other exchanges. The volume of trading in stocks

on all registered exchanges totaled 54.2 billion shares, a 3% increase from the

previous year, with 81% of the total accounted for by trading on the NYSE.

The volume of options contracts traded on options exchanges (excluding

exercises) was 227 million contracts in 1989, 16% higher than in 1988. The market

value of these contracts increased 23% to $76.8 billion. The volume of contracts

executed on the Chicago Board Options Exchange rose 13%to 126.8million; option

trading on the Amex increased 11%; contract volume on the Philadelphia Stock

Exchange rose 21%; and option trading on the Pacific Stock Exchange increased

36%.

141
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NASDAQ

(Volume and Market Value)

NASDAQ share volume and market value information for over-the-counter

trading has been reported on a daily basis since November 1, 1971. At the end of 1989

there were 4,963 issues in the NASDAQ system as compared to 5,144 a year earlier

and 2,582 at the end of 1978.

Share volume for 1989 was 33.5 billion as compared to 31.1 billion in 1988 and

3.6 billion in 1979. This trading volume encompasses the number of shares bought

and sold by market makers plus their net inventory changes. The market value of

shares traded in the NASDAQ system was $431.4 billion during 1989 as compared

to $347.1 billion in 1988 and $44.3 billion in 1979.

Share and Dollar Volume by Exchange

Share volume on all registered exchanges totaled 54.2 billion, an increase of 3%

from the previous year. The New York Stock Exchange accounted for 81% of the

1989 share volume; the American Stock Exchange, 6%; the Midwest Stock Exchange,

5%; and the Pacific Stock Exchange, 3%.

The market value of stocks, rights, and warrants traded was $1.8 trillion, 16%

higher than the previous year. Trading on the New York Stock Exchange contributed

86% of the total. The Midwest Stock Exchange and Pacific Stock Exchange contributed

6% and 3%, respectively. The American Stock Exchange accounted for 2% of dollar

volume.

144
Table 12

SHARE VOLUME BY EXCHANGES 1/

(In Percentage)

Total Share Volume

Year (Thousands) NYSE AMEX MSE PSE PHLX BSE CSE Other 11

1946 ........... 769,018 66.87 21.31 1.77 2.98 1.06 0.66 0.06 6.30 1960 ........... 893,320 76.32 13.64 2.16 3.11 0.97 0.66 0.09 3.16 1956 ............ 1,321,401 68.86 19.19 2.09 3.08 0.86 0.48 0.06 6.41 1960 .......... 1,441,120 68.47 22.27 2.20 3.11 0.88 0.38 0.04 2.66 1961 ........... 2,142,623 64.99 26.68 2.22 3.41 0.79 0.30 0.04 2.67 1962 ........... 1,711,946 71.31 20.11 2.34 2.96 0.87 0.31 0.04 2.07 1963 ............ 1,880,793 72.93 18.83 2.32 2.82 0.83 0.29 0.04 1.94

1964 ............ 2,118,326 72.81 19.42 2.43 2.66 0.93 0.29 0.03 1.44 1965 ............ 2,671,012 69.90 22.63 2.63 2.33 0.81 0.26 0.06 1.49

1966 ........... 3,313,899 69.38 22.84 2.66 2.68 0.86 0.40 0.06 1.23

1967 ............ 4,646,663 64.40 28.41 2.36 2.46 0.87 0.43 0.02 1.06 1968 ........... 6,407,923 61.98 29.74 2.63 2.64 0.89 0.78 0.01 1.33

1969 ........... 6,134,866 63.16 27.61 2.84 3.47 1.22 0.61 0.00 1.19

1970 ........... 4,834,887 71.28 19.03 3.16 3.68 1.63 0.61 0.02 0.69

1971. .......... 6,172,668 71.34 18.42 3.62 3.72 1.91 0.43 0.03 0.63

1972 ............ 6,618,132 70.47 18.22 3.71 4.13 2.21 0.69 0.03 0.64

1973 ........... 6,899,678 74.92 13.76 4.09 3.68 2.19 0.71 0.04 0.62

1974 ............ 4,960,842 78.47 10.28 4.40 3.48 1.82 0.86 0.06 0.64

1976 ........... 6,376,094 80.99 8.97 3.97 3.26 1.64 0.86 0.13 0.29

1976 ........... 7,129,132 80.06 9.36 3.87 3.93 1.42 0.78 0.44 0.16

1977 ........... 7,124,640 79.71 9.66 3.96 3.72 1.49 0.66 0.64 0.26

1978 .......... 9,630,066 79.63 10.66 3.66 3.84 1.49 0.60 0.16 0.17

1979 ............ 10,960,424 79.88 10.86 3.30 3.27 1.64 0.66 0.28 0.23

1980 ........... 16,686,986 79.84 10.78 3.84 2.80 1.64 0.67 0.32 0.21

1981 ........... 16,969,186 80.68 9.32 4.60 2.87 1.66 0.61 0.37 0.10

1982 ............ 22,491,936 81.22 6.96 6.09 3.62 2.18 0.48 0.38 0.07

1983 ........... 30,316,014 80.37 7.46 6.48 3.66 2.20 0.66 0.19 0.10

1984 .......... 30,648,014 82.64 6.26 6.03 3.31 1.79 0.86 0.18 0.04

1985 ........... 37,187,667 81.62 6.78 6.12 3.66 1.47 1.27 0.16 0.03

1986 ........... 48,680,624 81.12 6.28 6.73 3.68 1.63 1.33 0.30 0.02

1987 ............ 64,082,996 83.09 6.67 6.19 3.23 1.30 1.28 0.30 0.04

1988 .......... 62,666,664 83.74 4.96 6.26 3.03 1.29 1.32 0.39 0.02

1989 .......... 64,416,790 81.33 6.02 6.44 3.34 1.80 1.64 0.41 0.02

1/ Share volume for exchangas includas stocks, rights, and warrants; calendar, father than flSC8l, yeaf data is

reported 'n this tabla.

2/ Includas aI/ exchanges not listed Indivldual/y.

Source: SEC Form R-31

145
Table 13

DOLLAR VOLUME BY EXCHANGES 1/

(In Percentage)

Total Dollar Voluma

Year (Thousands) NYSE AMEX MSE PSE PHLX BSE CSE Other y

1945 ............ 16,284,552 82.75 .81 2.00 1.78 0.96 1.16 0.06 0.48

1950 ............ 21,808,284 85.91 6.85 2.35 2.19 1.03 1.12 0.11 0.44

1955 ............ 38,039,107 86.31 6.98 2.44 1.90 1.03 0.78 0.09 0.47

1960 ............ 45,309,825 83.80 9.35 2.72 1.94 1.03 0.60 0.07 0.49

1961 ........... 84,071,623 82.43 10.71 2.76 1.99 1.03 0.49 0.07 0.63

1962 ............ 54,865,293 86.32 6.81 2.76 2.00 1.05 0.46 0.07 0.54

1963 ............ 84,437,900 85.19 7.61 2.72 2.39 1.06 0.41 0.06 0.66

1964 ........... 72,461,684 83.49 8.45 3.16 2.48 1.14 0.42 0.06 0.81

1965 ............ 89,549,093 81.78 9.91 3.44 2.43 1.12 0.42 0.08 0.82

1966 ............ 123,697,737 79.77 11.84 3.14 2.84 1.10 0.56 0.07 0.68

1967 ............ 162,189,211 77.29 14.48 3.08 2.79 1.13 0.66 0.03 0.54

1968 .......... 197,116,367 73.55 17.99 3.12 2.65 1.13 1.04 0.01 0.51

1969 ............ 176,389,769 73.48 17.59 3.39 3.12 1.43 0.67 0.01 0.31

1970 ............ 131,707,946 78.44 11.11 3.76 3.81 1.99 0.67 0.03 0.19

1971 ............ 186,376,130 79.07 9.98 4.00 3.79 2.29 0.68 0.06 0.24

1972 ............ 206,966,263 77.77 10.37 4.29 3.94 2.66 0.76 0.06 0.27

1973 ........... 178,863,622 82.07 6.06 4.54 3.66 2.46 1.00 0.06 0.27

1974 ............ 118,828,270 83.63 4.40 4.90 3.60 2.03 1.24 0.06 0.24

1975 ............ 167,266,676 85.20 3.67 4.64 3.26 1.73 1.19 0.17 0.14

1976 ........... 196,224,812 84.35 3.88 4.76 3.83 1.69 0.94 0.63 0.02

1977 .......... 187,393,084 83.96 4.60 4.79 3.63 1.62 0.74 0.76 0.01

1978 ........... 261,618,179 83.67 6.13 4.16 3.64 1.62 0.61 0.17 0.00

1979 ............ 300,476,610 83.72 6.94 3.83 2.78 1.80 0.66 0.36 0.02

1980 .......... 476,600,688 83.53 7.33 4.33 2.27 1.61 0.62 0.40 0.01

1981 ............ 491,017,139 84.74 6.41 6.04 2.32 1.60 0.49 0.40 0.00

1982 ........... 603,094,266 85.32 3.27 6.83 3.06 1.69 0.61 0.43 0.00

1983 ............ 958,304,168 85.13 3.32 6.28 2.86 1.65 0.66 0.16 0.04

1984 ............ 951,318,448 85.61 2.26 6.57 2.93 1.68 0.85 0.19 0.00

1985 ........... 1,200,127,848 85.26 2.23 6.59 3.06 1.49 1.20 0.18 0.00

1986 ........... 1,707,117,112 85.02 2.66 6.00 3.00 1.67 1.44 0.41 0.00

1987 ............ 2,286,902,788 86.79 2.32 6.32 2.63 1.35 1.33 0.36 0.00

1988 ............ 1,587,960,769 86.81 1.96 5.46 2.62 1.33 1.34 0.49 0.00

1989 ........... 1,847,766,971 86.49 2.36 6.46 2.84 1.77 1.66 0.54 0.00

11 Dollar volume for exchanges Includes stocks, rights and warrents; celendar, rather than fiscal, year data IS

reported in this table.

2/ Includes all exchanges not hsted individually.

Source: SEC Form R.31

146
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Table 15

VALUE OF STOCKS LISTED ON EXCHANGES

(Billions of Dollars)

New York American Exclusively

Stock Stock On Other

Dec 31 Exchange Exchange Exchanges Total

1938 47.5 10.8 58.3

1940 46.5 10.1 56.6

1941 41.9 8.6 50.5

1942 35.8 7.4 43.2

1943 47.6 9.9 57.5

1944 55.5 11.2 66.7

1945 73.8 14.4 88.2

1946 68.6 13.2 81.8

1947 68.3 12.1 80.4

1948 67.0 11.9 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 25.4 4.2 337.3

1960 307.0 24.2 4.l 335.3

1961 387.8 33.0 5.3 426.1

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

1965 537.5 30.9 4.7 573.1

1966 482.5 27.9 4.0 514.4

1967 605.8 43.0 3.9 652.7

1968 692.3 61.2 6.0 759.5

1969 629.5 47.7 5.4 682.6

1970 636.4 39.5 4.8 680.7

1971 741.8 49.1 4.7 795.6

1972 871.5 55.6 5.6 932.7

1973 721.0 38.7 4.1 763.8

1974 511.1 23.3 2.9 537.3

1975 685.1 29.3 4.3 718.7

1976 858.3 36.0 4.2 898.5

1977 776.7 37.6 4.2 818.5

1978 822.7 39.2 2.9 864.8

1979 960.6 57.8 3.9 1,022.3

1980 1,242.8 103.5 2.9 1,349.2

1981 1,143.8 89.4 5.0 1,238.2

1982 1.305.4 77.6 6.8 1,389.7

1983 1,522.2 80.1 6.6 1,608.8

1984 1,529.5 52.0 5.8 1,587.3

1985 1,882.7 63.2 5.9 1,951.8

1986 2,128.5 70.3 6.5 2,205.3

1987 2,132.2 67.0 5.9 2,205.1

1988 2,366.1 84.1 4.9 2,455.1

1989 2,903.5 100.9 4.6 3,009.0

Source: SEC Form 1392

148
Certificate Immobilization

Book-entry deliveries continued to outdistance physical deliveries in the

settlement of securities transactions among depository participants of the Depository Trust Company. This tendency isillustrated intable 16,CERTIFICATE IMM0-

BILIZAnON TRENDS. The table captures the relative significance of the mediums

employed, in a ratio of book-entry deliveries to certificates withdrawn from DTC.

The figures include Direct Mail by Agents and municipal bearer bonds. In 1989,the

total certificates withdrawn decreased over 16%, and the ratio of book-entry

deliveries to certificates withdrawn continued to grow. In 1989, the ratio was 2.5

times the 1984 ratio of 4.8 book-entry deliveries rendered for every certificate

withdrawn.

Table 16

CERTIFICATE IMMOBILIZATION TRENDS

Depository Trust Company

(Including Bearer Securities)

1989 1988 1987 1986 1985 1984

Book-entry Deliveries at OTC

(in thousands) 73,900 67,200 78,000 66,700 55,800 48,000

Total of All Certificates

Withdrawn (m thousands) 7,700 9,200 12,500 11,599 11,299 12,599

Book-entry Oelivenes per

Certificates Withdrawn 9.6 7.3 6.2 58 4.9 3.8

149
Table 17

TYPES OF PROCEEDINGS

ADMINISTRATIVE PROCEEDINGS

Persons Subject to, Acts Constituting,

and Basis for, Enforcement Action

Broker-dealer, municipal securities

dealer, government securities dealer,

transfer agent, Investment adviser, or

associated person

Willful violation of secunties laws or rules;

aiding or abetting such violation; failure

reasonably to supervise others; Willful

misstatement or ornission In filing with the

Commission; conviction of or Injunction against

certain crimes or conduct.

Registered securities association

Violation of or Inability to comply with the

1934 Act, rules thereunder, or ItS own rules;

unjustified failure to enforce compliance with

the toreqomq or with rules of the Municipal

Securities Rulemaking Board by a member or

person associated with a member.

Member of registered securities

association, or associated person

Entry of Commission order against person pursuant

to the 1934 Act, Section 15(b); Willful violation

of securities laws or rules thereunder or rules of

the Municipal Securities Rulemaking Board; effecting transaction for other person with reason to

believe that person was committing violations

of secunties laws.

National securities exchange

Violation of or inability to comply with 1934

Act, rules thereunder, or Its own rules;

unjustified failure to enforce compliance With

the foregoing by a member or person associated

With a member.

150

sanction

Censure or limitation on activities;

revocation, suspension or denial of

registration; bar or suspension from

association (1934 Act, Sections 15(b)(4)-

(6), 15B(c)(2)-(5), 15(C)(c)(1 )-(2),

17A(c)(3)-(4); Advisers Act, Section

203(e)-(f)).

Suspension or revocation of registration;

censure or limitation of activities,

functions, or operations (1934 Act,

Section 19(h)(1)).

Suspension or expulsion from the

association; bar or suspension from

association with member of association

1934 Act, Section 19(h)(2)-(3)).

Suspension or revocation of registration;

censure or limitation of activities,

functions, or operations (1934 Act, Section

19(h)(1 )).
Member of national securities

exchange, or associated person

Entry of Commission order against person pursuant

to 1934 Act, Section 15(b); willful violation of

secunties laws or rules thereunder, effecting

transaction for other person with reason to

believe that person was t:ommitting violation

of securities laws.

Registered clearing agency

Violation of or inability to comply with 1934

Act, rules thereunder, or ItSown rules; failure

to enforce compliance with ItS own rules by

participants.

Participant in registered clearing agency

Entry of Commission order against participant

pursuant to 1934 Act, Section 15(b)(4); willful

violation of clearing agency rules; effecting

transaction for other person with reason to

believe that person was committing Violations

of securities laws

securities information processor

Violation of or inability to comply With

provisions of 1934 Act or rules thereunder

Any person

Willful violation of 1933 Act, 1934 Act,

Investment Company Act, or rules thereunder;

aiding or abetting such violation: Willful

misstatement in filing With Commission

Officer or director of selfregulatory organization

Willful violation of 1934 Act, rules thereunder,

or the organization's own rules; willful abuse

of authority or unjustified failure to enforce

compliance.

Suspension or expulsion from exchange; bar

or suspension from assocranon with member

(1934 Act, Section 19{h){2)-{3))

Suspension or revocation of registration;

censure or limitation of actvnies,

functions, or operations (1934 Act,

Section 19(h)(1 )).

Suspension or expulsion from clearing

agency (1934 Act. Section 19(h)(2)).

Censure or limitation of activities;

suspension or revocation of registration

(1934 Act, Section 11A(b)(6))

Temporary or permanent prorublnon

against serving In certain capacities with

regIstered investment company (Investment Company Act, Section 9(b)).

Removal from office or censure (1934

Act, Section 19(h){4)).

151
Principal of broker-dealer

Officer, director, general partner, ten

percent owner or controlling person of a

broker-dealer for which a SIPC trustee has

been appointed.

1933 Act registration statement

Statement materially inaccurate or incomplete.

Person subject to Sections 12,

13,14, or 15(d) of the 1934 Act

or associated person

Failure to comply with such provisions or having

caused such failure by an act or omission that

person knew or should have known would contribute

thereto.

Securities registered

pursuant to Section 12

of the 1934 Act

Noncompliance by Issuer with 1934 Act or rules

thereunder.

Public Interest requires trading suspension.

Registered investment company

Failure to file an Investment Company Act

reqistratron statement or a required report,

filing a materially incomplete or misleading

statement or report.

Company has not attained $100,000 net worth

90 days after 1933 Act registration statement

became effective.

152

Bar or suspension from being or

becoming associated with a broker-dealer

(SIPA, Section 14(b)).

Stop order refusing to permit or suspending effectiveness (1933 Act, Section

8(d».

Order directing compliance or steps

effecting compliance (1934 Act, Section

15(c)(4».

Denial, suspension of effective date,

suspension, or revocation of regIstration

(1934 Act, Section 120».

Summary suspension of over-thecounter or exchange trading (1934 12

Act, Section 12(k)).

Suspension or revocation of registration

(Investment Company Act, Section 8(e».

Stop order under 1933 Act; suspension

or revocation of registration (Investment

Company Act, Section 14(a».
Attorney, accountant, or other

professional or expert

Lack of requisite qualifications to represent

others; lacking In character or integrity;

unethical or improper professional conduct;

willful vlolanon of securities laws or rules;

or aidIng and abetting such violation.

Attorney suspended or disbarred by court;

expert's license revoked or suspended;

conviction of a felony or of a misdemeanor

Involving moral turpitude.

Permanent injunction against or finding of

securities violation in Commission-instituted

action; finding of securities violation by

Commission in administrative proceedings.

Member or employee of Municipal securities

Rulemaking Board

Willful violation of 1934 Act, rules thereunder,

or rules of the Board; abuse of authonty.

Permanent or temporary denial of

privilege of appearing or practicmq before

the Oomrnlssron (17 CFR Section

201.2(e)(1 )).

Automatic suspension from appearance

or practice before the Commission (17

CFR Section 201.2(6)(2))

Temporary suspension from practlcmq

before the Commission, censure,

permanent or temporary disqualification

from practicing before the Commission

(17 CFR Section 201 2(e)(3».

Censure or removal from office

(1934 Act, Section 15B(c)(8)).

CIVIL PROCEEDINGS IN FEDERAL DISTRiCT COURTS

Persons Subject to, Acts Constituting,

and BaSIS for, Enforcement Action

Any person

Engaging in or about to engage In acts or

practices violating secuntles laws, rules,

or orders thereunder (including rules of a

registered self-regulatory orpanlzanon).

Noncompliance with provisions of the laws, rules,

or regulations under 1933, 1934, or Holding

Company Act, orders issued by the Commission,

rules of a registered self-regulatory organization, or undertaking In a regIstration

statement

Sanction

Injunction against acts or practices

constitutmq violations (plus other

equrtable relief under court's

general equity powers) (1933 Act,

Section 20(b); 1934 Act, Section 21 (d);

Holding Company Act, Section 18(e), Investment Company Act, Section

42(d); Advisers Act, Section 209(d);

Trust Indenture Act, Section 321).

Writ of mandamus, injunction, or order

directing compliance (1933 Act, Section

20(c); 1934 Act, Section 21 (e); Holding

Company Act, Section 18(f)).
Trading while In possession of material

non-public information in a transaction on an

exchange or from or through a broker-dealer

(and transaction not part of a public

offering), aiding and abetting or directly

or indirectly controlling the person who

engages In such trading.

Issuer subject to Section 12 or 15(d)

of the 1934 Act, officer, director,

employee or agent of issuer; stockholder

acting on behalf of Issuer

Payment to foreign official, foreign political

party or official, or candidate for foreign

political office, for purposes of seeking the

use of influence In order to assist Issuer in

obtaining or retaining business for or with,

or directing business to, any person.

Securities Investor Protection

Corporation

Refusal to commit funds or act for the

protection of customers.

National securities exchange or

registered securities association

Failure to enforce compliance by members or

persons associated with ItS members with the

1934 Act, rules or orders thereunder, or rules

of the exchange or association.

Registered clearing agency

Failure to enforce compliance by its

participants with ItS own rules.

Issuer subject to

Section 15(d) of 1934 Act

Failure to file required information,

documents, or reports.

Registered Investment company

Name of company or of security issued by it

deceptive or misleading.

154

Maximum civil penalty: three times profit

gained or loss avoided as a result of

transaction (1934 Act, Section 21A(a)-(b».

Maximum CIVil penalty: $10,000 (1934

Act, Section 32(c».

Order directing discharge of obligations

and other appropnate relief (SIPA, Section

11(b».

Wnt of mandamus, injunction or order

directing such exchange or association to

enforce compliance (1934 Act, Section

21 (e».

Wnt of mandamus, Injunction or order

directing cleanng agency to enforce

compliance (1934 Act, Section 21(e».

Forfeiture of $100 per day (1934 Act,

Section 32(b».

Injunction against use of name (Investment

Company Act, Section 35(d».
Officer, director, member of advisory

board, adviser, depositor, or underwriter

of investment company

Engage In act or practice constituting breach

of fiduciary duty involving personal misconduct.

InJunctton against acting in certain

capacities for Investment company and other

appropriate relief (Investment Company Act,

Section 36(a)).

CRIMINAL PROSECUTION BY DEPARTMENT OF JUSTICE

Persons Subject to, Acts Constituting,

and Basis for, Enforcement Action

Any person

Willful violation of secunties laws or rules

thereunder; Willful misstatement In any document

required to be filed by secunties laws or rules,

Willful misstatement In any document required to

be filed by self-regulatory orqaruzanon In

connection With an applicatton for membership

or association with member

Issuer subject to section 12 or 15(d)

of the 1934 Act; officer or director of

issuer; stockholder acting on behalf of

issuer; employee or agent subject to the

jurisdiction of the United States

Payment to foreign official, foreign political

party or official, or candidate for foreign

political office for purposes of seeking the

use of Influence In order to assist issuer In

obtaining or retaining busmsss for or With,

or directing business to, any person .

Sanction

Maximum penalties. $1,000,000 fine and 10

years Imprisonment for individuals,

$2,500,000 fine for non-natural persons

(1934 Act, Sections 21 (d), 32(a)); $10,000

fine and 5 years irnpnsonrnsnt (or

$200,000 If a public utility holding

company for Violations of the Holding

Company Act) (1933 Act, Sections 20(b),

24; Investment Company Act,

Sections 42(e). 49; Advisers Act,

Sections 209(e), 217; Trust Indenture

Act, Secttons 321, 325, Holding Company

Act, Sections 18(f), 29).

Issuer -- $2,000,000; officer, director,

employee, agent or stockholder -- $100,000

and 5 years impnsonment (Issuer may

not pay fine for others) (1934 Act,

Sectton 32(c))

Statutory references are as follows: "1933 Act," the secunues Act of 1933, "1934 Act,"

the Securities Exchange Act of 1934, "Investment Company Act," the Investment Company Act of

1940, "Advisors Act," the Investment Advrssrs Act of 1940; "Holding Company Act," the Public

Utility Holding Company Act of 1935; "Trust Indenture Act," the Trust Indenture Act of 1939, and

"SIPA," the Secunties Investor Protection Act of 1970

•
Table 18

ENFORCEMENT CASES INITIATED BY THE COMMISSION

DURING FISCAL YEAR 1990 IN VARIOUS PROGRAM AREAS

(Each case initiated has been included in only one category listed below,

even though many cases involve multiple allegations and may fall under

more than one category)

Program Area In Which a %01

CIVil AcIIon or Admlnlslrabve Civil AdmlnlstralJVe Total

ProceedIng WeE>InllJated AcIIons[FN,l] [FN,2] ProceedIngS Total[FN,l] C8E>8S

secormes OfIenng Cases

(a) Non-regulated Entrty 24(89) 4 (4) 28 (93)

(b) Regulated Entrty 23(89) 27(34) 50 (123)

Total Secunbes OfIenng Cases 47Tf7Sf 3fl3li) 78 (216) 260/.

Broker-Dealer Cases

(a) Back Office 1 (2) 4 (8) 5 (10)

(b) Fraud Against Customer 11 (28) 9 (12) 20 (40)

(c) Stock Loan o (0) 1 (2) 1 (2)

(d) Government secunnes 1 (1) 2(2) 3 (3)

(e) Other 16(22) 22(28)

Total Broker-Dealer C8E>9S 19 (37) 32l46f -sn83f 170/0

Other Regulated Entity Cases

(a) Investment AdvIsers 11 (19) 20(35) 31 (54)

(b) Investment Companies 4(15) 4(4) 8 (19)

(c) Transfer Agents 1 (3) 1 (3)

Total Other Regulated Entity C8E>9S 15(34) 40176f 13%

Issuer Rnanelal Statement and Reporting C8E>9S

(a) Issuer Rnanclal DISClosure 16(46) 7(10) 23 (56)

(b) Issuer Reporting Other 13 (33) uu, 14(34)

(c) Issuer FCPA VIOlation 2(4) 0(0) 2(4)

Total Issuer Rnanc.aI Statement and Reporting C8E>9S 31 (83) 8(11) 39(94) 130/0

Insider Trading Cases 31 (86) 7 (7) 38(93) 130/0

Market ManIpulation C8E>9S 17(87) 7(7) 24(94) 8%

Corporate Control C8E>9S 11 (20) 0(0) 11 (20) 4%

Contempt Proceedings 7 (11) 0(0) 7(11) 20/0

Fraud Agaonst Regulated Entrtles 4 (9) 0(0) 4(9) 1%

Miscellaneous DosclosureJReportlng 1 (11) 0(0) 1 (11) 0%

Delinquent FilIngs

(a) Issuer ReportIng ..!J!l 10 (11)

(b) Fomns 3 & 4 1 (2) 0(0) 1l2f Total Delinquent Filings 10(12) 11 (13) 4%

GRAND TOTALS 193 (568) 111 (152) 304 (720) 1010/0 [FN,3]

[FN,l]The number of defendants and respondents IS noted parenthetICally.

(FN,2]ThlS category Includes InJuncbve actions, and CIvil and cnminal contempt proceedings.

[FN,3]Percentages total more than 100"10 due to roUnding of figures

156

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Table 19

INVESTIGATIONS OF POSSIBLE VIOLATIONS OF THE ACTS

ADMINISTERED BY THE COMMISSION

Pending as of October 1, 1989 998

Opened in fiscal year 1990 362

Total 1,360

Closed in fiscal year 1990 208

Pending as of September 30, 1990 1,152

Formal Orders of Investigation

Issued in Fiscal Year 1990 122

157
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Foreign Restricted List

The Securities and Exchange Commission maintains and publishes a Foreign Restricted List which is designed to put broker-dealers, financial institutions,

investors, and others on notice of possible unlawful distributions of foreign securities in the United States. The list consists of names of foreign companies whose

securities the Commission has reason to believe have been, or are being, offered for

public sale in the United States in possible violation of the registration requirement

of Section 5 of the Securities Act of 1933 (Securities Act). The offer and sale of

unregistered securities deprives investors of all the protections afforded by the

Securities Act, including the right to receive a prospectus containing the information required by the Act for the purpose of enabling the investor to determine

whether the investment is suitable. While most broker-dealers refuse to effect

transactions in securities issued by companies on the Foreign Restricted List, this

does not necessarily prevent promotors from illegally offering such securities

directly to investors in the United States by mail, by telephone, and sometimes by

personal solicitation. The following foreign corporations and other foreign entities

comprise the Foreign Restricted List.

1. Aguacate Consolidated Mines, Incorporated (Costa Rica)

2. Alan MacTavish, Ltd. (England)

3. Allegheny Mining and Exploration Company, Ltd. (Canada)

4. Allied Fund for Capital Appreciation (AFCA, S.A) (Panama)

5. Amalgamated Rare Earth Mines, Ltd. (Canada)

6. American Industrial Research S.A, also known as Investigation

Industrial Americana, S.A (Mexico)

7. American International Mining (Bahamas)

8. American Mobile Telephone and Tape Co., Ltd. (Canada)

9. Antel International Corporation, Ltd. (Canada)

10. Antoine Silver Mines, Ltd. (Canada)

11. ASCA Enterprisers Limited (Hong Kong)

12. Atholl Brose (Exports) Ltd. (England)

13. Atholl Brose Ltd. (England)

14. Atlantic and Pacific Bank and Trust Co., Ltd. (Bahamas)

15. Bank of Sark (Sark, Channel Islands, U.K.)

16. Briar Court Mines, Ltd. (Canada)

17. British Overseas Mutual Fund Corporation Ltd. (Canada)

18. California & Caracas Mining Corp., Ltd. (Canada)

19. Caprimex, Inc. (Grand Cayman, British West Indies)

20. Canterra Development Corporation, Ltd. (Canada)

21. Cardwell Oil Corporation, Ltd. (Canada)

22. Caribbean Empire Company, Ltd. (British Honduras)

23. Caye Chapel Club, Ltd. (British Honduras)

24. Central and Southern Industries Corp. (Panama)

25. Cerro Azul Coffee Plantation (Panama)

26. Cia. Rio Banano, S.A (Costa Rica)

27. City Bank AS. (Denmark)

28. Claw Lake Molybdenum Mines, Ltd. (Canada)

159
160

29. Claravella Corporation (Costa Rica)

30. Compressed Air Corporation, Limited (Bahamas)

31. Continental and Southern Industries, S.A. (Panama)

32. Crossroads Corporation, S.A. (Panama)

33. Darien Exploration Company, S.A. (Panama)

34. Derkglen, Ltd. (England)

35. De Veers Consolidated Mining Corporation, S.A. (Panama)

36. Doncannon Spirits, Ltd. (Bahamas)

37. Durman, Ltd. Formerly known as Bankers International Investment

Corporation (Bahamas)

38. Empresia Minera Caudalosa de-Panama, S.A. (Panama)

39. Ethel Copper Mines, Ltd. (Canada)

40. Euroforeign Banking Corporation, Ltd. (Panama)

41. Finansbanker a/s (Denmark)

42. First Liberty Fund, Ltd. (Bahamas)

43. General Mining S.A. (Canada)

44. Global Explorations, Inc. (Panama)

45. Global Insurance, Company, Limited (British West Indies)

46. Globus Anlage-Vermittlungsgesell-schaft MBH (Germany)

47. Golden Age Mines, Ltd. (Canada)

48. Hebilla Mining Corporation (Costa Rica)

49. Hemisphere Land Corporation Limited (Bahamas)

50. Henry Ost & Son, Ltd. (England)

51. Hotelera Playa Flamingo, S.A.

52. Intercontinental Technologies Corp. (Canada)

53 International Communications Corporation (British West Indies)

54. International Monetary Exchange (Panama)

55. International Trade Development of Costa Rica, S.A.

56. Ironco Mining & Smelting Company, Ltd. (Canada)

57. James G. Allan & Sons (Scotland)

58. [ojoba Oil & Seed Industries S.A. (Costa Rica)

59. Jupiter Explorations, Ltd. (Canada)

60. Kenilworth Mines, Ltd. (Canada)

61. Klondike Yukon Mining Company (Canada)

62. KoKanee Moly Mines, Ltd. (Canada)

63. Land Sales Corporation (Canada)

64. Los Dos Hermanos, S.A. (Spain)

65. Lynbar Mining Corp. Ltd. (Canada)

66. Massive Energy Ltd. (Canada)

67. Mercantile Bank and Trust & Co., Ltd. (Cayman Island)

68. Multireal Properties, Inc. (Canada)

69. J.P. Morgan & Company, Ltd., of London, England (not to be confused

with J.P. Morgan & Co., Incorporated, New York)

70. Norart Minerals Limited (Canada)

71. Normandie Trust Company, S.A. (Panama)

72. Northern Survey (Canada)

73. Northern Trust Company, S.A. (Switzerland)
74. Northland Minerals, Ltd. (Canada)

75. Obsco Corporation, Ltd. (Canada)

76. Pacific Northwest Developments, Ltd. (Canada)

77. Pan-Alaska Resources, S.A. (Panama)

78. Panamerican Bank & Trust Company (Panama)

79. Pascar Oils Ltd. (Canada)

80. Paulpic Gold Mines, Ltd. (Canada)

77. Pan-Alaska Resources, S.A. (Panama)

78. Panamerican Bank & Trust Company (Panama)

79. Pascar Oils Ltd. (Canada)

80. Paulpic Gold Mines, Ltd. (Canada)

161
Table 22

Fiscal 1990 Enforcement Cases

Listed by Program Area

Program Area-s-Offering Violations (By Non-Regulated Entities)

Name of Case

In the Matter of Telco Payphone Ltd. Partnership II

In the Matter of Robert D. Sichta

In the Matter of Michael C. Beatty

In the Matter of National Car Care, Inc.

SEC v. R.W. Technology, Inc.

SEC v. William A. Thome

SEC v. Michael C. Beatty

SEC v. American Assurance Underwriters Group Inc.

SEC v. Advanced Viral Research Corp.

SEC v. William E. Rooney

SEC v. Eurobond Exchange Ltd.

SEC v. Steven G. Osguthorpe

SEC v. Dewani Lauro Marine Product

Development Corp.

SEC v. Herman J. Schannault

SEC v. Transwestem Oil & Gas Co., Inc.

SEC v. Thomas Hydrocarbons, Inc.

SEC v. Alan O. Melchior

SEC v. Arthur Jackson Curry

SEC v. P.B. Ventures,

SEC v. OMAC Inc.

SEC v. Reddington Investments, Inc.

SEC v. Maxwell C. Huffman, Jr.

SEC v. European Fidelity, S.A.

SEC v. Robert Gary Lewis

SEC v:Blaine Chambers

SEC v. Wayne A. Bossung

SEC v. Andrew B. Hendryx

SEC v. Arthur R. Condie

Date Filed

02-05-90

07-19-90

08-20-90

09-27-90

10-02-89

10-19-89

12-01-89

12-08-89

12-14-89

01-02-90

01-25-90

05-11-90

06-08-90

06-14-90

06-20-90

06-26-90

08-08-90

08-15-90

08-15-90

08-24-90

08-31-90

09-05-90

09-18-90

09-20-90

09-20-90

09-26-90

09-27-90

09-27-90

Release No.

33-6855

34-28234

34-28356

33-6875

LR-I2271

LR-I2286

LR-12337

LR-12334

LR-12332

LR-12371

LR-12364

NONE

LR-12515

LR-12521

LR-12518

LR-12524

LR-12571

LR-12689

LR-12581

LR-12598

LR-12613

LR-1261O

LR-12627

LR-12630

LR-12625

LR-12640

LR-12658

LR-12638

Program Area-Offering Violations (By Regulated Entities)

Name of Case

In the Matter of Robert C. Grubbs

In the Matter of F. Richard Bishop

In the Matter of Thomas R. Dinnin

In the Matter of Olen Dominy

In the Matter of Charles Phillip Elliott

162

Date Filed

10-03-89

10-10-89

10-10-89

10-23-89

10-23-89

Release No.

34-27332

34-27348

34-27347

34-27375

34-27374
In the Matter of William E. Pohl

In the Matter of Rick E. Myers

In the Matter of Frank R. Grillo

In the Matter of William Flynn

In the Matter of Pietro Gattini

In the Matter of James B. Talman, Jr.

In the Matter of Bradley & Associates, Inc.

In the Matter of David K. Jeffers

In the Matter of Gregory T. Harry

In the Matter of Richard H. Van Eerden

In the Matter of Roger N. Arnold

In the Matter of Robert E. Lane

In the Matter of Royce Park Investments, Inc.

In the Matter of Laureen M. Farley

In the Matter of Richard L. Hoffman

In the Matter of Lawrence G. Zuliani

In the Matter of Benjamin J. Taormina

In the Matter of William D. Roszel

In the Matter of V. F. Minton Securities Inc.

In the Matter of Robert C. Gleave

In the Matter of Allen R. Asker

In the Matter of William Erwin Zilys

SEC v. Michael S. Douglas

SEC v. U.S. General Corp.

SEC v. Jeffers Investments Corp.

SEC v. RL Kotrozo Inc.

SEC v. Pegasus Entrepreneurial Ventures

SEC v. ALIC Corp.

SEC v. Thomas James Associates, Inc.

SEC v. Phoenix Aviation Inc.

SEC v. John J. Marston

SEC v. Robert E. Lane

SEC v. Robert C. Gleave

SEC v. Beres Industries Inc.

SEC v. Lee Lon Williams

SEC v. Donald Bader

SEC v. Profit Enterprises Inc.

SEC v. Profit Enterprises, Inc.

SEC v. William Edward Kinzel

SEC v. Charles A. Oglebay

SEC v. Thomas D. Kienlen

SEC v. Wacker Marketing Inc.

SEC v. Kim G. Girdner

SEC v. William A. Bates

SEC v. Candace M. LaCasto

10-31-89

11-21-89

12-21-89

01-08-90

02-01-90

02-22-90

02-23-90

06-19-90

06-25-90

07-05-90

07-06-90

07-18-90

07-19-90

07-19-90

07-26-90

08-21-90

08-29-90

09-19-90

09-21-90

09-27-90

09-28-90

09-28-90

11-13-89

11-22-89

12-28-89

02-22-90

03-14-90

03-21-90

03-29-90

05-21-90

05-24-90

07-03-90

07-09-90

08-09-90

08-10-90

08-16-90

08-17-90

08-21-90

09-10-90

09-11-90

09-17-90

09-26-90

09-28-90

09-28-90

09-28-90

IA-1209

34-27457

34-27560

34-27595

34-27668

34-27725

34-27842

34-28135

34-28144

34-28187

34-28188

34-28231

34-28236

34-28235

34-28267

34-28359

34-28395

IA-1251

34-28457

34-28478

34-28483

34-28494

LR-12303

LR-12304

LR-12365

LR-12385

LR-12421

LR-12419

LR-12431

AAER259

LR-12491

LR-12538

LR-12546

LR-12575

LR-12595

LR-12584

LR-12588

LR-12588

LR-12624

LR-12615

LR-1271O

LR-12636

LR-12656

LR-12673

LR-12655

163
Program Area-s-Broker-Dealen Back Office

Name of Case Date Filed Release No.

In the Matter of Lyle Thomas Bachman 01-16-90 34-27627

In the Matter of Anthony Stoisich 01-16-90 34-27626

In the Matter of Theodore Len 09-25-90 34-28465

In the Matter of James P. Moran 09-28-90 34-28490

SEC v. James P. Moran 09-26-90 NONE

Program Area-Broker Dealer: Fraud Against Customer

Name of Case Date Filed Release No.

In the Matter of Stamatios T. Kousisis 01-26-90 34-27646

In the Matter of Walter F. Kusay, Jr. 04-25-90 34-27945

In the Matter of Harry Abrams 06-04-90 34-28091

In the Matter of Michael R. Vierra 06-08-90 34-28097

In the Matter of Alexander Tihonow 07-18-90 34-28229

In the Matter of Harry A. Kenning, Jr. 07-18-90 34-28230

In the Matter of Ellwyn Fischbach 09-17-90 34-28444

In the Matter of Marc Stuart Weiner 09-28-90 34-28493

In the Matter of Waiter F. Curran 09-28-90 34-28485

SEC v. Harry Abrams 11-27-89 LR-12308

SEC v. Wellshire Securities Inc. 03-14-90 LR-12411

SEC v. Growth Capital Securities Inc. 03-16-90 LR-12736

SEC v. Harbour Bay Financial Co. 05-25-90 LR-12488

SEC v. Oscar Ayala 06-01-90 LR-12494

SEC v. Lloyd Securities Inc. 06-06-90 LR-12504

SEC v. Bruce Black 06-13-90 LR-12511

SEC v. H.A. Kenning Investments Inc. 06-29-90 LR-12534

SEC v. Mark Stephen Benskin 07-30-90 LR-12567

SEC v. Joel M. County 09-27-90 LR-12639

Program Area-Braker-Dealer: Stock Loan

Name of Case Date Filed Release No.

In the Matter of Ernst & Co. 02-05-90 34-27674

Program Area-i-Broker-Dealen Government Securities

Name of Case Date Filed Release No.

In the Matter of Frank Clarke and Co., Inc. 06-11-90 34-28103

In the Matter of Stotler & Co. 08-21-90 34-28360

SEC v. Frank Clarke & Co., Inc. 06-07-90 LR-12505

164
Program Area-s-Broker-Dealen Other

Name of Case Date Filed ReleaseNc

In the Matter of Paul Schoengold 10-03-89 34-27331

In the Matter of S.B. Lewis & Co. 12-07-89 34-27515

In the Matter of Philip A. Bernick 12-28-89 34-27574

In the Matter of Herbert L. Cantley 01-16-90 34-27628

In the Matter of William V. Frankel & Co 01-26-90 34-27649

In the Matter of North Atlantic Corp. 02-02-90 34-27670

In the Matter of Bagley Securities, Inc. 02-05-90 34-27673

In the Matter of Donaldson, Lufkin & Jenrette

Securities Corp. 04-11-90 34-27889

In the Matter of Robert D. Boose 04-25-90 34-27946

In the Matter of Goodrich Securities Inc. 06-25-90 34-28141

In the Matter of Philip M. Georgeson 07-05-90 34-28180

In the Matter of Michael Z. Landy 08-06-90 34-28314

In the Matter of Joseph M. McDonough 09-06-90 34-28409

In the Matter of Barton Bereck 09-25-90 34-28469

In the Matter of San Marino Securities, Inc. 09-28-90 34-28486

In the Matter of Garth Orson Potts 09-28-90 34-28487

SEC v. Philip M. Georgeson 07-05-90 LR-12533

SEC v. Joseph M. McDonough 09-06-90 LR-12607

SEC v. Toni S. Allen 09-06-90 LR-12606

SEC v. Carl Caserta 09-12-90 LR-12633

SEC v. Wellesley Mortgage Corop. 09-28-90 LR-12660

SEC v. San Marino Securities Inc. 09-28-90 LR-12644

Program Area-Investment Adviser

Name of Case Date Filed Release No.

In the Matter of The Blue Chip Market Advisor Inc. 10-25-89 lA-1207

In the Matter of JBT Management, Inc. 12-01-89 lA-1211

In the Matter of Edward G. Kanavel, Jr. 02-05-90 lA-I221

In the Matter of Financial Managment Services of

Northern Virginia, Inc. 04-23-90 lA-I226

In the Matter of Longhorn Trading Inc. 05-29-90 lA-I229

In the Matter of Kelly Kirk Shryoc 05-29-90 lA-I228

In the Matter of Mysore S. Sundara 05-30-90 IA-1230

In the Matter of Liberty Securities Group, Inc. 06-01-90 lA-I232

In the Matter of Patterson Capital Corp. 06-25-90 IA-1235

In the Matter of Management Intelligence Five Corp. 06-29-90 NONE

In the Matter of Goldberg & Associates Financial

Advisors, Inc. 07-25-90 lA-1242

In the Matter of Thomson McKinnon Asset

Management Limited Partnership 07-26-90 lA-1243

165
In the Matter of Robert Schwarz Inc. 08-31-90 IA-1248

In the Matter of Robert Michael Lee 09-17-90 IA-1249

In the Matter of R.E.c. Investors Inc. 09-18-90 IA-1250

In the Matter of Phoenix Asset Management Inc. 09-25-90 IA-1252

In the Matter of David S. Quintana 09-27-90 IA-1253

In the Matter of Joanne M. Stroud 09-28-90 IA-1256

In the Matter of Michael J. Helvey 09-28-90 IA-1255

SEC v. Rita Baskin 12-05-89 LR-12326

SEC v. Gregory D. Govan 12-13-89 LR-12322

SEC v. Halford-Smith Associates Inc. 02-15-90 LR-12384

SEC v. Financial Management Services of Northern

Virginia, Inc. 04-13-90 LR-12446

SEC v. Richard H. Van Eerden 06-07-90 LR-12552

SEC v. William P. Dillon 07-05-90 LR-12531

SEC v. Goldberg & Associates Financial Advisors, Inc. 07-18-90 LR-12553

SEC v. Robert Schwarz Inc. 07-31-90 LR-12602

SEC v. William S. Gotchey 09-14-90 LR-12617

SEC v. David S. Quintana 09-19-90 LR-12623

SEC v. Jeffrey L. Gee 09-25-90 LR-12634

Program Area-Investment Company

Name of Case Date Filed Release No.

In the Matter of Stein Roe & Farnham, Inc. 01-22-90 IC-17316

In the Matter of Fred Alger Management, Inc. 02-26-90 IC-17358

In the Matter of G. Richmond McFarland 07-30-90 AAER266

In the Matter of Robert Scarpetti 09-04-90 IC-I7724

SEC v. John V. Holmes 10-18-89 LR-12276

SEC v. Municipal Lease Securities Fund 12-18-89 LR-12331

SEC v. Dart Group Corp. 02-28-90 LR-12392

SEC v. Carl L. Lazzell 08-08-90 LR-12576

Program Area-Transfer Agent

Name of Case Date Filed Release No.

In the Matter of Rocky Mountain Securities

Transfer Co., Inc. 09-28-90 34-28495

Program Area-Issuer Financial Disclosure

Name of Case Date Filed Release No.

In the Matter of Stephen L. Hochberg 01-11-90 AAER251

Inthe Matter of Charles V. Moore, CPA 07-17-90 AAER264

166
In the Matter of Georgia McCarley 08-01-90 AAER267

Inthe Matter of Bruce T. Andersen, CPA 08-31-90 AAER268

In the Matter of Fluid Corp. 09-25-90 AAER276

In the Matter of William G. Gaede, Jr. 09-26-90 AAER274

Inthe Matter of Charles C. Lehman, Jr. 09-28-90 AAER275

SEC v. Security National Bancorp, Inc. 02-06-90 AAER253

SEC v. John E. Parigian 05-15-90 AAER257

SEC v. Sundstrand Corp. 05-21-90 AAER261

SEC v. Richard H. Towle 05-23-90 AAER258

SEC v. Bombay Place Restaurants, Inc. 05-24-90 AAER260

SEC v. R. Kelly Neal 06-12-90 AAER263

SEC v. William T. Kelsey 07-09-90 LR-12560

SEC v. Circle Express, Inc. 07-16-90 AAER272

SEC v. Desk Top Financial Solutions 07-25-90 AAER265

SEC v. Barry Jay Minkow 08-15-90 AAER269

SEC v. Rajiv P. Mehta 09-10-90 AAER271

SEC v. Richard I.Berger 09-18-90 AAER273

SEC v. Malibu Capital Corp. 09-25-90 LR-12635

SEC v. Fluid Corp. 09-25-90 LR-12661

SEC v. Dennis R. Trailer 09-27-90 AAER278

SEC v. Crowell & Co., Inc. 09-27-90 AAER277

Program Area-Issuer Reporting: Other

Name of Case Date Filed Release No.

In the Matter of Gene Kazlow 03-21-90 34-27832

SEC v. Robert D. Mercer-Falkoff 10-13-89 LR-12279

SEC v. Colin E. Tongs 01-11-90 LR-12361

SEC v. Robert Allen Krebs 01-18-90 LR-12368

SEC v. Bolar Pharmaceutical Co. 02-16-90 LR-12381

SEC v. Gene Kazlow 03-07-90 LR-12416

SEC v. H. Wayne Hayes, Jr. 05-03-90 LR-12465

SEC v. Allure Cosmetics, Ltd. 07-11-90 LR-12537

SEC v. R-2000 Corp. 07-16-90 LR-12543

SEC v. CherAmi Natural Pet Foods, Inc. 08-31-90 LR-12608

SEC v. Vista Management Inc. 09-25-90 LR-12662

SEC v. Wilbur J. Taylor 09-28-90 LR-12653

SEC v. Ronald N. Vance 09-28-90 LR-12652

SEC v. Carl W. Martin 09-28-90 LR-12651

Program Area-Issuer: FCPA Violations

Name of Case Date Filed Release No.

SEC v. Evergood Products Corp. 01-30-90 AAER252

SEC v. Gulf Power Co. 09-24-90 AAER281

1f17
Program Area-Insider Trading

Name of Case

In the Matter of Robert Chestman

In the Matter of Douglas Ronald Yagoda

In the Matter of R. Charles Hack

In the Matter of John E. McCollough, Jr.

In the Matter of Peter Jeffer

In the Matter of Lori Glauberman

In the Matter of Anthony Correra

SEC v. Finacor Anstalt

SEC v. Richard W. Bangham

SEC v. John Joseph Lynch

SEC v. Charles Lindberg

SEC v. Kenneth H. Kuehne

SEC v. Robert Charles Troup

SEC v. Thaddeus Pencikowski

SEC v. Brian J. Callahan

SEC v. James H. O'Hagan

SEC v. Fondation Hai

SEC v. Richard W. Dutrisac

SEC v. Charles R. Hack

SEC v. Robert N. Brethen

SEC v. Suzanne Vuko

SEC v. Stuart A. Godfrey

SEC v. Barry N. Katz

SEC v. Morton S. Neiman

SEC v. B. Francis Saul III

SEC v. Joseph Behar

SEC v. Alan C. Goulding

SEC v. [iro Yamazaki

SEC v. Wolfgang Marcour

SEC v. Henry Arnold Singer

SEC v. Ortwin Heider

SEC v. Steven L. Glauberman

SEC v. Saul Bluestone

SEC v. Mary Bushbaum

SEC v. Dale T. Iabour

SEC v. Howard P. MarguIeas

SEC v. Jason M. Chapnick

SEC v. Richard M. Nault

168

Date Filed

02-26-90

04-12-90

05-25-90

06-14-90

09-12-90

09-12-90

09-12-90

11-16-89

11-29-89

11-29-89

12-14-89

12-15-89

12-21-89

01-08-90

01-09-90

01-10-90

01-17-90

01-31-90

02-05-90

02-27-90

03-13-90

03-27-90

03-29-90

04-24-90

05-08-90

05-31-90

06-05-90

06-11-90

06-14-90

06-28-90

07-13-90

08-09-90

08-22-90

08-27-90

08-29-90

09-06-90

09-27-90

09-28-90

Release No.

34-27735

34-27899

34-28051

34-28118

34-28428

34-28427

34-28426

LR-12296

LR-12309

LR-12311

LR-12323

LR-12341

LR-12329

LR-12338

LR-12343

LR-12344

LR-12353

LR-12362

LR-12372

LR-12388

LR-12408

LR-12420

LR-12430

LR-12455

LR-12469

LR-12492

LR-12500

LR-12507

LR-12513

LR-12523

LR-12542

LR-12574

LR-12589

LR-12594

LR-12597

LR-12604

LR-12657

LR-12672
Program Area-Market Manipulation

Name of Case

Inthe Matter of Kirk A. Knapp

In the Matter of James T. Melton

In the Matter of Salim B. Lewis

In the Matter of Herbert Stone

Inthe Matter of Douglas Stowell

In the Matter of Suzanne Bosworth

Inthe Matter of George Salloum

SEC v. Leonard M. Tucker

SEC v. Lifeline Healthcare Group, Ltd.

SEC v. George T. Harry

SEC v. GAP Corp.

SEC v. Michael Kaufman

SEC v. Ahmad N. Bayaa

SEC v. Rosemary Grady

SEC v. Peter E. Butler

SEC v. Blinder Robinson & Co., Inc.

SEC v. Union National Mortgage Co.

SEC v. Salim B. Lewis

SEC v. Suzanne Bosworth

SEC v. Novaferon Labs, Inc.

SEC v. Douglas Stowell

SEC v. Power Securities Corp.

SEC v. Kevin L.Weakland

SEC v. Robert Schlien

Program Area-Corporate Control: Tender Offer

Name of Case

SEC v. BITInvestors Inc.

Date Filed

05-31-90

08-06-90

08-13-90

08-17-90

09-07-90

09-28-90

09-28-90

11-20-89

11-21-89

01-16-90

03-08-90

03-26-90

05-14-90

06-01-90

07-09-90

07-12-90

07-18-90

08-06-90

08-08-90

08-14-90

08-14-90

09-06-90

09-24-90

09-28-90

Date Filed

09-28-90

Release No.

IA-1231

34-28313

34-28333

34-28350

34-28416

34-28491

34-28489

LR-12307

LR-12300

NONE

AAER254

LR-12425

LR-12475

LR-12509

LR-12536

LR-12539

LR-12555

LR-12569

LR-12580

LR-12577

LR-12590

LR-12605

LR-12629

LR-12687

Release No.

LR-12650

Program Area-Corporate Control: Beneficial Ownership

Name of Case

SEC v. Don R. Daseke

SEC v. Edward P. Evans

SEC v. Francis Joseph Spillman

SEC v. Alan E. Clore

SEC v. Nortek Inc.

SEC v. John Simonelli

SEC v. John V. Hazleton

Date Filed

11-13-89

12-06-89

12-13-89

02-13-90

03-12-90

09-28-90

09-28-90

Release No.

LR-12293

LR-12315

LR-12321

LR-12377

LR-12406

LR-12648

LR-12647

1f;Q
Program Area-Corporate Control: Proxy Violations

Name of Case Date Filed Release No.

SEC v. Thomas Lee Oakes 04-23-90 LR-12451

SEC v. David Schardien 08-01-90 LR-12564

Program Area-Corporate Control: Other

Name of Case Date Filed Release No.

SEC v. Mesa Limited Partnership 09-27-90 LR-12637

Program Area-Contempt: Civil

Name of Case Date Filed Release No.

SEC v. Thomas Quinn 01-25-90 LR-12395

SEC v. Frank R. Breitweiser 04-11-90 LR-12441

SEC v. Francis Joseph Spillman 07-02-90 LR-12530

SEC v. R.G. Reynolds Enterprises, Inc. 07-18-90 LR-12554

SEC v. Robert J. Palle, Jr. 08-21-90 LR-12592

SEC v. Unioil 09-27-90 LR-12641

Program Area-Contempt: Criminal (Filed By SEC)

Name of Case Date Filed Release No.

SEC v. William H. Keller 11-03-89 LR-I2294

Program Area-Fraud Against Regulated Entities

Name of Case Date Filed Release No.

SEC v. Andrew Worden 03-15-90 LR-12415

SEC v. Anthony Serivola 08-07-90 LR-12573

SEC v. Glenn C. Jessen 09-17-90 LR-12621

SEC v. REC Investors, Inc. 09-18-90 LR-12622

Program Area-Miscellaneous DisdosurelReporting

Name of Case Date Filed Release No.

SEC v. Joel Nadel 05-18-90 LR-12487

170
Program Area-Delinquent Filings: Issuer Reporting

Name of Case

In the Matter of Micromedical Devices Inc.

SEC v. New Age Industries, Inc.

SEC v. First Hartford Corp.

SEC v. Sequential Information Systems, Inc.

SEC v. American Educators Financial Corp.

SEC v. American Capital Group, Ltd.

SEC v. Electronic Clearing House Inc.

SEC v. Learning Annex Inc.

SEC v. Advanced Monitoring Systems, Inc.

SEC v. Ener-Mark Corp.

Program Area-Delinquent Filings: Forms 3 & 4

Name of Case

SEC v. Joel M. Barry

Date Filed

09-25-90

10-24-89

11-21-89

12-11-89

12-19-89

04-19-90

04-25-90

05-21-90

06-20-90

07-03-90

Date Filed

08-21-90

Release No

34-28467

LR-12277

LR-12299

LR-12317

LR-12346

LR-12450

LR-12456

LR-12481

LR-12517

LR-12532

Release No.

LR-12587

171
Right to Financial Privacy

Section 21 (h) of the Securities Exchange Act of 1934 [15 U.S.C. 78u(h)(6)] requires that the Commission "compile an annual tabulation of the occasions on which

the Commission used each separate subparagraph or clause of [Section 21 (h)(2)]

orthe provisions ofthe Rightto Financial Privacy Act of 1978 [12 U.S.C. 3401-22 (the

RFPA)] to obtain access to financial records of a customer and include it in its annual

report to the Congress." During the fiscal year, the Commission made four applications to courts for orders pursuant to the subparagraphs and clauses of Section

21 (h)(2) to obtain access to financial records of a customer. The Commission

obtained access to the financial records of a customer using the procedures

provided by the following sections of the RFPA:

Section 1104(Customer Authorizations) 1

Section 1105(Administrative Subpoenas) 103

Section 1107(JudicialSubpoenas) 7

172
CORPORATE REORGANIZATIONS

The Commission entered its appearance in 34 reorganization cases filed under

Chapter 11 of the Bankruptcy Code involving companies with aggregated stated

assets of over $33 billion and about 250,000 public investors. Counting these new

cases, the Commission was a party in a total of 167Chapter 11cases during the fiscal

year. In these cases, the stated assets totalled approximately $65 billion and

involved about 875,000 public investors. Also, 31 cases were concluded through

confirmation of a plan of reorganization, dismissal, or liquidation, leaving 136cases

in which the Commission was a party at year-end.

173
Table 23

REORGANIZATION PROCEEDINGS UNDER CHAPTER 11 OF THE

BANKRUPTCY CODE IN 'WHICH THE COMMISSION ENTERED APPEARANCE

F.Y. F.Y.

Debtor District Opened Closed

A.H. Robins Co., Inc. 1 ED. VA 1985 1990

Aca Joe, Inc. 1 N.D. CA 1988

Action Auto Stores EA. MI 1990

ADI Electronics ED NY 1987

AlA Industries, Inc. ED PA 1984

Allegheny International, Inc. W.O. PA 1988

Allison's Place C.D CA 1988

Amdura Corporation 0 CO 1990

American Carriers, Inc. 0 KS 1989

American Continental Corporation D. AZ 1989

American Healthcare Mgmt, Inc. 1 N.D. TX 1988 1990

American Medical Technologies W.O. TX 1990

American Monitor Corp. S.D. IN 1986

Ames Department Stores, Inc., et aJ. SO. NY 1990

Anglcor Limited 1 D. MN 1989 1990

Anglo Energy, Inc. 1 S.D. NY 1988

Basix Corporation 1 S.D. NY 1988 1990

Bay Financial Corp., et aJ. D. MA 1990

Beehive International D. UT 1989

Beker Industries Corp S.D. NY 1986

Berry Industries Corp. 1. C.D. CA 1985 1990

Birdvrew Satellite Comrnurucauons, Inc 1 D. KS 1988 1990

Blinder Robinson & Company, Inc. D. CO 1990

Boardroom Business Products, Inc. C.D. CA 1989

Branch Industries, Inc. S.D. NY 1985

Buttes Gas & 011 Co. S.D. TX 1986

Calmark Real Estate 3 S.D. TX 1989 1990

Calumet Industries N.D. IL 1990

Camera Enterprises, Inc., et al. D. MA 1989

Canton Industrial Corp. C.D. IL 1988

Care Enterprises, Inc. 1 C.D CA 1988 1990

Chalet Gourmet Corp. 1 C.D CA 1985 1990

Charter Co. 1 MD. FL 1984 1990

CItywIde Securities Corp. 4 S.D. NY 1985

Coated Sales, Inc. S.D. NY 1988

Coleca Industries, Inc. 1 S.D. NY 1988 1990

Colorado-Ute ElectriC Association D. CO 1990

Commonwealth Oil Refining Co., Inc. W.D TX 1984

Consolidated Oil & Gas D. CO 1989

Consolidated Companies N.D. TX 1989

174
Table 23--Continued

REORGANIZATION PROCEEDINGS UNDER CHAPTER 11 OF THE

BANKRUPTCY CODE IN WHICH THE COMMISSION ENTERED APPEARANCE

F.Y. F.Y.

Debtor District Opened Closed

Conston Corporation E.D. PA 1990

Continental Information Systems S.D. NY 1989

Convenient Food Mart N.D. IL 1989

Crazy Eddie, Inc., et al. S.D. NY 1989

Crompton Co., Inc. SO. NY 1985

Dakota Minerals, Inc. D. WY 1986

Dart Drug Stores, Inc. D. MD 1989

Del.aurenths Entertainment 1 CD. CA 1988 1990

DeitaUS Corp. 1 E.D. TX 1989 1990

Dest Corp. N.D. CA 1989

Domain Technology, Inc. N.D CA 1989

Doskocil Companies, Inc. D. KS 1990

Drexel Burnham Lambert Group, Ltd S.D. NY 1990

Eagle Clothes, Inc. S.D NY 1989

Eastern Air Lines, Inc., et al. S.D. NY 1989

Engineered Systems & Development Corp. 2 N.D. CA 1988 1990

Enterprise Technologies, Inc. S.D. TX 1984

Equestrian Ctrs. of Amer , Inc. C.D. CA 1985

Fed Depart.lAlhed Stores et al. S.D. OH 1990

Financial & Bus. Serv., Inc. W.D NC 1986

Finest Hour, Inc. C.D. CA 1988

First Repubhcbank Corp. N.D. TX 1989

General Development Corporation S.D FL 1990

General Technologies Group E.D NY 1990

Global Manne, Inc. 1 S.D. TX 1986 1990

Greyhound Lines, et al. S.D. TX 1990

Hampton Healthcare, Inc. M.D. FL 1988

Hehonetics, Inc. C.D. CA 1986

Hohday Resources, Inc. 1 S.D. TX 1987 1990

Holland Industries, Inc. S.D. NY 1988

ICX, Inc. 2 D. CO ~987 1990

Inflight Services, Inc. S.D. NY 1987

Integrated Resources, Inc. S.D. NY 1990

Intn'l Pharmaceutical Products, Inc. C.D. CA 1988

Inter. American Homes, Inc., et al. D. NJ 1990

Jumping Jacks Shoes, et al. W.O. MO 1990

Kaiser Steel Corp. D. CO 1987

King of Video, Inc. D. NV 1989

Kurzweil Music Systems Inc. D. MA 1990

LaPointe Industries, Inc. D. CT 1989

17fi

-
Table 23--Continued

REORGANIZATION PROCEEDINGS UNDER CHAPTER 11 OF THE

BANKRUPTCY CODE IN WHICH THE COMMISSION ENTERED APPEARANCE

F.Y. F.Y.

Debtor District Opened Closed

Llvlngwell Incorporated S.D. TX 1990

Lomas Financial Corp. S.D. NY 1990

LTV Corporation S.D. NY 1986

MacGregor Sportmg Goods, Inc D. NJ 1989

Marathon Office Supply, Inc. C.D. CA 1988

Margaux, Inc. 1 N.D. CA 1989 1990

Mars Stores, Inc., et al. D. MA 1989

Marvin Leon Warner 1,4 M.D. FL 1988 1990

Maxicare Health Plus Inc. 1 C.D. CA 1989

McLean Industnes, Inc. S.D NY 1987

MCorp (MCorp Financial, Inc.

& MCorp Management) S.D TX 1989

Meridian Reserve, Inc. W.O. OK 1989

Michigan General Corp. 1 N.D TX 1987 1990

Midland Capital Corp. S.D NY 1986

MinlScnbe Corporation D. CO 1990

MiSSion Insurance Group, Inc. 1 C.D CA 1987 1990

Munson Geothermal, Inc D. NV 1988

Mustang Resources Corp. S.D. TX 1988

National Bancshares Corp of Texas W.O. TX 1990

National Financial Realty Trust S.D. IN 1990

Nltram Corporation 2 D. UT 1989

Nutri Bevco, Inc. S.D. NY 1988

Occidental Development Fund 11/4 C.D. CA 1989

Occidental Development Fund IV 4 C.D. CA 1989

Occidental Development Fund V 4 C.D. CA 1989

Oliver's Stores E.D NY 1987

OLR Development Fund LP C.D. CA 1989

OLR Development Fund 1/LP C.D. CA 1989

Overland Express, Inc. S.D IN 1988

Pacific Express Holding, Inc. E.D CA 1984

Pantera's Corp, et al. N.D. TX 1990

Pengo Industnes, Inc. N.D TX 1988

Peregnne Entertainment, Ltd. C.D. CA 1989

Pettibone Corp 1 N.D IL 1986 1990

Public Service Co. of New Hampshire D. NH 1988

QMax Technology Group, Inc. S.D. OH 1989

QT&T, Inc E.D. NY 1987

Qubix Graphic Systems 1 N.D. CA 1989

Ramtek Corporation N.D. CA 1989

Raytech Co. 0 CT 1989

176
Table 23--Continued

REORGANIZATION PROCEEDINGS UNDER CHAPTER 11 OF THE

BANKRUPTCY CODE IN WHICH THE COMMISSION ENTERED APPEARANCE

F.Y. F.Y.

Debtor District Opened Closed

Reflnemet International, Inc. C.D. CA 1988

Residential Resources Mortgage

Investment Corporation 0 AZ. 1989

Resorts International, Inc., et al. D. NJ 1990

Revco D.S. Inc. 4 N.D. OH 1988

Sahlen & Associates S.D. NY 1989

Sal ant Corporation S.D. NY 1990

Saratoga Standardbreds, Inc N.D. NY 1990

SCientific Micro Systems, Inc. 1 N.D CA 1989 1990

S.E. Nichols S.D. NY 1990

Seatrain Lines, Inc. S.D. NY 1981

Servamatic Systems, Inc. 1 N.D. CA 1986 1990

Sharon Steel Corp. W.O. PA 1987

SIS Corporation N.D. OH 1989

Sorg Incorporated, et al. S.D. NY 1989

South mark Corporation 1 N.D. TX 1989

SpecIalty Retail Concepts, Inc. W.O. NC 1988

Spencer Cos, Inc. D. MA 1987

Spring Meadows Associates 4 CD. CA 1988

Standard Metals Corp. 1 D. CO 1984 1990

Summit Oilfield Corp. N.D. TX 1989

Swanton Corp. S.D. NY 1985

Systems for Health Care, Inc. N.D. IL 1988

Telstar Satellite Corp. of America 4 C.D. CA 1989

Texas International Co. 1 W.O. OK 1988 1990

Texas American Bancshares, Inc. N.D. TX 1989

Texscan Corp. 1 D. AZ. 1986 1990

TGX Corp. W.O. LA 1990

The Circle K D. AZ. 1990

The Group, Inc D. NV 1990

The Regina Co. D. NJ 1989

TIdwell Industries, Inc. 3 N.D. AL 1986

Todd Shipyards Corp. D. NJ 1988

Towle Manufact./Rosemar Silver. S.D. NY 1990

Traweek Investment Fund No. 22, Ltd. 4 C.D CA 1988

Traweek Investment Fund No. 21, Ltd. C.D. CA 1988

Traweek Investment Fund No. 18, Ltd. C.D. CA 1988

Twistee Treat Corporation M.D. FL 1989

United Bldg. Service Corp. of DE 3 D. AZ. 1989 1990

Uruvanon, Inc. N.D. CA 1989

UNR Industries, Inc. 1 N.D. IL 1982 1990

1'7'7
Table 23--Continued

REORGANIZATION PROCEEDINGS UNDER CHAPTER 11 OF THE

BANKRUPTCY CODE IN WHICH THE COMMISSION ENTERED APPEARANCE

Debtor District

F.Y. F.Y.

Opened Closed

Washington Bancorporation

Wedtech Corp.

Wespac Investors Trust II 1

Westworld Community Healthcare. Inc.

Wheeling-Pittsburgh Steel Corp.

Zenith Corporation

ZZ2Z Best Co., Inc 2

Total Cases Opened (FY 1990)

Total Cases Closed (FY 1990)

D. DC

S.D. NY

C.D. CA

C.D. CA

W.O. PA

D. NJ

C.D. CA

1990

19B7

19BB

19B7

19B5

19B8

19B7

34

1990

1990

31

1. Plan of reorganization confirmed

2. Debtor hquidated under Chapter 7.

3. Chapter 11 case dismissed.

4. Debtor's securities not registered under Section 12(g) of the Exchange Act.

178
Table 24

Appropriated Funds vs Fees* Collected

$ Millions

300

77

FY1976

79 81 83 85 87 89

78 80 82 84 86 88 1990

"excludes disgorgements from fraud actions

179
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