SECURITIES

AND EXCHANGE

COMMISSION

33 ill ANNUAL

REPORT

For the Fiscal Year Ended June 30th
SECURITIES AND EXCHANGE COMMISSION

Headquarters Office

500 North Capitol Street

Washington, D.C. 20549

COMMISSIONERS

MANUEL F. COHEN, Chairman

HUGH F. OWENS

HAMER H. BUDGE

FRANCIS M. WHEAT

RICHARD B. SMITH

ORVAL L. Dnlsors, Secretary

u

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

Washington. DC. 20402 - Price 50 cents (paper cover)
SECURITIESAND EXCHANQECoxmse.10~ 

Washington, D.C., January 15,1968 

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

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

Commission covering the fiscal year July 1,1966 to June 30, 1967, in 

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

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

Holding Company Act of 1935; Section46 (a) of the Investment Company Act of 1940; Section 216 of the Investment Advisem Act of 1940; 

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

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

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

Respectfully, 

MANUELF. COHEN, 

Chaim'n. 

THE P~IDENT OF THE SENATE, 

THE SPEAKER THE HOUSE REPRESENTATIVES, / OF OF 

Washington, D.C. 

m 

TABLE OF CONTENTS

Page

Commissioners and staff offleers; ____________________________________ XI

Regional and branch offiees; , _______________________________________ XII

Biographies of Commlssionera, ______________________________________ XIII

INTROD UCTION___ ____________ ______ __ ___ ___ _______ XVII

PART I

IMPORTANT RECENT DEVELOPMENTS_______________________ 1

Mutual fund report and legislative proposals______________________ 1

Mutual fund management and its cost_______________________ 2

Sales charges generally _____________________________________ 3

The front-end load_________________________________________ 3

Capital gains distributions__________________________________ 3

Disqualification of individuals from association with an investmentcompany__________________________________________ 4

Breach of fiduciary duty _______ ________ ________ _____ 4

Insider trading in portfolio seourities..; _______________________ 4

Fund holding companies____________________________________ 5

Disinterested directors; ____ ______ __________ ______ _____ 5

Transfer of investment advisory contracts____________________ 5

Other mattera.c., , _________________________________________ 5

Other developmenta., , _________________________________________ 6

Take-over bid bill_ _ __ ____ __ _ ___ __ 6

Broker-dealer financial reports., _____________________________ 7

Commission level and structure., _ _ _ ___ _____ 8

Automation of market facilities______________________________ 8

Review of exchange rules regarding off-board trading.; _________ 9

PART II

OPERATION OF THE SECURITIES ACTS AMENDMENTS OF 1964___________________________________________________________ 10

Extension of disclosure requirements to over-the-counter securities; __ 10

Exemptions from registration___________________________________ 11

Securities of insurance companies____________________________ 12

Securities of foreign Issuers., __ __ _______ ________ 13

Regulation of broker-dealers who are not members of registered se- curities association.c.,.; _ _____ _________ _____ 15

Proceedings to obtain compliance with Securities Exchange Act registration or reporting requirementac., , __ ______________ 18

Disciplinary action against broker-dealers and their associated persons, 19

Summary suspension of over-the-counter trading__________________ 19

v
VI TABLE OF CONTENTS

PART III

Page

FULL DISCLOSURE OF INFORMATION ABOUT THE ISSUERS

OF SEC URITIES_ ______ ____ _ 21

Disclosure in connection with public offerings_____________________ 21

Type of information included in registration statement_________ 22

Proposed sbort form for registration of securities of certain Issuers; 23

Simplification of prospectuses., _ __ ___ __ ____ 24

Staff examination of registration statements____ _______________ 24

Time required to complete registration., ______________________ 25

Statistics regarding registration statements filed., ______________ 25

Statistics regarding securities registered; _ _ _ __________________ 27

Stop order proceedings; _ ___ __________________ 30

Examinations and investigations_____________________________ 31

Exemption from registration of small issues_______________________ 31

Exempt offerings under Regulation A________________________ 32

Reports of aales; __ ___ ___ ____________ 33

Suspension of exemption________________________________ 33

Exempt offerings under Regulation B________________________ 34

Reports of sales, __ ___ _____ _____________ 34

Exempt offerings under Regulation E________________________ 35

Exempt offerings under Regulation F________________________ 35

Continuing disclosure requirements______________________________ 36

Registration of securities on exchanges_______________________ 36

Registration of over-the-counter seeurities., ___________________ 36

Periodicreports___________________________________________ 37

Proxy solicitations..c ; , __ _________ ________ 37

Scope and nature of proxy regulation____________________ 37

Proposed amendments to proxy rules and information rules; 38

Statistics relating to proxy and information statements_____ 39

Stockholders' proposala.c.,., __ _____________ __ ___ 40

Ratio of soliciting to nonsoliciting companies______________ 40

Proxycon~ts________________________________________ 41

Insiders' security boldings and transactions___________________ 41

Ownership reports; ___ ____ _____ _________ 41

Recovery of short-swing trading profits___________________ 42

Investigations with respect to reporting and proxy provisions., _ _ 42

Accounting and auditing matters___ _______ ____ ___ ___ 42

Opinions of Accounting Principles Board_____________________ 44

Reporting by foreign Issuers., __ ____________ ______ _____ 44

Reporting by diversified companies., __ __ ___ ___ __ 45

Other current developments_________________________________ 45

Resignation of accountant from practice before commission_____ 46

Civil litigation involving disclosure matters_______________________ 47

Criminal prosecutions involving disclosure violations_______________ 48

Exemption for securities of international banks____________________ 50

International Bank for Reconstruction and Development_______ 50

Inter-American Development Bank__________________________ 52

Asian Development Bank .__ __ ______ _ 53

Trust Indenture Act of 1939____________________________________ 53
TABLE OF CONTENTS

PART IV

VII

Page

REGULATION OF SECURITIES MARKETS______________________ 55

Regulation of exchanges________ ___ _________ _____ 55

Registration and exemption of exchanges_____________________ 55

Review of exchange rules and prooedures., ____________________ 55

NYSE commission rate schedule-Kaplan v. Lehman Bros______ 56

Inspections of exchsngea.L; , _________________________ 56

Statistics relating to securities traded on exchanges________________ 57

Number of issuers and securities_____________________________ 57

Market value of securities available for trading________________ 57

Volume of securities traded; ___ __ _______________ 58

Foreign stocks on exchanges________________________________ 59

Comparative exchange statistics_____________________________ 59

Block distributions reported by exohanges; ___________________ 62

Unlisted trading privileges on exchanges______________________ 62

Delisting of securities from exchanges____________________________ 63

Over-the-counter trading in stocks listed on exchanges_____________ 65

Statistical studies_________ ___ ___ _________________ 66

Issues registered under the Securities Act of 1933______________ 67

New securities offerings____________________________________ 67

Individuam' savings________________________________________ 67

Private pension funds, __________________________ ____ 67

Stock trading of financial institutions, ___________ __ ___ 68

Financial position of eorporationa.c., , _______________ ______ 68

Plant and equipment expenditures___________________________ 68

Directory of registered companies_____ _________________ __ 68

Stock market data____ __________ ___________________ __ 68

PART V

CONTROL OF IMPROPER PRACTICES IN SECURITIES

l\1ARKETS___ ________ __ __ ______ ___ __________ __ 70

Regulation of broker-dealer and investment adviser practices______ 70

Registration, financial responsibility, record maintenance and

financial reporting requlrements., ____________ _____ 70

Registration__________________________________________ 70

Capital requirements with respect to broker-dealers________ 71

Financial reports of broker-dealers.L; , _ ____ ________ 71

Detection of improper practices______________________________ 72

Public complaints_________ _ ___ __________ ___ 72

Inspections___________________________________________ 72

Section of securities violations___________________________ 73

Use of computer for name searches______________________ 73

Investigations_____________________________________________ 74

Imposition of sanctlona.c .; __ ____________ ________ _ 75

Administrative proceedinga, ____ ___ _______________ 75

Civilproceedings______________________________________ 82

Criminal proeeeution.L, , __________ _____________________ 83
VIII TABLE OF CONTENTS

CONTROL OF IMPROPER PRACTICES IN SECURITIES

MARKETS-Continued

Regulation of broker-dealer and investment adviser practices-Con. Page

Supervision of activities of National Association of Securities

Dealers, Inc______ _____ ____ ______________ __ 84

N ASD disciplinary aetiona.c.,., ____ ____ ____________ 85

Commission review of NASD disciplinary action___________ 87

Commission review of N ASD action on membership., ______ 89

Commission inspections of NASD_______________________ 90

Supervision of exchanges___________________________________ 91

Exchange disciplinary aetion., , __________________________ 91

Termination of registration of San Francisco Mining Exchange_____________________________________________ 91

Misrepresentations in the sale or purchase of securitics_____________ 92

Manipulation_________________________________________________ 98

Improper use of inside information_______ __ _ ____________ 101

Enforcement problems with respect to foreign seeuritiea, ___________ 102

PART VI

REGULATION OF INVESTMENT COMPANIES_________________ 105

Companies registered under the Act______________________________ 107

Growth of investment company assets___________________________ 106

Capital leveraged funds., __________________ __________________ 106

The "Flexible Fund Annuity"-S.E.C. v. United Benefit Life Insurance Co_________________________________________________ 108

Control of improper praetiees., _ _________________________________ 109

Inspection and investigation program________________________ 109

Civil, administrative and criminal proceedings.; _______________ 1I0

Filings reviewed 114

Applications and proceedings_____ _______________________________ 1I4

New rule relating to transactions between affiliated investment 106

companies______________________________________________ 117

New rules relating to "reloading"________________________________ 117

PART VII

REGULATION OF PUBLIC-UTILITY HOLDING COMPANIES__ 119

Composition of registered holding-company systems________________ 119

Section 11 matters in registered holding-company systems__________ 121

Proceedings with respect to acquisitions, sales and other mattera, ___ 122

Financing of active registered public-utility holding companies and

their subsidlaries , _ _ __________________________________ _______ 124

Competitive bidding , _ __ ___ _ 125

Policy as to refundability of debt issues__________________________ 126

PART VIII

PARTICIPATION IN CORPORATE REORGANIZATIONS________ 128

Summary of aetivitiea.,., _ ___________________________________ 129

Jurisdictional, procedural and administrative matters______________ 129

Trustee's investdgation., __________________ _________ _______ 133

Reports on plans of reorganization_______________________________ 135

Activities with regard to allowances______________________________ 136

Intervention in Chapter XI proceedings__________________________ 140

~___________________________________
TABLE OF CONTENTS IX

PART IX Page

SUPPORTING ACTIVITIES_____ _________________________________ 141

Public information servioes; ____________________________________ 141

Dissemination of information_______________________________ 141

Publications__________________________________________ 142

Availability of information for public inspection______________ 143

Implementation of Public Information Act_________________ 144

Personnel and financial management_____________________________ 144

Organizational changes__ __ ____ __________________________ 144

Recruitment and training programs__________________________ 145

Merit awards to employees; __ ____ ___ 147

Employee benefit prograDlS_________________________________ 148

Personnel strength; financial management- _ _ _________________ 148

PART X

APPENDIX-STATISTICAL TABLES

Table 1. A 33-year record of registrations effective under the Securities

Act of 1933-fiscal years 1935-1967________________________ 153

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

year ended June 30, 1967____ _____ _________________ 154

Part 1. Distribution by months; _______ _________________ 154

Part 2. Purpose of registration and type of security________________ 154

Part 3. Purpose of registration and industry of registrant___________ 155

Part 4. Use of proceeds and industry of registrant_________________ 156

Table 3. Brokers and dealers registered under the Securities Exchange

Act of 1934-effective registrations as of June 30, 1967, classified by type of organization and by location of principal office; 157

Table 4. Number of security issues and issuers on exchanges____________ 158

Part 1. Un duplicated count as of June 30, 1967 of the number of stock

and bond issues admitted to trading on exchanges, and the

number of issuers involved_____________________________ 158

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

June 30, 1967, classified by trading status, and number of

issuers Involved; __ _____ _ _ _ 158

Table 5. Value of stocks on exchanges_______________________________ 159

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

exchanges in the calendar year 1966 and the 6-month period

ended June 30, 1967_____________________________________ 160

Part 1. 12 months ended December 31, 1966______________________ 160

Part 2. 6 months ended June 30, 1967____________________________ 160

Table 7. Comparative share sales and dollar volumes on exchanges______ 161

Table 8. Block distributions of stocks reported by exchanges____________ 162

Table 9. Unlisted stocks on exchanges_______________________________ 163

Part 1. Number of stocks on the exchanges as of June 30, 1967______ 163

Part 2. Unlisted share volume on the exchanges-calendar year 1966_ 163

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

under the Securities Act of 1933, the Securities Exchange Act

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

the Investment Company Act of 1940, and the Investment

Advisers Act of 1940___ __ ________________ _ _ 164

Table 11. A 34-year summary of all injunction cases instituted by the

Commission-1934 to June 30, 1967, by calendar year______ 165
x TABLE OF CONTENTS

Page

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

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

Commission participated_________ 166

Table 13. A 34-year summary of criminal eases developed by the Commission-1934 through 1967 by fiscal year_________________ 167

Table 14. A 34-year summary classifying all defendants in criminal cases

developed by the Commission-1934 to June 30, 1967_______ 168

Table 15. Summary of criminal cases developed by the Commission which were pending at June 30, 1967__ 168
COMMISSIONERS AND STAFF OFFICERS

Penn

Commissioners s:s~,;e;

MANuEL F. COHEN of Maryland, Chairman_____________________________ 1968

HUGH F. OWENS of Oklahoma________________________________________ 1970

HAMER H. BUDGEof Idaho____________________________________________ 1969

FRANCIS M. WHEAT of California______________________________________ 1971

RICHARDB. SMITH of New York_______________________________________ 1972

Secretary: ORVALL. DuBOIS

Executive Assistant to the Chairman: DAVIDL. RATNER

StaB Officers

EDMUNDH. WORTHY,Director, Division of Corporation Finance.

RoBERTH. BAGLEY,Associate Director.

SOLOMONFREEDMAN,Director, Division of Corporate Regulation.

JOHN A.. DUDLEY,Associate Director.

AARoN LEVY,Associate Director.

IRVING1\1. POLLACK,Director, Division of Trading and Markets.

THOMASW. RAE, Associate Director.

EUGENEH. ROTBEBG,Associate Director.

PHILIP A. LoOMIS,JR., General Counsel.

DAVIDFERBER,Solicitor.

WALTERP. NORTH,Associate General Counsel.

ANDREWBARB,Chief Accountant.

LINDSEYJ. MILLARD,Associate Chief Accountant.

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

LEONARDHELFENSTEIN,Director, Office of Opinions and Review.

W. VICTOR RODIN,Associate Director.

A1.FBED LETZLER,Associate Director.

WILLIAM E. BECKER,Chief Management Analyst.

FRANK J. DONATY,Comptroller.

ERNESTL. DESSECKEB,Records and Service Officer.

HARBYPOLLACK,Director of Personnel.

XI
REGIONAL AND BRANCH OFFICES

Regional Administrators

Region 1. New York, New Jersey.-Mahlon M. Frankhauser, 23rd Floor,

225 Broadway, New York, New York 10007

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

Building, Government Center, Boston, Mass. 02203

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

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

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

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

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

U.S. Courthouse and Federal Office Building, 219 South Dearborn Street,

Ohicago, Illinois 60604

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

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

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

76102

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

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

Street, Denver, Colorado 80202

Region 7. California, Nevada, Arlzona, Hawaii, Guam.-.ATthur E. Pennekamp, 450 Golden Gate .Avenue, Box 30042, San Francisco, California

94102

Region 8. Washington, Oregon, Idaho, ;\Iontana, .Alaska.-James E. Xewton,

900 Hoge Building, Seattle, Washington 98104

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

Washington, D.C. 20549

Branch Offices

Cleveland, Ohio 44199.-Room 779, Federal Office Building, 1240 E. 9th

Street.

Detroit, Michigan 48226.-230 Federal Building.

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

515Rusk Ave,

Los .Angeles, California 90028.-Room 309, .Allstate Title Building, 6331

Hollywood Blvd.

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

.Ave.

St. Louis, Missouri 63102.-Room 916, Federft,l Buildtng, 208 North

Broadway.

Salt Lake City, Utah 8411l.-Room 6004, Federal Building, 125 South State

Street.

XII
COMMISSIONERS

Manuel F. Cohen, Chairman

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

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

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

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

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

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

as research associate in the Twentieth Century Fund studies of the

securities markets. Ohairman Cohen joined the Commission's staff

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

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

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

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

Director of the Division of Corporation Finance. He was awarded

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

and the processes of capital formation and of government and other

controls in the principal financial centers of Western Europe. In

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

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

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

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

of articles on securities regulation published in domestic and foreign

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

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

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

designated Chairman of the Commission on August 20,1964.

Hugh F. Owens

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

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

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

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

Oklahoma College of Law, and became associated with a Chicago

law firm specializing in securities law. He returned to Oklahoma City

XIII
XIV SECURITIES A-"N"DEXCHAJ.'lGE COMMISSION

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

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

the United States Junior Chamber of Commerce. During World

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

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

became a partner in the firm of Hervey, May and Owens. From 1951 to

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

Texas, and thereafter returned to Oklahoma City, where he engaged

in the general practice of law under his own name. He also served as

a part-time faculty member of the School of Law of Oklahoma City

University. In October 1959, he was appointed Administrator of the

then newly enacted Oklahoma Securities Act and was active in the

work of the North American Securities Administrators, serving as

vice president and a member of the executive committee of that Association. He took office as a member of the Securities and Exchange Commission on March 23, 1964,for the term expiring June 5, 1965, and was

reappointed for the term expiring June 5, 1970.

Hamer H. Budge

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

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

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

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

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

and practiced law in the city of Boise, Idaho, from 1936 to 1951, except for 8% years in the United States Navy (1942-1945), with final

discharge as Lieutenant Commander. Elected to the Idaho State

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

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

November 1950, he represented Idaho's Second Congressional District

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

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

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

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

the term of officeexpiring June 5, 1969.

Francis M. Wheat

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

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

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

Commission, Commissioner "Wheat was a member of the Los Angeles

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

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

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

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

been active in bar association work, including service as Chairman

of the Committee on Corporations of the Los Angeles County Bar

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

of Securities, American Bar Association (Banking and Business Law

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

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

and State law. He took office as a member of the Commission on

October 2, 1964, for the term expiring June 5, 1966, and was reappointed for the term expiring June 5, 1971.

Richard B. Smith

Commissioner Smith was born in Lancaster, Pennsylvania, on July 9,

1928,and attended public schools there. He received a B.A. degree from

Yale University in 1949, where he held a scholarship, and an LL.B.

degree in 1953 from the University of Pennsylvania, where he was an

editor of the Law Review. Upon graduation he became associated with

the New York City law firm of Reavis & McGrath (then Hodges,

Reavis, McGrath, Pantaleoni & Downey). He remained with that firm

from 1953, except for a period with the legal department of W. R.

Grace & Co. in 1956-57, until his appointment to the Commission,

having become a partner of the firm in 1963.During this period he was

engaged in the general practice of law, specializing in corporate finance

and securities work. Commissioner Smith was active in bar association work, having served as a member, secretary and then Chairman

(1963-66) of the Committee on Aeronautics of The Association of the

Bar of the City of New York and during 1962-64 as a member of the

Committee on State Legislation of the New York State Bar Assoeiation, He is also a member of the American Bar Association. In 1961-62

he acted as counsel to a Commission of Inquiry into labor questions in

the thoroughbred racing industry, appointed by the Governor of the

State of New York. He was president of the University of Pennsylvania Law Alumni Association of New York City during 1965-67

and serves as a member of the Board of Managers of the Alumni

Society of the University of Pennsylvania Law School. He took office

as a member of the Commission on May 1, 1967,for the term expiring

June 5, 1967,and was reappointed to a 5-year term ending June 5,1972.

INTRODUcrION

The format for this Annual Report differs in an important way

from that used in previous years. It reflects the Commission's first

attempt to describe its work in accordance with the Planning-Programming-Budgeting System (PPBS) which has been prescribed for

agencies and departments of the Government. Whereas in the past

the Annual Report discussed the Commission's work under each of

the various Acts which the Commission administers, this Report

describes the Commission's activities in terms of the programs that

have been developed under these Acts but which may cut across them.

In its simplest terms PPBS is designed to produce for each agency

a precise definition of its goals and an explanation of how it is implementing those goals. This process requires an analysis of the alternative techniques available and the reasons why the agency chose the

alternatives it did. The principal objective of PPBS "is to improve the

basis for major program decisions, both in the operating agencies and

in the Executive Officeof the President." 1

The Report describes the four principal programs of the Commission. The first is that of full disclosure--to insure that there is adequate information available to the investing public about the issuers of

publicly offered or owned securities and their managements. The second program is market regulation-to insure that the markets function in a fair and orderly fashion. The third is the anti-fraud program-to control improper practices in the securities markets. The

fourth major program is the regulation of investment companies-a

program which combines elements of the other three in a special context. In addition to these four principal programs, the Report discusses

the Commission's other programs dealing with public utility holding

companies and with corporate reorganizations and a program of

general support for all of the Commission's external activities.

To a great extent the structure of this Report simply represents an

articulation of how the Commission is already making decisions The

increased use of PPBS, however, will help the Commission improve

its effectiveness in implementing the underlying goal of all the Federal securities laws-public confidence in the securities markets.

1Budget Bureau Bulletin No. 68-2, p. 1.

XVII

281-577-68-2

PART I

IMPORTANT RECENT DEVELOPMENTS

MUTUAL FUND REPORT AND LEGISLATIVE PROPOSALS

On December 2, 1966, the Commission submitted to Congress its

Report evaluating the policy implications of the growth of the investment company industry since 1940 and recommending legislation designed to meet the major problems it found.' The Report was submitted

pursuant to a provision of the Investment Company Act authorizing

the Commission to make a study and investigation if it deems "that

any substantial further increase in the size of investment companies

creates any problem involving the protection of investors or the public

interest," and to report the results to Congress. The Report concluded

that mutual funds and other investment companies offer a sound and

useful investment medium for the public but that their dramatic

growth in recent years has created problems which require attention

by the Congress, the Commission, and the industry.

The Report had its genesis in 1958when the Commission authorized

the Wharton School of Finance and Commerce of the University of

Pennsylvania to make a study of the mutual fund industry and to

submit a report to the Commission. The Wharton Report, which was

submitted to Congress in August 1962, found that the important current problems in the mutual fund industry involved potential conflicts

of interest between fund management and shareholders and the impact of fund growth and stock purchases on stock prices.

The Wharton Report was supplemented by the Report of the Special Study of Securities Markets, prepared by a staff group of the

Commission, which dealt with aspects of the mutual fund industry

outside the scope of the Wharton Report. The Special Study's Report,

which was published in 1962-1963, focused on sales of mutual fund

shares, the special problems raised by the front-end load in the sale

of contractual plans and allocations of mutual fund portfolio

brokerage.

Neither the Special Study Report nor the Wharton Report was a

report by the Commission as such. The Commission thereafter carelThe report has been printed as Report No. 2337 of the House Committee on

Interstate and Foreign Commerce, 89th Oong., 2d Bess. Copies may be purchased

from the U.S. Govt. Printing 01llce.

1
2 SECURITIES AND EXCHANGE COMMISSION

fully evaluated the public policy questions which were raised by these

Reports and following further studies by its staff submitted its recommendations to Congress in December 1966.

On May 1, 1967, the Commission submitted to Congress its legislative proposals. These proposals were introduced in the Senate as S.

1659 and in the House of Representatives as H.R. 9510 and H.R. 9511.

Hearings were held in July and August 1967 by the Senate Committee

on Banking and Currency and in October 1967 by the House Subcommittee on Commerce and Finance of the Committee on Interstate

and Foreign Commerce. While the legislation was under consideration

by the Congress, the Commission and representatives of the mutual

fund industry discussed revision of certain of the proposals in an attempt to find a satisfactory solution to some of the objections expressed

by the industry.

In November 1967 Senator McIntyre introduced an amendment to

S. 1659 which would specifically authorize commercial banks to operate various types of collective investment funds: (1) collective funds

for managing agency accounts; (2) common trust funds for assets held

by banks in a bona fide fiduciary capacity; (3) collective investment

funds for corporate employee pension, profit-sharing or retirement

plans; and (4) collective funds for so-called H.R. 10 plans for selfemployed persons pursuant to the provisions of the Smathers-Keogh

Act. The amendment would also modify and clarify the application

of the securities laws to various types of activities in which banks engage. In response to a request by the Senate Banking and Currency

Committee, Chairman Cohen testified on the amendment. The Commission took no position on the provision of the amendment which

would authorize banks to operate commingled :funds for managing

agency accounts and for other purposes.

The principal conclusions and recommendations of the Report and

the legislative proposals implementing the recommendations are as

follows:

Mutual Fund Management and Its Cost

The Commission recommended that the Investment Company Act

be amended to provide expressly that all compensation received by investment advisers and other persons affiliated with a registered investment company for services to such company shall be reasonable and to

provide for judicial enforcement of this statutory standard. The standard of reasonableness would be applied in the light of all relevant

factors.

A requirement that the compensation be reasonable would appear

inherent in the fiduciary relationship between investment company

shareholders and an investment advisory organization which is in
THIRTY-THIRD ANNUAL REPORT 3

effective control of the fund. The existing provisions of the Investment

Company Act, however, provide no adequate means by which such a

requirement may be enforced.

Sales Charges Generally

In 1940 Congress determined to leave the question of sales loads

"for the present at least" to competition among principal underwriters

of the different funds. However, owing to the manner in which mutual

fund shares are sold, the underwriters have found it to their advantage

to keep sales loads high in order to compete for dealer interest. This

form of competition is facilitated by the provision of the Act which

prohibits a dealer from selling fund shares below the price specified

by the principal underwriter in the prospectus and thus prevents

price competition among dealers in the sale of shares of any particular fund. Some disparity between mutual fund sales loads and

the cost of investing in listed or unlisted securities may be warranted;

however, the Commission believes the existing disparity, which is

very great by any standard, is unwarranted.

The proposed legislation would place a 5 percent ceiling on charges

for mutual fund sales, subject to a power in the Commission to grant

exceptions where appropriate. This proposed maximum charge would

still be substantially greater than the sales charges generally prevailing in the securities markets.

The Front.End Load

The distinctive feature of so-called contractual plans is that as much

as 50 percent of the payments made by the investor during the first

year may be deducted for sales charges. This feature, known as the

"front-end load," is permitted under a specific provision of the Act.

While the Act limits the aggregate sales charge on a completed plan

to 9 percent of the amount invested, the front-end load feature

works to the disadvantage of all planholders, including those who

complete their plans on schedule. It is particularly to the disadvantage of those who fail to complete their plans since they may pay sales

charges ranging from 25 percent to 100 percent of the net amount

invested in plan shares.

The proposed legislation would eliminate the front-end load feature and require that sales charges be spread equally over all payments, thus reducing the undue loss suffered by those investors who

do not complete their plans, as well as making sure that a greater

proportion of the money paid by an investor is invested for his benefit.

Capital Gains Distributions

The Report concluded that normally there is no justification for

distribution of capital gains more than once a year. More frequent
4 SECURITIES AND EXCHANGE COMMISSION

distributions facilitate certain improper selling practices for mutual

fund shares and place undesirable pressures on managers of investment company portfolios to realize and distribute capital gains

irrespective of investment considerations.

Under the Commission's proposals, the Act would be amended generally to prohibit investment companies from distributing realized

capital gains to shareholders more than once a year. This proposal

would require all investment companies to conform to the practice

now followed by the majority.

Disqualification of Individuals From Association With an Investment Company

The Report contained recommendations designed to improve the

administration and enforcement of the Act. One of the most important

of these would strengthen the provisions of the Act which bar persons

who have willfully violated the securities laws from being affiliated

in officialcapacities with investment companies.

The Act, which presently disqualifies from association with an

investment company persons convicted or enjoined on the basis of

specified acts of misconduct, would be amended to conform to the

corresponding provisions of the Securities Exchange Act and the

Investment Advisers Act by authorizing administrative proceedings

before the Commission to determine whether or not any person

connected with an investment company has willfully violated the

Federal securities laws and, if so, what sanctions, if any, should be

imposed in the public interest.

Breach of Fiduciary Duty

Another recommendation of the Report which was designed to improve administration and enforcement of the Act concerns Section 36

of the Act, which presently permits the Commission to seek an injunction against investment company managers alleged to be guilty of

gross misconduct or gross abuse of trust. Under the legislative proposals, this Section would be amended to authorize action against such

persons for breach of fiduciary duty to the investment company and

to give the court greater flexibility in choosing remedies.

Insider Trading in Portfolio Seeurities

A new Section would be added to the Act to empower the Commission specifically to adopt rules and regulations with respect to trading

in securities held or being acquired by investment companies by

persons affiliated with such companies. This proposal would fill the

need indicated in the Report for better definitions of standards and

codes of ethics with respect to insider trading in investment company portfolio securities.
TEURTY-TEURD ~AL REPORT 5

Fund Holding Companies

The Report found that one of the most striking recent developments in the investment company industry has been the emergence

of the "fund holding company," a mutual fund which invests primarily in the shares of other mutual funds. Fund holding companies

are in a position to exercise undue influence over the activities of their

portfolio companies because of the ever-present possibility that they

will redeem their relatively large holdings in those companies. Moreover, the fund holding company is a particularly expensive investment medium, of doubtful utility to investors.

Under the Commission's proposals, the Act would be amended to

prohibit the creation of new fund holding companies or the acquisition of additional securities of registered investment companies by

existing fund holding companies.

Disinterested Directors

The Commission proposed that the Act be amended to require that

persons acting as so-called independent directors of investment companies be entirely independent of and disinterested in the management. This would exclude persons having close family, business or

professional relationships with management from being classified as

independent directors.

Transfer of Investment Advisory Contracts

A new Section would be added to the Act to prohibit the transfer

of investment advisory or management contracts with investment

companies on terms which are burdensome or inequitable to the investment company. This proposal results from the Report's concern

that the present safeguards in the Act are inadequate to protect fund

shareholders in this area.

Other Matters

Other proposed amendments to the Investment Company Act are

designed to up-date its provisions by eliminating inconsistencies and

deleting certain exemptions. It is also proposed that the Investment

Advisers Act be amended to conform its provisions for disciplinary

action to the 1964 amendments to the Securities Exchange Act of 1934

and to eliminate the exemptions from the Act for investment advisers

serving investment companies.

Other matters were discussed in the Report which did not result

in recommendations for additional legislation. The Report observed

that mutual funds incurred brokerage costs of more than $100 million

in effecting portfolio transactions during 1965 and that the use of

brokerage to provide additional compensation to dealers selling fund
6 SECURITIES AND EXCHANGE COMMISSION

shares has potentially adverse effects on mutual fund shareholders

and upon the structure of the securities business and the manner in

which its markets operate. For instance, it encourages fund managers

to direct their portfolio transactions in such a way as to produce the

greatest sales of fund shares, regardless of whether they produce the

best or most economical execution of portfolio transactions. Itencourages dealers to recommend to their customers shares of the funds

which offer them the largest amount of income from portfolio business, regardless of whether the shares of these funds are the most

appropriate for the particular customer. The Report concluded that

these problems are rooted in the rules of the stock exchanges. The

Commission has advised the exchanges that re-examination and

changes in their commission rate structures and rules are necessary to

deal with these problems."

The Report also concluded that policy implications of investment

company growth, though not requiring legislative action at this time,

merit the attention of the Congress. The Report examined the market

impact of mutual fund growth and the increasing participation of other

types of institutional investors in the nation's stock markets. While the

markets on the whole have thus far responded to the changes wrought

by increasing strains on the ability of the auction market to handle the

relatively large transactions that are characteristic of institutional investors, these changes require a reappraisal of existing practices and

procedures by the Commission, the securities industry, and institutional investors themselves. Such a reappraisal requires more data than

is now available on the securities holdings and trading patterns of all

institutional investors, including the noninsured private pension funds.

OTHER DEVELOPMENTS

Take-Over Bid Bill

On August 30,1967, S. 510,the so-called "Take-over Bid" legislation,

was passed by the Senate and is now pending before the House Committee on Interstate and Foreign Commerce. This legislation is designed to afford full disclosure and other protections to investors in

connection with purchases of substantial blocks of stock of publiclyheld corporations either through cash tender offers or private or open

market purchases and in connection with repurchases by corporations

of their own stock. On March 21, and again on :May4,1967, Chairman

Cohen had testified concerning S. 510 before the Subcommittee on

Securities of the Committee on Banking and Currency, United States

Senate. The bill which was passed included certain amendments suggested in the statement submitted by the Commission. The Commission

believes that on the whole the bill provides a workable means of dealing

with the problems which have arisen in these areas.

• See p. 8, infra.
THIRTY-THIRD ANNUAL REPORT 7

The bill would amend Section 13 of the Securities Exchange Act of

1934 to require any person who acquires beneficial ownership of more

than 10 percent of any class of registered equity securities to file with

the appropriate exchange, the issuer, and the Commission promptly

after such acquisition a statement containing pertinent information

about his background and identity. Itwould further make it unlawful

for an issuer to purchase its own securities in contravention of Commission rules. The bill also would amend Section 14 of the Securities

Exchange Act to require any person making a tender offer for any class

of registered equity security which, if consummated, would result in

his owning more than 10 percent of such class, to file with the Commission, send to the issuer and provide to security holders pertinent

information about his background and identity. The bill would provide certain additional protections to shareholders in tender offers.

It would permit persons to withdraw tendered shares within a specified period, provide that tendered shares be taken up on a pro-rata

basis under certain circumstances, provide that subsequent price increases in the tender offer be paid to persons who have already tendered

their shares at lower prices, and prohibit persons soliciting tender offers

from making false, misleading or deceptive statements or engaging in

fraudulent or manipulative practices.

Broker-Dealer Financial Reports

For the past several years, the Commission has continued its research

into broker-dealer operations in an attempt to understand fully the

economic forces at work in the industry. In this connection, the Commission has met with various representatives of the exchanges and the

National Association of Securities Dealers to develop a system whereby

more adequate financial information would become available on a

periodic basis.

As reported in the annual report for 1966, the New York Stock

Exchange, at the Commission's urging, improved its income and

expense reports and made them mandatory for all members doing a

public commission business. The Commission is now engaged in an

effort to obtain reports from all segments of the industry with respect

to all aspects of the securities business. Its staff is working with the

various self-regulatory bodies to formulate a uniform reporting standard for all brokers and dealers. The information contained in these

reports is, of course, vital to the Commission's ability to make informed

decisions in many areas of its responsibilities including the structure of

commissions and other charges paid among the various segments of the

business and by the public. It is also essential to enable the Commission

to keep abreast of the economic trends in all sectors of the industry.

Finally, this information could make more effective the work of the

several self-regulatory institutions.
8 SECURITIES AND EXCHANGE COMMISSION

Commission Level and Structure

The Commission staff has continued to review and study the level

and structure of commission rates on exchanges. In recent years the

growing influence of institutional investors, who typically buy and

sell in large blocks, has greatly complicated the question of the reasonableness of commission rates. It is apparent that a commission rate

structure which requires the same commission per share for large

blocks as for lOO-share blocks is unrelated to the cost of handling

transactions, a fact reflected in the willingness of exchange members

to forego a large proportion of their regular commissions derived

from mutual fund business, through "give-ups," "give-aways," and

reciprocal arrangements. These practices are not desirable. Among

other things, they create substantial conflicts of interest for the

managers of investment companies, since generally the give-ups and

similar practices are used to serve the interests of the managers rather

than the stockholders of the funds. Accordingly, the Commission has

given notice to all exchanges that it believes that exchange rules

must be changed so as to preclude customer-directed give-ups. The

Commission has also urged the exchanges to consider the adoption

of a volume discount. Pursuant to its responsibilities in this area, the

Commission has advised the various self-regulatory organizations

that, if customer-directed give-ups are not abolished, the Commission

itself may find it essential to exercise its rulemaking powers under

the Exchange Act.

Automation of l\larket Facilities

In fiscal year 1966 the Commission appointed an Electronic Data

Processing Committee composed of computer technologists, staff

attorneys and certain administrative personnel to keep abreast of the

increasing implementation of automation techniques and equipment

in the securities markets. During the past fiscal year this Committee and its individual members met with various exchanges, the

National Association of Securities Dealers, suppliers of stock market

data and other interested parties to discuss such matters as the establishment of central bookkeeping systems and central depositories for

securities, the improvement of quotations, the automation of surveillance procedures and the clearing operation, and the automation of

the execution of odd-lot transactions. These continuing conferences

have accomplished two ends. First, they have served to keep the

Commission informed of the many developments in this field and

secondly, they have enabled the Commission to make judgments on

the direction in which these developments have been moving and to

suggest changes, where necessary, for the protection of the public

investor.
THIRTY-TIDRD ANNUAL REPORT 9

Extensive meetings and discussions IULYebeen held between the

Commission staff and representatives of the New York Stock Exchange

on the Exchange's development of a central hack office accounting

system and a centralized system for the handling and delivery of

securities through the use of automated procedures.

Review of Exchange Rules Regarding Off-Board Trading

In fiscal year 1966 the Commission, pursuant to Section 19(b) of

the Securities Exchange Act of 1934, requested the New York Stock

Exchange to amend its rules to allow its members to effect transactions

in listed securities off the Exchange. Prior to this request, Exchange

Rule 394 prohibited all off-board transactions in listed securities,

whether effected on a principal or agency basis, unless exempted by

the Exchange. The net effect of the rule was to restrict the public's

ready access to all markets and to limit competition between the

exchange market and the over-the-counter market.

On October 20, 1966, the Board of Governors of the New York

Stock Exchange, in compliance with the Commission's request,

amended Rule 394 to permit member broker-dealers to execute transactions with certain nonmember broker-dealers who maintain markets

in listed securities. In the past fiscal year the Commission has conducted studies to determine whether the rule change has had the

desired effect of promoting competition between the exchange specialist

and the nonmember market-maker and of providing the public customer with the benefits of the best available market. The initial studies

indicated that a relatively small number of exchange members were

making use of the amended rule. Accordingly the Commission has

been working with the Exohange to clarify the rule and certain

Exchange interpretations thereof and to fully educate member firms

to the availability and use of this new mechanism. These efforts are

continuing.
PART II

OPERATION OF THE SECURITIES ACTS AMENDMENTS

OF 1964

Extension of Disclosure Requirements to Over-the-Counter Securities

The 1964 amendments to the Securities Exchange Act of 1934 extended to investors in many publicly held companies whose securities

are traded in the over-the-counter market the same fundamental

disclosure protections which that Act formerly afforded only to investors in companies with securities listed on a national securities

exchange. Generally speaking, Section 12(g), added to the Act in

1961,requires a company with total assets exceeding 1 million dollars

and a class of equity securities held of record by 500 or more persons

to register those securities with the Commission. Upon registration,

the periodic reporting, proxy solicitation and insider reporting and

trading provisions of the Act become applicable.

During the fiscal year, 562 registration statements were filed under

Section 12(g), making a total, together with those previously filed, of

2,746. Eight of these statements were withdrawn before they had become effective upon determination that they were not required to be

filed under the Act. In addition, 45 registrations have been terminated

pursuant to Section 12(g) (4) because the number of shareholders fell

below 300.

Of the 2,746 registration statements filed, 1,568were those of issuers

already subject to the periodic reporting requirements of the Act under

Section 13 or 15(d). This figure includes 135 registration statements

(78 in fiscal year 1965,28 in 1966,and 29 in 1967) filed by issuers with

another security registered on a national securities exchange and 1,433

(851 in fiscal year 1965,353 in 1966,and 229 in 1967) by issuers subject

to the reporting requirements of Section 15(d) as a result of having

registered securities under the Securities Act. These 15(d) companies

had, however, not been subject to the proxy solicitation and insider

reporting and trading provisions of the Exchange Act. The remaining

1,170 issuers which filed registration statements (not including those

withdrawn) had not been subject to any of the disclosure or insider

trading provisions and became subject to them through registration.

Issuers with securities registered under Section 12(g) filed 1,984

definitive proxy statements pursuant to Regulation 14A during the

fiscal year. In addition, 18 of the 37 proxy contests during the year

10
THIRTY-THIRD ANNUAL REPORT 11

which were subject to Regulation 14A involved securities registered

under Section 12(g). A total of 92 information statements in definitive

form was filed pursuant to Section 14(c), also added to the Act in

1964, and Regulation 14C adopted by the Commission thereunder.

Section 14(c) requires issuers of securities registered under Section 12

(both listed and unlisted), in accordance with rules and regulations

prescribed by the Commission, to transmit to security holders from

whom proxies are not solicited prior to a security holders' meeting

and to file with the Commission an information statement containing

information substantially equivalent to that which would be required

in a proxy statement,"

Exemptions From Registration

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

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

to grant a complete or partial exemption from the provisions of Sections 12(g), 13, 14, 15(d), or 16 if the Commission finds that because

of the number of public investors, the amount of trading interest in

the securities, the nature and extent of the activities of the issuer, the

income or assets of the issuer, or otherwise, the exemption is not inconsistent with the public interest or the protection of investors.

During the fiscal year, 13 applications for complete or partial exemptions were filed and 12 applications filed during prior years were

still pending. Of these 25 applications, 4 were granted," 3 were denied,

6 were withdrawn, and 12 were pending at the end of the year. Exemptions were granted for a variety of reasons. In one instance, a

temporary exemption from the Section 12(g) registration requirements was granted pending a determination whether the company

would be liquidated by the court-appointed receiver or its management returned to the stockholders. One issuer which became subject

to the registration requirements as of the end of its last fiscal year

was exempted because, as a result of a tender offer, the number of its

shareholders had subsequently been reduced below 300, and the company would have been entitled to termination of registration. In

another case, an exemption was granted to a broker-dealer and member of the New York Stock Exchange, whose stock is not publicly

traded, but is held mainly by key employees who may resell only to

the firm. Another issuer was exempted from Section 14(c) with respect to any stockholders meeting solely for the election of directors.

1Complete statistics with regard to proxy solicitations may be found at p. 89,

infra.

As required by the Act, exemptions were granted only after notice and opportunity for hearing. No hearings were requested as to any applications which

were granted.

•
12 SECURITIES AND EXCHANGE COMMISSION

The company's sole operations consisted of receiving the return from

a perpetual lease of its property and the company's only major shareholder had always elected the directors.

In one instance, a requested exemption was denied after a hearing.

The applicant in the case, Orchard Supply Building 00., operates

three retail hardware stores. Its total assets substantially exceed the

minimum figure specified in Section 12(g) and, as of the time of the

hearing, it had more than double the minimum number of shareholders.

The company urged that small shareholders should be disregarded

in applying the 500-shareholder test. It also alleged that there was

limited trading interest in its common stock, that it was basically a

local concern, and that to require compliance with the registration and

other provisions of the Exchange Act would impose a heavy financial

burden on it without commensurate benefit to its shareholders or the

investing public.

In his initial decision the hearing examiner noted the strong public

policy favoring registration, as reflected in the legislative history of

the 1964 amendments, and pointed out that the standards incorporated

in the legislation were the result of very careful administrative and

legislative study and should not be lightly disregarded. He concluded

that the company had not sustained the burden of justifying the requested exemption and that such exemption would not be consistent

with the public interest and the protection of investors. The examiner

rejected the contention that a "de minimis" rule should be applied to

exclude small shareholders from the calculation of the number of

shareholders. He further found that the company's shareholders were

not receiving important financial information which they would receive upon registration; that there had been substantial trading in the

company's stock; and that the extent of its sales indicated that its

operations had a significant impact on interstate commerce. The company did not seek review of the initial decision, and the Commission

did not order review on its own initiative. The initial decision therefore

became the final decision of the Commission,"

Securities of Insurance Companies.-8ecurities of insurance companies which meet specified conditions are exempted from the provisions of Section 12(g) of the Act. As described in the last annual

report,' these conditions are that (1) the company is required to and

does file an annual statement conforming to that prescribed by the

National Association of Insurance Commissioners ("NAJC") with

the insurance regulatory authority of its domiciliary State; (2) the

company is regulated in the solicitation of proxies as prescribed by

Securities Exchange Act Release No. 8104 (June 20, 1967).

See 32nd Annual Report, pp.12-13.

•

•
THIRTY-THIRD ANNUAL REPORT 13

the NArC; and (3) the purchase and sale of securities issued by the

company by beneficial owners, directors or officersof the company are

subject to reporting and trading regulations substantially in the manner provided by Section 16 of the Act. Last year's report also discussed

the steps that had been taken by the various States and their insurance

regulatory authorities to meet these conditions.

Securities of Foreign Issuers.-Section 12(g) (3) authorizes the

Commission to grant complete or partial exemptions for foreign securities if it concludes that such exemptions are in the public interest

and consistent with the protection of investors. To determine how best

to apply the Exchange Act to foreign issuers so as to assure that

American investors would have available adequate information about

such issuers, the Commission made an extensive study of the disclosure

and reporting requirements and practices in many of the countries

whose issuers have securities traded in the United States, and of the

requirements of many leading foreign stock exchanges. The Commission also consulted with representatives of American brokers, dealers,

financial analysts, the principal banks issuing American Depositary

Receipts (ADR's) and other persons who are interested in foreign

securities, and received recommendations from interested domestic

and foreign groups. During this study, the Commission exempted

until November 30, 1965, all securities of foreign companies and

certificates of deposit therefor,"

After completing this initial study, the Commission, in November

1965,published for comment proposals including rules and forms to be

applicable to foreign companies subject to Section 12(g).6 The Commission received many comments on these proposals. After careful

consideration of these comments, and after further discussion with

interested persons and groups, the Commission decided not to adopt

the proposals at that time, but rather to extend the temporary exemption until November 30, 1966,1Because registration of securities under Section 12(g) is not required until 120 days after the end of the

issuer's fiscal year, this extension meant that companies whose fiscal

year ended December 31 would not have to register their securities

until April 30, 1967.

As a basis for further study, the Commission also asked those foreign issuers which it had reason to believe would have been subject

to the Act, had the proposed rules been adopted, to furnish to the

Commission certain information which they made public abroad. Most

of these companies complied with the request. After careful examiSecurities Exchange Act Release No.7 427 (September 15, 1964).

Securities Exchange Act Release Nos. 7746, 7747, 7748 and 7749.

7 Securities Exchange Act Release No. 7867 (AprlI21, 1966).

•

•
14 SECURITIES AND EXCHANGE COMMISSION

nation of the material furnished, the Commission decided to revise its

original proposals. It determined that the continuing improvement in

the quality of the information being made public by foreign issuers

warranted exempting from Section 12(g) the securities of those foreign companies which have not sought a public market for their securities in the United States through a public offering or through

stock exchange listing, and which furnish the Commission with certain information published pursuant to foreign law or stock exchange

requirement or sent to their security holders.

On April 28, 1967, the Commission adopted Rules 3b-4, 12g3-2, 13a16 and 15d-16 and amended Rules 13a-ll and 1ild-ll.s In connection

with the adoption of these new rules, the registration and annual report forms for use by foreign issuers were also revised and a new Form

6-K for periodic reports was adopted," Under the new rules, securities

of a foreign company are exempt from registration under Section

12 (g) if the class of securities has fewer than 300 holders resident in

the United States. Foreign companies which have not previously been

subject to the reporting requirements of the Act may obtain an exemption from Section 12 (g) by furnishing to the Commission copies of

certain information which they have made public abroad or have sent

to their security holders together with a notification that such information is being furnished in order to obtain the exemption.

Foreign companies which have reporting obligations arising from

the listing of securities on a United States securities exchange or from

a public offering of their securities in the United States are exempted

from Section 12(g) for the duration of such prior obligation. Registration of a class of securities under Section 12(g) would not affect

the reporting requirements of these companies or subject them to any

further provision of the Act, and the exemption thus serves only to

eliminate unnecessary filings. This exemption is not available, however,

to companies 'which are essentially United States companies or to

North American or Cuban companies with securities listed on a United

States securities exchange. Such companies are subject to the provisions of sections 14 and 16 of the Act governing proxy solicitations

and insider reporting and short-term trading with respect to their

registered securities.

The Commission decided not to adopt at the present time special

rules applicable to brokers and dealers who deal in foreign securities.

It did, however, call to the attention of brokers, dealers and investors

the fact that information concerning certain foreign issuers may not

be available in the United States. The Commission intends to issue

Securities Exchange Act Release No. 8066.

Securities Exchange Act Release Nos. 8067, 8068 and 8069 (April 28, 1967).

•

•
THIRTY-THIRD ANNUAL REPORT 15

lists from time to time showing which foreign issuers have registered

securities under Section 12(g), which have obtained exemptions by

furnishing information in the manner noted, and which have done

neither. One such list was issued on August 10, 1966, showing 80 issuers which had furnished information voluntarily to the Commission

and 32 issuers which had not done SO.'0 The Commission maintains a

continuing review of activity in the markets for foreign securities to

see whether the new rules are achieving their purpose and whether

further rules are necessary.

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

Association

Prior to the 1964 amendments, brokers and dealers registered with

the Commission who were not members of the National Association of

Securities Dealers, Inc. ("NASD"), or of one of the principal exchanges, were not subject to any comprehensive regulation concerning

their qualifications or business practices. A major objective of the

amendments was "to insure that the Commission has the necessary

authority to provide regulation of nonmember brokers and dealers

comparable to that imposed by (self-regulatory) associations on their

membership, including the requirement that these nonmember brokers

and dealers pay fees which will compensate the Commission for this

additional regulation." 11

Subsections (1;), (9) and (10) of Section 15(b) of the Exchange

Act authorize the Commission to adopt rules and regulations prescribing standards of training and experience and establishing other prerequisites for entry into the securities business by nonmember brokers

and dealers and their associated persons, and rules and regulations for

such brokers and dealers designed to promote just and equitable principles of trade, prevent unreasonable profits or unreasonable rates of

commissions or other charges, and in general to protect investors and

the public interest and remove impediments to and perfect the mechanism of a free and open market. The Commission is also authorized to

adopt rules and regulations imposing fees to defray the cost of regulating nonmember broker-dealers.

The last two annual reports of the Commission described the initial

steps taken to implement these statutory provisions." including the

adoption in September 1965 of Rule 15b8-1 which among other things

requires associated persons of nonmember broker-dealers to pass a

qualification examination. During the 1967 fiscal year, 2,368 associated

persons took the Commission's general securities examination, which is

,. Securities Exchange Act Release Act No. 7934.

U House Report No. 1418, 88th Cong., 2d Sess., p. 12.

,. 31st Annual Report, pp. 11-13 ; 32nd Annual Report, pp. 16-18.

281-577--68----3
16 SECURITIES AND EXCHANGE COMMISSION

administered by the NASD. As of the end of the fiscal year, there were

462 registered nonmember broker-dealers with a total of about 22,000

associated persons.

During the past fiscal year and within the month following its close,

the Commission took important further steps to implement the statutory provisions. In October 1966,it published a proposal to adopt Rules

15b10-1 through 15b10-6 under Section 15(b) (10).18 On July 17, 1967,

the proposed rules with certain modifications, as well as a Rule 15b10-7,

were adopted, effective October 2, 1967.H The new rules establish

standards of general business conduct, suitability of recommendations

and supervision of associated persons, regulate discretionary accounts,

and impose recordkeeping requirements.

Rule 15b10-1 defines certain terms used in the other rules. Rule

15b10-2 requires nonmember brokers and dealers and their associated

persons to adhere to high standards of commercial honor and just

and equitable principles of trade in the conduct of their business. The

rule is designed to impose a general ethical standard of fair dealing.

Rule 15b10-3, the suitability rule, provides that no recommendation

to purchase, sell, or exchange a security shall be made unless the

broker or dealer or associated person making the recommendation

has reasonable grounds to believe that the recommendation is "not

unsuitable" in view of the customer's investment objectives, financial

situation and needs as disclosed by the customer after reasonable

inquiry or as otherwise known by the broker or dealer or associated

person.

The nature and extent of the inquiry to be made will depend on all

the facts and circumstances. Thus, depending on the length of the

interval between recommendations, it might be sufficient simply to ask

the customer whether there has been any material change in his circumstances since the previous inquiry. The broker-dealer is not precluded from making a recommendation because the customer, after

reasonable inquiry, declines to furnish information concerning his

investment objectives, financial situation and needs.

This rule is not an attempt to second-guess the exercise of the reasonable business judgment of a broker-dealer or to make him an insurer

of favorable investment performance. The recommendation must be

judged in the light of the information available to the broker-dealer

after reasonable inquiry as to the customer's situation at the time of

the recommendation and not by reference to subsequent events.

The discretionary account rule, Rule 15b10-5, provides that discretionary authority to effect transactions in a customer's account must

13 Securities Exchange Act Release 1'0.7984 (October 25,1966).

,. Securities Exchange Act Release No. 8135 (July 27, 1967).
TIDRTY-TIDRD ANNUAL REPORT 17

be given in writing and the customer must indicate his reasons for

granting such authorization.

The supervision and recordkeeping rules are designed to give effect

to the suitability and discretionary account rules. The supervision rule,

Rule 15bl0-4, imposes a general duty on nonmember brokers and

dealers to supervise diligently the securities activities of their associated persons. Itrequires the maintenance and enforcement of written

procedures setting forth the measures adopted to comply with the

duties imposed by the rule. The written procedures must include the

review and written approval of the opening of new customer accounts;

frequent examination of customer accounts; and the prompt review

and written approval of all securities transactions. The rule also requires that the written procedures include special supervisory treatment for discretionary accounts. Further, a supervisor is required to

review promptly and approve in writing the handling of all customer

complaints which are handled by or pertain to the associated persons

subject to his supervision.

The recordkeeping rule, Rule 15bl0-6, requires that a record with

specified identifying information be kept for each person who becomes

a customer after the effective date of the rule. This record must also

contain the signatures of the customer, the associated person regularly

handling the account and a supervisor designated pursuant to the

supervision rule. Where the broker-dealer, or any associated person,

has made any recommendation to the customer to purchase, sell or

exchange any security, the record must also state the customer's occupation, marital status, investment objectives, and other information

concerning the customer's financial situation and needs which the

broker-dealer or associated person considered in making the recommendation, and the signature of the broker or dealer or associated

person who made the recommendation. If a recommendation is made to

a person who was a customer prior to the effective date of the rule, a

record containing the above information must be made and kept

current.

Where a customer has delegated discretionary authority to the

broker-dealer or any associated person, the broker-dealer's records

must contain the customer's written delegation of discretionary authority, a statement of the customer's reasons for granting such

authority, and the written approval of the supervisor. The rule also

requires maintenance of a separate complaint file, which must include

copies of all material relating to complaints, and a record of action, if

any, taken by the broker-dealer. All records to be maintained under

the recordkeeping rule are required to be preserved for not less than

6years.
18 SECURITIES AND EXCHANGE COMMISSION

The last of this group of rules, Rule 15bl0---7,exempts from the

other rules members of national securities exchanges who do not carry

customers' accounts and whose annual gross income from the over-thecounter business does not exceed $1,000.

The Commission's staff is presently engaged in drafting additional

rules under Section 15(b) (10) pertaining to advertising and sales literature of nonmember broker-dealers.

In May 1967,the Commission adopted Rule 15b9-1, which establishes

assessment fees for the 1967fiscal year.!" The rule requires the filing of

an assessment form and payment of a base fee for each nonmember

broker or dealer and payment of additional fees for each associated

person and each officeof the broker-dealer.

Pursuant to the inspection program for nonmember broker-dealers,

a number of inspections were carried out during the year. These were

designed to determine compliance with existing rules and to obtain

information with respect to the type of securities activities engaged in

by nonmember broker-dealers.

Proceedings To Obtain Compliance With Securities Exchange Act Registration

or Reporting Requirements

Section 15(c) (4) which was added to the Securities Exchange Act

by the 1964 amendments assists the Commission in obtaining compliance 'with the registration and reporting provisions of Sections 12,

13 and 15(d) of that Act, in terms both of filing the required documents and of accuracy and completeness of documents filed. Under

the Section if the Commission finds after notice and opportunity for

hearing that any person has failed to comply with these provisions,

the Commission may publish its findings and issue an order requiring

compliance upon such terms and conditions and within such time

as it may specify. The first hearings to be held under Section 15(c) (4)

took place during the 1967 fiscal year. Two of the cases involved

allegedly deficient registration statements under Section 12(g) of

the Act filed by Hadson Ohio Oil Company and Ventura Oil Company, respectively. In the third proceeding, Crescent Corporation

and Pakco Companies, Inc. were charged with the filing of allegedly

deficient periodic reports and failure to file required reports.

The Crescent-Pakco proceeding afforded a striking demonstration

of the use of proceedings under Section 15(c) (4) to obtain adequate

and accurate disclosure of material facts. It was alleged that Crescent,

whose securities are listed on the New York Stock Exchange, and

Pakco, an over-the-counter company, had failed to file certain reports

and had filed materially misleading reports in order to conceal certain

material insider transactions. After 2 months of hearings, the com15 Securities Exchange Act Release No. 8086 (May 29,1967).
THIRTY-THIRDA~~AL REPORT 19

panies, pursuant to offers of settlement, filed amended and additional

reports disclosing that the control person of the two companies had

made use of their assets in connection with the purchase of a control

block of Crescent's stock.v

The other two cases were also disposed of pursuant to offers of

settlement. These settlements provided, among other things, for the

filing by Hadson and Ventura of correcting amendments to their

registration statements and the mailing of a copy of the amended

registration statements to their shareholders."

Disciplinary Action Against Broker-Dealers and Their Associated Persons

The provisions enacted in 1964 giving the Commission authority

to proceed directly against and impose sanctions on individuals associated with broker-dealer firms and expanding the range of sanctions

which it may impose on broker-dealers have by now become wellestablished elements in the regulatory scheme. Four proceedings solely

against individuals associated. with broker-dealers were pending at

the beginning of the 1967 fiscal year, and another such proceeding

was instituted during the year. Three of these proceedings resulted

in orders barring the individuals from further association with a

broker-dealer, and two were still pending at the end of the year. In

proceedings in which broker-dealers as well as certain of their associated persons were named as respondents, 102individuals were barred

from further association with a broker-dealer, and 25 others were

suspended from such association for varying periods of time. In addition' the Commission, in orders entered during the year, suspended

the registrations of two broker-dealers.

Summary Suspension of Over-the-Counter Trading

Section 15(c) (5) of the 1964 amendments authorizes the Commission to suspend over-the-counter trading in any security (except an

exempted security) summarily for 10 days if the Commission believes

the public interest and protection of investors so require. Brokerdealers are prohibited from trading in any such security during the

period of suspension. This provision is a counterpart to Section

19(a) (4) which provides for summary suspension of trading in securities listed on a national securities exchange.

During the 1967 fiscal year, the Commission temporarily suspended

trading in 14 over-the-counter securities, compared to 5 in fiscal 1966

and 2 suspensions in fiscal 1965. In all but one of these cases, the

Commission suspended trading when it learned of information not

generally known to the securities conununity and investors which

indicated that there were substantial questions concerning the finan10 See Securities Exchange Act Release No. 8144 (August 14, 1967).

17 Securities Act Release Nos. 4872 (July 18, 1967) and 4874 (JUly 19, 1967).
20 SECURITIES AND EXCHANGE COMMISSION

cial condition or business operations of the companies involved. The

suspensions were ordered pending clarification and adequate public

dissemination of information concerning these matters. IS

In some instances, the Commission instituted enforcement action

shortly following the suspension where related violations of law were

uncovered. For example, in a case involving First Standard Corporation of New York City, the Commission suspended over-the-counter

trading in the company's common stock as a result of information

obtained in a staff investigation indicating that incomplete and misleading information and false rumors concerning the business operations of the company and its development of new product lines were

publicly disseminated. Subsequently, the Commission filed a complaint

in the U.S. District Court for the Southern District of New York

seeking to enjoin the company and others from violating the antifraud provisions of the Securities Exchange Act of 1934 and to compel

the defendants to issue a clarifying statement about the company and

its products. An order enjoining further violations was entered against

the defendants and the issuer thereafter issued a clarifying statement.

The Commission thereupon terminated the trading suspension, cautioning investors to consider carefully the information made available

in connection with the injunctive action before effecting transactions

in the company's stock.

In the remaining case, which involved S & P National Corporation,

the suspension followed a request for such action by the trustee-receiver

of S & P who had been appointed by the court in an injunctive action

by the Commission against the corporation, its subsidiaries and two

individuals. The trustee's request was based on the fact that settlement

negotiations were pending which could result in values to public

holders of S & P stock substantially above the market prices in recent

years. Trading was suspended pending clarification of these matters."

The suspension was later terminated following submission to the court

of a Plan of Settlement and Reorganization under which, among other

things, an offer would be made by S & P to its public stockholders to

purchase their shares at prices above recent market prices, following

which S & P would be liquidated and dissolved." A notice of a hearing

on the Plan which had been mailed to stockholders and published

contained an explanation of the Plan and stated that the Plan was

available for inspection.

l8 Securities Exchange Act Release Nos. 7956 (September 15,1966),7958 (September 19, 1966), 8010 (December 20, 1966), 8026 (January 19, 1967), 8048

(March 21, 1967), 8061 (April 21, 1967), 8065 (April 27, 1967),8077 (May 12,

1967), 8080 (May 18, 1967), 8088 (May 26, 1967), 8095 (June I, 1967), 8097

(June 5, 1967), and 8108 (June 22, 1967).

,. Securities Exchange Act Release No. 8077 (May 12, 1967). For the earlier

history of this case, see 32nd Annual Report, pp. 117-118.

.. Securities Exchange Act Release No. 8153 (August 30,1967).
PART m

FULL DISCLOSURE OF INFORMATION ABOUT THE ISSUERS

OF SECURITIES

One important thrust of the Federal securities laws administered by

the Commission, as well as the rules, regulations, registration and reporting forms adopted by the Commission to implement those laws, is

to provide public disclosure of financial and other information about

publicly-held companies and those companies seeking to raise capital

through the public offering of their securities. The objective of such

disclosure is to enable public investors to evaluate the securities of

these companies on an informed and realistic basis. Thus, the Securities

Act of 1933 requires the filing of registration statements with the Commission by companies proposing the public offering of securities, and

the use of a prospectus containing prescribed financial and other information in the offering and sale of their securities. Certain types of

offerings and securities are exempt from the registration and prospectus requirements of the Securities Act. The Securities Exchange Act of 1934 requires the registration of securities and the

filing of annual and other periodic reports containing similar data by

companies whose securities are listed on a national securities exchange

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

there is a substantial public interest. The Exchange Act further extends the disclosure principle by requiring disclosure of material information to holders of registered securities whose proxies are solicited

for the election of directors or the approval of other corporate action,

and by requiring "insiders" of companies whose equity securities are

registered to report their holdings of and transactions in all equity

securities of the issuer with whom they are affiliated.

DISCLOSURE IN CONNECTION WITH PUBLIC OFFERINGS

Disclosure under the Securities Act with respect to securities to be

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

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

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

registration statement containing certain required financial and other

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

of the registration statement and contains the more significant data set

21
22 SECURITIES AND EXCHANGE COMMISSION

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

to evaluate the securities and make an informed investment decision.

The registration statement is available for public inspection as soon

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

of the statement under prescribed limitations, actual sales may not

be made until the statement has become effective. The Commission

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

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

unlawful to represent to investors that the Commission has approved

or otherwise passed on the merits of registered securities.

Type of Information Included in Registration Statement

Generally speaking, a registration statement relating to securities

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

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

diminish, the particular items of information required to be disclosed

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

protection of investors. To facilitate the registration of securities by

different types of issuing companies, the Commission has prepared

special registration forms which vary in their disclosure requirements

so as to provide maximum disclosure of the essential facts pertinent

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

expense of compliance with the law.

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

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

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

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

earnings; underwriters' commissions; payments to promoters made

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

and principal stockholders in material transactions with the issuer;

pending legal proceedings; and the purposes to which the proceeds

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

certified by an independent accountant. The registration statement of a

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

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

expenses, the underwriting and distribution of the securities being

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

financial statements.
THIRTY-THIRD~AL REPORT 23

Proposed Short Form for Registration of Securities of Certain Issuers

The Commission announced during the fiscal year that it had under

consideration a proposed short form (Form S-7) for registration

under the Securities Act of equity securities (including convertible

debt) and subordinated debt securities of certain issuers which are to

be offered to the public for cash.' The form's use would be limited

to domestic and Canadian companies which have a class of equity

securities listed on a national securities exchange and registered under

Section 12(b) of the Securities Exchange Act of 1934, have filed reports under Section 13 or 15(d) of that Act for a period of at least

5 years, and meet certain tests as to sales volume, earnings and stability

of management and business.

The proposed form is based on the assumption that issuers meeting

these conditions have disclosed in their periodic reports or proxy or

stockholder information statements adequate information regarding

such matters as the composition and remuneration of management,

transactions of management with the registrant, the issuance of options, and the identity of controlling persons. A prospectus for securities registered on the form would therefore require no disclosure with

respect to these items. Generally speaking, it would require only the

following information: the price and underwriting data; the intended use of the proceeds; a description of the registrant's business;

earning statements; a description of the securities to he registered;

and balance sheets of the registrant and its subsidiaries.

The Commission anticipates that prospectuses and registration statements on the proposed form would be considerably shorter than those

filed on existing forms. They would be substantially easier to prepare

and, if properly prepared, could be processed more rapidly.

The Commission also proposed to amend paragraph (a) of Rule 174

under the Securities Act so that securities registered on the proposed

form would be exempt from the prospectus delivery requirements of

Section 4(3) of the Act. Under this amendment a dealer would not be

required to deliver a prospectus to his customer if he is no longer acting

as an underwriter of the offering or is not engaged in a transaction

involving participation in the offering.

The proposed form would represent a closer integration of the

requirements of the Securities Act and the Securities Exchange Act

within the present statutory framework. In this connection, the Commission and its staff are engaged in a careful review of the existing

reporting and disclosure requirements under the Securities Exchange

Act to improve the information contained in and the timeliness of the

reports filed under that Act.

1Securities Act Release Xo, 4849 (Noveruber 16,19(6).
24 SECURITIES AND EXCHANGE COMMISSION

On November 27, 1967, the Commission adopted Form S-7 with

certain revisions resulting from consideration of the public comments

received (Securities Act Release No. 4886).

Simplification of Prospectuses

During the fiscal year the Commission requested the cooperation of

issuers in improving the clarity of prospectuses for securities registered

on Form S-8, a simplified :form for the registration of securities under

various employee stock purchase, savings, stock option and similar

plans," These prospectuses are sometimes unduly complex and technical, particularly the parts describing the plan. Some prospectuses give

the full text of the plan. Others summarize the plan's provisions, but

use its legal phraseology. The result is that it is difficult :for employees

to understand readily the nature o:fthe plan and their rights and duties

under it.

Some issuers, recognizing the need for a clear presentation, include

in the prospectus, or transmit with the prospectus in booklet form, a

description of the plan in plain language. Sometimes these descriptions are in question-and-answer form. The Commission commended

this practice and suggested that it might well be extended to the prospectus proper. For example, a booklet containing a description of the

plan in simple, nontechnical terms may be substituted for that portion

of the prospectus dealing with the plan, or the booklet may be

expanded and serve as the full prospectus.

Staff Examination of Registration Statements

Registration statements are examined by the Commission's staff for

compliance with the standards of adequate and accurate disclosure.

This examination is primarily the responsibility of the Division of

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

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

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

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

such as where the deficiencies in a registration statement appear to

stem from careless disregard of applicable requirements or from a

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

sent and the Commission either conducts an investigation to determine

• Securities Act Release No. 4844 (August 5,1966).
THIRTY-THIRD ANNUAL REPORT 25

whether "stop-order" proceedings should be instituted or immediately

institutes such proceedings. A discussion of the exercise of the "stoporder" power during fiscal year 1967 begins on page 30.

Time Required To Complete Registration

The Commission's staff endeavors to complete its examination of

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

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

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

thereto) . Since most registration statements require one or more amendments, they usually do not become effective until some time after the

original 20-day period. The period between filing and effective date is

intended to afford investors an opportunity to become familiar with

the proposed offering through the dissemination of the preliminary

form of prospectus. The Commission can accelerate the effective date

so as to shorten the 20-day waiting period, taking into account the

adequacy of the information respecting the issuer theretofore available to the public, the facility with which the facts about the offering

can be understood, the public interest and the protection of investors.

The note to Rule 460 under the Act lists some of the more common

situations in which the Commission considers that the statute generally

requires it to deny acceleration.

The median number of calendar days which elapsed from the date

of the original filing to the effective date with respect to the 1,460

registration statements that became effective during the 1967 fiscal

year 3 was 36, compared with 38 days for 1,280 registration statements

in :fiscal year 1966 and 36 days for 1,097 registration statements in

fiscal year 1965. The number of registration statements :filed during

fiscal year 1967 was 1,637, as compared with 1,450 and 1,209, respectively, inthe two preceding years,'

The following table shows by months during the 1967 fiscal year

the number of registration statements which became effective, and the

number of calendar days elapsed during the registration process for

the median registration statement.

Statistics Regarding Registration Statements Filed

During the 1967 :fiscal year, 1,836 registration statements were filed

for offerings of securities aggregating $36.2 billion, as compared with

1,697 registration statements :filed during the 1966 fiscal year for offera This figure excludes 192 amendments filed by investment companies pursuant to Section 24(e) of the Investment Company Act of 1940, which provides

for the registration of additional securities through amendment to an effective

registration statement rather than the filing of a new registration statement.

These figures exclude 199, 247 and 167 amendments filed by investment companies pursuant to Section 24(e) of the Investment Company Act for fiscal years

1967, 1966 and 1965, respectively.

•
26 SECURITIES AND EXCHANGE CO~SSION 

Time in repistratdon under the Becurtties Act of 1933 by mmths durtng the RscaE 

yea? ended JuneSO, 1967 

NUMBER OP CALENDAR DAY0 

Menths 

IN^^^^ 

reg(stration 

011 

number 

Total 


01 
/ I statements da In

a~eotive - regisgtion 

July 1966 ................. 98 40 Mar...................... 124 34 


dug...................... 127 45 ...................... 175 30 


8ept...................... 38 ae 2ay...................... 197 33 


Oot...................... 83 42 Juns...................... 201 36 

NOT

DBD....................... 

...................... 102 

86 

38 

a7 Fiscal 1967 lor 


--


Jan. lM7 ................. 84 ae medianeffective 


Feb...................... 86 40 registration 


statemant ........ 1,480 36 


8- n. 3to text, supra; 

ings amounting to $31.1 billion. This represents an increase of 8.1 

percent in the number of statements 6led and 16.3 percent in the dollar 

amount involved. 

Of the 1,836 registration statements filed in the 1967 fiscal year, 440, 

or 24 percent, were filed by companies that had not previously 6led 

registration statements under the Securities Act of 1933. Comparable 

/figures for the 1966 and 1965 fiscal years were 422, or 24.8 percent, and 

458, or 33 percent, respectively. 

From the effective date of the Securities Act of 1933 to June 30, 

1967, a cumulative total of 28,955 registration statements has been filed 

under the Act by 12,505 different issuers covering proposed offerings 

of securities aggregating over $345 billion. 

Particulars regarding the disposition of all registration statements 

filed under the Act to June 30,1967, are summarized in the following 

table : 

Num$er and ddspositlon of registration statements filed 

Prior to July 1.1864 to Total June I July I, 1866 I Jane a0, 19m I 30,1967

Awr te dollar amount. 

~s%d (in billions) ......................................... S?OB. 9 $34&1 


As aective <in billions) .................................... / 7 . 1 f.%: / $331.3 


(a) blades 199regi~tntionstatements coveringpmpwed offeringstotaling V,785,411,449ffled by invest- ment companies under Section 24(e)(l) of the Investment Company Act of 1840which pdta registration by mendment to a previously effective reglstnrtian statement. (a) Exdmdes 10 rsglstratbn statements that bme &eahvs duri the yea: but wem subseqoently 

wlthdram: thsss 10 statements %is counted in the 152statemsntswit%mw donng the gear. (4Excludes28 registration statements sffeotive prior to July 1,1988, whbh raem mthdrawn during the 

year: these 28 statwents are rated under withdrswn. 

(d) Exalodea one regishation statement eflwtive during the ear and one reglstratlon statement etlmtip1~ prlorlor to Jul 1 1Q66on whioh atop orders ram Dlaosd and Wtegdurlngthe ~seslysar; thw two statsments are ~flsote8uhdweti~otlve. 
-- 

THIRTY-THIRD ANNUAL REPORT 27 

The reasons given by registrants for requesting withdrawal of the 

152 registration statements that were withdrawn during the 1967 fiscal 

year are shown in the following table: 

Number of Percent ~~naon ror~egktrant'swithdrawal mueat statements of total 

wifhdr~wn withdrawn 

I. withdrswa requested sftar receipt of the atoff's lettar olmmment. ....... 5 8.3 


2. ~eglstrantwas advised that statement should be wdhdrawnor stop order 

m4rn would be negausry. ........................................ 3 I.9 


3. cgsogein &noing ple,m................................................ 87 57.2 


4 Changein market mr~dltloos~............................................ 44 28.9 


5: Reglptrsnt was uneble to negotiate aoeeptable agreement wlth underwntw~................................................................. 2 1.4 


8. win file an pmper tom ................................................... I .7 


7. WIll Blenew registration statement ................................. 10 66 


Tots1................................................................. 162 100.0 


Statistics Regarding Securities Regisled 

During the fiscal year 1967, a total of 1,640 registrations of securities 

in the amount of $34.2 'billion became effective under the Securities Act 

of 1935.5The number of statements was the highest since fiscal year 

196.2, and the dollar amount of registrations was the largest on 

record. The large volume of issues reflected the general expansion in 

the economy during the period and the increased nee.& for funds by 

busines The chart on page 26 shows the number and dollar amounts 

of regi2r'rations from 1935 to 1967. 

The figures for 1967 include all registrations which became effective 

including secondary distr2butions and securities registered for other 

than cash sale, such as issues exchanged for ohher securities and securities reserves for conversion Of the dollar amount of securities registered in 1967, 52 percent was for the account of the issuer for cash 

sale, 13 percent for the account of the issuer for other than cash sale, 

and 5 percent for the socount of others. 

The following tsble compares the volume of securities registered for 

the account of the issuer and for the acoount of others for the past 3 

fiscal years : 

(dd(Uiona Of dollor*) 

Far ecoount of issuer for wh pile 27.980 

For -ant ofismar, othsr thanoesh sale ................................... 


Total 

'The figure of 1,649 excludes 6 registration statements which became effective 

during the year but be£ore*,competitive bids were received, and as to which 

amendments disclosing the accepted terns, including the offering price, were not 

Bled during the year. It includes two statements effective in Bscal Year 1966, as 

ta which such amendments were not filed untll flscal year 1967. 
28 SECURITIES AND EXCHANGE COMMISSION

SECURITIES EFFECTIVELY REGISTERED WITH S.E.C.

Dollars Billions 1935.1967 36

32

28

24

20

16

12

8

4

15

10

5

o

1935 40 45 50 (Fiscal Years)

55 60 65

05-4737 (8-87)

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

issuer, approximately $28 billion, represented an increase of $2 billion,

or 9 percent, over the previous year, and compares with the record increase of $11 billion in 1966 over 1965. Registration of new common

stock issues aggrega.ted $15.1 billion, $3.1 billion less than in the 1966

fiscal period and reflected a decrease of registrations of investment company issues which aggregated $9.4 billion during fiscal 1967. Registration of new bonds, notes and debentures increased 75 percent over the

previous year and accounted for $12.5 billion of the 1967 volume. Preferred. stock issues amounted to $558 million. Appendix Table 1 shows
- - 

------ 

------ 

------ 

------ 

THIRTY-THIRD ANNUAL REPORT 29 

the number of statements which became effective and total amounts 

registered for each of the fiscal years 1935 through 1967, and contains 

a classification by type of security of issues to be offered for cmh sale 

on behalf of the issuer during those years. Mom detailed information 

for 1967is given in Appendix Table 2. 

Corporate issues intended for immediate cash sale totaled $13.4 billion, an increase of $4.7 billion over the previous year. Manufacturing 

companies registered the highest volume of new issues of the corporate 

group, $5.5 billion, almost double the amount registered in the previous 

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

volume, totaling $3.4 billion. Issues of communication companies 

amounted to $2.1 billion. Among the other industry groups, financial 

and real estate issues totaled $530 million. while trade, service. minine. . nn~l other mirc~llaneous issuw amounted to $1.9 billion. Registration 

of foreign government issues scheduled for immediate sale totaled $(;SO 

million as compared to $480 million in the preceding year. 

The following table shows the distribution by industry of issues registered during the last 3 fiscal years for the account of issuers to be offered for cash sale: 

1987 h P-t 1DBBln Pemt 1Mln Pemt 

dlllons oi total mWm of total mlllicma oftotal 

Islues offared lor immediate de: 

c01wate: 

Manulsotorlng........................ 6.480 18.8 10.8 1,451 4 8 


Edraoti~s............................ 203 ., z% .S 111 1.0 


~leot~ gru and water............... 8.41 122 11.8 1,n8
 11.7

~ranwdaatioqothe thanrailmad ... I , L6 ag .7 145 1. 0 

cmnmuni~tion~ ..................... 7.7 1.801 6. i ns 4.8 


Finanolal and real &ate .............. 2.g 1.8 1,m 8.8 822 8.8 


trade^............................... 180 .8 %a 1.0 162 1.1 


68rslw~......................... 218 .8 Ta .3 BB 0.4 


Constructionand mlsc................ 5 .a 25 .1 22 0.2 


~otal ............................. la,ui rsi bra 31.1 86.6 


Foreign government................... 681 2.4 182 1.8 '?$ 2.1 


~ ~forimmediate t d sale............ 14 1% 50.6 9.282 an. o 6, em an. 6


Issussoffend over ao extendedperiod:.... 13.828 4 6 18.482 64.0 9.m 61.4 

Totd for wh ~ahfor wunt of 

Issuer............................. 27,950 la0 25,722 lbl.0 14856 lm.0 


Of the $13.4 billion expected from the immediate cash sale of corporate securities for 611e account of issuers in 196'7,over 76 percent ($10.2 

billion) was designated for plant and equipment expenditurss and approximately 15 percent ($2.1 billion) for working capital. The balance 

was to be used for retirement of securities and for other purposes including purchase of securities and repayment of bank loans. Appendix 

Table 2, Part 4, contains a classification of uses of proceeds by principal industry groups. 
-- 

30 SECURITIES AND EXCHANGE COMMISSION 

Registration of issues to be offered over an extended period amounted 

to $13.8 billion, approximately $2.6 billion below the record figure of 

$16.5 billion for 1966. These issues are classified below : 

I (in miuions) 

Investment mmpany issues: 

Managemant open-andL ........................................ $7.014 S9.W 64,959 


Management olmsd-end ......................................... 16 


Unit investment trust .......................................... 
 F-ammnt ceniilo8les............................. 1~~~~~~~~~~ 250 


Tdal investment companies....... ........................... 8,438 12,434 


Employee s9ving plan cpdiacates ................................... 1.357 1,015 797 


5eDuritieslor employees st& option p1sns. ........................ 2,809
 Other, including stook far warrants and optirms.~ ................... 422 


Told........l................................................ 13,828 16,462 9, W6 


Stop Ordcr Proceedings 

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

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

"suspending" the effectiveness of a registration statement which 

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

material fact required to be stated t.herein or necessary to make the 

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

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

distribuGon of the securities so long as tho order remains in effect. 

Although losses which may have been suffered by investors before 

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

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

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

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

As of the beginning of the fiscal year, three stop order proceedings 

were pending. During the year, three additional proceedings were 

instituted, and three were terminated through the issuance of stop 

orders. In one case; no review of the hearing examiner's initial decision was sought by the registrant, or ordered by khe Commission, and 

the initial decision accordingly bemme the ha1 decision of the Commission. The other two stop orders which were issued during the year 

were issued in a consolidated proceeding pursuant to offers of settlement by the t.wo investment companies involved, Delaware Fund, Im. 

and Decatar Income Fund, Znc.The Commission's orders ' and subse- 

' Dide Land and TimDer Corporation, Securities Act Release No. 4841 (July 27, 

1986). 


'See Securities Act Release No. 4863 (Mayl. 1967). 
TEITRTY-TEITRD ANlfUAL REPORT 31

quent opinion 8 in this proceeding are discussed at pages 78-79 of this

Report. The stop orders as to these two registration statements were

later lifted upon the filing of amended registration statements. As of

the end of the fiscal year, three stop order proceedings were pending.

Examinations and Investigations

The Commission is authorized by Section 8(e) of the Act to make

an examination in order to determine whether a stop order proceeding

should be instituted under Section 8(d), and in connection therewith

is empowered to examine witnesses and require the production of

pertinent documents. The Commission is also authorized by Section

20(a) of the Act to make an investigation to determine whether any

provision of the Act or any rule or regulation prescribed thereunder

has been or is about to be violated. In appropriate cases, investigations

are instituted under this Section as an expeditious means of determining whether a registration statement is false or misleading or omits

to state any material fact. The following tabulation shows the number

of such examinations and investigations which were in progress during

the year:

Pending at beginning of fiscal year______________________________ 29

Initiated during fiscal year_____________________________________ 13

42

Closed during fiscal year____________________________________________ 9

Pending at close of fiscal year_______________________________________ 33

EXEMPTION FROM REGISTRATION OF SMAll ISSUES

The Commission is authorized under Section 3(b) of the Securities

Act to exempt, by its rules and regulations and subject to such terms

and conditions as it may prescribe therein, any class of securities from

registration under the Act, if it finds that the enforcement of the

registration provisions of the Act with respect to such securities is not

necessary in the public interest and for the protection of investors by

reason of the small amount involved or the limited character of the

public offering. The statute imposes a maximum limita:tion of $300,000

upon the size of the issues which may be exempted by the Commission

in the exercise of this power.

Acting under this authority, the Commission has adopted the following exemptive rules and regulations:

Rule 234: Exemption of first lien notes.

Rule 235: Exemption of securities of cooperative housing corporations.

Rule 236: Exemption of shares offered in connection with certain

transactions.

Regulation A: General exemption for U.S. and Canadian issues up to

$300,000.

Securities Act Release No. 4875 (July 19, 1967).

281-5717-68-4

•
32 SECURITIES AND EXCHANGE COMMISSION

Regulation B: Exemption for fractional undivided Interests in oil or gas

rights up to $100,000.

Regulation F: Exemption for assessments on assessable stock and for assessable stock offered or sold to realize the amount of assessment thereon.

Under Section 3 (c) of the Securities Act, which was added by

Section 307(a) of the Small Business Investment Act of 1958, the

Commission is authorized to adopt rules and regulations exempting

securities issued by a small business investment company under the

Small Business Investment Act. Acting pursuant to this authority,

the Commission has adopted Regulation E, which is described below.

Exemption from registration under Section 3 (b) or 3 (c) of the Act

does not carry any exemption from the provisions of the Act prohibiting fraudulent conduct in the offer or sale of securities and imposing

civil liability or criminal responsibility for such conduct.

Exempt Offerings Under Regulation A

Regulation A permits a company to obtain needed capital not in

excess of $300,000 (including underwriting commissions) in anyone

year from a public offering of its securities without registration, provided specified conditions are met. These include the filing of a notification supplying basic information about the company with the

Regional Office of the Commission in the region in which the company

has its principal place of business, and the filing and use in the offering

of an offering circular. However, an offering circular need not be filed

or used in connection with an offering not in excess of $50,000 by a

company with earnings in one of the last 2 years.

During the 1967 fiscal year, 383 notifications were filed under Regulation A, covering proposed offerings of $74,761,963, compared with 410

notifications covering proposed offerings of $75,218,434 in the 1966

fiscal year.

The following table sets forth various features of the Regulation A

offerings during the past 3 fiscal years:

Offerings under Regulation..4.

Fiscal year

1967 1966 1965

--- --- SIze:$100,000 or less ________________________________________________________ Over 101 128 98 $100,000 but not over $200,000 ____________________________________ 92 94 101 Over $200,000 but not over $300,000 ____________________________________ 190 188 198 --- --- --- 383 410 397

Underwriters: Used_________________________________________________________________ Not used__________________________________ 57 68 68 . ___________________________326 352 329

--- --- --- 01lerors:

~=~oW~_~~~~~:::::::::::::::::::::::::::::::::::::::::::::::::: 360 386 371

17 13 19 Issuers and stockholdersJointly_______________________________________6 11 7
THIRTY-THIRD ANNUAL REPORT 33

Reports of SaIes.-Regulation A provides that within 30 days after

the end of each 6-month period following the date of the original offering circular required by Rule 256, or the statement required by Rule

257, the issuer or other person for whose account the securities are

offered must file a report of sales containing specified information.

A final report must be filed upon completion or termination of the

offering.

During the fiscal year 1967, 820 reports of sales were £iledreporting

aggregate sales of $45,288,600.

Suspension of Exemption.-The Commission may suspend an exemption under Regulation A where, in general, the exemption is sought

for securities for which the regulation provides no exemption or where

the offering is not made in accordance with the terms and conditions

of the regulation or with prescribed disclosure standards. Following

the issuance of a temporary suspension order by the Commission, the

respondents may request a hearing to determine whether the temporary suspension should be vacated or made permanent. If no hearing

is requested within 30 days after the entry of the temporary suspension

order and none is ordered by the Commission on its own motion, the

temporary suspension order becomes permanent.

During the 1967fiscal year, temporary suspension orders were issued

in 13 cases, which, added to the 2 cases pending at the beginning of

the fiscal year, resulted in a total of 15 cases for disposition. Of these,

the temporary suspension order was vacated in 1 case and became

permanent in 10 cases: in 7 by lapse of time, in 2 by withdrawal of

the request for hearing, and in 1 after hearing. Four cases were

pending at the end of the fiscal year.

The case in which the suspension was made permanent following

a hearing was Fibercraft Products Oorporation» Fibercraft had been

organized for the purpose of manufacturing and selling laminated

fiberglass products, primarily boats. In 1964, the company and two

selling stockholders, Thomas C. Bennett, President, and Jacqueline

W. Bennett, Treasurer, filed a notification with the Commission with

respect to a proposed public offering under Regulation A of an

unspecified number of shares of common stock at the market, with a

maximum aggregate offering price of $50,000.

The Commission found that Fibercraft and the selling stockholders

had distributed sales material in the form of a letter to stockholders

which was misleading in that it reported a very substantial increase

in both sales and net worth without disclosing that the figures included

the sales and net worth of another company being acquired by Fibercraft and without disclosing that 125,000 shares of Fibercraft stock

• Securities Act Release No. 4847 (September 16, 1966).
34 SECURITIES AND EXCHANGE COMMISSION

were to be issued in the undisclosed acquisition which would substantially reduce the proportionate interest of the stockholders.

The Commission also found that the statement filed pursuant to

Rule 257 failed to name Michael A. Light as one of the persons in control and therefore an affiliate of Fibercraft and to disclose required

information regarding Light and his holdings of, and transactions in,

the company's securities. Light was a major stockholder of the company, and while he was vice president and a director had been instrumental in helping it improve its financial condition and also supervised

the accounting procedures and the preparation of periodic reports and

helped supervise the plant. Although Light resigned as an officer and

director in August 1964, he continued to be active in the company's

affairs, attended directors' meetings, participated in merger negotiations, and suggested the filing under Regulation A.

The Commission also found that no exemption was available because

the aggregate offering price, when computed, as required by Rule 254,

to include the price at which Light sold about 40,000 shares of Fibercraft's stock in violation of the registration requirements of the Act

within 1 year prior to the commencement of the proposed offering,

exceeded the $50,000 limitation imposed on offerings under Rule 257.

Exempt Offerings Under Regulation B

During the fiscal year ended June 30, 1967, 353 offering sheets and

329 amendments thereto were filed pursuant to Regulation B and were

examined by the Oil and Gas Section of the Commission's Division of

Corporation Finance. During the 1966 and 1965 fiscal years, 235 and

173 offering sheets, respectively, were filed. The following table indicates the nature and number of Commission orders issued in connection with such filings during the fiscal years 1965-67. The balance of

the offering sheets filed became effective without order.

Action taken on offering sheets filed under Requlation B

FIscal years

Temporary suspension orders (under Rule 340(a» Orders termmatlng proceeding after amendment

Orders termmatmg effectiveness of offenng sbeet

Orders fixmg effeetrve date of amendment (no proceeding pending)

Orders consenting to withdrawal of offering sheet and terminating pro- ceedmg

Orders consenting to withdrawal of offering sbeet (no proceeding pending).

Total number of orders

16 14 13

10 10 7

1 0 0 257 203 128

0 0 2

14 12 5

--- --- --- 298 239 155

Reports of Sales.-The Commission requires persons who make

offerings under Regulation B to file reports of the actual sales made

pursuant to that regulation. The purpose of these reports is to aid

the Commission in determining whether violations of law have oc-

_

_

_

_

_

_
TIDRTY-TIDRD ANNUAL REPORT 35

curred in the marketing of such securities. The following table shows

the number of sales reports filed under Regulation B during the past

3 fiscal years and the aggregate dollar amount of sales during each of

such fiscal years.

Reports of Sales Under Regulation B

I

_______ 1

Number of sales reports filed 1

Aggregate dollar amount of sales reported

1967 ,

3,9781 $3,986,187

1966 I__ I~

3, 301 I 2,015 $2,998,583 $1,603,144

Exempt Offerings Under Regulation E

Regulation E provides a conditional exemption from registration

under the Securities Act for securities of small business investment

companies registered under the Investment Company Act of 1940

which are licensed under the Small Business Investment Act of 1958

or which have received the preliminary approval of the Small Business Administration and have been notified by the Administration

that they may submit an application for such a license.

The regulation, which is substantially similar to the general exemption provided by Regulation A, requires the filing of a notification

with the Commission and, except in the case of offerings not in excess of

$50,000, the filing and use of an offering circular containing certain

specified information.

No notifications were filed under Regulation E during the 1967fiscal

year.

Exempt Offerings Under Regulation F

Regulation F provides an exemption for assessments levied upon

assessable stock and for delinquent assessment sales in amounts not

exceeding $300,000 in anyone year. Itrequires the filing of a simple

notification giving brief information with respect to the issuer, its

management, principal security holders, recent and proposed assessments and other security issues. The regulation requires a company

to send to its stockholders, or otherwise publish, a statement of the

purposes for which the proceeds of the assessment are proposed to be

used. Copies of any other sales literature used in connection with the

assessment must be filed. Like Regulation A, Regulation F provides

for the suspension of an exemption thereunder where the regulation

provides no exemption or where the offering is not made in accordance

with the terms and conditions of the regulation or in accordance with

prescribed disclosure standards.

During the 1967 fiscal year, 19 notifications were filed under Regulation F, covering assessments of $494,404. These notifications were

filed in three of the nine regional officesof the Commission: Denver,

San Francisco and Seattle. Underwriters were not employed in any

_
36 SECURITIES AND EXCHANGE COMMISSION

of the Regulation F assessments. No Regulation F exemptions were

suspended during the fiscal year.

CONTINUING DISCLOSURE REQUIREMENTS

Registration of Securities on Exchanges

Unless a security is registered on a national securities exchange

under the Securities Exchange Act of 1934 or is exempt from registration, it is unlawful for a member of such exchange or any broker

or dealer to effect any transaction in the security on the exchange. In

general, the Act exempts from registration obligations issued or guaranteed by a state or the Federal Government or by certain subdivisions

or agencies thereof and authorizes the Commission to adopt rules and

regulations exempting such other securities as the Commission may

find necessary or appropriate to exempt in the public interest or for

the protection of investors. Under this authority the Commission has

exempted securities of certain banks, certain securities secured by

property or leasehold interests, certain warrants and, on a temporary

basis, certain securities issued in substitution for or in addition to

listed securities.

Pursuant to Section 12 of the Exchange Act, an issuer may register

a class of securities on an exchange by filing with the Commission and

the exchange an application which discloses pertinent information

concerning the issuer and its affairs. Information must be furnished

regarding the issuer's business, its capital structure, the terms of its

securities, the persons who manage or control its affairs, the remuneration paid to its officers and directors, and the allotment of options,

bonuses and profit-sharing plans. Financial statements certified by an

independent accountant must be filed as part of the application.

Form 10 is the form used for registration by most commercial and

industrial companies. There are specialized forms for certain types

of securities, such as voting trust certificates, certificates of deposit

and securities of foreign governments.

Statistics regarding securities traded on exchanges may be found

in Part IV of this report, as well as in certain of the appendix tables.

Registration of Over.the-Connter Securities

As previously noted, Section 12(g) of the Exchange Act requires the

registration of securities traded over the counter, when certain standards as to assets of the issuer and number of shareholders are met. The

same forms used for the registration of securities on an exchange are

used for the registration of over-the-counter securities. Part II of

this report includes statistics regarding the number of registration

statements filed during the fiscal year pursuant to Section 12(g) and

related information.
TLnRTY-THIRD ANNUAL REPORT 37 

Periodic Reports 

Section 13 of the Exchange Act requires issuers of securities regisbred pursuant to Section 12 to file periodic reports keeping current 

the information contained in the application for registration or registration statemant. These periodic reports include annual, semi-annual, 

and current reports. The principal annual report form is Form 10-K, 

which is designed to give current information regarding the matters 

covered in the original filing. Semi-annual reports required to be filed 

on Form 9-K are devoted chiefly to furnishing mid-year hancial 

data. Current reports on Form 8-K are required to be fled for each 

month in which any of certain specified events of immediate interest to 

investors have occurred. A report on this form deals with matters such 

as changes in control of the registrant, important acquisitions or dispositions of wets, the institution or termination of important legal 

and important changes in the issuer's securities. Section 

15(d) of the Exchange Act, generally speaking, requires issuers which 

have registered securities under the Securities Act of 1933 and which 

have no securities registered under Section 12 to fle the reports described above. 

The following table shows the number of reports filed during the 

fiscal year pdrsuant to Sections 18 and 15(d) of the Exchange Act. As 

of June 30,1967, there mere 2,606 issuers having securities listed on a 

national securities exchange and registeredunder Section 12(b) of the 

Act, 2,738 issuers having securities registered under Section 12(g), and 

1,153 additional .issuers which were subject to the =porting requirements of Section 15 (d) of the Act. 

Numaer of annual and other periodfo reports filed by issuers under the iseourities 

Ezchange Act of 1954 

I Number of re- ffledby 1 

Type ol reports Llsted hers O~-th8+mnterhsum ffliop Total reports 

fillngrepOrts mports under fllad under Sgtion 

Aund reports......................... 
 Bemhmual wrt3.................... 2% 
 c-t report3 ........................
 %PIS I,M z, ns B,XQ Qnarterlympmts.. .................... 25 88 Zag 


Tow reportsffled................ 8.013 2.880 18.065 


Pmry Solieitation. 

Swpe and Nature of Proxy Regulation.-Regulation 14A under 

the Exchange Act, implementing Section l4(a) of that Act, Terns 

the manner in which proxies or other authorizations may be sohcited 

from the holders of securities registered under Section 12 of that Act, 

whether for the election of directors, approval of other corporate 
38 SECURITIES AND EXCHANGE COMMISSION

action, or some other purpose,"? Itrequires that in any such solicitation,

whether by the management or minority groups, disclosure must be

made of all material facts concerning the matters on which such holders

are asked to vote, and they must be afforded an opportunity to vote

"yes" or "no" on each matter. The regulation also provides, among

other things, that where the management is soliciting proxies, any

security holder desiring to communicate with other security holders

for a proper purpose may require the management to furnish him with

a list of all security holders or to mail his communication to security

holders for him. A security holder may also, subject to certain limitations, require the management to include in its proxy material any

appropriate proposal which he wants to submit to a vote of security

holders. Any security holder or group of security holders may at any

time make an independent proxy solicitation upon compliance with

the proxy rules, whether or not the management is making a solicitation. Certain additional provisions of the regulation apply where a

contest for control of the management of an issuer or representation

on the board is involved.

Copies of proposed proxy material must be filed with the Commission in preliminary form prior to the date of the proposed solicitation.

'Where preliminary material fails to meet the prescribed disclosure

standards, the management or other group responsible for its preparation is notified informally and given an opportunity to correct the deficiencies in the preparation of the definitive proxy material to be

furnished to security holders.

Under Section 14(c) of the Act, issuers of securities registered under

Section 12must, in accordance with rules and regulations prescribed by

the Commission, transmit information comparable to proxy material to

security holders from whom proxies are not solicited with respect to a

stockholders' meeting. Regulation 14C implements this provision by

setting forth the requirements for "information statements."

Proposed Amendments to Proxy Rules and Information Rules.-

During the fiscal year, the Commission invited public comments on

proposed amendments to its proxy rules under Section 14(a) and its

information statement rules under Section 14(c).ll At the request of

certain persons who desired further time to study the proposed amendments and submit comments thereon, the Commission extended the

period within "which comments could be submitted and most of the

proposed amendments were still pending at the close of the fiscal year.

The Commission did, however, adopt amendments to Rules 14a-3,

14a-6, 14c-3 and 14c-5P

ro This regulation also applies to security holders of registered public-utility

holding companies, their SUbsidiaries, and registered investment companies.

11 Securities Exchange Act Release No. 8000 (December 5,1966).

l2 Securities Exchange Act Release No. 8029 (January 24, 1967).
THIRTY-THIRD ANNUAL REPORT 39

Paragraph (b) of Rule 14a-3 formerly provided that if a solicitation is made on behalf of management and relates to an annual meeting

at which directors are to be elected, the proxy statement must be accompanied or preceded by an annual report to security holders containing certified financial statements for the last fiscal year. This paragraph was amended to require an issuer, other than an investment company, to include in such annual report financial statements for the last 2

fiscal years, although only the last year's statement must be certified.

Provision was made, however, for the omission of statements for the

earlier of the 2 years upon a showing of good cause. Because there are

special problems with respect to investment companies and because

most of their reports had already been published by the effective date

of the amendment, it was determined not to make the change applicable

to the reports of such companies at this time.

Paragraph (b) of the rule was further amended by the addition of

a note stating that it is unnecessary to send a copy of the annual report

to each of several security holders of record having the same address

if such security holders consent to the sending of a lesser number of

copies. However, where a security holder of record has an obligation

to obtain or send the annual report to other persons, such as the beneficial owners of the securities held in his name, the new provision does

not relieve him of such obligation.

An amendment to paragraph (0) of Rule 14a-3 increased from four

to seven the number of copies of each annual report sent to security

holders which must be furnished to the Commission for its information. This will enable the Commission to send copies to certain of its

regional offices,including the regional office :for the region in which

the issuer has its principal office.

In order to maintain consistency between the proxy rules and the

rules relating to information statements, Rule 14c-3 was amended to

conform to the amended Rule 14a-3.

Rules 14a-6 and 14c-5 were amended to require the filing with the

Commission of five copies of all preliminary material, rather than

three copies as previously required. The additional copies are needed

to expedite examination of the material and for recording in connection

with the Commission's data processing program.

Statistics Relating to Proxy and Information Statements.-During the 1967 fiscal year, 4,633 proxy statements in definitive form were

filed, 4,611 by management and 22 by nonmanagement groups or

individual stockholders. In addition, 92 information statements were

filed. The proxy and information statements related to a total of 4,370

companies, some 355 of which had a second solicitation during the

year, generally for a special meeting not involving the election of

directors.
40 SECURITIES AND EXCHANGE COMMISSION

The votes of security holders were solicited with respect to the following types of matters, other than the election of directors;

Mergers, consolidations, acquisitions of businesses, purchases and sales

of property, and dissolution of companies________________________ 427

.Authorizations of new or additional securities, modifications of existing securities, and recapitalization plans (other than mergers, consolidations,etc.)________________________________________________ 819

Employee pension and retirement plans (including amendments to

existing plans)_________________________________________________ 81

Bonus or profit-sharing plans and deferred compensation arrangements

(including amendments to existing plans and arrangements)_____ 166

Stock option plans (including amendments to existing plans) 523

Stockholder approval of the selection by management of independent auditors 1,608

Miscellaneous amendments to charters and by-laws, and miscellaneous

other matters (excluding those listed above) 1,424

Stockholders' Proposals.-During the 1967 fiscal year, 192 proposals submitted by 45 stockholders were included in the proxy statements of 127 companies under Rule 14a-8 of Regulation 14A.

Typical of such stockholder proposals submitted to a vote of security

holders were resolutions relating to amendments to charters or by-laws

to provide for cumulative voting for the election of directors, preemptive rights, limitations on the grant of stock options to and their

exercise by key employees and management groups, the sending of a

post-meeting report to all stockholders, and limitations on charitable

contributions.

A total of 93 additional proposals submitted by 42 stockholders was

omitted from the proxy statements of 39 companies in accordance

with Rule 14a-8. The principal reasons for such omissions and the number of times each such reason was involved (counting only one reason

for omission for each proposal even though it may have been omitted

under more than one provision of Rule 14a-8) were as follows:

Reason for Omission of Proposals

Number

VVithdrawn by proponent_________________________________________ 22

Concerned a personal grievance against the company 19

Not a proper subject matter under State law_______________________ 15

Reason for proposal deemed misleading__________________________ 14

Related to the ordinary conduct of the company's business________ 13

Kot timely submitted____________________________________________ 9

Involved SUbstantially the same matter as one previously proposed.,., 1

Ratio of Soliciting to Nonsoliciting Companies.-Of the 2,606

issuers that had securities listed and registered on national securities

exchanges as of .Iune 30, 1967,2,382 had voting securities so listed and

registered. Of these 2,382 issuers, 2,144, or 90 percent, solicited proxies
TEITRTY-TEITRD~AL REPORT 41

under the Commission's proxy rules during the 1967 fiscal year for

the election of directors.

Proxy Contests.-During the 1967 fiscal year, 37 companies had

proxy contests involving the election of directors. In 18 contests control of the board was at stake while the other 19 involved representation on the board. Pursuant to the requirements of Rule 14a-ll, 556

persons, both management and nonmanagement, filed detailed statements as participants.

Management retained control in 12 of the 18 contests for control of

the board of directors, 1 was settled by negotiation, nonmanagement

persons won 4 and 1 was pending as of June 30, 1967. Of the 19 cases

where representation on the board of directors was involved, management retained all places on the board in 9 contests, opposition candidates won places on the board in 5 cases, 2 were settled by negotiation,

and 3 were pending as of the end of the fiscal year.

Insiders' Security Holdings and Transactions

Section 16 of the Securities Exchange Act and corresponding provisions in Section 17 of the Public Utility Holding Company Act of

1935 and Section 30(f) of the Investment Company Act of 1940 are

designed to provide other stockholders and investors generally with

information as to insiders' securities transactions and holdings, and to

prevent the unfair use of confidential information by insiders to profit

from short-term trading in a company's securities.

Ownership Reports.-Section 16(a) of the Exchange Act requires

every person who beneficially owns, directly or indirectly, more than

10 percent of any class of equity security which is registered under Section 12(b) for exchange listing or under Section 12(g) for over-thecounter trading, or who is a director or an officer of the issuer of any

such security, to file statements with the Commission disclosing the

amount of all equity securities of the issuer of which he is the beneficial owner and changes in such ownership. Copies of such statements

must also be filed with exchanges on which securities are listed. Similar provisions applicable to insiders of registered public-utility holding companies and registered closed-end investment companies are

contained in Section 17(a) of the Public Utility Holding Company

Act and Section 30(f) of the Investment Company Act.

During the fiscal year, 85,283 ownership reports (13,494 initial

statements of ownership on Form 3 and 71,789 statements of changes

in ownership on Form 4) were filed with the Commission. This is a

decrease of 10,949 reports from the record high of 96,232 reports filed

during the 1966 fiscal year which included a large number of initial

statements by insiders of issuers of over-the-counter securities registered under Section 12(g).
42 SECURITIES AND EXCHANGE COMM:ISSION

All ownership reports are made available for public inspection as

soon as they are filed at the Commission's officein 1Vashington and at

the exchanges where copies are filed. In addition, the information contained in reports filed with the Commission is summarized and published in the monthly "Official Summary of Security Transactions and

Holdings," which is distributed by the Government Printing Officeon

a subscription basis to more than 25,000 persons.

Recovery of Short-Swing Trading Profits.-In order to prevent

insiders from making unfair use of information which they may have

obtained by reason of their relationship with a company, Section 16(b)

of the Exchange Act, Section 17(b) of the Holding Company Act, and

Section 30(f) of the Investment Company Act provide for the recovery by or on behalf of the issuer of any profit realized by insiders

(in the categories listed above) from certain purchases and sales, or

sales and purchases, of securities of the company within any period

of less than 6 months. The Commission at times participates as amicus

curiae in actions to recover such profits when it deems it important to

present its views regarding the interpretation of the statutory provisions or of the exemptive rules adopted by the Commission thereunder. Two such cases are discussed in Part V of this report.

Investigations With Respect to Reporting and Proxy Provisions

Section 21(a) of the Exchange Act authorizes the Commission to

make such investigations as it deems necessary to determine whether

any person has violated or is about to violate any provision of the Act

or any rule or regulation thereunder. The Commission is authorized,

for this purpose, to administer oaths, subpoena witnesses, compel their

attendance, take evidence and require the production of records. The

following investigations were undertaken pursuant to Section 21(a)

in connection with the enforcement of the reporting provisions of

Sections 12, 13, 14 and 15(d) of the Act and the rules thereunder, particularly those provisions relating to the filing of annual and other

periodic reports and proxy material:

Investigations pending at beginning of fiscal year___________________ 38

Investigations initiated during fiscal year 10

48

Investigations closed during fiscal year____________________________ 15

Investigations pending at close of fiscal year________________________ 33

ACCOUNTING AND AUDITING MAITERS

The several Acts administered by the Commission reflect a recognition by Congress that dependable financial statements of a company

are indispensable to an informed investment decision regarding its
THIRTY-TEITRD~AL REPORT 43

securities. The value of such statements is directly dependent on the

soundness of the judgment exercised in applying accounting principles

and practices in their preparation, and on the adequacy and reliability

of the work done by public accountants who certify the statements.

A major objective of the Commission has been to improve accounting

and auditing standards and to assist in the establishment and maintenance of high standards of professional conduct by certifying

accountants. The primary responsibility for this program rests with

the Chief Accountant of the Commission.

Pursuant to the Commission's broad rulemaking power regarding

the preparation and presentation of financial information, it has

adopted a basic accounting regulation (Regulation S-X) which,

together with opinions on accounting principles published as "Accounting Series Releases," governs the form and content of financial

statements filed under the statutes administered by the Commission.

The Commission has also formulated rules with respect to accounting

for and auditing of brokers and dealers, and has prescribed uniform

systems of accounts for companies subject to the Public Utility Holding Company Act of 1935. The accounting rules and the opinions of

the Commission and its decisions in particular cases have contributed

to clarification and wider acceptance of the accounting principles and

practices and auditing standards developed by the profession and

generally followed in the preparation of financial statements.

In the large area of financial reporting not covered by its rules, the

Commission's principal means of protecting investors from inadequate

or improper financial reporting is by requiring a certificate of an

independent public accountant, based on an audit performed in accordance with generally accepted auditing standards, which expresses

an opinion as to whether the financial statements are presented fairly

in conformity with accounting principles and practices which are

recognized as sound and which have attained general acceptance. The

requirement of the opinion of an independent accountant is designed

to secure for the benefit of public investors the detached objectivity

of a knowledgeable person not connected with the management.

In order to keep abreast of changes and new developments in financial and economic conditions and in recognition of the need for a

continuous exchange of views and information between the Commission's staff and outside accountants regarding appropriate accounting

and auditing policies, procedures and practices for the protection of

investors, the staff maintains continuing contact with individual

accountants, other government agencies, and various professional organizations. These include the American Accounting Association, the

American Institute of Certified Public Accountants, the American
44 SECURITIES AND EXCHANGE COMMISSION

Petroleum Institute, the Financial Analysts Federation, the Financial

Executives Institute, and the National Association of Railroad and

Utilities Commissioners.

Opinions of Accounting Principles Board

The Accounting Principles Board of the American Institute of

Certified Public Accountants performs a vital function in the improvement of accounting standards and practices. The work of the Board

is reflected in accounting research studies and opinions for the guidance of the profession. Drafts of these studies and opinions are

referred to the Commission's accounting staff for review and comment

prior to publication. During the fiscal year significant opinions were

issued by the Board which pertained to accounting for the cost of

pension plans and to reporting the results of operations. The Board's

opinion on accounting for pension costs provides that pension costs

within specified minimum and maximum limits shall be accrued on a

consistent basis from year to year. Previously, alternative practices

were permitted that resulted in substantial differences in accounting

among companies and variations within a company in accounting for

costs between years.

The opinion on reporting the results of operations provides improved

standards in two major problem areas. One part of the opinion specifies that net income shall reflect all items of profit and loss recognized

during a period except for prior period adjustments, and that extraordinary items of income and expense shall be segregated from the

results of ordinary operations and be shown separately in the income

statement. These provisions accord closely with SEC requirements as

published in Regulation S-X.

In the second part of the opinion, additional guidelines were promulgated for the computation and reporting of earnings per share of

common stock, which have resolved a number of difficult problems in

this area. One aspect of the opinion which relates to the determination

of the effect of convertible securities on earnings per share is particularly timely, since convertibles have become increasingly popular in

recent years.

An omnibus opinion was also issued which provides guidelines for

the profession in a number of areas of lesser significance. The Board

has indicated that it expects to issue several additional opinions by

early 1968.

Reporting by Foreign Issuers

In connection with the adoption by the Commission during the fiscal

year of rules applicable to foreign issuers and the revision of related

reporting forms, as described at pages 13-15 above, the accounting
THIRTY -THIRD ANNUAL REPORT 45

requirements applicable to financial data to be provided under such

rules were also revised. Under the revised requirements, foreign issuers that are registered or are required to register and file periodic

reports under the Securities Exchange Act must file the financial statements, schedules and accountants' certificates which would be required

of domestic issuers. Any material variation in accounting principles

or practices from the form and content of financial statements prescribed in Regulation S-X must be disclosed and, if practicable, the

effect of each such variation must be given. As noted previously, foreign issuers which have not sought a public market for their securities

in the United States through a public offering or a stock exhange

listing and who have more than 300 American security holders, may

obtain exemption from the registration and reporting requirements if

they file with the Commission certain specified information which they

publish abroad. Foreign issuers which have fewer than 300 American

security holders are exempt from the requirements.

Reporting by Diversified Companies

The increasing number of business acquisitions and mergers in

recent years, particularly the diversified type, has caused the Commission to explore the need for more detailed reporting on the disparate

operations of registrants who are broadly diversified. During the year

the staff has been considering the problems involved in any extension

of requirements in this area of financial reporting, particularly with

respect to the feasibility of eliciting by rule, from all companies affected, additional information meaningful to investors.

In this connection the staff has consulted with business and professional groups. The Commission has authorized the Chief Accountant

to serve on an advisory board, representing various sectors of the

accounting, financial and industrial communities, in connection with

a comprehensive study and survey of all aspects of the problem being

conducted under the sponsorship of the Financial Executives Institute.

The staff is also considering many comments made by individuals,

corporations and organizations and the growing volume of current

literature being published on the subject.

Staff surveys have indicated that there has been an increase in voluntary disclosures by diversified companies in recent annual reports to

stockholders. More companies have provided breakdowns of sales by

divisions or product lines, and there has been some increase in the

reporting of profits on comparable bases. This trend will be taken into

account in the development of practical reporting standards.

Other Current Developments

The Chief Accountant and his staff cooperated with the Commission's Division of Corporate Regulation in the preparation of a
46 SECURITIES AND EXCHANGE COMMISSION

proposal to revise its Uniform System of Accounts for Mutual Service

Companies and Subsidiary Service Companies. The purpose of the

proposal was to eliminate a requirement that service companies retain

their records permanently, unless otherwise authorized by the Commission, and to substitute appropriate procedures for the orderly

destruction of records, the retention of which is no longer necessary in

the public interest or for the protection of investors or consumers.

The revision was adopted by the Commission on August 12, 1966.13

During the year the Chief Accountant's staff cooperated with the

Division of Trading and Markets in the preparation of a release 14

interpreting Rule 15c3-1, the "net capital" rule, under the Securities

Exchange Act. The release is more fully described at page 71 of this

report.

A revision of Form X-17A-5, the form for the annual report of

financial condition required to be filed by brokers and dealers pursuant

to Section 17 of the Securities Exchange Act, was prepared by the

Division of Trading and Markets and the Chief Accountant's Office,

after consideration of comments received on a proposed revision 15 of

the form. The revision was adopted by the Commission on October 3,

1967.16

Resignation of Accountant From Practice Before Commission

On the basis of information furnished to the Commission in a

nonpublie investigative proceeding conducted during the fiscal year,

the Commission had reason to believe that a certified public accountant

may have failed to adhere in a number of respects to generally accepted

auditing standards and the Commission's minimum audit requirements,

in connection with the preparation and submission to the Commission

of certain financial statements in accordance with the requirements of

Rule 17a-5 under the Securities Exchange Act for reports by brokers

and dealers.

The accountant, without admitting or denying any such lack of

adherence, tendered his resignation in which he agreed not to appear

or practice before the Commission in the future. The Commission

determined that in view of the resignation no further proceedings

were necessary and entered an order accepting the resignation."

,. Holding Company Act Release No. 15540 and Accounting Series Release

No.l06.

l< Securities Exchange Act Release No. 8024 and Accounting Series Release

No. 107 (January 18, 19(7).

15 Securities Exchange Act Release No. 7683 (August 23,19(5). See 31st Annual

Report, p, 145,and 32nd Annual Report, p. 135.

II Securities Exchange Act Release No. 8172.

11 Accounting Series Release No. 108 (February 9, 1967).
TEIRTY-TEITRD ~AL REPORT 47

CIVIL LITIGATION INVOLVING DISCLOSURE MATTERS

Summarized below are some of the more significant civil court cases

relating to disclosure matters in which the Commission participated

either as a party or as amicus curiae during the fiscal year. Civil

proceedings related to other phases of the Commission's work are discussed in Parts V-VIII of this report.

S.E.O. v, North American Beaver Associatiorc" involves the construction of the term "investment contract," which is included in the

definitions of "security" in both the Securities Act and the Exchange

Act. The court, in granting the Commission's motion for a preliminary

injunction, held that the combined activities of the seven corporate and

three individual defendants in selling live beaver and contracts for

their care, management, replacement and breeding to members of the

public constituted an investment contract.

One of the defendants appealed to the Court of Appeals for the

Tenth Circuit," contending that the activities of each of the defendants should be measured separately because none owns stock of the

other. The Commission contends that the absence of stock holdings

among the defendants is unimportant, since they all acted together

and would have to act together in order to continue their business.

Previously the defendants had carried out all aspects of their business

through one business entity.

InS.E.O. v. Great American Industries, Inc.,20 the corporate defendant had purchased certain mining properties through issuance of its

securities. A substantial portion of the securities went to persons whose

only role in the transactions was claimed to have been as .finders. The

facts regarding the transfer of the shares to these .finders were not

disclosed inreports filed with the Commission and releases issued to the

press which described the purchase transactions. The district court held

that this information was not material, and that in order to obtain

injunctive relief the Commission was required to prove that the facts

were actually known to those preparing the reports and press releases.

The Commission appealed to the Court of Appeals for the Second

Circuit with respect to these and other points.

In Fischer v, Kletz,,21 the district court, agreeing with the Commission that "as a statutory 'independent public accountant' " a .firm of

accountants engaged to audit and certify financial statements to be

included in reports to be .filed with the Commission had assumed

responsibilities not only to its corporate client but to the stockholders

18 D. Utah, ~172-66.

10 Case No. 9199.

"259F. Supp. 99 (S.D. N.Y., 1966).

11266 F. Supp.180 (S.D. N.Y., 1967).

281-G77--38---0
48 SECURITIES AND EXCHANGE COMMISSION

of the corporation and the public as well, held that the accounting firm

was under a duty to disclose material information allegedly received

by it after its certification which indicated that the financial statements

were inaccurate. The court further held that the accountants could be

liable for damages at common law for violation of that duty but did

not reach any decision on the position urged by the Commission that

such violation could also give rise to a private right of action under

Section10(b) of the Exchange Act and Rule 10b-5 thereunder.

InBarnes v, Osofsky,22 the Court of Appeals for the Second Circuit

held that a civil action to impose liability for untrue or misleading

statements or omissions in a registration statement under Section 11 of

the Securities Act may be maintained only by persons who purchase

securities that are the direct subject of the prospectus and registration

statement. The court adopted the view urged by the Commission,

amicus curiae, that as to open market purchasers liability extends only

to purchasers of the registered shares and not to purchasers of previously outstanding shares. The court observed that it is for this reason

that a private action under Section 10 (b) of the Exchange Act does

not simply duplicate the remedy already afforded by Section 11 of

the Securities Act.

CRIMINAL PROSECUTIONS INVOLVING DISCLOSURE VIOLATIONS

During the year convictions were obtained or indictments returned

in several cases referred by the Commission to the Department of Justice involving the filing of registration statements or periodic reports

which the Commission had considered were so seriously false or misleading as to warrant criminal prosecution.

Robert M. Swa:ffield and Stanley W. Stanick were convicted in

August 1966 of filing a false registration statement and of conspiracy

to violate the anti-fraud and false statement provisions of the Securities Act.23 Through the alteration and manipulation of the financial

records of a subsidiary of Shinn Industries, Inc., the defendants understated the net losses and overstated the assets of Shinn and caused such

figures to appear in a registration statement and in prospectuses circulated to the investing public in connection with the sale of $900,000

worth of common stock of Shinn. The defendants were each fined

$5,000, but their sentences were suspended and they were placed on

probation for 3 years.

In May 1967, Alfred Dallago, a former officer and director of Lancer

Industries, Inc., was convicted of conspiracy to violate the anti-fraud

and false statement provisions of the Securities Act and of violating

11373 F. 2d 269 (1967).

II S. D. Cal, Cr. No. 35688-IH.
THIRTY-THIRD ANNUAL REPORT 49

the false statement provision of the Exchange Act in connection with

the filing by Lancer of amendments to a registration statement and of

an annual report.'" Dallago caused fictitious sales and purchases to

be recorded on Lancer's books, creating the impression that sales

volume was increasing and that assets providing a basis for further

growth were being acquired, and caused figures reflecting these fictitious transactions to appear in financial information filed with the

Commission.

Louis Wolfson and Elkin Gerbert, along with three other persons,

were indicted for conspiring to violate, and violations of, the antifraud and reporting provisions of the Exchange Act.25 Among other

things, the defendants are charged with filing with the Commission

and the New York Stock Exchange a false and misleading balance

sheet as a part of the annual report filed by Merritt-Chapman & Scott

Corp. Wolfson and Gerbert are also charged with perjury, allegedly

committed when testifying in a Commission investigation of transactions in Merritt-Chapman stock. In a separate case, Wolfson and Gerbert were indicted for distributing a large block of stock of Continental Enterprises, Inc., a corporation which they allegedly controlled,

without complying with the registration requirements of Section 5

of the Securities Act.26 Subsequent to the end of the fiscal year, they

were found guilty on all counts of the indictment in the latter case.

Wolfson was sentenced to 1 year in prison and a $100,000 fine, Gerbert

to 6 months and a $50,000 fine.

In another case, Gerald W. Eskow, former president of Yale Express System, Inc. and Fred H. Mackensen, Yale's former administrative vice president, were indicted in February 1967 for violations

of the Mail Fraud Statute in connection with the mailing of false Yale

financial statements for the purpose of inducing major lending institutions to purchase over $2 million of Yale's notes." Mackensen and

Norman Goldwasser, Yale's former director of accounting, are also

charged with causing Yale to file reports containing false information

regarding Yale's financial condition with the Commission, the New

York Stock Exchange and the Interstate Commerce Commission.

The case is awaiting trial.

Harold Roth, president and chairman of the Board of Continental

Vending Machine Corporation, and three certified public accountants

were indicted in October 1966 for conspiring to file a false annual report for Continental Vending with the Commission and the American

Stock Exchange." In July 1966, Roth and two other persons had been

.. D.D.C., Cr. No. 341-66 .

.. S.D.N.Y., 66 Cr. 832.

.. S.D.N.Y., 66 Cr. 720.

., S.D.N.Y., 67 Cr. 145

.. S.D.N.Y. 66 Cr. 831.

•
50 SECURITIES AND EXCHANGE COMMISSION

indicted for violations of the anti-fraud provisions of the securities

laws, the ownership reporting provisions of the Exchange Act and the

registration provisions of the Securities Act, in connection with an

alleged scheme to defraud Continental Vending by causing it to lend

over $16% million to the defendants, their nominees and associates,

who used the funds to finance their personal stock transactions," Both

cases are awaiting trial.

In a criminal case involving an important application of principles

regarding the availability of the so-called private offering exemption

from the registration requirements of the Securities Act, the Court of

Appeals for the Fourth Circuit, in U.S. v. Oueter Ohannel Wing 007'-

poration,SO affirmed the conviction of the defendant corporation and

Willard T. Custer, its president, for criminal contempt for selling unregistered securities in violation of an injunction obtained by the

Commission.

The court ruled that the question whether the claimed exemption

was available was controlled by the Supreme Court's decision in S.E.O.

v. Ralston Purina Oompany,Sl where it was held that the exemption is

available only where the persons to whom the securities are offered

have "access to the same kind of information that the Act would make

available in the form of a registration statement." Here that test was

not met, and the court held that the claimed "sophistication" of the

purchasers was not a substitute. The court further held that it is not

necessarily a basis for exemption that the issuer requires purchasers

to agree to hold the securities for investment and causes a legend restricting transfer to be imprinted on the stock certificates. Finally, the

court held that for a criminal contempt conviction it was not necessary

to prove specific intent to violate the injunction; it was enough to

show that the defendants intentionally committed the acts constituting

the violation with full knowledge of the relevant circumstances.

EXEMPTION FOR SECURITIES OF INTERNATIONAL BANKS

International Bank for Reconstruction and Development

Section 15 of the Bretton Woods Agreements Act, as amended, exempts from registration under both the Securities Act of 1933 and the

Securities Exchange Act of 1934 securities issued, or guaranteed as to

both principal and interest, by the International Bank for Reconstruction and Development. The Bank is required to file with the Commission such annual and other reports with respect to such securities as

the Commission determines to be appropriate in view of the special

.. S.D.N.Y. 66 Cr. 539

.. 376 F. 2d 675 (1967).

81346 U.S. 119 (1953).

•
TEITRTY-TEITRD~AL REPORT 51

character of the Bank and its operations, and necessary in the public

interest or for the protection of investors. Pursuant to this authority,

the Commission has adopted rules requiring the Bank to file quarterly

reports and also to file copies of each annual report of the Bank to

its board of governors. The Bank is also required to file reports with

the Commission in advance of any distribution in the United States

of its primary obligations. The Commission, acting in consultation

with the National Advisory Council on International Monetary and

Financial Problems, is authorized to suspend the exemption at any

time as to any or all securities issued or guaranteed by the Bank

during the period of such suspension. The following summary of the

Bank's activities reflects information submitted by the Bank to the

Commission.

The Bank reported a net income of $170 million for the fiscal year

ending June 30,1967. This compared with net earnings of $144million

in the fiscal year 1966.

The Executive Directors have allocated $160million from the year's

net income to the Supplemental Reserve against losses on loans and

guarantees, increasing it to $892 million. This raised the Bank's total

reserves, including the Special Reserve, to $1,183million. The Executive Directors reported that they have decided to recommend to the

Board of Governors that $10 million, the balance of the year's net

income, be transferred to the Bank's affiliate, the International Development Association.

Gross income for the fiscal year 1967 was $331 million, compared

with $292 million in the preceding year. Expenses, which included

$131 million for interest on Bank borrowing, bond issuance and other

financial expenses, totaled $162 million, compared with $148 million

last year.

During the year, the Bank made 47 loans totaling $877 million, including a loan of $100 million to the Bank's affiliate, the International

Finance Corporation, compared with a total of $839 million last year.

The loans were made in Brazil (five loans), Cameroon, Chile, Republic

of China, Colombia (two loans), Congo (Brazzaville), Cyprus, Ecuador, Guatemala, Honduras (two loans), Iceland, India, Iran, Iraq,

Jamaica (two loans), Japan, Kenya, Tanzania and Uganda, Malaysia

(two loans), Nicaragua, Pakistan (two loans) , Peru, Philippines (two

loans), Senegal, Singapore (two loans), South Africa, Swaziland,

Thailand (two loans), Trinidad and Tobago (two loans), Tunisia,

Turkey, Venezuela, Yugoslavia and Zambia. This brought the total

number of loans to 508 (including IFC) in 82 countries and territories

and raised the gross total of commitments to $10,671million. By June

30, as a result of cancellations, exchange adjustments, repayments and
52 SECURITIES AND EXCHANGE COMMISSION

sales of loans, the portion of loans signed still retained by the Bank

had been reduced to $7,122 million.

During the year the Bank sold or agreed to sell $69 million principal

amounts of loans, compared with sales of $82 million last year. On

June 30, the total of such sales was $2,035 million, of which all except

$69 million had been made without the Bank's guarantee.

On June 30, the outstanding funded debt of the Bank was $3,075.2

million, reflecting a net increase of $269.4 million in the past year.

During the year the funded debt was increased through the public sale

of Can$20 million (US$18.5 million) of Canadian dollar bonds, $425

million of U.S. dollar bonds of which $273.1 million were sold under

delayed delivery arrangements, and SwF60 million (US$14 million)

of Swiss franc bonds, the private placement of bonds and notes of

$232 million, DM:128 million (US$32 million) and SwF33.3 million

(US$7.7 million), and the issuance of $39.1 million of bonds under

delayed delivery arrangements. The debt was decreased through the

retirement of bonds and notes of $144 million, DM80 million (U8$20

million) and SwF33,333,333 (US$7.8 million), and by purchase and

sinking fund transactions amounting to $54.1 million.

During the year Singapore, Guyana and Indonesia became members

of the Bank, and the following eight countries increased their subscription to the Bank's capital: Syrian Arab Republic, Morocco,

Venezuela, Iraq, Canada, Nicaragua, Greece and Liberia. Thus on

June 30, 1967 there were 106 member countries and the subscribed

capital of the Bank amounted to $22,849.8 million.

Inter-American Development Bank

The Inter-American Development Bank Act, which authorizes the

United States to participate in the Inter-American Development Bank,

provides an exemption for certain securities which may be issued or

guaranteed by the Bank similar to that provided for securities of the

International Bank for Reconstruction and Development. Acting pursuant to this authority, the Commission adopted Regulation lA, which

requires the Bank to file with the Commission substantially the same

information, documents and reports as are required from the International Bank for Reconstruction and Development. The Bank is also

required to file a report with the Commission prior to the sale of any

of its primary obligations to the public in the United States. The following summary of the Bank's activities reflects information submitted by the Bank to the Commission.

During the year ended June 30, 1967, the Bank made 15 loans totaling

the equivalent of $158,740,000 from its ordinary capital resources,

bringing the gross total of loan commitments outstanding to 144,

aggregating $831,089,000. During the year, the Bank sold or agreed
THIRTY-THIRD ANNUAL REPORT 53

to sell $5,158,500 in participations in the aforesaid loans, all of such

participations being without the guarantee of the Bank, The loans

from the Bank's ordinary capital resources were made in Argentina,

Brazil, Chile, Colombia, Costa Rica, El Salvador, Guatemala, Mexico,

Nicaragua, Peru and Venezuela.

During the year the Bank also made 4'7loans totaling the equivalent

of $295,905,000 from its Fund for Special Operations, bringing the

gross total of loan commitments outstanding to 144, aggregating

$'756,148,000.The Bank made no loans during the year from the Social

Progress Trust Fund, which it administers under an Agreement with

the United States, leaving the gross total of loan commitments out.

standing from that Fund at 11'7,aggregating $501,226,000.

On June 30, 196'7,the outstanding funded debt of the ordinary capital resources of the Bank was the equivalent of $442,894,000, reflecting

a net increase in the past year of the equivalent of $68,994,000. During

the year the funded debt was increased through a public bond issue in

Switzerland in the amount of SwF 50,000,000 (US $11,434,000), a public offering in the United States of $50,000,000 of bonds, the private

placement in Latin America of an issue of $30,000,000 of short-term

dollar bonds, and the drawing under a loan agreement with the ExportImport Bank of Japan of the equivalent of $2,560,000 in Japanese yen.

The funded debt was decreased through the retirement of $25 million

of short-term dollar bonds.

The subscribed ordinary capital of the Bank on June 30,1967, was

the equivalent of $1,'769,820,000 of which $1,388,240,000 represented

callable capital.

Asian Development Bank

The Asian Development Bank Act, approved March 16, 1966, authorizes United States participation in the Asian Development Bank

and provides an exemption for certain securities which may be issued

or guaranteed by the Bank similar to the exemptions accorded the

International Bank for Reconstruction and Development and the

Inter-American Development Bank. The Agreement establishing this

organization became effective August 22, 1966, and the Bank formally

opened for business in Manila, the Philippines, on December 19, 1966.

By the end of the 1967 fiscal year, the Bank had received 20 percent

of its authorized paid-in capital of $550 million. Another $550 million

is callable. No bond issues had been placed, and no loans extended by

June 30, 1967. The Bank has received a $250,000 technical assistance

grant from the United States.

TRUST INDENTURE ACf OF 1939

This Act requires that bonds, debentures, notes, and similar debt

securities offered for public sale, except as specifically exempted, be
-- 

54 SECURITIES AND EXCHANGE COMMISSION 

issued under an indenture which meets the requirements of the Act and 

has been duly qualified mith the Commission. 

The provisions of the Act are closely integrated with the requirements of the Securities Act. Registration pursuant to the Securities 

Act of securities to he issued under a trust indenture subject to the 

Trust Indenture Act is not permitted to become effective unless the 

indenture conforms to the requirements of the latter Act designed to 

safeguard the rights and interests of the purchasers. Moreover, specified information about the trustee and the indenture must be included 

in the registration statement. 

The Act was passed after studies by the Commission had revealed 

the frequency with which trust indentures failed to provide minimum 

protections for security holders and absolved so-called trustees from 

minimum obligations in the discharge of their trusts. It requires that 

the indenture trustee be free of conflicting interests which might interfere with the faithful exercise of its duties in behalf of the purchasers 

of the securities. It requires also that the trustee be a corporation with 

minimum combined capital and surplus; imposes high standards of 

conduct and responsibility on the trustee; precludes preferential collection of certain claims owing to the trustee by the issuer in the event 

of default; provides for the issuer's supplying evidence to the trustee 

of compliance with indenture terms and conditions such as those relatipg to the release of substitution of mortgaged property, issuance 

of new securities or satisfaction of the indenture; and provides for 

reports and notices by the trustee to security holders. Other projvisions 

of the Act prohibit impairment of the security holders' right to sue 

individually for principal and interest except under certain circumstances, and require the maintenance of a list of security holders which 

may be used by them to communicate mith each other regarding their 

rights as security holders. 

Number ofIndentures filed under the Trust Indenture Act of 1939 

I h'gp( Agwegste 

amount 

Indentures ending Tune 30,1966............................................ 33 $%0, w.703 


~ndenturesLed during ~scdyear........................................... 493 13,930,206,911 


Total for disposal...................................................... 456 14,620,865,620 


Disposition during 5.%alyear: Indentures ualaed ..................................................... 363 11,910,iM.m
 Indentures &18tsd by amendment or wlthdiaivn. ....................... 20 317,193,861


Indentura~ pending June 30.1967.. ...................................... 73 2,362,974 830 


Total.................................................................. 466 14,8X,866,620 

Pacific Coast Stock Exchange

Philadelphia-Baltimore- Washington

Stock Exchange

Pittsburgh Stock Exchange

Salt Lake Stock Exchange

San Francisco Mining Exchange 1

Spokane Stock Exchange

PART IV

REGULATION OF SECURITIES MARKETS

REGULATION OF EXCHANGES

Registration and Exemption of Exchanges

As of June 30, 1967, 14 stock exchanges were registered under Section

6 of the Securities Exchange Act of 1934 as national securities

exchanges:

American Stock Exchange

Boston Stock Exchange

Chicago Board of Trade

Cincinnati Stock Exchange

Detroit Stock Exchange

Midwest Stock Exchange

National Stock Exchange

New York Stock Exchange

Pursuant to Section 5 of the Exchange Act, the Commission has exempted three exchanges from registration because of the limited volume of transactions effected on them:

Colorado Springs Stock Exchange Richmond Stock Exchange

Honolulu Stock Exchange

Review of Exchange Rules and Procedures

Rule 17a-8 promulgated under Section 17(a) of the Exchange Act

provides that each national securities exchange must file with the

Commission a report of any proposed amendment to or other change

in its rules and practices not less than 3 weeks (or such shorter period

as the Commission may authorize) before taking any action to effectuate the change. These proposals are submitted for review and comment to the Commission's Division of Trading and Markets. The

Division also reviews, on a continuing basis, the existing rules, regulations, procedures, forms and practices of all national securities

exchanges in order to ascertain the effectiveness of the application and

enforcement by the exchanges of their own rules; to determine the

adequacy of the rules of the exchanges, and of related statutory provisions and rules administered by the Commission, in light of changing market conditions; and to anticipate and define problem areas

1Subsequent to the end of the fiscal year, an order of the Commission terminating the registration of the San Francisco Mining Exchange became eft'ective.

See p. 91, infra.

65
56 SECURITIES AND EXCHANGE COMMISSION

so that members of the Commission staff can meet with representatives

of the exchanges to work out salutary procedures within the framework of cooperative regulation.

NYSE Commission Rate Schedule-Kaplan v, Lehman Bros.

In Kaplan v, Lehman Bros., et 01.,2 a shareholder suing on behalf

of certain mutual funds alleged that the New York Stock Exchange,

in establishing and enforcing its minimum commission rate schedule,

was guilty of a per se violation of the anti-trust laws. The district

court granted summary judgment for the defendants, holding that

the Exchange's action was within the authority conferred on it by

the Exchange Act and therefore was not illegal per se. The court

added that if the complaint were to be construed as an attack on the

reasonableness of the commission rate structure or level, such matters

were clearly within the jurisdiction of the Commission under the

Exchange Act and should therefore be brought to the Commission

for its initial adjudication.

The Commission participated as amicus curiae in the Court of

Appeals for the Seventh Circuit, urging affirmance. That court

affirmed, holding that the fixing of minimum commission rates by

the Exchange was not a violation of the anti-trust laws, since such

action by the Exchange was contemplated by the Exchange Act and

is subject to Commission review and oversight under Section 19(b)

of that Act.

On November 13, 1967, a petition for a writ of certiorari was denied

by the Supreme Court.

Inspections of Exchanges

Pursuant to the regulatory scheme of the Exchange Act the Commission actively oversees the discharge by the national securities

exchanges of their self-regulatory responsibilities . .As part of this

program, the Office of Regulation in the Division of Trading and

Markets conducts regular inspections of various phases of exchange

activity. During the past fiscal year, the Office of Regulation conducted two inspections of the New York Stock Exchange and one of

the American Stock Exchange, covering such areas as registered

trader surveillance and exchange regulation of the floor and off-floor

activities of their members. In addition, the Office carried out extensive general inspections of the Pacific Coast Stock Exchange and

Philadelphia-Baltimore-Washington Stock Exchange. The inspection

program provides a means of ensuring exchange compliance with

regulatory responsibilities and enables the Commission to recommend

"250 F. Supp. 562 (N.D. ru, 1966), afjd 371 F. 2d 409 (O.A. 7, 1967), cert. den.

S6 L. W. 3204 (November 13, 1967).
THIRTY-THIRD ANNUAL REPORT 57

improvements and refinements designed to increase the effectiveness

of self-regulation.

In cases where it appeared that revisions in internal policies were

desirable in order to improve an exchange's performance, the Commission staff communicated its views to the particular exchange and

discussed the matters with exchange personnel to arrive at appropriate

solutions.

STATISTICS RELATING TO SECURITIES TRADED ON EXCHANGES

Number of Issuers and Securities

As of June 30,1967,4,573 stock and bond issues, representing 2,748

issuers, were admitted to trading on securities exchanges in the United

States. Of these, 4,370 securities issues (3,008 stock issues and 1,362

bond issues), representing 2,606 issuers, were listed and registered on

national securities exchanges, the balance consisting primarily of securities admitted to unlisted trading privileges and securities listed on

exempted exchanges. The listed and registered issues included 1,686

stock issues and 1,250 bond issues, representing 1,478 issuers, listed and

registered on the New York Stock Exchange. Thus, with reference to

listed and registered securities, 56.7 percent of the issuers, 56.1 percent

of the stock issues and 91.8 percent of the bond issues were on the New

York Stock Exchange. Table 4 in the Appendix to this report contains

comprehensive statistics as to the number of securities issues admitted

to exchange trading and the number of issuers involved.

During the 1967 fiscal year, 158 issuers listed and registered securities on a national securities exchange for the first time, while the registration of all securities of 130 issuers was terminated. A total of 395

applications for registration of securities on exchanges was filed.

Markel Value of Securities Available for Trading

As of December 31, 1966, the market value of stocks and bonds admitted to trading on U.S. stock exchanges was approximately $644

billion. The tables below show various components of this figure.

With reference to the tables, .jt should be noted that issues traded

on either the New York or American Stock Exchange are not traded

on the other of those exchanges. Many of these issues are also traded

on the so-called regional exchanges. The figures below for "other exchanges," however, show only the number of issues traded solely on

the regional exchanges. The figures in the tables exclude issues suspended from trading and a few inactively traded issues for which

quotations were not available.
i 

I 

I 

I 

I 

I 

I 

i 


I 

SECURITIES AND EXCHANGE COMMISSION 58 

s mNew York Stack Exchange .............................................. *marloan stack Ex6 e 0 

Exdoloslv& on otherxngas.......................................... 

1.ea3 

1,g 3,81

TOC~ ~tok~ 3,IW 614,a7

Bonds: NW york st&&~~~haog~ .............................................. Amerl- Stock Erchange............................................... E.clusively on other er~hangas.......................................... 

1,na 

88 

11 

128,1

I,m

1

Total bonds........................................................... 1,%1 128,68

Total stacks and bonds................................................ 4,493 843,98

.IOOlUdes warrants. 

The number and market value as of December 31,1966, of preferred 

and common stocks separately were as follows: 

PM~medstocks Commoa staoks 

Nm. 

ber 

Market 

Value 

(nxillions) 

Nunber 

Market 

value 

(mlluons) 

New York Stoh Eaohenge.~ .......................... American Stock Exchan e ............................. Exolu~ivelyon other ex angan... ..................... 

588 

91 

108 $. 

75? 1 . 926 

$47487

% 70

4 18

TPt.1 ................ . 697 11,619 2509 6Q7

The 3,106 stock issues represented over 13.2 billion shares. 

The New York Stock Exchange has reported aggregate marke

values of all stocks listed therean monthly since December 31, 1924

when the figure was $27.1 billion. The American Stock Exchange has 

reported totals as of December 31 annually since 1936. Aggregates for 

stocks exclusively on the remaining exchanges have been compiled as 

of December 31 annually by the Commission since 1948. The available 

dats since 1936 appear in Table 5 in the Appendix of this Annual 

Report. It should be noted that changes in aggregate market valuw 

over the years reflect not only changes in prices of stocks but also such 

factors as new listings, mergers into listed compa~es, removals from 

listing and issuance of additional shsres of a listed security. 

Volume of Semitie Traded 

The total volume of securities traded on all exchanges in calendar 

1966 was 3.3 billion shares, including stocks, warrants and rights, and 

$3.7 billion principal amount of bonds. The 1966 total dollar volume 

of all issues traded was $127.9 billion. Trading in stocks increased 24 

percent in share volume and 38 percent in dollar volume over 1965

Volume continued to increase suwantially in the first 6 months of 

1967. 
THIRTY-THIRD ANNUAL REPORT 59 

The figuresbelow show the volume and value of securities traded on 

dl stock exchanges during the calendar year 1966, and the first 6 

months of 1967. Tables 6 and 7 in the appendix of this Annual Report 

contain more comprehensive statistics on volume, by exchanges. 

Volume MU1value of trading on aU e5chnnges 

(Amounts in thousands) 

I Calendar I FirstBmos. 

year 1806 1867 

vo1-B: 

stadcs (shares)...... ~..:~.. .................. 
- .

nlghtsandrarrants (umts).~ ............................ ... 
 sonas ( indpal amount m dollars) r.................................... Market us% (dollars): S-ks...~~ ..... ............................ 
 Rights and WIVTBnb................. 1.................................... 
 Bonds ...................... 
 Total ................................................................. 


*Doesnot include U.S. Cmrerwnont Bond*. 

Foreign St& on Exchangee 

The estimated market value on December 31,1966, of all shares and 

certificates representing fomign stocks on U.S. stock exchanges was 

$16.9 billion, of which $14.1 billion represented Canadian and $2.8 

billion represented other foreign stocks. 

-

Dso. i,1968 

Canadian Other iorelgn Total 

-

n ~ a value yvyOs I IrsUBs I value

The total number of foreign stocks on the exchanges as of the end 

of 1966 was unclinged from the previous year. Prior to fi~ihthe 

number had declined from 173 as of the end of 1960 to130in 1965. The 

declining trend of recent years in the percentage of bkal reported 

share volume on the American and New York Stock Exchanges 

represented by trading in foreign stooks was reversed in calendar year 

1966. On the American Stock Exchange, the percentage was 17.1, up 

from 15.1 in 1966; on the New York Stock Exchange, it was 3.6, up 

from 2.0. 

Comparative Exchange Statistics 

During fiscal year 1967, there was a moderate increase in the total 

number of stocks listed on exchanges. The slight advance in the number 

of listed stocks on the New York and American Stock Exchanges is 
60 SECURITIES AND EXCHANGE COMMISSION 

consistent with the trend of recent years. In contrast, the number of 

stocks available for trading exclusively on other exchanges has declined 

steadily over the years, and bhe current figure is lass than one-third the 

total in 1940. 

Net number of stocks on achanges 

June30 


In calendar 1966, the aggregate value of shares listed on the New 

York Sbck Exchange represented an increasing proportion of total 

share value on all exchanges as it has in most years since the late 

1940's. The percentage of the total share value accounted for by American Stock Exchange stocks remained unchanged from the previous 

year whiie the percentage for stocks traded exclusively on other exchanges continued to decline. 

Nm York Amerioan ErcluJlvdy I St@ 1 UI I

Exchange Exchange sohangs 


I I 

The figures below show the annual volume of shares traded, including rights and warrants, on all exchanges during selected years 

since 1940. In 1966, both share and dollar volume continued their 

steady climb of the past 3 years and reached new peaks. Trading was 

particularly active on the American Stock Exchange with dollar volume on that Exchange increasing 65 percent over the previous year. 

Volume on all exchanges continued at record levels during the first 

6 months of 1967. 
THIRTY-THIRD ANNUAL REPORT 61 

Bhare and dollar volume aemchanges 

Calendsr ysar 

In 1966 the ratio of share volume on the regional exchanges to the 

total on all exchanges rose slightly to halt its steady decline over the 

years. The regional exchange percentage of dollar volume increased 

or the second consecutive year. The American Stock Exchange 

of share and dollar volume have increased steadily since 

1963 while the percentages of the New York Stock Exchange have dacreased. In the first 6 months of 1967 the New York Stock Exchange 

share ratio showed a sharp drop, as the American StockExchange ratio 

rose to 27 petcent from 23 percent in 1966.In the following presentation 

stocks, warrants and rights are included. Annual data in more detail 

are shown in Appendix Table 7 in this Annual Report. 

Annual sale8 of stoclc on eachanges, in percentages 

Cdendsr year 
62 SECURITIES AND EXCHANGE COMMISSION

Block Distributions Reported by Exchanges

The usual method of distributing blocks of listed securities considered too large for the auction market on the floor of an exchange is

to resort to "secondary distributions" over the counter after the close

of exchange trading. Secondary distributions declined both in number

and value during the calendar year 1966. The 1966 secondary distributions aggregating $1,523,373,000 were slightly lower than the record

high of $1,603,107,000 reached in 1965. During the first 6 months of

1967, there were 73 secondary distributions with a total value of

$666,066,000.

Special Offering Plans were adopted by many of the exchanges in

1942, and Exchange Distribution Plans in 1953, in an effort to keep as

much trading as possible on their floors. Since 1962 there have been no

special offerings. Exchange distributions continued to decline from the

record of 72 in 1963 to 52 in 1966. However, the value of the 1966 exchange distributions was $118,349,000 compared to $107,498,000 in

1963.

Bloclc distributiom Of stocks reported by exchanges

Number I Shares in I

Shares sold I Value

offer (dollars)

12months ended December 31, 1966

Special offerings____________________________________

01 01 01 0 Exchange distnbutions _____________________________ 52 3,381,522 3,042,599 118,348,856 Secoudary dlstnbutrons ____________________________ 126 28,151,194 29,045,238 1,523,372,589

6 months ended June 30, 1967

~~~:~~~~!s~~butio;;s~~~::::::::::: ::::::::::::::: ~I 0 0 0

1,393,085 1,517,579 50,211,110 Secondary distributrons ____________________________ 15,206,253 15,905,336 666,066, 102

Details of these distnbutlons appear In the Commission's monthly Statistical Bnlletlns. Data for prior

years are shown m Appendix Table 8 m this Annual Report. Sseondary distributions Include only those

which were approved by exchanges for partloipatton by their members.

Unlisted Trading Privileges on Exchanges

The number of stocks with unlisted trading privileges which are

not also listed and registered on other exchanges continued to decline

during the fiscal year," As of June 30, 1967, there remained 103 such

issues, compared with 116 as of June 30,1966. Ten issues were removed

from the American Stock Exchange, and one each from the Pacific

Coast, Philadelphia-Baltimore-Washington, and Spokane Stock Exchanges. During the calendar year 1966, the reported volume of tradAs a result of the 1964 amendments to Section 12(f) of the Securities Exchange Act, unlisted trading privileges can be extended only for securities listed

and registered on another securities exchange. However, unlisted trading privileges in effect prior to the amendments were permitted to be eontinued,

•

•

•
TEITRTY-TEITRD~UAL REPORT 63

ing on the exchanges in stocks with only unlisted trading privileges

increased to about 23,985,000 shares, or about 0.75 percent of the total

share volume on all exchanges, from about 23,775,000 shares, or about

0.92 percent of share volume, during calendar year 1965.

About 96 percent of the 1966 volume was on the American Stock

Exchange while three other exchanges, Spokane, Honolulu and Salt

Lake, accounted for the remaining 4 percent. The share volume in

these stocks on the American Stock Exchange represented 3.2 percent

of the total share volume on that exchange.

As of June 30, 1967, there were 1,824 unlisted trading privileges on

exchanges in stocks listed and registered on other exchanges. The volume of trading in these stocks for the calendar year 1966 was reported

at about 113,613,000 shares. About 13 percent of this volume was on

the American Stock Exchange in stocks listed on regional exchanges

and 87 percent was on regional exchanges in stocks listed on the New

York or American Stock Exchanges. While the 113,613,000 shares

amounted to only 3.6 percent of the total share volume on all exchanges, they constituted substantial portions of the share volume of

most regional exchanges, as reflected in the following approximate percentages: Boston 86 percent; Cincinnati 82 percent; PhiladelphiaBaltimore-Washington 79 percent; Detroit 74 percent; Pittsburgh

60 percent; Pacific Coast 32 percent; and Midwest 29 percent.'

Applications by exchanges for unlisted trading privileges in stocks

listed on other exchanges, filed pursuant to Rule 12f-1 under Section

12(f) (1) (B) of the Securities Exchange Act, were granted by the

Commission during the fiscal year ended June 30, 1967, as follows:

Number

Stock exchanges: oJ.tock. Boston 45

Cincinnati 7

I>etroit 3

Mrrdvvest 13

Pacific Coast____________________________________________________ 6

Philadelphia Baltimore- Washington 55

PIttsburgh 4

Total__________________________________________________________ 133

I>ELISTING OF SECURITIES FROM EXCHANGES

Under Section 12( d) of the Securities Exchange Act, upon application by an issuer or an exchange securities may be withdrawn or

stricken from listing and registration in accordance with the rules of

the exchange and upon such terms as the Commission may impose for

the protection of investors.

The distribution of unll--ted stocks among the exchanges and share volume

therein are shown in Appendix Table 9.

281-517-68-6

-

•
64 SECURITIES AND EXCHANGE COMMISSION

During the .fiscal year ended June 30,1967, the Commission granted

applications by exchanges and issuers to delist 56 stock issues, representing '53issuers, and 5 bond issues. 'Since two stocks were each delisted

by two exchanges, the total of stock removals was 58 as follows:

Application filed by : Stocu Bond8

~erican Stock Exchange__________________________________ 19 5

Detroit Stock Exchange____________________________________ 1

Midwest Stock Exchange____________________________________ 7

National Stock Exchange__________________________________ 1

New York Stock Exchange__________________________________ 14

Pacific Coast Stock Exchange________________________________ 4

San Francisco Mining Exchange____________________________ 3

Salt Lake Stock Exchange__________________________________ 2

Issuer 7

Total 58 5

The seven applications by issuers which were granted during the

year removed one security each from the Boston, Detroit, National

and Pacific Coast Stock Exchanges, and three securities from the

Philadelphia- Baltimore-Washington Stock Exchange.

Delisting applications by exchanges are generally based on one or

more of the following grounds: the number of shares of the issue in

public hands or the number of share holders is insufficient; the market

value of outstanding shares or trading volume on the exchange is too

low; the issuer has failed to meet the exchange's requirements as to

earnings or financial condition; the issuer has failed to file reports with

the exchange as required; or the issuer has ceased operations or is in 'the

process of liquidation.

During the fiscal year, the Commission in two instances granted

exchange delisting applications which were opposed by the issuers involved. In Fifth, Avenue Industries Oorporation.: the company's principal operating properties had been taken by New York City through

condemnation. The New York Stock Exchange, after withholding action for some time at Fifth Avenue's request because of the pendency

of litigation regarding the condemnation award, sought to delist the

company's stock. Ingranting the application, the Commission held that

in view of the drastic reduction of the scope of the company's operating activities and their minor significance compared to the condemnation claim, the Exchange's position that the company had ceased to be

an operating company was not unreasonable. In any event, the Commission noted, it was clear that in terms of the Exchange's delisting

rules the company's operating assets had been substantially reduced

and it had discontinued a substantial portion of its operations. The

I Securities Exchange Act Release No. 7977 (October 18, 1966).
THIRTY-THIRD ANNUAL REPORT 65

Commission further held that the Exchange's action was an appropriate exercise of its function of maintaining high standards with

respect to securities admitted to trading, and that there was no basis

for requiring the Exchange to await further developments including

additional steps in the condemnation procceedings and utilization of

the funds to be received.

Fotoohrome.Tnc:" involved a provision of the American Stock Exchange's delisting policies that securities will be considered for delisting where the issuer has not operated at a net profit in any of its last

3 fiscal years. Fotochrome had sustained losses for its last 4 fiscal years.

It contended, however, that the Exchange had not in the past applied

this provision to companies in sound financial condition such as Fotochrome and that delisting should at least be deferred pending results

of the current year which it expected would show a profit. The Commission rejected these arguments. It held that even if prior delistings

involved issuers in a poorer financial condition, the Exchange, in advancing the objective of limiting the market afforded by it to securities

having suitable characteristics, should not be "straitjacketed by limited prior applications." The Commission further ruled that there was

no basis for requiring the Exchange to await the results of current

operations.

OVER-THE-COUNTER TRADING IN STOCKS LISTED ON EXCHANGES

In order to correct a dearth of information concerning over-thecounter trading in common stocks traded on national securities exchanges (the so-called "third market"), the Commission, in December

1964, adopted Rule 17a-9 under the Exchange Act which, together

with related reporting forms, provides a system for the identification

of broker-dealers making over-the-counter markets in such stocks and

for the reporting of summaries of third market transactions. Originally, the specified reports were required to be filed with respect to

over-the-counter transactions in common stocks traded on all national

securities exchanges whose annual sales volume exceeded $20 million.

During the 1967 fiscal year the Commission amended Rule 17a-9 and

the reporting forms 7 so as to limit the reporting requirements to stocks

listed on the New York Stock Exchange, which account for about 98

percent of third market volume.

Under the reporting requirements, market makers must report their

over-the-counter and exchange trading in the stocks in which they

make a market, as well as certain over-the-counter trading in other

listed common stocks. Broker-dealers who are not market makers are

Securities Exchange Act Release No. 7985 (October 24, 1966).

Securities Exchange Act Release No. 8047 (March 22, 1967).

•

•
66 SECURITIES AND EXCHANGE COMMISSION 

required to report certain large third market transactions. Coincident 

with the amendment referred to above, Rule 17a-9 and the related 

forms were further amended to provide for separate reporting of overthe-counter transactions in common stocks listed on the New York 

Stock Exchange effected with Exchange members by "nonmember 

market makers" pursuant to Rule 394(b) of the New York Stock 

Exchange and amended Rule 19b-1 under the Securities Exchange 

Act. These rules permit Exchange members to solicit qualified nonmember market makers t~ participate in the execution of orders for 

listed securities off the floor of the Exchange under designated cond1tions.B The various reports are designed to reflect all sales topersons 

other than broker-dealers, i.a, to individuals and institutions. 

During the calendar year 1966, total over-the-counter sales of common stocks listed on the New York Stock Exchange amounted to 58.2 

million shares valued at $2,873 million. This latter figure was the 

equivalent of 2.9 percent of the value of shares of common and preferred stwks traded on the New York Stock Exchange. Although 

third market volume was greater than in the previous year, it did not 

keep pace with the increased volume on the Exchange. 

In lhe first half of 1967, third market volume was larger than in 

the co+ponding period of 1966 both in aotual amounts and in relation to volume on the New YorkStock Exchange. 

Over-the-counter volume in Eommon stocks listed on 

the New York Stock Exchange 

O~er-theOvw-th% New Yarlr countersales 

counter ssles 8t00k Ex- ss 8ercent of 

of common change New York 

stmks aolume . Stool; Exchange

vO1"me 

I Share volume (thousands) 

-1ncludw ~dumsin both annmon andpreferred stooks 


STATISTICAL STUDIES 


The regular statistical activities of the Commission and its participation in the overall Government statistical program under the 

direction of the Office of Statistical Standards, Bureau of the Budget, 

'See 32nd Annnal Report, p. 3. 
TIDRTY-TIDRD ANNUAL REPORT 67

have been continued in the Commission's Office of Policy Research. The

statistical series described below are published in the Commission's

monthly Statistical Bulletin. Inaddition, current figures and analyses

of the data are published quarterly on new securities offerings, individuals' savings, stock trading of financial institutions, financial position of corporations, and plant and equipment expenditures.

Issues Registered Under the Securities Act of 1933

Monthly statistics are compiled on the number and volume of registered securities, classified by industry of issuer, type of security, and

use of proceeds. Summary statistics for the years 1935-67 are given

in Appendix Table 1 and detailed statistics for the fiscal year 1967

appear in Appendix Table 2.

New Securities Offerings

Monthly and quarterly data are compiled covering all new corporate and noncorporate issues offered for cash sale in the United States.

The series includes not only issues publicly offered but also issues privately placed, as well as other issues exempt from registration under

the Securities Act, such as intrastate offerings and offerings of railroad securities. The offerings series includes only securities actually

offered for cash sale, and only issues offered for the account of issuers.

Estimates of the net cash flow through securities transactions are

prepared quarterly and are derived by deducting from the amount of

estimated gross proceeds received by corporations through the sale of

securities the amount of estimated gross payments by corporations to

investors for securities retired. Data on gross issues, retirements and

net change in securities outstanding are presented for all corporations

and for the principal industry groups.

Individuals' Savings

The Commission compiles quarterly estimates of the volume and

composition of individuals' savings in the United States. The series

represents net increases in individuals' financial assets less net increases in debt. The study shows the aggregate amount of savings and

the form in which they occurred, such as investment in securities, expansion of bank deposits, increases in insurance and pension reserves,

etc. A reconciliation of the Commission's estimates with the personal

saving estimates of the Department of Commerce, derived in connection with its national income series, is published annually by the Department of Commerce as well as in the Securities and Exchange

Commission Statistical Bulletin.

PriYale Pension Funds

An annual survey is published of private pension plans other than

those administered by insurance companies, showing the flow of money

into these funds, the types of assets in which the funds are invested
68 SECURITIES AND EXCHANGE COMMISSION

and the principal items of income and expenditures. Quarterly data

on assets of these funds are published in the Statistical Bulletin.

Stock Trading of Financial Institutions

A new statistical series containing data on stock trading of four

principal types of financial institutions was begun with the publication of a report in June 1966. Information on purchases and sales of

common stock by private noninsured pension funds and nonlife insurance companies has been collected on a quarterly basis by the Commission since 1964; these data are combined with similar statistics

prepared for mutual funds by the Investment Company Institute and

for life insurance companies by the Institute of Life Insurance. A

quarterly release is being published.

Financial Position of Corporations

The series on the working capital position of all U.S. corporations,

excluding banks, insurance companies and savings and loan associations, shows the principal components of current assets and liabilities,

and also contains an abbreviated analysis of the sources and uses of

corporate funds.

The Commission, jointly with the Federal Trade Commission, compiles a quarterly financial report of all U.S. manufacturing concerns.

This report gives complete balance sheet data and an abbreviated

income account, data being classified by industry and size of company.

Plant and Equipment Expenditures

The Commission, together with the Department of Commerce, conducts quarterly and annual surveys of actual and anticipated plant

and equipment expenditures of all U.S. business, exclusive of agriculture. After the close of each quarter, data are released on actual

capital expenditures of that quarter and anticipated expenditures for

the next two quarters. In addition, a survey is made at the beginning

of each year of the plans for business expansion during that year.

Directory of Registered Companies

The Commission annually publishes a list of companies required

to file annual reports under the Securities Exchange Act of 1934. In

addition to an alphabetical listing, there is a listing of companies by

industry group classified according to The Standard Industrial Classification Manual.

Stock Market Data

The Commission regularly compiles statistics on the market value

and volume of sales on registered and exempted securities exchanges,

round-lot stock transactions on the New York and American Stock

Exchanges for account of members and non-members, odd-lot stock

transactions on the New York and American Stock Exchanges, odd-lot
TEITRTY-TEURD ~AL REPORT 69

transactions in 100 selected stocks on the New York Stock Exchange

and block distributions of exchange stocks. Since January 1965, the

Commission has been compiling statistics on volume of over-thecounter trading in common stocks listed on national securities exchanges (the so-called "third market") based on reports filed under

Rule 17a-9 of the Securities Exchange Act.

Data on round-lot and odd-lot trading on the New York and American Stock Exchanges are released weekly. The other stock market data

mentioned above, as well as these weekly series, are published regularly

in the Commission's Statistical Bulletin.
PART V

CONTROL OF IMPROPER PRACTICES IN

SECURITIES MARKETS

REGULATION OF BROKER-DEALER AND INVESTMENT

ADVISER PRACTICES

Registration, Financial Responsibility, Record Maintenance and Financial

Reporting Requirements

Registration.-Subject to limited exemptions, the Securities Exchange Act of 1934 requires all brokers and dealers who use the mails

or instrumentalities of interstate commerce in the conduct of an overthe-counter securities business to register with the Commission. Similarly, the Investment Advisers Act of 1940, which establishes a pattern of regulation comparable to that established by the Exchange

Act with respect to brokers and dealers, requires with certain exceptions the registration of investment advisers.

As of June 30, 1967, 4,175 broker-dealers and 1,732 investment

advisers were registered.

The following tabulation reflects various data with respect to registrations of brokers and dealers and investment advisers during the

1967 fiscal year:

Broker-Dealers

Effective registrations at close of preceding year 4,363

Applications pending at close of preceding year_____________________ 30

Applications filed during year_____________________________________ 334

Total 4,727

Applications denied______________________________________________ 5

Applications withdrawn_________________________________________ 7

Registrations withdra Wll_________________________________________ 441

Registra tions cancelied___________________________________________ 34

Registrations revoked____________________________________________ 32

Registrations effective at end of year 4,175

Applications pending at end of year_______________________________ 33

Total 4,727

70
TEITRTY-TEITRD ANNUAL REPORT

Investment AIl'Vi8ers

71

Effective registrations at close of preceding year 1,633

Applications pending at close of preceding year____________________ 26

Applications filed during year_____________________________________ 327

Total 1,986

Registrations cancelled or withdrawn_____________________________ 214

Registrations denied or revoked___________________________________ 4

Applications withdra wn__________________________________________ 9

Registrations effective at end of year 1,732

Applications pending at end of year_______________________________ 27

Total 1,986

Capital Requirements with Respect to Broker-Dealers.c -Tiule

15c3-1 under the Exchange Act, commonly known as the net capital

rule, imposes minimum net capital requirements on brokers and dealers.

Inaddition, it limits the amount of indebtedness which may be incurred

by a broker-dealer in relation to its capital, by providing that the

"aggregate indebtedness" of a broker-dealer may not exceed 20 times

the amount of its "net capital" as computed under the rule.

During the fiscal year, the Commission issued a two-part staff interpretation of, and guide to computations under, the net capital rule,

to assist brokers and dealers in complying with the rule.' Part I explains the operation of the rule, including the exemptions therefrom,

and discusses questions concerning the application of the rule frequently presented to the Division of Trading and Markets for interpretation. Part II, prepared by the Office of Chief Accountant, consists

of an example of the computation of "net capital" made by a hypothetical broker-dealer, and includes a detailed trial balance work

sheet with explanatory notes.

The Commission also amended Rule 17a-3, its recordkeeping rule,

to require brokers and dealers to prepare a record of the computation

of "aggregate indebtedness" and "net capital" at least once a month."

These computations will help to keep broker-dealers currently informed of their capital positions. At the same time, the Commission

amended Rule 17a-4 to require preservation of these net capital computations and related working papers for a 3-year period.

Financial Reports of Broker-Dealers.-Rule 17a-5 under the

Exchange Act requires registered broker-dealers to file annual reports of financial condition with the Commission. These reports must

be certified by a certified public accountant or public accountant who

is in fact independent, with certain limited exemptions applicable to

1Securities Exchange Act Release No. 8024 (January 18,1967).

• Securities Exchange Act Release No. 80?..3(January 18, 1967).
72 SECURITIES AND EXCHANGE COMMISSION

situations where certification does not appear necessary for customer

protection. During the fiscal year 3,987 reports were filed with the

Commission.

These reports enable the Commission and the public to determine

the financial position of broker-dealers. They provide one means by

which the staff of the Commission can determine whether a brokerdealer is in compliance with the net capital rule. Failure to file required

reports may result in the institution of administrative proceedings to

determine whether the public interest requires remedial action against

the registrant.

Detection of Improper Practices

Public Complaints.-The Commission has various sources of information concerning possible violations of the Federal securities laws.

A primary source is complaints by members of the general public

concerning the activities of certain persons in securities transactions.

During fiscal 1967 the Commission received some 4,000 complaints

from investors and others relating to broker-dealers and investment

advisers. The Commission's staff gives careful consideration to such

complaints and, if violations are indicated, an investigation may be

commenced. Other outside sources of information include the stock

exchanges, the National Association of Securities Dealers, Inc.,

brokerage firms, State and Canadian securities authorities, better

business bureaus, and various law enforcement agencies.

Inspections.- The program of surprise inspections of broker-dealers

and investment advisers by the Commission's staff is another important

device for the detection of improper practices. During fiscal 1967,

1,019 broker-dealer inspections and 273 investment adviser inspections

were carried out. These inspections produced indications of various

types of infractions, as shown below:

Broker-Dealers

Financial difficultles.,., ______ ______ __ 118

Improper hypothecation___________ 16

Unreasonable prices in securities purchases and sales________________ 34

Noncompliance with Regulation T_________________________________ 77

"Secret profits" 5

Noncompliance with eonflrmatlon and bookkeeping rules_____________ 545 Others 407

Total indicated vfolatlons 1,202

_
TEITRTY-TEIRD~AL REPORT

Investment Advisers

73

Books and records deficienL_______________________________________ 42

Registration application inaccurate________________________________ 53

False, misleading, or otherwise prohibited advertising_______________ 20

Improper "hedge clause" * 17

Failure to provide for nonasstgnulnlity in investment advisory contract___________________________________________________________ 14

Others 7

Total indicated violations____________________________________ 153

."Hedge clauses" used in literature distributed by investment advisers generally state,

in substance, that the information furnished is obtained from sources believed to be reliable,

but that no assurance can be given as to its accuracy. A clause of this nature may be

improper where the recipient may be led to believe that he has waived any right of action

against the investment adviser.

Section of Securities Violations.-A Section of Securities Violations is maintained by the Commission as a part of its enforcement

program to provide a further means of detecting and preventing fraud

in securities transactions. This Section maintains files which contain

information concerning persons who have been charged with, or found

in violation of, various Federal and State securities statutes, as well

as considerable information concerning Canadian violators. These

files play a valuable role in the Commission's enforcement program

and provide a clearinghouse for other enforcement agencies. The information in the files is kept current through the oooperation of

various governmental and nongovernmental agencies.

During the fiscal year, the Section received 3,869 "securities violations" letters either providing or requesting information and dispatched 1,'765 eommunications to cooperating agencies. Among other

matters, information was received from several States and Canada

respecting 104 criminal actions, 25 injunctive actions, 267 actions in

the nature of cease and desist orders and 1'70 other administrative

orders, such as denials, suspensions and revocations of registrations

of issuers, broker-dealers and salesmen. Information with respect to

5,636 persons or firms was added to the files, including information regarding 2,202 persons and firms not previously identified. As of the

end of the 1967 fiscal year, the files contained information concerning

'75,614 persons and firms.

Use of Computer for Name Searches.-The use of the Commission's

computer for "name searches" in the enforcement program has resulted in a substantial increase in the amount of information available

and the speed with which it can be obtained. The names of suspected

securities law violators are checked against the more than 1 million

entries presently stored in the computer. Upon request, the Commission

also performs "name searches" on prospective securities salesmen and
74 SECURITIES AND EXCHANGE COMMISSION

others whose names are submitted by the exchanges, the NASD and

the State securities commissions. Ifthe subject checked has been named

in formal filings with the Commission, has been a party to a proceeding, or has been involved in an investigation, such information, together with pertinent dates, relationships and cross references, is

available immediately on a printout. Formerly a time-consuming

manual search of indices and files was required.

Investigations

Each of the Acts administered by the Commission specifically authorizes it to conduct investigations to determine whether violations

of the Federal securities laws have occurred.

The nine regional officesof the Commission, with the assistance of

their respective branch offices,are chiefly responsible for the conduct

of investigations. In addition, the Office of Enforcement of the Division of Trading and Markets at the Commission's headquarters office conducts investigations dealing with matters of particular interest

or urgency, either independently or with the assistance of the regional

offices.The Office of Enforcement also exercises general supervision

over and coordinates the investigative activities of the regional offices

and recommends appropriate action to the Commission.

It is the Commission's general policy to conduct its investigations

on a confidential basis. Such a policy is necessary to effective law enforcement and to protect persons against whom unfounded or unconfirmed charges might be made. The Commission investigates many

complaints where no violation is ultimately found to have occurred.

To conduct such investigations publicly would ordinarily result in

hardship or embarrassment to many interested persons and might

affect the market for the securities involved, resulting in injury to

investors with no countervailing public benefits. Moreover, members

of the public would tend to be reluctant to furnish information concerning violations if they thought their personal affairs would be

made public. Another advantage of confidential investigations is that

persons suspected of violations are not made aware that their activities

are under surveillance, since such awareness might result in frustration or obstruction of the investigation. Accordingly, the Commission

does not generally divulge the results of a nonpublic investigation

unless it is made a matter of public record in proceedings brought

before the Commission or in the courts.

When it appears that a serious violation of the Federal securities

laws has occurred or is occurring, a full investigation is conducted.

Under certain circumstances is becomes necessary for the Commission

to issue a formal order of investigation which designates members of

its staff as officersto issue subpoenas, take testimony under oath and
TEaRTY-TEaRD ANNUAL REPORT 75

require the production of documents. Usually this procedure is resorted

to only when the subjects of the investigation and others involved are

uncooperative and it becomes necessary to invoke the subpoena power

to complete the investigation. During the fiscal year ended June 30,

1967, the Commission issued 170 such formal orders.

The following table reflects in summarized form the investigative

activities of the Commission during fiscal 1967:

Investigations 01possible violations ot the Acts administered by the Oommission

Pending June 30, 1966____________________________________________ 772

~evv cases_______________________________________________________ 390

Total 1,162

Closed 373

Pending June 30, 1967____________________________________________ 789

Imposition of Sanctions

Where enforcement action appears appropriate, the Commission

may proceed in one of several ways, although the use of one procedure

may not necessarily preclude the use of another with respect to the same

conduct. The Commission may: (1) institute administrative proceedings, (2) institute civil proceedings in the appropriate U.S. district

court to enjoin further violations of law, or (3) refer the case to the

Department of Justice or appropriate local enforcement authorities for

criminal prosecution.

Administrative Proceedings.-Under the Securities Exchange Act,

as amended in 1964, the Commission has available to it a wide range

of administrative sanctions which it may impose against brokers and

dealers and persons associated with them. The Commission may deny

a broker-dealer's application for registration. With respect to a brokerdealer already registered, it may impose sanctions ranging from censure through suspension of registration to revocation of registration.

It may also suspend or terminate a broker-dealer's membership in a

stock exchange or registered securities association. Associated persons

of broker-dealers may be censured, or suspended or barred from association with any broker-dealer. Under the Investment Advisers Act,

the Commission may impose comparable sanctions against investment

advisers, but has no authority to proceed against persons associated

with investment advisers.

The Commission may impose a sanction only if, after notice and

opportunity for hearing, it finds that (1) the respondents committed

willful violations of the securities acts or are subject to certain disqualifications, such as convictions or injunctions relating to specified

types of misconduct, and (2) a particular sanction is in the public

interest.
76 SECURITIES AND EXCHANGE COMMISSION

Set forth below are statistics regarding administrative proceedings

pending during fiscal year 1967 with respect to brokers and dealers

and investment advisers.

Broker-Dealers

Proceedings pending at beginning of fiscal year:

Against broker-dealer r'egistrants__________________________________ G 70

llgainst broker~ealer applicants__________________________________ 6

llgainst individuals only__________________________________________ 4

Total_____________________________________________________ 80

Proceedings instituted during fiscal year:

llgainst broker~ealer registrants_________________________________ 28

llgainst broker~ealer applicants__________________________________ 3

llgainst nonregistered broker~ealer_______________________________ 1

llgainst individuals only 1

Total 33

Total proceedings current during fiscal year______________________ 113

Disposition of proceedings :

Registration revoked-____________________________________________ 1122

Registration revoked and firm expelled from National llssociation

of Securities Dealers, Inc. (NASD) e 10

Beglstratlon suspended for period of time__________________________ 2

Suspended for period of time from NASD__________________________ 2

Suspended for period of time from NASD and stock exchanges_______ 1

Registrationdenied_______________________________________________ 5

VVithdravval of registration permitbed_____________________________ 2

VVithdravval of application permitted______________________________ 1

Registration cancelled____________________________________________ 2

Individual respondent barred from association vvith brokers or dea1ers________________________________________________________ 3

Total G50

Proceedings pending at end of fiscal year:

Against broker-dealer registrant.s__________________________________ 57

llgainst broker-dealer applicants__________________________________ 3

Against nonregistered broker-dealer________________________________ 1

Against individuals only_________________________________________ 2

Total proceedings pending at end of year________________________ 63

Total proceedings accounted for__________________________________ 113

G Does not include six proceedings in which registrations of broker-dealer firms had been

revoked prior to the 1967 fiscal year, but which were not concluded as to the remaining

respondents untU fiscal 1967.

b Three of these proceedings were stlll pending as to some respondents at close of fiscal

year.

e One of these proceedings was still pending as to some respondents at close of fiscal

year.
THIRTY-TmRD ANNUAL REPORT 77

In addition, action was taken against 149 individuals associated with

the firms included above or with firms previously sanctioned which

disqualified such individuals from engaging in the securities business

without the subsequent approval of the Commission or for a specified

period of time.

Investment Advi.ser.q

Proceedings pending at beginning of fiscal year:

Against investment adviser registrants____________________________ 8

Proceedings instituted during fiscal year:

Against investment adviser registrants____________________________ 3

Total proceedings current during fiscal year______________________ 11

Disposition of proceedings:

Registra tion revoked____________________ __ 4

Dismissed on withdrawal of registration__________________________ 1

Touu__________________________________________________________ 5

Proceedings pending at end of fiscal year:

Against investment adviser registrants____________________________ 6

Total proceedings accounted for_________________________________ 11

Formal administrative proceedings under the statutes administered

by the Commission generally culminate in the issuance of an opinion

and order. Where hearings are held, the hearing officer who presides

normally makes an initial decision following the hearings, unless such

decision is waived by the parties. Under an amended procedure which

went into effect in April 1966, the initial decision includes an appropriate order. If Commission review is not sought, and if the case is not

called up for review on the Commission's own initiative, the initial

decision becomes the final decision of the Commission.

In those instances where it prepares its own decision, upon review

or waiver of an initial decision, the Commission, or the individual

Commissioner to whom a case may be assigned for the preparation of

an opinion, is generally assisted by the Office of Opinions and Review.

This Office is directly responsible to the Commission and is completely

independent of the operating divisions of the Commission, consistent

with the principle of separation of functions embodied in the Administrative Procedure Act. Where the parties to a proceeding waive

their right to such separation, the operating division which participated in the proceeding may assist in the drafting of the Commission's

decision.

The Commission's opinions are publicly released and are distributed

to the press and to persons on the Commission's mailing list. In addition, they are printed and published periodically by the Government

Printing Office in bound volumes entitled "Securities and Exchange

Commission Decisions and Reports."
78 SECURITIES AND EXCHANGE COMMISSION

A few of the more significant decisions of the Commission in administrative proceedings with respect to broker-dealers and investment

advisers and involving what may be characterized as improper brokerage or investment adviser practices are summarized in the following

paragraphs: 5

The Commission addressed itself in three instances during the year

to the practice of "interpositioning," i.e., interposing, in the execution

of transactions, a second broker-dealer between the customer's brokerdealer and the best available market.

In Delaware Management Oompany, lne.,' the principal issue involved interpositioning in the execution of portfolio transactions for

mutual funds. Delaware Management Co., a registered broker-dealer,

was the investment adviser of and principal underwriter for two

mutual funds and its officers were the officers of the funds. It interposed a second broker-dealer, which did not maintain markets in listed

or unlisted securities, between the funds and the best market in order

to compensate the second firm for selling the funds' shares and to

stimulate further sales. It was established that the funds were in a

position to deal directly with the same broker-dealers used by the

interposed broker on as favorable a basis. As a result, the funds were

caused to incur unnecessary brokerage costs and charges. The Commission concluded that this practice constituted a fraud on the funds and

their shareholders by both broker-dealers and their principals.

The Commission found additional fraudulent conduct by the management company and its officersin that they caused one of the funds

to sell portfolio securities at a price below that offered by another

broker-dealer the same day, through a broker-dealer selected because

it supplied research services to the management company. The Commission further held that the funds' prospectuses were misleading in

stating that the funds would seek the most favorable prices and execution of orders.

The Commission's findings were based on a stipulated record and on

offers of settlement submitted by the respondents under which, solely

for the purpose of the proceedings, they consented to certain findings.

Pursuant to the offers, the Commission temporarily suspended the

broker-dealer registrations of the two firms, suspended their principals

from association with any broker or dealer and issued stop orders as

to the funds' registration statements. In determining to accept the

offers, the Commission gave consideration among other things to the

agreement of the management company to reimburse the funds for

Additional broker-dealer decisions are summarized below under "Manipulation" and "Improper Use of Inside Information."

4 Securities Exchange Act Release Nos. 8071 (May 1, 1967) and 8128 (July 19,

1967).

•
TIDRTY-TIDRD ANNUAL REPORT 79

their excess costs and losses, totaling over $300,000, and the fact that

the interpositioning had been discontinued some months before the

proceedings were instituted.

Two other decisions of the Commission which involved interpositioning were rendered on review of disciplinary action by the National

Association of Securities Dealers, Inc. (NASD) and are discussed in

the section dealing with NASD matters at pages 87-89.

As in the past, a number of Commission decisions issued during the

year dealt with campaigns by broker-dealers to sell highly speculative

securities by means of a concerted high pressure sales effort including

the use of false and misleading representations and predictions. Among

these cases were Seaboard Securities Corporation." A.lfred Miller,.

J.P. Howell & 00., I no:' and James De M ammos" In each instance, the

sales effort was characterized by predictions of specific and substantial

increases in the price of the securities within relatively short periods of

time. The Commission reiterated the principle that such predictions

are inherently fraudulent and cannot be justified. Itrevoked the registrations of the broker-dealers involved and barred various individuals

who, as principals or salesmen, participated in the fraudulent schemes,

from being associated with a broker or dealer.

In the Miller case, the Commission rejected the argument of two

individuals, one of whom had been president of the broker-dealer and

the other a salesman, that they were naive and were "dupes" of the

controlling person of the broker-dealer. Itstated that "the protection

from fraud to which investors are entitled cannot be dissipated by

claims of naivete or gullibility on the part of those who hold themselves out as professionals with specialized knowledge and skill and

undertake to furnish guidance but nevertheless participate in a highpressure campaign to sell speculative securities." In the de Mammos

case, the Commission held that whether or not a broker-dealer operation could be characterized as a "boiler-room," the legal principles

applicable to "boiler-rooms" were applicable to any concerted fraudulent high-pressure sales campaign.

In a decision under the Investment Advisers Act of 1940, Marketlines, Inc.,D the Commission revoked the registration of an investment

adviser for publishing and distributing materially false and misleading advertisements of its market letters and for failing to make required disclosures in amendments to its registration application. The

respondent published newspaper advertisements soliciting subscripa Securities Exchange Act Release No. 7967 (September 30, 1966).

Securities Exchange Act Release No. 8012 (December 28, 1966).

1Securities Exchange A.ct Release No. 8<Y78(June 1, 19(7).

8 Securities Exchange Act Release No. 8090 (June 2, 1967)'.

Investment Advisers Act Release No. 206 (January 20, 1967).

281-l'i77-68-7

•

•
80 SECURITIES AND EXCHANGE COMMISSION

tions to its market letter which stated that "interest in LOW PRICED

STOCKS is opening profit possibilities that will undoubtedly pave the

way for many family fortunes in the years just ahead;" that the respondent had developed a "completely unique advisory service;" and

that certain items covered by the market letter were "backed by the

research and experience" of its "financial scientists and chartists." The

Commission held that the advertisements, "in presenting a highly optimistic picture of the profits that would accrue to subscribers . . .,

were materially misleading in failing to disclose the risks inherent in

the purchase and sale of securities and were obviously designed to whet

the speculative appetite of unsophisticated investors .... " Among

other things, the Commission also pointed out that the reference to

"financial scientists" was highly misleading in implying that techniques for evaluating securities could be reduced to an exact science.

Among court decisions affirming Commission orders in brokerdealer proceedings were the following:

In Irish v. 8£.0.,10 the Court of Appeals for the Ninth Circuit

affirmed an order of the Commission revoking the registration of Russell L. Irish and expelling him from membership in the NASD. The

court held that the record contained substantial evidence to support the

Comission's findings that "Mr. Irish advanced his own interests to

the detriment of his customers by making excessive trades in mutual

funds ('churning'), charging excessive commissions and making sales

to customers at prices just below the minimum break points." The

court held that certain delays in the proceeding were insufficient to

warrant reversal or remand of the proceeding to the Commission and

found that petitioner had "failed completely to show how the Commission caused him prejudice" by waiting from 1959, the time of the last

hearing, until 1965 to revoke his registration. The court stated that

instead of requesting that the proceedings be dismissed, petitioner

should have sought "a speedy decision" by the Commission on the

merits.

In R. A.. Holman. d!J 00., Inc. v. 8.E.0.,11 the Court of Appeals for

the Second Circuit affirmed the Commission's order revoking petitioner's registration as a broker-dealer, expelling petitioner from membership in the NASD and making permanent an earlier Commission

order temporarily suspending a Regulation A exemption. The opinion

dealt principally with petitioner's claim that the proceedings before

the Commission had not been fair.

The court held that an informal investigation initiated by the Division of Corporation Finance, while Commissioner Woodside was Di10367 F. 2d 637 (1966), cert, den. 386 U.S. 911 (1967).

u366 F. 2d 466 (C.A. 2, 1966), amended on rehearing as to other issues, 377

F. 2d 665 (1967), cert den. December 4, 1967.
THIRTY-THIRD ANNUAL REPORT 81

rector, did not by itself, without some additional evidence, disqualify

him from participating in an adjudicatory capacity in preliminary

stages of the proceedings against petitioner. The court distinguished

Amos Treat &: 00., v. 8.E.0.,12 noting that "in this case the SEC has

made extensive disclosures, upon sworn statements, as to the nature

of the investigation and as to Woodside's role in it" and, since petitioner had the burden of proof, it "was obliged either to offer evidence

contradicting the sworn statements of the Commission, or to point out

the inadequacy and inconsistency, if any, in the sworn statements, before [it] was entitled to subpoena the Commission members and staff."

The court refused to consider petitioner's contention that the hearing examiner was disqualified because he had passed mandatory retirement age, holding that the challenge was not timely made.

After proceedings had been instituted against petitioner involving

certain of the violations charged, there were ee parte communications

from the Commission staff to the Commission concerning consolidation

of these proceedings with pending Regulation A proceedings and

amendment of the order to include additional charges. The court held

that the Commission "was not required to divulge the communications

in question which merely concerned the nature of the proposed proceedings" and that these communications were not "the ex parte communications forbidden by Section 5 (c) of the Administrative Procedure Act .... "

In two cases concluded this year, M. G. Davis &: 00., I'M. v, Oohen 18

and Fontaine v. 8.E.0.,I4 the Commission has successfully defended

against attempts by registered broker-dealers to enjoin the continuation of administrative proceedings instituted against them. In both

cases it was held that the district court lacked jurisdiction of an action requesting injunctive relief against the Commission because plaintiffs had failed to exhaust their administrative remedies and had not

shown facts sufficient to bring their cases within the narrow exceptions

to the exhaustion doctrine. In Davis, the Court of Appeals for the Second Circuit affirmed the decision of the district court 15 granting the

Commission's motion to dismiss the complaint. While the district court

had considered and rejected plaintiffs' contentions on their merits, the

court of appeals held that even if plaintiffs had been correct in their

contentions that the Commission was acting in excess of its authority

they had failed to show an excess "so extreme as to warrant a district

12305 F. 2d 260 (C.A.D.C.1962).

u369 F. 2d 360 (C.A. 2,1966) .

.. 259 F. Supp. 880 (D.P.R., 1966), appeal dismissed, C.A. 1, No. 6840, ?tray 25,

1967.

115 See 32d Annual Report, p, 120.
82 SECURITIES AND EXCHANGE COMMISSION

court to upset the orderly course of review procedures." Alternatively,

the court held that "~v.en if appellants could surmount the jurisdictional hurdle, their action must fail, because they do not allege that

they would be irreparably injured if denied relief." It added that "the

usual factors of litigation expense and frustration due to delay .•.

are not such threatened injuries as will satisfy this requirement."

The Court of Appeals for the First Circuit, in denying a motion for

a stay pending appeal in Fontaine,16 similarly found it "unthinkable

that an administrative agency cannot even institute a proceeding until

it has had, in effect, the permission of the district court and of the court

of appeals whenever the parties to be investigated choose to deny its

jurisdiction," although it recognized that injury, expense and inconvenience might be involved. In that case the district court had applied

the doctrine of primary jurisdiction as well as the doctrine of exhaustion of administrative remedies in denying plaintiff's motion for a

preliminary injunction against the conduct of an administrative proceeding and in granting the Commission's motion for summary judgment. The district court held that questions concerning the scope of the

Commission's jurisdiction, application of Commission rules and regulations, and plaintiff's rights as a broker-dealer registered under the

Securities Exchange Act "will not be ripe for judicial decision until

the SEC has had the opportunity contemplated by the Exchange Act

to pass upon them." It also held that plaintiff's arguments that the

Commission had exceeded its jurisdiction in instituting the proceeding,

and that if required to comply with certain demands made by the Commission the plaintiff might thereby 'be required to violate Swiss law,

"provide no basis for an exception to the exhaustion and primary jurisdiction doctrines."

In a similar case, not yet concluded, Thomson &: McKinnon v.

S.E.O.,17 the Court of Appeals for the Second Circuit affirmed from the

bench the district court's denial of a motion by a registered brokerdealer for a preliminary injunction against an investigation into its

activities. Plaintiffs had argued that the Commission could not investigate certain of its activities which had come to the Commission's

attention in a related proceeding, previously concluded, to which plaintiffs had not been parties. Although plaintiffs had so contended before

the Commission by a motion to limit the investigation, the district

court held that it "lacks jurisdiction to enjoin, or partially enjoin, the

investigation" because plaintiffs had not exhausted their administrative

remedies. .

Civil Proceedings.- Each of the several statutes administered by

the Commission authorizes the Commission to seek injunctions against

,. CCB Fed. Sec. L. Rep. 1191,892(C.A. I, No. 6840, February 14, 1967).

"268 F. Supp.Tl, affirmed without opinion, o.s. 2, No. 31297 (May 1, 1967).
TEITRTY-TEITRD~AL REPORT 83

continuing or threatened violations, Such violations may involve a

wide range of illegal practices, including the purchase or sale of

securities by fraud, and the sale of securities without compliance with

the registration requirements of the Securities Act. During the 1967

fiscal year, permanent injunctions were obtained against 34 registered

broker-dealers, 3 of whom were also registered investment advisers."

Criminal Prosecution.- The statutes administered by the Commission provide that the Commission may transmit evidence of violations

of any provisions of these statutes to the Attorney General, who in

turn may institute criminal proceedings. Where an investigation by the

Commission's staff indicates that criminal prosecution is warranted, a

detailed report is prepared. After careful review by the General

Counsel's Office,the report and the General Counsel's recommendations

are considered by the Commission, and if the Commission believes

criminal proceedings are warranted the case is referred to the Attorney

General and to the appropriate U.S. Attorney. Commission employees

familiar with the case generally assist the U.S. Attorney in the presentation of the facts to the grand jury, the preparation of legal

memoranda for use in the trial, the conduct of the trial, and the

preparation of briefs on appeal.

During the past fiscal year 44 cases were referred to the Department

of Justice for prosecution. As a result of these and prior referrals, 53

indictments were returned against 213defendants, including 24brokerdealers and principals of broker-dealers and 17 broker-dealer employees. Convictions were obtained against 127 defendants in 42 cases,

including 25 broker-dealers and broker-dealer principals and 20

broker-dealer employees. Convictions were affirmed in 8 cases, and

appeals were still pending in 12 other criminal cases at the close of the

period. In addition, two individuals were convicted of criminal contempt during the fiscal year for violations of court orders previously

entered enjoining further violations of the securities laws.19

As in prior years, several criminal prosecutions during the past fiscal

year involved high pressure sales by broker-dealers of speculative,

unseasoned securities of over-the-counter issuers. For instance, six

principals of over-the-counter brokerage firms were convicted after

a 10-weektrial of violations of the anti-fraud provisions of the Securities Act of 1933in the offer and sale of stock of Allied Entertainment

Corporation of America." Prior to trial, a market-letter writer for

an investment advisory firm and two other principals of brokerage

,. Other statistics regarding the Commission's civil litigation activities are

contained in Appendix tables 10---12.

1.Other statistics regarding criminal cases developed by the Commission are

contained in Appendix tables 13-15.

.. S.D.N.Y .• 65 Cr. 198.
84 SECURITIES AND EXCHANGE COMMISSION

firms had pleaded guilty. The jury failed to reach a verdict with

respect to Marvin Hayutin, the principal promoter of the scheme

to distribute a large block of unregistered, "insider" Allied. stock by

means of fraudulent representations and a manipulated market in the

quotation sheets for the over-the-counter market. However, Hayutin

was convicted in a 6-week retrial on charges of conspiring to violate the

anti-fraud and registration provisions of the Securities Act, and for

substantive violations of the registration provisions of that Act, and

was sentenced to 2lf2 years imprisonment and fined $14,000. This second

Allied case is now on appeal. A European banker, through whom the

stock transactions were channeled, remains a fugitive in the case.

In affirming the convictions of four of the defendants in the original

Allied case, the Court of Appeals for the Second Circuit made clear

that the failure of a broker-dealer to disclose secret cash commissions

received from an insider of the issuer in return for recommending

stock to public customers can constitute part of a scheme to defraud

under Section 17 of the Securities Act, even though the broker sells

the stock as principal rather than as agent.21

In a case involving a classic "boiler-room" promotion, Charters &

Co. of Miami, Inc., a Florida broker-dealer, three principals of the

firm, and a securities promoter were convicted of conspiracy to violate

the anti-fraud provisions of the Securities Act for their participation

with other defendants in selling stock of Bankers Intercontinental

Investment Co., Ltd. and Florida Patsand Corp. by means of a high

pressure telephone sales campaign. Certain other defendants, including Arnold Mahler, president of Broadwall Securities, a New

York broker-dealer, pleaded guilty to the charges against them."

In a related case,23 Mahler's conviction for conspiring to give and

giving false testimony in a Commission investigation regarding

Broadwall's "boiler-room" activities was affirmed. The court held

among other things that the statute relating to the giving of false

testimony covers oral as well as written statements, and that it was

not necessary for the jury to find that the false statements made to

the Commission were material.

Supervision of Activities of National Association of Securities Dealers, Inc.

Section 15A of the Exchange Act provides for registration with the

Commission of national securities associations and establishes standards and requirements for such associations. The National Association

of Securities Dealers, Inc. (NASD) is the only association registered

under the Act. The Act contemplates that such associations will

:II United States v. Bilotti, 380 F. 2d 649 (C.A. 2, 1967).

IS S.D.N.Y., 65 Cr. 435.

IS United States v. Mahler, 363 F. 2d 673 (C.A. 2, 1966).
TEITRTY-TEIRD ~AL REPORT 85

serve as a medium for self-regulation by over-the-counter brokers

and dealers. Their rules must be designed to protect investors and the

public interest, to promote just and equitable principles of trade, and

to meet other statutory requirements. They are to operate under the

general supervision of the Commission, which is authorized to review

disciplinary actions taken by them, to disapprove changes in their

rules, and to alter or supplement their rules relating to specified

matters. Review of NASD rules is carried out for similar purposes as

the review of exchange rules described at page 55.

In adopting legislation permitting the formation and registration

of national securities associations, Congress provided an incentive to

membership by permitting such associations to adopt rules which preclude a member from dealing with a nonmember broker or dealer

except on the same terms and conditions as the member affords the

general public. The NASD has adopted such rules. As a result, membership is necessary to profitable participation in underwritings since

members may properly grant price concessions, discounts and similar

allowances only to other members.

At the close of the fiscal year the NASD had 3,659 members,

reflecting a net decrease of 48 members during the year. This decrease was the net result of 218 admissions to and 266 terminations

of membership. At the end of the year NASD member firms had

5,283 branch offices,reflecting a net increase of 258 officesduring the

year. This increase was the net result of the opening of 861 new offices

and the closing of 603 offices.During the year the number of registered

representatives and principals, which categories include all partners,

officers, traders, salesmen and other persons employed by or affiliated

with member firms in capacities which involve their doing business

directly with the public, increased by 6,884 to stand at 90,525 as

of June 30, 1967. This increase was the net result of 15,895 initial

registrations, 11,734 re-registrations and 20,745 terminations of registrations during the year.

During this period the NASD administered 39,354 qualification

examinations of which approximately 22,000 were for NASD qualification and the balance for other agencies, including major exchanges,

the Commission 24 and various States.

NASD Disciplinary Actions.-The Commission receives from the

NASD copies of its decisions in all disciplinary actions against members and registered representatives. In general, such actions are based

on allegations that the respondents violated specified provisions of the

NASD's Rules of Fair Practice. Where violations are found the

NASD may impose one or more sanctions upon a member, including

.. See pp.15-16, 8upra.
86 SECURITIES AND EXCHANGE COMMISSION

expulsion, suspension, fine, or censure. Ifthe violator is an individual,

his registration as a representative may be suspended or revoked, he

may be suspended or barred from being associated with any member,

and he may be fined and/or censured. Under Section 15A(b) (4) of the

Exchange Act and the NASD's by-laws, no broker-dealer may be

admitted to or continued in NASD membership without Commission approval if he has been suspended or expelled from membership

in the NASD or a national securities exchange; he is barred or suspended from association with a broker or dealer or with members

of the NASD or an exchange; his registration as a broker-dealer has

been denied, suspended, or revoked; he has been found to be a cause

of certain sanctions imposed upon a broker-dealer by the Commission,

the NASD or an exchange; or he has associated with him any person

subject to one of the above disqualifications.

During the past fiscal year the NASD reported to the Commission

its final disposition of disciplinary complaints against 143 member

firms and 123 individuals associated with them. With respect to 32

members and 33 associated persons, complaints were dismissed because

the alleged violations had not been established." In the remaining

cases, violations were found and penalties were imposed on 111 members and 90 registered representatives or other individuals. The maximum penalty of expulsion from membership was imposed against 13

members, and 7 members were suspended from membership for periods

ranging from 5 days to 3 months. In many of these cases, substantial

fines were also imposed. In another 80 cases, members were fined

amounts ranging from $50 to $3,000. In 11 cases, the only sanction

imposed was censure, although censure was usually a secondary penalty

1'1' here a more severe penalty was also imposed.

Various penalties were also imposed on associated individuals found

in violation of NASD rules. The registrations of 35 registered representatives were revoked, and 10 representatives had their registrations

suspended for periods ranging from 5 days to 3 months. Fines in

various amounts were also imposed against many revoked or suspended representatives. In addition, 43 other representatives were censured and/or fined amounts ranging from $100 to $4,000.Two individuals were barred from association with any NASD member.

.. The majority of the cases where allegations against members were dismissed

involved misuse of customers' and/or firm securities or funds by a representative

under such circumstances that the member could not have known of or prevented

the impropriety. The Securities Acts Amendments of 1964 authorized registered

securities associations to take disciplinary action directly against individuals

associated with members. The NASD has amended its rules to provide for such

nctlon. In the fiscal year there were 19 cases in which the sole respondents were

individuals associated with members.
THIRTY-TIDRD ANNUAL REPORT 87

Commission Review of NASD Disciplinary Action.-Section

15A(g) of the Exchange Act provides that disciplinary actions by the

NASD are subject to review by the Commission on its own motion

or on the timely application of any aggrieved person. This Section

also provides that upon application for or institution of review by the

Commission the effectiveness of any penalty imposed by the NASD is

automatically stayed pending Commission review, unless the Commission otherwise orders after notice and opportunity for hearing. Section 15A(h) of the Act defines the scope of the Commission's review.

If the Commission finds that the disciplined party committed the acts

found by the NASD and thereby violated the rules specified in the

determination, and that such conduct was inconsistent with just and

equitable principles of trade, the Commission must sustain the NASD's

action unless it finds that the penalties imposed are excessive or oppressive, in which case it must cancel or reduce them.

At the start of the fiscal year, 15 NASD disciplinary decisions were

pending before the Commission on review. During the year 4 additional cases were brought up for review. Twelve cases were disposed

of by the Commission. In 5 of these cases, the Commission sustained

in full the disciplinary action taken by the NASD. 26 It dismissed the

review proceedings in 1 case as having been abandoned," and permitted the withdrawal of 2 applications for review. With respect to

the 4 remaining cases, in 2 the Commission sustained the action against

some of the applicants, and reduced the penalty or set aside action

against others; 26 in 1 it set aside the association's action; 29 and in the

last case it reduced the penalty." Seven cases were pending as of the

end of the year.

Two of the decisions issued by the Commission during the year upon

review of NASD action dealt with "interpositioning." In the first of

these decisions, the Commission sustained the NASD's action expelling

H. O. Keister & Oompooy from membership in the association and

revoking the registration as a registered representative of H. C.

Keister, the member's principal partner." However, it reduced from

$1,000 to $500 a fine imposed on another partner who was not active

in the member's business .

.. Securities Excbange Act Release Nos. 7928 (August 5,1966) ; 7950 (September 12, 1966) ; 7991 (November 16, 1966) ; 8003 (December 8, 1966) ; and 8066

(December 14, 1966).

Securities Excbange Act Release No. 7963B (September 27,1966) .

.. Securities Excbange Act Release Nos. 7986 (October 26, 1966) and 7988

(November 1,1966)

.. Securities Excbange Act Release No. 7964 (September 29,1966) .

.. Securities Excbange Act Release No. 8032 (February 8, 1967).

11 Securities Excbange Act Release No. 7988 (November 1, 1966)

~

•

•
88 SECURITIES AND EXCHANGE COMMISSION

According to the Commission's opinion, the member had been

engaged principally in effecting retail transactions in the over-thecounter market. Itthen hired a trader for the purpose of developing

an over-the-counter trading department which would serve as a vehicle

for reciprocity for listed business given by the firm to exchange members. The trader entered into an arrangement with the senior order

clerk of a large exchange firm under which over-the-counter orders of

customers of the exchange firm would be directed to the member's

trading department. Substantial payments were made to the order clerk

to influence and reward him. The member effected a large number of

transactions in a wide variety of securities with the exchange firm.

Principal transactions were offset with, and agency transactions

effected for, dealers who were market makers or traditional sources of

those securities.

The Commission rejected applicants' contention that the public was

not harmed because the member, as a wholesale dealer, assertedly

could obtain a better price from market makers than the exchange

firm. Itstated that it was unlikely that the member had accessto a more

favorable market with respect to the many securities involved than

the exchange firm, a substantial retailer of considerable standing. The

Commission held that the interpositioning in fact operated to increase

the price paid by the exchange firm's customers for securities purchased by them and to reduce the amount they received for securities

sold as compared with the best prices obtainable. Itconcluded that the

member's conduct aided and abetted the exchange firm's wrongful

conduct and violated the NASD's rules, even aside from the payments

to the order clerk. The Commission also concluded that Keister must

have been aware of the interpositioning and should have known of the

payments being made to the order clerk and that he was responsible

for the violations.

Ina companion disciplinary action, which was not appealed to the

Commission, the exchange member was fined $2,000 and the partner

in charge of its over-the-counter department was suspended for 30

days and fined $2,000. With reference to applicants' contention that

by comparison the penalties as to them were unduly harsh, the Commission noted that it did not have the benefit of arguments on behalf

of the exchange member and its partner. The Commission stated, however, that it would be of considerable assistance to it in reviewing cases

such as this to have a fuller exposition of the reasons entering into the

determination to apply different sanctions to respondents involved in

the activity under scrutiny. Itfurther stated that differences in sanctions for persons with seemingly similar responsibility for violations

raise questions, in the absence of appropriate justification, respecting

the adequacy of existing statutory provisions for review of NASD
THIRTY-THIRD ANNUAL REPORT 89

disciplinary decisions (which allow the Commission to reduce NASD

sanctions but not to increase them).

Ina dissenting opinion, Commissioner Budge emphasized the unexplained disparity in treatment by the NASD of the two firms and their

partners. Even aside from this disparity, he was of the view that the

penalty against Keister was too severe in light of Keister's advanced

age and his long period of employment in the securities business.

Commissioner Wheat concurred in the views of Commissioner Budge

as to the severity of the sanction imposed on Keister.

In a second interpositioning case, the Commission sustained the

NASD's findings that T~O'JYlO,8Brown Ill, while employed as a

trader for a member firm, interposed both his firm and another

broker-dealer between a customer of the member and the best available market." At a time when the member held a customer's open

limited price order with respect to an over-the-counter security, Brown

purchased shares of the same security from other dealers for the member's trading account at prices below the limit price. Brown then

caused these shares to be sold to another broker-dealer, a nonmarket

maker, at slightly higher prices and, pursuant to a buy-back arrangement, to be repurchased at the limit price for the customer's account.

The Commission found that the purpose of the arrangement was to

reciprocate for business in listed securities obtained from the other

broker-dealer.

While Brown conceded that his conduct violated the NASD's rules

of fair practice, he contended, among other things, that he should not

be penalized because his method of handling the trades was consistent

with what he believed to be the member's normal procedures. The

Commission held that the record did not support this contention, but

that in any event he should have been aware of his obligation to give

the benefit of the best price to the customer. However, in view of the

isolated nature of Brown's misconduct and his otherwise good record,

the Commission reduced the penalty from a 3-month suspension of

Brown's registration as a registered representative to a 30-day

suspension.

Commission Review of NASD Action on Membership.-As previously noted, Section 15A(b) (4) of the Act and the by-laws of the

NASD provide that, except where the Commission finds it appropriate

in the public interest to approve or direct to the contrary, no broker

or dealer may be admitted to or continued in membership if he, or any

person associated with him, is under any of the several disabilities

specified in the statute or the NASD by-laws. A Commission order

approving or directing admission to or continuance in association

.. Securities Exchange Act Release No. 8032 (February 8. 1967).
90 SECURITIES AND EXCHANGE COMMISSION

membership, notwithstanding a disqualification under Section

15A(b) (4) of the Act or under an effective association rule adopted

under that Section or Section 15A(b) (3), is generally entered only

after the matter has been submitted initially to the association by the

member or applicant for membership. The association in its discretion

may then file an application with the Commission on behalf of the

petitioner. If the association refuses to sponsor such an application

the broker or dealer may apply directly to the Commission for an order

directing the association to admit or continue him in membership. At

the beginning of the fiscal year, five applications for approval of

admission to or continuance in membership were pending. During the

year, eight additional applications were filed, six were approved,

one was withdrawn, one was discontinued, and one was denied, leaving

four applications pending at the year's end.

The Commission denied an application by the NASD for approval

of a member's continuance in membership with Michael Shaub in its

employ." Commission approval was required because in March 1966

Shaub had been named a cause of the revocation of the broker-dealer

registration of Crow, Brourman & Chatkin, Inc.S4 on the basis of

his participation, while employed as a salesman by the Crow firm in

1962-63, in a high-pressure fraudulent sales campaign with respect

to highly speculative securities.

The Commission noted that Shaub's proposed employment would

involve retail sales of speculative securities, the same type of activity

in which his previous violations occurred. It further noted that the

required positive showing that Shaub's conduct since the violations

had been on such a high level as to demonstrate that he had changed

his ways had not been made. In addition, the Commission stated that

it had not been shown that the supervisory procedures of the prospective employer would be adequate. The Commission also took into

account the short lapse of time since Shaub had been named a cause.

Commission Inspections of NASD.-Under the regulatory scheme

of the Exchange Act the Commission is also charged with general

oversight of national securities associations in the performance of

their self-regulatory activities. In carrying out this responsibility the

Commission staff conducts periodic inspections of various phases of

NASD activity. These inspections assist the Commission in insuring

that the NASD is complying with its self-regulatory responsibilities

and enable the Commission to recommend improvements designed to

increase the effectiveness of such self-regulation.

During the past .fiscal year, the Commission staff inspected the

NASD's district office in New York City, focusing particular attensa Secur! ties Exchange Act Release No. 8113 (June 30, 1967) .

.. Securities Exchange Act Release No. 7839 (March 15, 1966).
TEITRTY-TEITRD~AL REPORT 91

tion on the district's activities in certain substantive regulatory areas,

including the enforcement of NASD standards of fair practice governing the reasonableness of prices charged to customers by member firms,

the execution of over-the-counter retail transactions, and the maintenance of procedures for the supervision of salesmen and other employees. Another inspection covered the work of the NASD Committee

on Underwriting Arrangements. That Committee has the responsibility

for reviewing public offerings of securities of unseasoned companies

and determining whether the arrangements for compensating the

underwriter might be unreasonable and therefore in violation of applicable rules and policies. Where it appeared to the staff of the Commission that modifications of NASD procedures or policies were desirable

in order to improve the association's performance, the staff's views

were communicated to the association and conferences were held with

a view toward arriving at appropriate solutions.

Supervision of Exchanges

Exchange Disciplinary Action.-Each national securities exchange

reports to the Commission disciplinary actions taken against its members, member firms, and their associated persons for violation of any

rule of the exchange or of the Securities Exchange Act or any rule

or regulation thereunder. During the fiscal year, 10 exchanges reported

over 100 separate actions, including impositions of fines in 39 cases

ranging from $50 to $5,000, with total fines aggregating $29,775, the

suspension from membership of 13 individuals and 2 member organizations and the censure of 2 member firms. These exchanges also

reported the imposition of various sanctions against 81 registered

representatives and employees of member firms. In addition, several

exchanges reported a large number of informal staff actions of a

cautionary nature.

Termination of Registration of San Francisco Mining Exchange.-

InSan Francisco Mining Exchange v. S.E.O.3s, the Court of Appeals

for the Ninth Circuit affirmed an order of the Commission of April 22,

1966,entered pursuant to Section 19(a) (1) of the Securities Exchange

Act, withdrawing the registration of the San Francisco Mining

Exchange. The Commission had found that the Exchange over a

period of years had repeatedly neglected to enforce compliance by its

members and by issuers of securities listed thereon with the reporting,

insider trading and anti-fraud provisions of the Exchange Act and

had lent its facilities to securities distributions made in violation of

the registration requirements of the Securities Act of 1933. The Commission had also found that officials of the Exchange had been personally involved in repeated violations of the securities laws. The

.. 378 F. 2d 162 (C.A. 9, 1967).
92 SECURITIES AND EXCHANGE COMMISSION

Exchange did not contest these findings; it contended that the remedy

proposed by the hearing examiner, which would have permitted it to

reorganize within 90 days, was supported by the record and that the

Commission's remedy, withdrawal of the Exchange's registration, was

not. The court held that the Commission's decision was reasonable and

was not an abuse of discretion, noting that "the complete reorganization proposed by the hearing examiner . . . would in essence be the

withdrawal of the registration of the present Exchange, and the registration of a completely new exchange."

The court also rejected the Exchange's allegations that it had been

denied due process because of the Commission's refusal to issue subpoenas ad teetifioamduan. and duces teoum. directed to the Commissioners

and the Secretary for the purpose of determining whether there had

been prejudgment and bias in the administrative proceeding. The

court held that the Commission was entitled to refuse such requests

if, as here, the evidence sought was not shown to be generally relevant

and material, stating, "Were that otherwise, an indiscriminate subpoenaing of Commission members would lead to an unreasonable and

unnecessary delay of the administrative process."

MISREPRESENTATIONS IN THE SALE OR PURCHASE OF SECURITIES

Among the improper practices which constantly concern the Commission and its staff and which are the subject of frequent enforcement

action is the use of false or misleading representations in connection

with the sale or purchase of securities." The comments in the preceding

section regarding detection methods, investigations and sanctions are

in general equally applicable to this type of conduct. The Commission also frequently participates as amicus curiae in litigation between

private parties under the so-called anti-fraud provisions of the securities laws, where it considers it important to present its views regarding

the interpretation of those provisions.

During the course of the fiscal year, the Commission participated

either as a party or as amicus curiae in a number of cases involving

important issues under the anti-fraud provisions.

In 8E.0. v. VanHorn,31 an action to enjoin the defendants, among

other things, from violating the anti-fraud provisions of the Securities

Act of 1933 through false and misleading statements in the sale of

securities, one of the principal issues was whether "scienter or fraudulent intent" must be proven as a prerequisite to injunctive relief under

.. Misrepresentations are, of course, an integral part of "boiler-room" or similar

high-pressure fraudulent operations by broker-dealers. To the extent misrepresentations are employed in that context, they are discussed in the section on

improper broker-dealer practices.

:n 371 F.2d 181 (C.A. 7, 1966).
THIRTY-THIRD ANNUAL REPORT 93

Sections 17(a) (2) and (3) of the Act. In affirming the issuance of a

preliminary injunction, the Court of Appeals for the Seventh Circuit

held that there is no such requirement, stating that:

"In view of the plain language employed by Congress, it would be presumptuous on our part to hold that the applicability of the clauses involved is

dependent on intent to defraud. Not only did Congress fail to include such

a requirement, but legislative history indicates that it did so deliberately."

During the year the Commission participated either as a party or

as amicus curiae in cases in three different judicial circuits posing

the question whether corporate mergers or consolidations constitute

purchases or sales of securities within the meaning of Section 10(b)

of the Securities Exchange Act and Rule 10b-5 thereunder as well

as the other related anti-fraud provisions of the securities laws. In

an amicus brief over two decades ago in National Supply 00. v.

Leland Stanford Jr. U(J1iversity,38the Commission had taken the

position that a merger was not a sale for purposes of the anti-fraud

provision of the Securities Act of 1933,89 and the Court of Appeals for

the Ninth Circuit had adopted the Commission's "no-sale" position.

For at least the past 15years, however, the Commission has consistently

taken the position that, whatever the status of a corporate merger or

consolidation for purposes of the registration provisions of the Securities Act, it constitutes a purchase or sale of the securities for purpose

of the anti-fraud provisions. This is the position that the Commission

took in a'111JWus briefs in Vine v, Beneficial Finance 00.40 and Desha v.

Susquehanna OorpP and as a party in S.E.O. v, National Securities,

Inc.42 Both the Court of Appeals for the Second Circuit in the Vine

case, decided during the fiscal year, and the Court of Appeals for the

Seventh Circuit in the Dasho case, decided soon after the close of the

fiscal year, agreed with the Commission's amious position in those

cases. The Court of Appeals for the Second Circuit stated:

"We note that whatever stance it adopted two decades ago, the Commission

strongly urges in this case that the short form merger resulted in a purchase

and sale of plaintiff's stock within the meaning of Rule 10b-5."

Inthe Vine case, which involved a short form merger, the court also

held that no proof of reliance is required where "no volitional act is

required and the result of a forced sale is exactly that intended by the

wrongdoer." It therefore found it unnecessary to deal with the Commission's "interesting contention" that damages incurred by a security

holder as a direct result of a violation of Section 10(b) and Rule

18134 F. 2d 689 (C.A. 9), cert. den., 320 U.S. 773 (1943) .

.. Section 17(a) .

.. 374 F. 2d 627 (C.A. 2, 1967), cert, den. December 4, 1967.

.. 380 F. 2d 262 (C.A. 7, 1967) cert, den. December 4,1967 .

.. Affirmed, CCR Fed. Sec. L. Rep. 'lI92,018 (C.A. 9, November 14, 1967)'.
94 SECURITIES AND EXCHANGE COMMISSION

lOb-v are recoverable under those provisions even if he was not a purchaser or seller of those securities.

One of the most recurrent issues in litigation under anti-fraud provisions in recent years has been the scope of the Federal securities

laws vis-a-vis State law in the corporate and other areas. With the

almost universal acceptance of private rights of action under Section

lO(b) and Rule lOb-5, persons with possible grievances under State

law have increasingly asserted those grievances in the Federal courts

under the anti-fraud provisions as well, in order to take advantage of

the liberal substantive and procedural provisions of the Federal securities laws. In deciding such cases the courts have been faced with the

question whether the conduct complained of falls in that area in which

State and Federal law exist side by side and complement each other,

or in the area occupied solely by State law. The Commission participated as amicus curiae during the fiscal year in cases posing this

question.

One such case, A. T. Brod & 00. v. Perl(Y/J),43 involved what has been

called the "man bites dog" situation. Inthat case the plaintiff broker

alleged that the defendant customer placed an order to purchase securities with the intention not to pay for them unless their market value

had increased by the date that payment was due. The defendant argued

that the Federal securities laws were only designed to protect investors,

and that all that had been alleged was a breach of contract in violation

of State law. The Court of Appeals for the Second Circuit agreed with

the amicus position of the Commission that the securities laws were

not designed only to protect investors, and that the alleged intention of

the defendant customer to pay for the securities only under certain

conditions constituted fraud within the meaning of Section lO(b) and

Rule lOb-5 and not a mere breach of contract. The court also agreed

with the Commission that the anti-fraud provisions are not limited to

fraud as to the investment value of securities. Itstated that:

"We believe that lOeb) and rule lOb-5 prohibit alZ fraudulent schemes in

connection with the purchase or sale of securities, whether the arti1lces

employed involve a garden type variety of fraud, or present a unique form

of deception. Novel or atypical methods should not provide immunity from

the securities laws."

The Dasho case, which was discussed earlier in connection with the

no-sale issue," involved a transaction in which the defendant corporation transferred cash and stock in another corporation to a dissident

group of the defendant corporation's shareholders in exchange for the

dissidents' stock in the defendant corporation. The transaction was

4., 375 F. 2<13D3 (a.A. 2, 1007).

See p 93, supra.

~

"
THIRTY-THIRD ANNUAL REPORT 95

allegedly entered into to prevent the dissident shareholders from

bringing a derivative suit against management, and the exchange ratio

was allegedly unfair to the defendant corporation. Although all the

directors of the defendant corporation, who approved the transaction,

were aware of 'these facts, they were either proposed defendants in the

threatened derivative suit or representatives of the dissident group.

The Commission took the position in its brief as amicus curiae that

under these circumstances it was a violation of Rule 10b-5 for the directors to fail to disclose these facts to their stockholders even though

stockholder approval of the transaction was neither required under

State law nor sought. One member of the panel of the court of appeals

wrote a concurring opinion in which another joined which considered

inter alia the decision by the Court of Appeals for the Second Circuit

in Ruckle v. Roto-Asnerioaa OOrp.45 where some of the directors had

not been participants in the transaction and thus could be deceived in

the ordinary sense. Here also, the opinion stated, there had been a violation of the anti-fraud provisions since

"the failure of the defendant directors to perform their duty presumably

injured the corporation, and I do not believe it is sound to differentiate between situations where the directors were unanimous in wrongdoing and

those where less than all were involved."

A similar issue was involved in Pappas v. Moss.46 In that case the

directors of the defendant corporation had issued stock in the corporation to themselves and others at an allegedly inadequate price.

All of the directors, who approved the transaction with themselves,

were fully aware of the facts, and stockholder approval was not required under State law. In this case, however, shareholder approval

was sought so that the stock could be listed on an exchange, and allegedly false statements were made to the shareholders in the process.

The defendant directors owned a majority of the shares of the corporation and voted them in favor of the transaction. The Commission's

position in its brief amicus ouriae was that, when interested directors

of a corporation approve a securities transaction on its behalf at an

unfair price and make misrepresentations of material facts apparently

designed to deceive the shareholders, they violate Section 10(b) and

Rule 10b-5 regardless of their voting power either as directors or as

shareholders. The case was awaiting decision at the end of the fiscal

year.

The .final case in this group, Mutual Shares Oorp. v. Genesco,lnc.,47

involved a tender offer made by the defendant corporation for the

•• 339F.2d24 (1964).

.. Docket Nos. 16,405-16,411 (C.A.3) .

1CCR Fed. Sec. L. Rep. 11 91,983 (C.A. 2, 1967).

281-ti77--68--8

•
96 SECURITIES AND EXCHANGE COMMISSION

shares of a second corporation. The plaintiffs claimed to have purchased stock in the second corporation in reliance on this tender offer,

which did not disclose either the fact that certain assets of the second

corporation were worth substantially more than their book value or

the alleged intention of the defendant corporation to loot the second

corporation after gaining control. The Court of Appeals for the Second Circuit, in a decision handed down after the close of the fiscal year,

agreed with the Commission that, since (1) the plaintiffs allegedly

purchased rather than sold stock in the second corporation on the basis

of the tender offer, (2) the information as to the true value of the

corporate assets was publicly available and plaintiffs under their own

allegations benefited from this nondisclosure by being able to purchase their stock at depressed prices, (3) there were no affirmative

misrepresentations alleged and (4) the defendant corporation was not

an insider of the second corporation, this aspect of the complaint stated

no cause of action.

The court stated:

"As the Commission's amicus brief points out, if plaintiffs' proposition were

'accepted, it would convert any instance of corporate mismanagement into

a Rule 10b-5 case."

Also in agreement with the Commission's position, the court went on

to state that with respect to the period after plaintiffs became security

holders they would have a cause of action for any damages resulting

from defendant's alleged downward manipulation of the market price

of the stock, to enable it to purchase shares at depressed prices, although it held that they had not been damaged because they had not

sold their stock. It held, however, that plaintiffs had standing to seek

an injunction against the alleged manipulation without any proof of

loss. In Pacific 17l8. 00. v. Blot 48 the Commission, as amicus, stated

that it was inclined to believe that a noninsider who is planning to

make a tender offer may make open market purchases of the same

stock at lower prices without disclosing the forthcoming tender offer.

The district court did not reach this issue but instead denied a preliminary injunction against the use of the shares acquired in this

manner on the basis of two points urged by the Commission: (1) that

a corporation does not have standing to seek an injunction against a

tender for its shares absent an allegation that the corporation was

itself defrauded or injured by the tender, and (2) that the fact that

one has acquired stock in violation of the anti-fraud provisions is not

sufficient to prevent him from exercising such rights of a shareholder

under State law as the right to obtain a list of shareholders.

In a decision involving the scope of the term "security" as defined

in the Securities Exchange Act, the Court of Appeals for the Seventh

48 267 F. Supp, 936 (S.D. N.Y., 19(7).
THIRTY-THIRD ANNUAL REPORT 97

Circuit, in Toherepnia v. Knight,49 reversing the decision of the district COurt,60 held, contrary to the views expressed by the Commission as amicus curiae, that withdrawable capital shares issued by

a State-chartered savings and loan association are not securities within

that definition and that the district court, therefore, did not have jurisdiction of a cause of action based upon alleged violation of Rule

100-5 brought by the holders of such shares. Supported by the Commission, plaintiffs petitioned the Supreme Court for a writ of certiorari. The writ was granted and on August 31, 1967, a brief was

filed on behalf of the Commission.

In the criminal area, further progress was made during the fiscal

year in the prosecution of fraudulent securities promotions. Last year's

report had discussed the return of indictments in the American

Bonded Mortgage Company case, charging the defendants with employing a scheme to distribute notes purportedly "guaranteed" by

mortgages, in violation of the anti-fraud provisions of the Securities

Act.51 In December 1966 the defendants were convicted The most

severe sentences were imposed on Mark H. Kroll and William Cahn,

who were sentenced to 10 years imprisonment and fined $40,000 and

$15,000, respectively.

In another prosecution involving the sale of high-interest bearing

notes and debentures, John B. Sanders, Jr., was convicted of violating

the anti-fraud provisions of the Securities Act on an indictment charging fraud in the sale of securities of three corporations known as the

"Underwriters" group, as well as certificates of deposit of Lords Bank

and Trust Company, Ltd., a Bahamian bank. 52 This bank was one of

a number of Bahamian banking institutions that had been placed on

the Commission's Foreign Restricted List due to unlawful securities

distributions in the United States. 53 Sanders was sentenced to a total

of 10 years imprisonment.

Eight individuals and three corporations were convicted of violating the anti-fraud provisions of the Securities Act in connection with

the sale of stock of Air and Space Underwriters, Inc., primarily to

residents of Indiana." A particularly significant aspect of the case was

the conviction of Van C. Vollmer, former editor of an Indiana financial newspaper, of violating the "anti-touting" provisions of Section 17 (b) of the Securities Act by failing to disclose that he received

compensation for promoting the company's securities in the news and

editorial columns of the newspaper .

.. 371 F. 2d 374 (C.A. 7), certim"aN granted, 387 U.S. 941 (1967).

""N.D. Ill., No. 640 1285 (January 17,19(6).

lil See p. 125.

.. W. D. La., No. 17697 .

.. See p. 103, intra.

G< -S.D. Ind., 66 Cr. 108.
98 SECURITIES AND EXCHANGE COMMISSION

In sustaining the conviction of Donald R. Elbel of violations of the

anti-fraud provisions of the Securities Act and of the Mail Fraud

Statute, the Court of Appeals for the Tenth Circuit 115 made it plain

that requisite criminal intent may be inferred from a "reckless disregard" for the underlying truth or falsity of the represenations

made. The court also held that a defendant's allegation that he believed

in the eventual success of the business venture is no defense to criminal

charges of misrepresentations of material facts. Elbel had been convicted of devising a scheme to offer and sell securities of Coffeyville

Loan and Investment Company by fraudulent means.

MANIPULATION

The Exchange Act and Commission rules under the Act prohibit

various kinds of manipulative activities. In order to enable the Commission to meet its responsibilities for the surveillance of the securities

markets, the market surveillance staff has devised a number of procedures to identify possible manipulative activities. A program has

been adopted with respect to surveillance over listed securities, in which

the staff's activities are closely coordinated with the stock watching

operations of the New York and American Stock Exchanges. Within

this framework, the staff reviews the daily and periodic stock watch

reports prepared by these exchanges and on the basis of its analysis of

the information developed by the exchanges and other sources, determines matters of interest, possible violations of applicable law, and

the appropriate action to be taken.

In addition, the market surveillance staff maintains a continuous

ticker tape watch of transactions on the New York and American

Stock Exchanges and the sales and quotations sheets of regional exchanges to observe any unusual or unexplained price variations or

market activity. The financial news ticker, leading newspapers and

various financial publications and statistical services are also closely

followed.

If any of these sources reveals possible violations, the market surveillance staff conducts a preliminary inquiry into the matter. These

inquiries, some of which are conducted with the cooperation of the

exchange concerned, generally begin with the identification of the

brokerage firms which were active in the security. The staff may communicate with partners, officers or registered representatives of the

firms, with customers, or with officials of the company in question to

determine the reasons for the activity or price change in the securities

involved and whether violations may have occurred.

The Commission has also developed an automated over-the-counter

surveillance program to provide more efficient and comprehensive

.. Elbel v. U.S.,364 F. 2d 127 (1966).
THIRTY-TIDRD ANNUAL REPORT 99

surveillance. The automated equipment is programmed to identify,

among other things, unlisted securities whose price movement or dealer interest varies beyond specified limits in a pre-established time

period. When a security is so identified, the automated system prints

out current and historic market information concerning it. This data,

combined with other available information, is collated and analyzed to

select those securities whose activity indicates the need for further

inquiry or referral to the Commission's enforcement staff.

In addition to the Commission's market surveillance activities, the

other detection methods previously discussed are also useful tools in

the detection of manipulation. Prior comments of a general nature

regarding investigations and the nature of sanctions available are

equally pertinent to manipulations.

Among Commission decisions during the year dealing with manipulative activities by broker-dealers, the following are of particular

interest:

In Kamen & Oompany,56 the Commission dealt with a manipulative scheme perpetrated by a group of employees of the Kamen firm,

a New York and American Stock Exchange member. The employees

solicited numerous nonexchange member broker-dealers throughout

the country to place their exchange business in listed securities with

the firm in return for over-the-counter business to be furnished them

by the firm. The only over-the-counter business furnished, however,

was in the form of contrived transactions in the stock of Jerome, Richard & Co., Inc., a registered broker-dealer which certain of these employees had organized.

Inthe typical situation, a member of the group would telephone an

out-of-town nonexchange member dealer (A) and in a single conversation instruct that dealer to purchase a specified number of Jerome

shares from another designated dealer (B) at a specified price and simultaneously to sell the same shares to a third designated dealer (C) at

a specified price which was usually lh or % of a point higher than

the purchase price. This last dealer (C) was then in a similar manner

instructed by a member of the group to buy the shares at that higher

price from the prior dealer (A) and simultaneously to sell them to

still another designated dealer (D) at an even higher price. In this

manner a large number of circuits of transactions were effected among

approximately 100 nonmember broker-dealers. Finally the group arranged for a large number of shares to end with two "dummy" corporations. The failure of these corporations to pay for the stock resulted

in losses to various broker-dealers totaling more than $475,000.

The Commission found that although there was no evidence to support a finding that the firm's managing partner had actual knowledge

.. Securities Exchange Act Release No. 7965 (September 29,1966).
100 SECURITIES AND EXCHANGE COMMISSION

of the group's plan or the methods by which it was accomplished, the

firm and the partner failed to discharge their responsibilities to institute and maintain adequate supervisory procedures designed to prevent violations. Itsuspended the firm from its exchange memberships

and NASD membership for 10 business days and suspended the partner from association with any broker or dealer for 90 days.

In F. 8. Johns & Oompany, Inc.,51 the Commission found that a

number of 'broker-dealers participated in a manipulative scheme with

respect to the stock of Diversified Funding, Inc., masterminded by the

Johns firm and its president, who were also engaged in retailing

Diversified stock through -a "boiler-room" sales campaign. The Commission found that the Johns firm, in order to create the appearance of

a broad and active market 'and to facilitate the retail distribution at

artificially inflated prices of substantial blocks of Diversified stock

which it held or expected to acquire, induced other dealers to place

ostensibly independent, but in reality fictitious, quotations in the quotation sheets for the over-the-counter market at continually increasing

levels, in willful violation of the anti-fraud provisions. The Commission further held that the other dealers, who should have realized

that they were cogs in a manipulative scheme, were culpable participants in the scheme. With respect to one of the respondents, Reuben

Rose & Co., Inc., whose trader had on his own entered into the arrangement with F. S. Johns, the Commission held that the firm failed to

exercise the necessary supervision over the trader. Itfound that the

firm "exercised no supervision whatever over the day-to-day activities

of its trader . . . . The controls which were assertedly maintained

were directed toward protection of the firm's capital rather than to

protection of investors. Under the circumstances, the firm's failure

of supervision made it a participant in [the trader's] misconduct."

Two criminal cases developed during <thefiscal year involved the

manipulation of stocks listed on the American Stock Exch-ange. In

United States v, Osborne A.ndreas,58 six defendants were indicted for

conspiring to manipulate the price of the stock of Pentron Electronics

Corporation while distributing a block of Pentron stock for Andreas,

the former president of the corporation. Two of the defendants, Mark

Rolland, a partner in a Chicago factoring firm called Investment

Associates, and Spero FurIa, a securities salesman, have pleaded guilty

to the charges. In United States v. Henry Dubbin,59 seven defendants,

including Dubbin, the president of Canaveral International Corporation, were indicted for conspiring to manipulate the price of Canaveral

stock.

111 Securities Exchange Act Release No. 7972 (October 10, 1966).

.. S.D.N.Y., 67 Cr. 243.

.. S.D.N.Y., 67 Cr. 361.
THIRTY-THIRD ANNUAL REPORT 101

IMPROPER USE OF INSIDE INFORMATION

Corporate insiders by virtue of their position may have knowledge

of material facts which are unavailable to the general public and may

be able to use such knowledge to their advantage in transactions in

the company's securities. Section 16 of the Securities Exchange Act

was designed to curb the misuse of inside information. As previously

noted, that section requires insiders to report their security holdings

and transactions and provides for the recovery by or on behalf of the

issuer of short-swing trading profits realized by insiders. The Commission is not a party in suits under Section 16, but frequently participate as amicus curiae in those instances where significant interpretive

issues are involved. Aside from Section 16, however, those who make

improper use of inside information in the purchase or sale of securities

may also be liable for damages or subject to injunctive action under

the anti-fraud provisions of the securities acts, either at the instance

of injured private litigants or the Commission itself, or subject to

disciplinary action in administrative proceedings instituted by the

Commission.

In Penmahma &: OomPO/ll/Y, Inc.,oo the Commission held, among

other things, that where a director and controlling person of a company sold its securities without making disclosure of the adverse financial condition of the company which condition was inconsistent

with the favorable public image of the company known to and even

fostered by him, his sales violated the anti-fraud provisions.

The last annual report 61 discused at some length the decision of the

trial court in S.E.O. v, Teeas Gulf Sulphur 00./2 rendered early in

the 1967 fiscal year. This is an action by the Commission for injunctive

and other relief against various insiders of Texas Gulf as well as

against the company itself raising important issues under the antifraud provisions of Rule 10b-5 with respect to insiders' securities

transactions based on undisclosed inside information. Both the Commission and the two individuals who were found by the trial court to

have violated the law appealed from the decision, and the appeals were

argued in March 1967 before the Court of Appeals for the Second

Circuit.

InPettef« v, Butler,63 an action under Section 16(b) of the Securities Exchange Act, the Court of Appeals for the Eighth Circuit,

contrary to the position urged by the Commission in an amicus curiae

brief, held that a conversion of preferred stock into common stock,

at a time when the preferred had been called for redemption, did not

... Securities Exchange Act Release No. 8063 (April 27, 1967)

.. 32nd Annual Report, pp. 114-115.

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

.. 367F. 2d. 528 (C.A. 8, 1966), cert. den., 385 U.S. 1006 (1967).

•
102 SECURITIES AND EXCHANGE COMMISSION

constitute a "purchase" of the common within the meaning of that

section.

In Ohemical Fund, Inc. v, Xerow Oorporations" the Court of Appeals for the Second Circuit held that for purposes of determining

beneficial ownership under Section 16 of the Securities Exchange Act

convertible debentures are not a separate "class" of an equity security.

It further held that the test of liability under Section 16(b) where

convertible debentures are involved is whether the total percentage

of common stock which a holder would own following a hypothetical

conversion of his debentures would exceed 10 percent of the outstanding common stock thus hypothetically augmented. The Commission

had filed a brief, amicus curiae, urging that the debentures constituted

a separate class of an equity security.

ENFORCEMENT PROBLEMS WITH RESPEcr TO FOREIGN SECURITIES

The unlawful offer and sale of Canadian securities in the

United States remained at a fairly low level in fiscal 1967, continuing

the trend of the past few years. The decline of unlawful Canadian

promotions since the operations of the Toronto and Montreal "boilerrooms" of the late 1950's is due primarily to effective cooperation

and liaison between the Commission and the Alberta, Ontario and

Quebec Securities Commissions and quasi -offlcial bodies such as the

Toronto and Montreal Stock Exchanges and the Broker-Dealers' Association of Ontario. A promising development during the year was

the enactment of new securities laws in Ontario and several other

Canadian provinces. The Commission is following with considerable

interest the steps being taken to create a Federal securities agency in

Canada, and has offered to provide full assistance to it.

The Commission has continued to work closely with the Ontario

Royal Commission on Atlantic Acceptance Corporation Limited in

its investigation into the circumstances surrounding the collapse in

June 1965 of Atlantic Acceptance, a large Canadian finance company.

The Royal Commission, which was appointed in the wake of Atlantic's

financial debacle, has held 124 days of public hearings, at several of

which a member of this Commission's staff testified. The Atlantic

Acceptance collapse had wide ramifications, and resulted in a loss of

almost $100 million to Canadian and American investors. Numerous

criminal charges have been brought, mostly in Ontario, as a result of

the investigation, and the Commission has assisted the Ontario Securities Commission and the Attorney General's Department of Ontario

in connection with many of those cases.

In response to a request from the Internal Revenue Service, the

Commission assisted it in an investigation of substantial evasions of

.. 377 F. 2d 107 (e.A..2, 1967).
TEURTY-TEURD ~AL REPORT 103

the Interest Equalization Tax on purchases by Americans of foreign

securities from foreign sellers. These evasions have taken place through

the use of false certificates of American ownership of foreign securities. Two indictments have been returned against alleged tax evaders.

In addition, a new system for substantiation of the fact of prior United

States ownership of taxable securities has been established by the

Internal Revenue Service in order to avoid the evasive practices. This

system implements a recent amendment of the Interest Equalization

Tax section of the Internal Revenue Code of 1954.

Offers and sales to American residents of unregistered securities

in the form of certificates of deposit issued by Bahamian banks have

declined considerably due to the enactment in late 1965 of Bahamian

legislation regulating the bank business in that colony. The name of

one Bahamian savings and loan association was added to the Commission's Foreign Restricted List 65 during the year, however, as a

result of the offer and sale of its securities (in the form of savings

account passbooks) to United States residents. The Commission deleted the names of 13 Bahamian "banks" from the Foreign Restricted

List after being informed by the Bahamas Ministry of Finance that

their corporate charters had been revoked.

The Commission's Foreign Restricted List has reflected the changing character of its foreign enforcement effort. As of June 30, 1967,

only 26 companies remained on the list, the smallest number since

its establishment. The names of 41 Canadian and 14 Bahamian companies were deleted from the list during the fiscal year in accordance

with established procedures, while the names of 1 Canadian, 2 Bahamian, 1 British Honduran and 4 Panamanian companies were added

to the list. The current list and supplements to it are issued to and

published by the press, and copies are mailed to all registered brokerdealers and are made available to the press.

As of September 30, 1967, there were 30 companies on the list, including 18 Canadian, 4 Bahamian, 7 Panamanian and 1 British Honduran companies, as follows:

Bahamian

American International Mining

Bahamas Savings and Loan Association

Bankers International Investment

Corporation

Compressed Air Corporation Limited

British Honduran

Caribbean Empire Company, Ltd.

.. The Foreign Restricted List consists of foreign companies whose securities

the Commission has reason to believe are being, or recently have been, distributed

in the United States in violation of the registration requirements ot the Becurttles

Act of 1933.
104 SECURITIES AND EXCHANGE COMMISSION

Canadian

Allegheny Mining and Exploration

Company Limited

Autofab, Ltd.

Bayonne Mine, Ltd.

Briar Court Mines, Ltd.

International Claim Brokers, Ltd.

Ironco Mining & Smelting Company,

Ltd.

Keele Industrial Developments, Ltd.

Kenilworth Mines, Ltd.

Mack Lake Mining Corporation, Ltd.

Norart Minerals Limited

North West Pacific Developments,

Ltd. now known as Pacific Northwest Developments, Ltd.

Obsco Corporation, Ltd.

Paracanusa Coffee Growers, Ltd.

St. Lawrence Industrial Development Corporation

Ste. Sophie Development Corporation

St. Stephen Nickel Mines, Ltd.

Trans-Oceanic Hotels Corporation,

Ltd.

Victoria Algoma Mineral Company,

Ltd.

Panamanian

British Overseas Mutual Fund Corporation

Cerro Azul Coffee Plantation

Darien Exploration Company, S.A.

De Veers Consolidated Mining Corporation, S.A.

Euroforeign Banking Corporation,

Ltd.

Panamerican Bank & Trust Company

Victoria Oriente, Inc.

In dealing with fraudulent foreign promotions, the Commission is

continuing to benefit from simplified procedures :for obtaining foreign postal fraud orders. The Post OfficeDepartment has cooperated

fully with the Commission's program.
PART VI

REGULATION OF INVESTMENT COMPANIES

The Investment Company Act of 1940 provides for the registration

and regulation of companies primarily engaged in the business of

investing, reinvesting, owning, holding or trading in securities. The

Act, among other things, requires disclosure of the financial condition

and investment policies of such companies; prohibits changes in the

nature of their business or their investment policies without shareholder approval; regulates the means of custody of their assets;

requires management contracts to be submitted to shareholders for

approval; prohibits underwriters, investment bankers, or brokers

from constituting more than a minority of the board of directors;

and prohibits transactions between investment companies and their

officers,directors, or other affiliates except with approval of the Commission. The Act also regulates the issuance of senior securities and

requires face-amount certificate companies to maintain reserves adequate to meet maturity payments. Investment companies must also

file periodic reports and are subject to the Commission's proxy rules,

and certain "insiders" of closed-end companies are subject to the

insider reporting and "short swing" trading rules. The securities of

investment companies which are offered to the public are required

to be registered under the Securities Act of 1933.

The Division of Corporate Regulation performs the principal functions under the Investment Company Aot. Inaddition, it has responsibility for the administration of disclosure requirements with respect

to registration statements filed by investment companies under the

Securities Act of 1933and the administration of the periodic reporting,

proxy solicitation and other applicable provisions of the Securities

Exchange Act of 1934 with respect to such companies.

Part I of this report summarizes the Commission's Report on the

Public Policy Implications of Investment Company Growth, which

was submitted to Congress in December 1966,and the legislative proposals implementing the recommendations of the Report for amendment of the Investment Company Act, submitted in May 1967.

COMPANIES REGISTERED UNDER THE Acr

As of June 30,1967, there were 842 investment companies registered

under the Act, including 68 small business investment companies. Of

105
- - 

106 SECURITIES AND EXCHANGE COMMISSION 


this total, 743 were 'Lactive" companies, whose sets had an aggregate 

market value of approximately $58.2 billion. Compared with the 

corrasponding totals at June 30,1966, these figures represent WI overall 

increase of approximately $8.4 billion in the market value of assets 

and an increase of 76 in the number of active registered companies. 

The asset increase is partly due to appreciation in the assets of previously registered companies and partly to the large increase in the 

number of registered companies. The following table shows the various 

categories of registered companies as well as the number of companies 

and the approximate market due of the assets in each oakgory as 

of June 30,1967 : 

Number 01register4 cornpanlea Appmrimate

market value 

of assets ot BOUPB 

Ab1.1 1 Inactive. / Total

Manegemsntopsnad ("muhlalfunds") ....... 935 


~ansgementclosed-end.......... 161 


Unitjnvestmant ~ust ......................... 141 


Fa-amount o8rtEcate ........................ 6 


,Total.................................... 743 


"lllncllve"tr1@rsf3rw16tere<l wrn~snluahlrll asolJur.e31. 1867. WPreln Lllepmrwol balnslQuldafod or L~,:L, 1. or L9.e Blo~l81. ~~pl~enf~o~ i,'>nurnl10 ~~CIIOCI yf80111.8 Act 10, ~I~rqsrrhfL?. (rr whlilh P3v0 othenl~gon~I at, 181kW11ed and relastn remrmd ouly unto well tuna a tho tururmrsron~ssuerorders 

unJcr Ss!rrrr 811, trsmlr,rrlnp Ibrv r?jutr.rlan. 

The approximately $5 billion of assets of the iLactive" registered 

unit investment trusts include approximately $4.4 billion of assets of 

unit investment trusts which invest in securities of other registered 

investment companies, substantially all of them mutual funds. 

During the fiscal year, 108 new companies, including 1 small business investment company, registered under the Act while the registrations of 41 companies, including 3 small business investment companies, 

were terminated. The classification of these companies is as follows: 

Registered Rabtrtretlon 

during the terminated 

6scal yes during the 1 I Bsrnl year 

GROWTE OF INVESTMENT COMPANY ASSETS 

The following table illustrates the striking growth of assets of 

investment companies over the years since the enactment of the 

Investment Company Act: 
TEURTY-THIRD ANNUAL REPORT 107 

Number of inunvsslmenl companiaa regialcred under the Inuealmenl Company Act and 

their eslided aggregate maeta, in round amounts, at the end of each fiscal year, 1941 through 1987 

rbcnl yes ended June M 

-

. ~ hnereme b ~in aggregate mirseta reaeofs the sale of new securllipsa(i well an capital sppmclstlon. 

CAPITAL LEVERAGED FUNDS 

During fiscal year 1967 a new type of investment company known 

as a capital leveraged investment company developed and nine such 

companies registered under the Investment Company Act. 

In the capital leveraged company, one-half of the capital is contributed by 'LIncome Shareholders" and the other half by "Capital 

Shareholders." The Income Shareholders are entitled to the entire 

income of the company for a specified number of years, and at the 

end of the specified period to a liquidation value. With respect to the 

companies which have registered, the specified period ranges from 12 

to 18 years. The Capital Shareholders are entitled to the capital 

appreciation on the total capital of the company at the expiration of 

the specified period less the liquidation value of the income shares. 

In other words, the Income Shareholders give up the capihl appreciation on their investment to the Capital Shareholders in return for 

which the latter give up the income on their investment. The stated 

purpose of these companies is to enable investors who seek either 

income or growth of capital to the exclusion of the other to maximize 

their goals. Seven of the capital leveraged companiw have sold their 

securities to the public for cash and the two others issued their securities in exchange for securities held by pnblic iilr cstors. 
108 SECURITIES AND EXCHANGE COMMISSION

All but one of the registered capital leveraged companies are closedend investment companies which, so long as their income shares are

outstanding, will neither issue more stock of either class nor redeem

any securities which they have already issued. The one open-end company sold the two classes as a unit and will redeem as a unit. The

holders of units may, if they so desire, sell either class on the open

market. This open-end company also will not issue any additional

shares.

All of the closed-end capital leveraged companies filed applications

for exemption from Section 18(a) (2) (E) of the Act, which requires

dividends on senior securities that are stocks (here the income shares)

to be cumulative. The one open-end company, which provided safeguards with respect to its income shares substantially equivalent to

those that would be operative if the restrictions of Section 18(a) were

applicable, applied for exemption from Section 18(f) (1) which generally prohibits an open-end company from issuing any senior security.

The Commission granted these applications. In order to minimize the

conflict of interest between the two classes and to protect against

undue leverage, the Commission, with the consent of the companies,

imposed certain conditions in the exemptive orders.

THE "FLEXIBLE FUND ANNUITY"-S.E.C. v, UNITED BENEFIT LIFE

INSURANCE CO.

InS.E.O. 'V. United Benefit Life Imeuranoe 00.,1 the Supreme Court,

reversing the decision of the court of appeals," held that the "Flexible

Fund Annuity" contract offered and sold by United Benefit Life

Insurance Company is subject to the registration requirements of the

Securities Act of 1933. Rejecting the view of the court of appeals that

the contract must be characterized in its entirety, the Supreme Court

held that the operation of the contract during the accumulation, or

pay-in, period, when the company "promises to serve as an investment

agency and allow the policyholder to share in its investment experience," must be assessed independently ''to determine whether that

separable portion of the contract falls within the class of those

exempted by Congress from the requirements of the Securities Act,

and, if not, whether the contract constitutes a 'security' within Section

2 of that Act .... " In holding that the exemption from registration

provided by Section 3(a) (8) of the Act for insurance and annuity

contracts is unavailable with respect to the accumulation portion of

the contract, the Court emphasized that arrangements of this type

1387 U.S. 202 (1967). Earlier stages of the litigation in this case are discussed

in the 32nd Annual Report, pp, 112-13; 31st Annual Report, p. 127; 29th Annual

Report, pp. 119-20.

• 359 F. 2d 619 (1966).
THIRTY-THIRD ANNUAL REPORT 109

"require special modifications of State law, and are considered to appeal

to the purchaser not on the usual insurance basis of stability and

security but on the prospect of 'growth' through sound investment

management." The Court added that the contract provision under

which the company guarantees a partial repayment to the purchaser

does not convert the contract into one of insurance; "the basic difference between a contract which to some degree is insured and a contract

of insurance must be recognized." Finally, the Court held that the

accumulation provisions constitute an "investment contract" within

the meaning of Section 2 of the Securities Act. In so holding, the

Court noted that "contracts such as the 'Flexible Fund' offer important competition to mutual funds ... and are pitched to the same

consumer interest in growth through professionally managed investment," and then stated that "it seems eminently fair that a purchaser of

such a plan be afforded the same advantages of disclosure which inure

to a mutual fund purchaser under ... [the registration provisions]

of the Securities Act." Having thus disposed of the issues raised under

the Securities Act, the Court remanded the case to the court of appeals

for consideration of the question whether the Flexible Fund is an

investment company under the Investment Company Act-an issue

which the lower courts had not reached.

CONTROL OF IMPROPER PRAcrICES

Inspection and Investigation Program

Section 31(b) of the Investment Company Act authorizes the Commission to make periodic and special examinations of registered

investment companies. Pursuant to this authority the Commission's

staff conducted 156 inspections during fiscal 1967. Many of these

inspections disclosed violations not only of the Investment Company

Act but also of other statutes administered by the Commission. Most

of the violations uncovered during routine inspections appear to have

resulted from unfamiliarity with the Investment Company Act and

were resolved after they were brought to the attention of management.

Some of the violations uncovered, however, were serious in nature.

These included inadequate arrangements for the safekeeping of investment company assets, failure to disclose true sources of periodic income

and capital gain distributions paid to shareholders, inadequate disclosures concerning the activities of the investment company and

failure to maintain adequate fidelity bond coverage for persons dealing

with investment company assets. The inspections also disclosed several

instances where the procedures for pricing investment company shares

did not conform with statutory requirements and with procedures

set forth in the company's prospectus. Instances were also uncovered
110 SECURITIES AND EXCHANGE COMMISSION

in which self-dealing transactions had been effected by affiliated persons in violation of Section 17 of the Act.

Largely as an outgrowth of the information obtained during routine

inspections, 12 private investigations were commenced during the fiscal

year to develop the facts concerning what appeared to be serious

violations.

Civil, Administrative and Criminal Proceedings

During the fiscal year, the Commission, on the basis of facts

developed through investigations, instituted three civil and two administrative actions. In two other cases, which had been referred to the

Department of Justice for criminal prosecution, indictments were returned. Other proceedings, previously instituted, were concluded or

progressed toward conclusion.

In one of the civil actions, BE.O. v, Montauk Financial Corporation,s the Commission obtained a permanent injunction prohibiting

the company from operating as an unregistered investment company

and its president from aiding and abetting such conduct, and enjoining

both respondents from violating the anti-fraud provisions of the

Securities Act of 1933 by selling securities of the company without

disclosing material facts regarding its financial condition. The complaint also sought a receiver of Montauk's assets. By agreement among

the court and the parties, however, the defendants filed a plan for the

voluntary liquidation of Montauk which the court approved. The

plan provides, among other things, for the surrender by the president

and certain other stockholders of some of the stock originally issued

to them in exchange for certain securities.

In BE.O. v. Milton,4 the Commission sought an injunction prohibiting David M. Milton, former chairman of the board of directors and

chief executive officer of The Equity Corporation, a registered investment company, from acting as an officer or director of Equity or any

other registered investment company. The Commission also sought an

accounting and restitution from Milton in favor of Equity and a majority-owned subsidiary of Equity, Bell Intercontinental Corporation.

The complaint alleged that Milton was guilty of gross misconduct

and gross abuse of trust in respect of Equity, that he converted to his

own use certain assets of Equity and that he caused Bell to purchase

at an excessive price the assets of a company with which he was affiliated. It further alleged that he made false and misleading statements to

the board of directors of Equity and concealed from the board material

information concerning the business of, and transactions engaged in

I E. D. Mo., Oiv. No. S67013.

'S.D. N.Y., 66 Oiv. 3053.
THIRTY-THIRD ANNUAL REPORT 111

by, Equity and its subsidiaries and affiliated persons; that he concealed from the board certain conflicts of interest between his fiduciary

duties to Equity and his personal interests; that by means of these

concealments and false and misleading statements he secured authorization from Equity's board of directors for numerous transactions

which benefited himself and certain of his associates and controlled

companies; and that he prevented Equity's directors from being

furnished with sufficient information to enable them to discharge

their obligations and responsibilities to direct and manage the business

and affairs of Equity.

Following the close of the fiscal year Milton consented in a stipulation of settlement to the entry of a permanent injunction. In view of

the pendency of certain shareholder derivative actions seeking recovery from Milton and others in favor of Equity and Bell on the

basis of the same matters alleged in the Commission's complaint, the

Commission agreed, as part of the settlement, to the dismissal of that

portion of its complaint which sought monetary relief against Milton

in favor of Equity and Bell. Included in the stipulation of settlement,

which was incorporated into the final judgment, were several provisions designed to protect the interests of the shareholders of Equity

and Bell.

In S.E.O. v. Sterling Precision Oorporation,t' the Commission

sought an injunction prohibiting further violations of Section 17(a)

of the Investment Company Act and an order decreeing that the redemption by Sterling of certain of its preferred stock and debentures

held by a registered investment company affiliated with Sterling violated that section and was void. After the close of the fiscal year, the

district court granted Sterling's motion for summary judgment, holding that although supervision by the Commission of the redemption

might have been desirable in the public interest, it was not required

under the statute. The court held that the omission from Section

17(a) (2) of a specific reference to "redemption" indicated that Congress meant to exclude redemption transactions from the prohibition

in that section of "purchase[s]" from a registered investment company by affiliated persons. The Commission has appealed from the

district court's decision.

The last annual report II discussed earlier stages of the litigation in

SE.O. v, Wong, an action in which the Commission, among other

things, sought an order under Section 36 of the Investment Company

Act enjoining the defendants from serving as officers or directors of

S.D. N.Y., 66 Civ. 3052.

Page118.

281-577-68-9

~

•
112 SECURITIES AND EXCHANGE COMMISSION

a registered investment company, because of their alleged "gross

abuse of trust" while serving in those capacities for Puerto Rico Capital Corporation. As previously noted, the district court denied motions

to dismiss the complaint," It also denied a motion by one of the defendants to permit an interlocutory appeal with respect to the court's

rulings that (1) a former officer or director of a registered investment

company who allegedly committed gross abuse of trust while serving

in that capacity cannot evade the injunctive provisions of Section 36

by resigning before the complaint is filed; and (2) the Commission

may seek ancillary relief of restitution and an accounting in injunctive actions instituted under the Investment Company Act and the

Securities Exchange Act," Subsequently, the court granted an application by the receiver for the investment company to be substituted for

the company, which had been named as a nominal defendant, and to

be realigned as a co-party plaintiff. In connection with this application

the court held that an implied private right of action exists under

Section 36.

The two administrative proceedings principally involved alleged

improprieties by the investment advisers and principal underwriters

of mutual funds in the execution of portfolio transactions for the

funds, as well as related misrepresentations in the sale of the funds'

securities. In one of the proceedings, Delaware Management Oompany, Ino., it was charged that a broker-dealer, which was a substantial

dealer in the shares of the two funds involved, was improperly "interposed" between the funds and the best market, thus causing the funds

to incur excessive costs in their portfolio transactions. This proceeding

culminated during the year in the issuance of an order by the Commission accepting offers of settlement submitted by the respondents,

which provided among other things for reimbursement of the mutual

funds for excess costs incurred," Subsequent to the close of the year the

Commission issued its detailed findings and opinion." This case is

discussed at greater length at pages 78-79, supra. The other administrative proceeding, which was still pending at the close of the fiscal

year, involves allegations, among others, that the adviser and principal

underwriter of a mutual fund caused the fund to purchase for its

portfolio highly speculative securities which were unsuitable for the

fund and inconsistent with its stated investment policies.

In February 1966, the Commission had instituted administrative

broker-dealer proceedings against Investors Overseas Services (lOS)

and its wholly-owned subsidiary, Investors Continental Services, Ltd.,

252 F. Supp. 608 (D.P.R., 1966).

254 F. Supp. 66 (D.P.R.,1966).

Securities Act Release No. 4863 (May 1, 1967).

10 Securities Exchange Act Release No. 8128 (July 19, 1967).

•

•

•
THIRTY-THIRD ANNUAL REPORT 113

(ICS), both registered broker-dealers, as well as several persons associated with those firms, The order alleged violations of (1) the

registration provisions of Section 5 of the Securities Act of 1933 and

Section 7 of the Investment Company Act with respect to the

offer and sale of unregistered interests in The Fund of Funds, Ltd.

(FOF) (a foreign investment company whose portfolio consists

largely of shares of investment companies registered under the Investment Company Act) and unregistered participations in the lOS

Investment Program (a program for the accumulation of interests

in FOF); (2) Section 17(d) of the Investment Company Act and

Rule 17d-1 thereunder, relating to transactions between International

Investment Trust, an investment company affiliate of lOS and FOF,

and certain registered investment companies; and (3) Section 17 ofthe

Securities Exchange Act relating to the failure to preserve and produce

certain books and records of lOS and ICS.11

In May 1967, the Commission announced that it had accepted an

offer of settlement submitted by the respondents proposing termination

of the proceedings without any findings as to these allegations and

agreeing for that purpose that: (1) respondents would not engage

in any activities subject to the Commission's jurisdiction; (2) lOS and

its affiliates would cease all sales of securities to U.S. citizens or nationals wherever located (with certain very limited exceptions), and

lOS would return funds which certain U.S. citizens and residents

had invested in FOF; (3) respondents would remove the lOS securities complex from the jurisdiction of the Commission by the sale or

other disposition of Investors Planning Corporation of America, a

registered broker-dealer, and ICS, withdrawal of lOS's registration

as a broker-dealer, and deregistration under the Investment Company

Act of five registered investment companies wholly owned by FOF;

(4) lOS and its affiliates would not acquire directly or indirectly

any controlling interest in any financial entity doing business in the

United States; and (5) lOS would cause FOF and its affiliated investment companies to make only such further purchases of shares of registered investment companies as are within the percentage limitations

now provided in Section 12(d) (1) of the Investment Company Act

and would abide by any future legislation applicable to foreign fund

holding companies such as FOF.12

In one of the criminal actions, a fonner sales representative and

divisional manager for the investment adviser and underwriter of an

investment company was charged in an ll-count indictment with

violations of the anti-embezzlement and larceny provisions of the In11 Securities Exchange Act Release No. 7816 (February 7, 1966).

D Securities Exchange Act Release No. 8083 (May 23,1967).
114 SECURITIES AND EXCHANGE COMMISSION

vestment Company Act as well as violations of the anti-fraud provisions of the Securities Act of 1933 and violation of the Mail Fraud

Statute. The indictment alleges that the defendant embezzled and converted to his own use funds and assets of the investment company. In

the other action, the former president of an investment company was

charged in a 6-count indictment with misappropriating $69,900 from

the company's shareholders through a series of sham transactions. He

was also charged with conspiring with another to defraud the company

by causing it to purchase shares of companies which are now worthless. The investment company is currently in receivership.

The Commission's enforcement program under the Investment Company Act was responsible for the return of approximately $700,000 to

investors, directly or indirectly, during the fiscal year, including approximately $376,000 as a result of the settlement in the Delaware

Management matter.

FILINGS REVIEWED

As previously noted, investment companies offering their shares for

sale to the public must register them under the Securities Act of

1933. The companies themselves, of course, must register under the

Investment Company Act. The registration statements of investment companies filed pursuant to the Securities Act are reviewed for

compliance with that Act and the Investment Company Act. The

Commission's rules promulgated under the Investment Company Act

generally require that the basic information contained in notifications

of registration and in registration statements of investment companies

filed under the Investment Company Act be kept current through

periodic and other reports. In addition, proxy soliciting material filed

by investment companies is reviewed for compliance with the Commission's proxy rules. The following table sets forth the nature and volume

of filings processed during the past fiscal year:

Pending Pending

Type of Matenal June 30, Filed Processed June 30, 1966 1967

Registration statements and post-elIective amendments under the SecuntIes Act of 1933______________________ 63 1,001 964 100

Registrations under the Investment Company Act of 1940__________________________________________________ -50 94 86 58 Proxy solrcitmg matenal; ______________________________ 30 489 441 78 Annual reports _________________________________________ 612 564 574 602 Quarterly reports _______________________________________ 67 271 287 51 PeriodIC reports to shareholders contammg financial

1,669 statements ___________________________________________ 705 2,108 266 Copies of sales litemture ________________________________ 633 2,766 3,045 354

ThIS figure represents an adjustment of last YC<lI'S Ilgure,

APPLICATIONS AND PROCEEDINGS

Under Section 6(C) of the Act, the Commission, by rules and regulations, upon its own motion or by order upon application, may

-
TEITRTY-TEITRD~AL REPORT 115

exempt any person, security, or transaction from any provision of the

Act if and to the extent such exemption is necessary or appropriate

in the public interest and consistent with the protection of investors

and the purposes fairly intended by the policy and provisions of the

Act. Other sections, such as 6(d), 9(b), 10(£), 17(b), 17(d), and

23(c), contain specific provisions and standards pursuant to which the

Commission may grant exemptions from particular sections of the

Act or may approve certain types of transactions. Also, under certain

provisions of Section 2, 3, and 8, the Commission may determine the

status of persons and companies under the Act. One of the principal

activities of the Commission in its regulation of investment companies

is the consideration of applications for orders under the above sections.

During the fiscal year, 226 applications were filed under these and

other sections of the Act, and 211 applications were disposed of. As

of the end of the year, 115 applications were pending. The following

table presents a break-down, by sections involved, of the number of

applications filed and disposed of during the year and the number

pending at the beginning and closeof the year.

A pplications filed with or acted upon by the Commission under the Investment Compan y

Act during the fiscal year ended June 30, 1967

Pending Pen

secnons Subject July I, Filed Closed June

1966 196

-- -- - 3, 6______________ Status and exemptlon _______________________________ 22 44 36 7________________ Reglstration of investment compames _______________ 3 3 4 8(0 ______________ Termination of registration __________________________ 33 39 41

9, 10, 16_________ Regulation of affillatton of directors, officers, employees, investment advisers, underwntcrs, and others _____________________________________________ 3 13 13 12, 13, 14(a), 15__ Regulation of funcnons and actrvitres of investment compames _________________________________________ 7 29 23 11, 25____________ Regulation of secunties exchange offers and reorga- nization matters. 0 3 0 17_______________ Regulation of transactrons WIth affiltated persons ____ 21 49 46 2.

18, 19,21,22,23 __ Requirements as to capital structure, loans, distn- buttons and redemptions and related matters ______ 10 36 40 6 7_______________ Periodic payment plans _____________________________ 0 2 1 1

--.------------ Regulation of face-amount certrticate companies _____ 1 0 0 1

- .------------ Periodic and other reports 0 8 7 1

-- -- -- -- TotaL -- -_ .. 100 226 211 115

2

28

30

Some of the more significant matters in which applications were

considered are summarized below:

The Commission denied an exemption from Section 17(a) of the

Investment Company Act for a proposed purchase by Bowser, Inc. of

222,600shares of its voting common stock from The Equity Corporation, a registered investment company, Sterling Precision Corporation,

an affiliate of Bowser and Equity, J. Russell Duncan, chairman of

Sterling's board of directors, and Jardun Corporation, a company

wholly owned by Duncan," The Commission determined that the appli11 Investment Company Act Release No. 4842 (February 8, 1967).

___________________• ______________

- ___________________________

____ --- ------------ ---------------------------------
116 SECURITIES AND EXCHANGE COMMISSION

cants had failed to establish that the terms of the proposed transaction,

including the consideration to be paid, met the test of Section 17(b)

of the Act that such terms be reasonable and fair and not involve overreaching on the part of any person concerned.

The Commission found that in arranging for the proposed purchase,

Bowser's president and his adherents on the Bowser board of directors

were primarily motivated by the desire to maintain control of Bowser.

The proposed purchase would have avoided a threatened proxy contest

or tender offer by Duncan and the interests aligned with him. The

Commission stated that applicants had not shown that the use of the

corporation's funds for such a purpose would be fair to all of Bowser's

stockholders.

The Commission further found that applicants had failed to establish that the proposed purchase price of $13 per share was fair. Applicants relied on the fact that this price was about the same as the

market price quoted for Bowser stock on the American Stock Exchange

at the time the parties entered into the purchase agreement. The Commission stated, however, that such market price could not furnish an

appropriate standard by which to judge the fairness of the purchase

price, since the market price was significantly inflated as a result of

the heavy volume of insider buying by the vying groups.

The Commission subsequently denied a petition for rehearing filed

by Sterling, Duncan and Jardun, and these parties have appealed the

Commission's order to the Court of Appeals for the District of

Columbia Circuit.

In December 1966, Electric Bond and Share Company and American & Foreign Power Company Inc., its 56 percent-owned subsidiary,

both registered investment companies, entered into a merger agreement providing for the exchange of each share of common stock of

Foreign Power not owned by Bond and Share for %oth of a share

of Bond and Share common stock. The companies filed a joint application pursuant to Sections 17(b) and 6(c) of the Act for an order

exempting the proposed merger from Section 17(a) and other sections

of the Act.14

Prior to the date set for hearings, a shareholder of Foreign Power

instituted an action in a State court to enjoin the merger and moved

the Commission to dismiss its proceedings or to stay them pending

determination of the court action. The court thereafter granted a

motion by Foreign Power and Bond and Share to stay its proceedings

pending the Commission's proceedings, and the Commission denied the

motion before it. The shareholder participated in the hearings which

were concluded in May 1967. The parties and participants waived a

.. See Investment Company Act Release No. 4826 (January 23, 1967).
TffiRTY-TffiRD ANNUAL REPORT 117

decision by the hearing examiner and submitted briefs to the Commission. At the close of the fiscal year the matter was pending.

New Rule Relating to Transactions Between Affiliated Investment Companies

Section 17(a) of the Act, broadly speaking, prohibits purchase and

sale transactions between investment companies and persons or companies affiliated with such companies. Under Section 17(b), however,

the Commission may exempt proposed transactions from this prohibition when it finds that the terms are fair and that certain other

conditions are met. Rule 17a-7 exempts from Section 17(a) transactions between affiliated registered investment companies involving the

purchase or sale for cash and at the "independent current market

price" of securities traded on a national securities exchange." The

rule is designed to eliminate the need for filing a Section 17(b) application under circumstances where it ris unlikely that the findings required by that section for an exemption could not be made. Inaddition,

it appears that the rule will serve the interests of investors by permitting affiliated registered investment companies which previously may

have purchased or sold securities on the open market in order to

avoid the application procedures of Section 17(b) and thereby incurred duplicate brokerage charges, to effect such transactions with

each other and pay no such charges.

NEW RULES RELATING TO "REWADING"

Section 11(a) of the Act, in substance, prohibits an open-end investment company from imposing a sales load in connection with the

"exchange" of new shares for outstanding shares in the same company.

Certain open-end companies have issued shares which, by their terms,

terminate after a stated period of time. Upon investment of the proceeds of the terminated shares in new shares, a new sales load has been

imposed. Rule lla-1, published for comment during the fiscal year and

adopted shortly after the close of the year, makes it clear that the term

"exchange" includes the issuance of new shares under the above circumstances and thus precludes the imposition of a new sales load."

Section ll(b) (2) exempts from Section ll(a) an offer of exchange

made pursuant to the right of conversion, at the shareholder's option,

from one class or series into another "class or series of securities issued

by the same company." Rule llb-1 was adopted as a companion rule

to Rule lla-1 to make it clear that the exemption is not available to all

investment companies which might seek to escape the provisions

of Rule lla-1P Itdoes so by specifying that the exemption is available

"'Investment Company Act Release No. 4697 (September 8, 1966).

"Investment Company Act Release No. 5024 (July 12, 1967).

17 Investment Company Act Release No. 5025 (July 12, 1967).
118 SECURITIES AND EXCHANGE COMMISSION

only to the type of "series company" described in Section 18(f) (2) of

the Act, i.e., a company which maintains a series of separate differentiated pools of assets in respect to each of which there is a class or series

of securities outstanding with exclusive participation inthe particular

pool.
PART VII

REGULATION OF PUBUC-UTILITY HOLDING COMPANIES

Under the Public Utility Holding Company Act of 1935, the Commission regulates interstate public-utility holding-company systems

engaged in the electric utility business and/or in the retail distribution

of gas. The Commission's jurisdiction also extends to natural gas

pipeline companies and other nonutility companies which are subsidiaries of registered holding companies. There are three principal

regulatory areas under the Act. The first includes those provisions

of the Act which require the physical integration of public-utility

companies and functionally related properties of holding-company

systems and the simplifioation of intercorporate relationships and

financial structures of such systems. The second covers the financing

operations of registered holding companies and their subsidiaries, the

acquisition and disposition of securities and properties, and certain

accounting practices, servicing arrangements, and intercompany transactions. The third area of regulation includes the exemptive provisions

of the Act, and provisions relating to the status under the Act of

persons and companies and regulating the right of persons affiliated

with a public-utility company to become affiliated with a second such

company through the acquisition of securities.

COMPOSmON OF REGISTERED HOLDING-COMPANY SYSTEMS

At the close of the fiscal year, there were 27 holding companies

registered under the Act. Of these, 22 are included in the 18 "active"

registered holding-company systems, 4 of the 22 being subholding

utility operating companies in these systems/ The remaining 5 registered holding companies, which are relatively small, are not considered

part of "active" systems," In the 18 active systems, there are 89

1The four subholding companies are Louisiana Power & Light Company, a

public-utility IlUbsidiary of Middle South Utiliti'es, Inc.; The Potomac Edison

Company and Monongahela Power Company, pUblic-utility subsidlaries of Allegheny Power Systems, Incorporated; and Southwestern ElectTic Power Company, a public-utility subsidiary of Oentral and South West Corporation.

These holding companies are British American Utilities Corporation; Kinzua

Oil &: Gas Corporation and its subholding company, Northwestern Pennsylvania

Gas Oorporatfon : and American Gas Company and Standard Gas &: Electric

Company, which are in the process of dissolution.

119

•
------- 

------- 

120 SECURITIES AND EXCHANQE COMMISSION 

Classificationof Cmnpanies aa of June SO, 1967 

Aggregate solely ~p16 ~leotrlc ayrtam Registered holdlog wmpany wistered temd andim Non- Inaotive Total assets leas 

~ystams ho~iholding gas utuity mm- mm- valu~iion mm- operat utility aub- panles panies wemos,st 

pinies ing wm- sub- sidiarim Deoember 

WlBP SIdlar185 31.1988 

Name (thousands) 

1. Allegheny Power Eystem, I*~.. ..................... 1 2 5 a m am,^ 

2. Am- Eleotrlc Power 0 

Compsn Ino 1 0 12 9 1 23 1,938320 

3. ~~r~&ataturii~ii--'--

Com3w ................ 1 0 3 4 0 8 1,246,?28 

4. Cent and South Wmt 

Corporstion.............. 1 1 4 1 1 8 W2.299 

6. Columbia Gss System, Inc., Tha ................ 1 0 13 8 0 22 1,812,807 

6. Consolidated Nahual Gas 

CmW$ ................ 1 0 4 2 0 7 997,321 

7. Delmayva ower & Light
 Compamf 0 1 2 0 0 3 288.784 

8. Eastern U llities Aciatm..................... 1 0 4 0 2 7 114.446 

8. General Public Utilities DO orstion.............. 1 0 5 4 0 10 1,361,04

10. ~168 huth Utilities. 

Inc. ...................... 1 1 6 1 3 12 1,2nzbu

11. National Fuel Gas Cmnb.Ntp$Gi sctllc..... 1 0 3 2 0 6 B0,mO plani.i . Systm.................. 1 0 13 1 0 15 811.062 

13. Northeast Utlltties ......... 1 0 6 7 6 20 888.31D 

14. Ohio Edwn Company ..... 0 1 3 0 o 4 192 n7 16. PB~~OII compmy,........ 1 o I 22 n ra 1,119:oss 

16. Philadelphia Electno 


Power Downy ......+. 0 1 1 0 1 3 69.W4 

17. 8outhemCompany The ... 1 0 6 2 0 a 2,121,99

18. UtBh Pmer & ~igdt Dampany-.. ............. 0 1 1 0 0 2 340,817 

BubtotdS................ 14 8 06 68 38 2?3 16,880,48

I-: Adjustment to diminate 


duplication io count result- 


ing Uom three mmpanias 
 belw sobsldiarlesin two systems and two wm being aobaldlarlm in ti%m 

systems 1........................................ -6 -1 .......... -7 ............ 

Add: Adjustment to include 


the %sat3 of thmenve 


jointly*mad 8"midides 


and to remove the parsnt 
 wmpanies' in~astments 


6hDosin whloh areincluded 


in the system-ts above.............................................................. 32.118 

Yan%eeAtomI~Electric Power 


Compan and Conneotlnrt 


Yankee gtomia Power 

Oompsny are l+olyied as utlllty subsidmries 


of Northeast Utilities. 


These mmp811im BIB BISo 


statlltom Bubsidiariesol 


NEES but they have not 
 been dduded above as such. 


Add: Adjustment to include 


total wets of these two 
 oompanles, lsss veloatien reserves and to eliminate 

~ortheeht utiatles' and 


NEEB'investment thereii. .......................................................... 95,m 

Total mmpanhs nnd 

~~8~ts 1. ~ative systems. 14 8 80 67 38 216 17,017,967 

RepreSenta the oousolideted assets, less vduatlan rmrves, ofesch system ss rsportedpo the CommisBiOn on Po- U5S for the year lea. 

These,flve mmpanies are Beechbottom Power Company Ino. and Wlndwr Pmer Xoua Coal Company whlch are iodlrect subsidiaries of Amsriesn Electric her Company Inc. and Allegheny Powav 

~yst~~~no: Ohio Ydsy Electric C~r~ration and its sumidlam 1ndlana-kentueky Electric Cop tion, w loh he owned 37.8 percent by Amsrioan Elmtrio Power bompany Ino. 16.5percent by Ohlo 

Edlson Com any, 12.6 penent by Allegheny Power Systam, Im..and 33.2 berewit by other mmpmisa; 

and~he~rgahorna~orp. which Bowned32percent by the Central and @nth West Co tionsystem 34 peroant by the Mlddls buth Utilities, Inc. smtem, and 34 pemnt by.= eleotrio utavmmpany nof 

a?ao0iated wlth 8 registered system. 
TEITRTY-TEITRD~AL REPORT 121

electric and/or gas utility subsidiaries, 67 nonutility subsidiaries, and

38 inactive companies, or a total, including the parent holding companies and the subholding companies, of 216 system companies. The

table on page 120 shows the number of active holding companies and

the number of subsidiaries (classified as utility, nonutility, and inactive) in each of the active systems as of June 30, 1967, and the

aggregate assets of these systems, less valuation reserves, as of

December 31,1966.

SECTION 11 MATTERS IN REGISTERED HOLDING-COMPANY SYSTEMS

In New Erngland Electric Sy8tem, as reported earlier," the Court

of Appeals for the First Circuit disagreed with the Commission's

interpretation of the phrase "loss of substantial economies" in Clause

(A) of Section 11 (b) (1) and reversed the order of the Commission

directing New England Electric System to divest itself of its gas

properties. The Supreme Court of the United States, however, sustained the Commission's position and remanded the case to the

court of appeals for further consideration.' On remand, the court

of appeals, after the filing of further briefs, again set aside the Commission's order," Proceeding on the premise that the Commission is to

be held to a "most stringent" standard in applying the "loss of substantial economies" test, the court concluded that the Commission's

analysis was not adequate to sustain its divestment order. The Supreme Court has granted the Commission's petition for a writ of

certiorari,"

As reported previously,' during fiscal year 1966 Penmeoil Oompany,

a registered holding company, and United Gas Corporation: its gas

utility subsidiary, jointly filed a two-part plan with the Commission

pursuant to Section 11 (e) of the Act. Part I proposed the sale of

United's gas distribution system, and Part II the consolidation of

Pennzoil and United. Part I of the plan was abandoned after completion of hearings thereon; an amended plan provides solely for

the consolidation of Pennzoil and United. The proceedings on the

amended plan were consolidated with proceedings instituted by the

Commission under Sections 11(b) (1) and 11(b) (2). Hearings have

been concluded, and, at the close of the fiscal year, the case was pending before the Commission for decision.

32nd Annual Report, p, 77; 31st Annual Report, pp. ~7.

SEa v. New England Electric System, 384 U.S. 176 (1006).

New England Electric Systemv. SEa, 376 F.2d 107 (1967).

SEa v. New England Bleotrio System, October Term, 1967,No. 305.

For the status of similar Section l1(b) (1) problems of other registered

holding companies which have not been disposed of, see 31st Annual Report, p.

87; 27th Annual Report, p. 104.

7 32nd Annual Report, pp, 77-78.

•

•

•

•
122 SECURITIES AND EXCHANGE COMMISSION

In Eastern Utilitie8 Associates, the Commission approved a plan

under Section 11 (e) of the Act to eliminate the publicly-held minority

interests in the three subsidiary companies of Eastern," In Northeast

Utilities, the Commission, after the close of the fiscal year, approved

a Section l1(e) plan proposing the elimination of the publicly-held

minority interests in two of the subsidiary companies of Northeast,"

American Gas Oompany, a registered holding company, filed a twopart plan in fiscal year 1966 proposing its liquidation and dissolution

pursuant to Section 11 (e) of the Act. Pursuant to Part I, approved by

the Commission," American sold its gas utility properties and paid

certain of its indebtedness. After a public hearing on Part II of the

plan, the Commission approved an initial 20 percent cash distribution

to the debenture holders." By separate Findings, Opinion and Order,

the Commission, over the objection of a debenture holder, authorized

American to acquire for $400,000 in cash additional shares of its sole

subsidiary company's common stock to provide the latter with necessary funds to complete construction of additional facilities." The

remaining aspects of Part II are pending for decision by the Commission.

PROCEEDINGS wrra RESPECf TO ACQUISITIONS, SALES,

AND ornER MATTERS

During the fiscal year, the Commission approved a proposal by

American Natural Gas Company, a registered holding company, to

acquire through CIG Corporation, its recently-organized subsidiary

company, substantially all of the assets of Central Indiana Gas Company, a nonaffiliated gas utility company in exchange for the issuance

of 746,691 shares of its $10 par value common stock to Central Indiana." Under the proposal, Central Indiana would be dissolved

following the distribution of the American Natural stock to its

stockholders.

Several other proceedings were pending at the close of the fiscal

year. In some of these, decisions were issued shortly after the end of the

8 Eastern Utilities Assooiates, Holding Company Act Release No. 15637 (January S,l967).

The U.S. District Court for the District of Massachusetts entered an order

on April 3, 1967, approving and enforcing the plan. Civil Action No. 67-137-F.

Northeast Utilities, Holding Company Act Release No. 15808 (August 7,

1967).

10 Part I of the plan was approved by the Commission in American Gas 00.,

Holding Company Act Release No. 15568 (September 26, 1966) and enforced

by the U.S. District Court for the District of Nebraska, Civil Action No. 02622,

by order dated December 2,1966.

11 American Gas Co., Holding Company Act Release No. 15774 (June 22,1967).

1.American Gas Oo., Holding Company Act Release No. 15784 (July 12, 1967).

18 American Natural Gas Co., Holding Company Act Release No. 15620 (December 12, 1966).

•
THIRTY-THIRD ANNUAL REPORT 123

year. American Electric Power Company, Inc., a registered holding

company, had filed an application-declaration with the Commission

regarding the proposed acquisititon by American of outstanding shares

of common stock of Michigan Gas and Electric Company ("MGE"),

a nonassociate gas and electric utility company. A hearing was held,

and, after the close of the fiscal year, the Commission, in a three to

one decision, authorized the proposed acquisition by American." The

MGE shares are to be acquired from public stockholders pursuant to a

tender offer, from Michigan Gas Utilities Company ("MGU"), a

nonassociate gas utility company, and in the open market. The Commission also authorized the disposition to MGU of MGE's gas properties. MGE is to be liquidated and the electric interests retained by

the American holding-company system.

Northeast Utilities, a registered holding company, filed an application-declaration relating to a proposed offer by Northeast to exchange,

through an invitation for tenders, common stock to be issued by it for

the outstanding shares of capital stock of Holyoke 'Vater Power Company, a nonassociate company. The City of Holyoke, Massachusetts,

and its Gas and Electric Department urged the imposition of certain

conditions if the proposed acquisition were approved. Following the

close of the fiscal year, the Commission issued a decision authorizing

Northeast to proceed with the offer." The Commission ruled that it

was not appropriate to impose the conditions requested.

As reported previously," Eastern Gas and Fuel Associates, an exempt holding company which owns all the outstanding stock of Boston

Gas Company, has filed an application for permission to acquire common stock of Brockton Taunton Gas Company, a nonassociate gas

utility company, pursuant to a tender offer and by the exercise of an

option. The management of Brockton Taunton opposed the application, and extensive hearings were held. After the end of fiscal year,

the Commission granted the application subject to certain conditions

(Holding Company Act Release No. 15887,November 3,1967).

Vermont Yankee N'UCZearPower Corporation and 7 of its 10 sponsor-companies filed an application relating to the initial financing by

Vermont Yankee of its proposed nuclear-powered electric generating

plant through the issuance of common stock to the sponsor-comparries." A substantially identical proposal was filed by Maine Yankee

"American Electric Power Co., Holding Company Act Release No. 15800 (July

24,19(7).

111 Northeast Utilities, Holding Company Act Release No. 15825 (August 18,

1967).

14 32nd Annual Report, p. 80.

U Vermont Yankee Nuclear Pincer Corp., Holding Company Act Release No.

15652 (February 1, 1967).
124 SECURITIES AND EXCHANGE COMMISSION

Atomic Power Oompany and 9 of its 11 sponsor-companies." Applications for intervention and requests for hearing have been filed in

these proceedings and, at the close of the fiscal year, both cases were

pending.

FINANCING OF ACTIVE REGISTERED PUBLIC-UTILITY HOLDING

COMPANIES AND THEIR SUBSIDIARIES

During the fiscal year 1967, 12 active registered holding-company

systems issued and sold for cash 31 issues of long-term debt and capital

stock, aggregating $659 million," pursuant to authorizations granted

by the Commission under Sections 6 and 7 of the Act.20 All of these

issues were sold for the purpose of raising new capital.

The following table shows the amounts and types of securities issued

and sold by registered holding companies and their subsidiaries during

fiscal 1967:

Securities issued and sold for cash to the public and financial institutions by active

registered holding co mpanies and their subsidiaries, fiscal year lB67

[Inrullllons]

Holding-company system Bonds Deben- Preferred Common

tures stock stock

10 ..••..••......•....•..........•...•.

35 ....•.... , ....•••..•................ 20 •...••••...• 10 ...•........

15

6 ....•.•••.•.

10 ....•....... 8 .....•..•.•. 30 •••••....... 16

10

12

Allegheny Power System, Inc.:

Potomac Edison Co., The .. ..•.•....... ......•••... $10 •....•...... Amencan Eleetne Power Co., Inc. ........•... ....••.••••. .......•.... $48

American Natural Gas Co.:

Michigan ConsolIdated Gas Co....................... $35 ••••••••••••••••••••••••••••••••••••

MIchigan Wisconsin Pipe Line Co.................... 45 ••••........••...•••.•.............. WlSconsm Gas Co.................................... 18 ••.•..... , ..•.•...•.................

Colnmbla Gas System, Ine., The...................... .•.......... $40 .•..•..•................ Delmarva Power & Light Co.......................... .•........•. .•.•.....•.. ••.....•.... 12 Eastern Utilities ASSOCIates:

O:~:~stpg~l~~~fi,~~ec~~~~~ .. ~::::::::::::::::::::: ...•...•.. :. :::::::::::: :::::::::::: """""28

Jersey Central Power & Light Co.................... 30 15 ....•.•••••..•..•.•.••..

Pennsylvania Electric Co............................ -51 ........•.••....•••••.••••.•.....•..

New Jersey Power & LIght Co....................... 10 ...•....•.••..•..•••••••..••.....••. Middle South Utilities, Inc.' Arkansas Power & LIght Co ....••......•..••...•.... LOUISIanaPower & Light Co ...•...........•........ MISSissippi Power & LIght Co..•••..•......••.•.•....

New Orleans Public Service Co ..•...................

New England Electric System.

New England Power Co •........••.•...•.....•......

Northeast Utlllties: Connecticut LIght and Power Co., The .

Hartford Electne Light Co. The . Western Massachusetts Electric Co .

Pennsoil Co.: Duval Corp. .................•...................... .•.......... 25 .......••.......•. , ..... Southern Company, The .......•.................•.•.........•. __. .•.•........ .......•.... 52 Alabama Power Co.................................. 34 ..••...•.... 7 ......•.•...

Mississippi Power Co .....•..•••..•.. __ 10 ...•••..• , ........••.•.........•....

TotaL •••••••..•....••••••• , •....••••....•.••••.. 388 80 61 140

Two Issues.

18 Maine Yankee Atomic Power 00., Holding Company Act Release No. 15655

(February 6, 1967).

YO Debt securities are computed at their principal amount, preferred stock at the

offering price, and common stock at offering or subscription price .

.. The active systems which did not sell stock or long-term debt securities to the

public are: Central and South West Corporation; Consolidated Natural Gas Company; National Fuel Gas Company; Ohio Edison Company; Philadelphia Eiectric

Power Company; and Utah Power & Light Company.

"""""""""""'"

-
TIDRTY-TIllRD ANNUAL REPORT 125

The table does not include securities issued and sold by subsidiaries

to their parent holding companies, debt securities maturing in less

than 10 years which were issued as temporary financing, portfolio

sales by system companies, or securities issued for assets or securities

of other companies. Transactions of this nature also require authorization by the Commission except, pursuant to Section 6(b) of the Act,

the issuance of notes having a maturity of less than 9 months where

the aggregate amount does not exceed 5 percent of the principal

amount and par value of the other securities then outstanding.

Competitive Bidding

Rule 50 under the Act requires that all proposed issuances or sales

of any securities of, or owned by, any system company be at

competitive bidding unless an exception from such requirement is

available under the terms of paragraphs (a) (1) to (a) (5), inclusive,

of the rule. Of the 31 issues of securities shown in the preceding table,

28 issues, aggregating $594 million, were offered for competitive

bidding pursuant to the requirements of Rule 50. The remaining three

issues, aggregating $65 million, were sold to the public or to existing

shareholders at prices and terms determined by the issuers or set by

negotiation with underwriters. These three issues consisted of: (1) a

nonunderwritten rights offering of $28 million of common stock by

General Public Utilities Corporation, a registered holding company,

to its shareholders; (2) a negotiated underwritten public offering of

$25million of debentures, maturing March 1, 1982,by Duval Corporation, a nonutility subsidiary of United Gas Corporation, which is a

public-utility subsidiary of Pennzoil Company; and (3) a nonunderwritten rights offering of $12 million of common stock by Delmarva

Power & Light Company, a registered holding operating company, to

its shareholders and employees of its subsidiaries. With respect to the

General Public Utilities Corporation and Duval Corporation issues,

the Commission, pursuant to paragraph (a) (5) of Rule 50, granted

exceptions from the competitive bidding requirements." The Delmarva Power & Light Company issue was automatically exempt from

those requirements pursuant to paragraph (a) (1) of Rule 50.

During the period from May 7, 1941, the effective date of Rule 50,

to Jillle 30, 1967, a total of 969 issues of securities with an aggregate

value of $14,930million have been sold at competitive bidding under

"'Paragraph (a) (5) of Rule 50 provides for exceptions from the competitive

bidding requirements of the rule where the Commission finds such bidding is

not necessary or appropriate under the particular circumstances of the individual case. In GeneraZ Public Utilities Gorp., the exception was granted .•. to

the extent such rule may be applicable to the proposed sale." Holding Company

Act Release No. 15601 (November 16, 1966).

"
126 SECURITIES AND EXCHANGE COMMISSION

the rule. These totals compare with 238 issues of securities with an

aggregate value of $2,636 million which have been sold pursuant to

orders granting exceptions under paragraph (a) (5). Of the total

amount of securities sold pursuant to such orders, 133 issues with a

total value of $2,153 million were sold by the issuers and the balance

of 105 issues aggregating $483 million were portfolio sales. Of the 133

issues sold by the issuers, 71 were in amounts of from $1 to $5 million,

3 debt issues were in excess of $100 million each,22 and 2 stock issues

totaling $36 million were issued in fiscal 1966 to holders of convertible

debentures and employee stock options.

POLICY AS TO REFUNDABILITY OF DEBT ISSUES

In accordance with its long-standing policy under the Act, the

Commission has continued to require that all debt securities and preferred stocks sold by registered holding companies and their subsidiaries be fully refundable at the option of the issuer upon reasonable

notice and that any redemption premium be reasonable in amount.

Exceptions from this policy have been permitted only where clearly

warranted by the circumstances of a particular case.

The 32nd Annual Report, pages 82-84, contains a summary of the

results of an examination by the Commission's staff of all electric and

gas utility bond issues (including debentures) sold at competitive

bidding between May 14, 1957, and June 30,1966, by companies subject

to the Act as well as those not so subject. This study was extended to

include the fiscal year 1967.

During the period from May 14, 1957 to June 30, 1967, a total of

666 electric and gas utility debt issues, aggregating $16,005.4 million

principal amount, was offered at competitive bidding. These included

471 refundable issues totaling $9,497.5 million, and 195 nonrefundable

issues totaling $6,507.9 million. The latter issues were all nonrefundable for 5 years except one, which was nonrefundable for" years. The

refundable issues thus represented 70.7 percent of the total number of

issues and 59.3 percent of principal amount.

During fiscal year 1967, 75 debt issues were offered, aggregating

$2,234.5 million principal amount. They consisted of 37 refundable

issues totaling $915 million and 38 nonrefundable issues totaling

$1,319.5 million. The number of refundable issues thus represented 49.3

percent of the number of issues and 40.9 percent of principal amount.

The weighted average number of bids for fiscal 1967 was 4.41 on the

refundable issues and 4.16 on the nonrefundable issues, while the median number of bids was 4 both on the refundables and the nonrefund-

.. Ohio Valley Electric Corporation, a $860 million bond issue; United Gas

Corporation, a $116 million bond issue; and Pennzoil Company, a $135 million

note issue maturing in 18 months sold to underwriters.
TEITRTY-TEITRD ANNUAL REPORT 127

ables." With respect to the success of the marketing of the debt issues,

an issue was considered to have been successfully marketed if at least 95

percent of the issue was sold at the syndicate price prior to termination

of the syndicate. On this basis, during fiscal 1967, 51 percent of the

refundable issues were successful, as against 47.4 percent of the nonrefundable issues.t! In terms of principal amount for fiscal 1967, 60.2

percent of the refundable issues were successful, as compared to 36.3

percent of the nonrefundable issues," Extension of the comparison to

include the aggregate principal amount of all issues which were sold

at the applicable syndicate prices up to the termination of the respective

syndicates, regardless of whether a particular issue met the definition

of a successful marketing, indicates that during fiscal year 1967, 81

percent of the combined principal amount of all the refundable issues

was sold, as compared with 76 percent of the nonrefundable issues. 26

.. The weighted average number of bids received during the period from May

14, 1957 to June 30, 1967, was 4.77 on the refundable issues and 4.27 on the nonrefundable issues. The median number of bids was 5 on the refundables and 4

on the nonrefundables .

.. For the period from May 14, 1957 to June 30, 1967, 62.8 percent of the

refundable issues and 58.5 percent of the nonrefundable issues were successful.

25 For the period from May 14, 1957 to June 30, 1967, 59.4 percent of the

refundable issues were successful, as against 54.7 percent of the nonrefundable

ones.

.. For the period from May 14, 1957 to June 30, 1967, the applicable percentages

were 81 percent of the refundables and 79 percent of the nonrefundables.

281-577--68----10
PART vm

PARTICIPATION IN CORPORATE REORGANIZATIONS

The Commission's role under Chapter X of the Bankruptcy Act,

which provides a procedure for reorganizing corporations in the U.S.

district courts, differs from that under the various other statutes which

it administers. The Commission does not initiate Chapter X proceedings or hold its own hearings, and it has no authority to determine any

of the issues in such proceedings. The Commission participates in proceedings under Chapter X in order to provide independent, expert assistance to the courts, the participants, and investors in a highly complex area of corporate law and finance. It pays special attention to the

interests of public security holders who may not otherwise be represented effectively.

Where the scheduled indebtedness of a debtor corporation exceeds

$3 million, Section 172 of Chapter X requires the judge, before approving any plan of reorganization, to submit it to the Commission for its

examination and report. Ifthe indebtedness does not exceed $3 million,

the judge may, if he deems it advisable to do so, submit the plan to the

Commission before deciding whether to approve it. When the Commission files a report, copies or a summary must be sent to all security

holders and creditors when they are asked to vote on the plan. Th£J

Commission has no authority to veto or to require the adoption of a

plan of reorganization.

The Commission has not considered it necessary or appropriate to

participate in every Chapter X case. Apart from the excessive administrative burden, many of the cases involve only trade or bank creditors

and few public investors. The Commission seeks to participate principally in those proceedings in which a substantial public investor interest is involved. However, the Commission may also participate

because an unfair plan has been or is about to be proposed, public security holders are not represented adequately, the reorganization proceedings are being conducted in violation of important provisions of

the Act, the facts indicate that the Commission can perform a useful

service, or the judge requests the Commission's participation.

For purposes of carrying out its functions under Chapter X, the

Commission has divided the country into five geographic areas. The

New York, Chicago, San Francisco and Seattle regional offices of the

Commission each have responsibility for one of these areas. Each of

128
THIRTY-THIRD ANNUAL REPORT 129

these offices has lawyers, accountants, and financial analysts who are

engaged actively in Chapter X cases in which the Commission has filed

its appearance. Supervision and review of the regional offices' Chapter

X work is the responsibility of the Division of Corporate Regulation

of the Commission, which, through its Branch of Reorganization, also

serves as a field officefor the fifth area.

SUMMARY OF ACI'IVITIES

In the :fiscalyear 1967, the Commission continued to maintain a high

level of activity under Chapter X. It entered its appearance in 16 new

proceedings involving companies with aggregate stated assets of approximately $200 million and aggregate indebtedness of approximately $131 million. These proceedings involved the rehabilitation of

corporations engaged in various businesses, including, among others,

plastics manufacturing, pre-fabricated homes, well logging services,

manufacture of geophysical instruments and aerospace equipment, real

estate and mortgage investments, operation of hospitals, bowling alleys, and an amusement park.

Including the new proceedings, the Commission was a party in a

total of 103 reorganization proceedings during the year. The stated

assets of the companies involved in these proceedings totaled approximately $777 million and their indebtedness approximately $661 million. The proceedings were scattered among district courts in 33 States

and the District of Columbia, as follows: 13 in New York, 9 in California, 7 in Florida, 6 in New Jersey, 5 each in Arizona and Texas, 4

each in Illinois, Kentucky, Michigan, North Carolina, Pennsylvania

and Washington, 2 each in Colorado, the District of Columbia, Indiana, Kansas, Louisiana, Minnesota, Montana, Nevada, Oklahoma,

South Dakota and West Virginia; and 1 each in Alabama, Arkansas,

Connecticut, Hawaii, Idaho, Maryland, Massachusetts, Missouri, Ohio,

Tennessee, Utah and Virginia.

During the year, 17 proceedings were closed. As of the end of the

year the Commission was a party in 86 reorganization proceedings.

JURISDICTIONAL, PROCEDURAL AND ADMINISTRATIVE MATI'ERS

In Chapter X proceedings in which it participates, the Commission

seeks to advise the courts with respect to application of the procedural

and substantive safeguards to which all parties are entitled. The Commission also attempts to secure judicial uniformity in the construction

of Chapter X and the procedures thereunder.

In Parknoood; 11W.,I answers to the Chapter X petitions were filed by

several secured creditors alleging that the petitions had not been filed in

] D. D.C., No. 39-66.
130 SECURITIES AND EXCHANGE COMMISSION

good faith, primarily because it was unreasonable to expect that a

plan of reorganization could be effected. The Commission supported

the good faith of the Chapter X petitions, taking the position that for

purposes of determining whether it is unreasonable to expect that a

plan of reorganization can be effected, the appraisal values of the

debtor's property should be based on assumed normal market conditions and should not be adjusted downward because of alleged "tight

money" conditions. The special master concluded that the petitions

were filed in good faith. After the closeof the fiscal year, a hearing was

held before the judge on objections to the special master's report and

the matter is pending.

InTower Oredit Oorp.,2 as previously reported," a second involuntary Chapter X petition, filed by three creditors, and supported by

the Commission, was approved by the court as having been filed in

good faith. There are pending appeals by the State court receiver and

by the debtor, and certain of its officersand creditors.' The State court

receiver contends on appeal, as he did in the district court, that the

Chapter X petition had not been filed in good faith, and should have

been dismissed, chiefly on the ground that the pending State court receivership proceeding would better subserve the interests of the debtor's creditors and stockholders.

In Bankers T1'U8t,5 the Commission moved to disqualify, as not disinterested under Section 158 of Chapter X, the law firms serving as

attorneys for the trustee because, prior to Chapter X, the firms had

served as attorneys for the debtor trusts and certain members of the

firms had served as trustees of the debtors, positions similar to those

of corporate directors. Although the court indicated that the Commission's motion was well founded, it denied the motion because it was

reluctant to disqualify persons who were already familiar with the

debtors' properties and problems, especially where no specific allegations of impropriety had been made. The Commission does not agree

with this interpretation of Section 158.

In Minneapolis Scientific Oontrols Oorp.,6 the Commission filed a

motion to restrain an attorney representing the management group

from soliciting public stockholders to sign powers of attorney granting

him authorization to appear on behalf of the stockholders in the proceedings and to vote on all plans of reorganization. The attorney

agreed to limit his representation to the management and, after the

other stockholders were notified that he had withdrawn his represenM.D. Fla., No. 66-171-Bk-T.

32nd Annual Report, p. 95.

C.A. 5, No. 24572.

S.D. Ind., No. IP-66-B-2375.

D. Minn., No. 4-66-Bky-1l7.

•

•

•

•

•
THIRTY-THIRD ANNUAL REPORT 131

tation of the solicited stockholders, the Commission withdrew its

motion.

In Westec Oorporation.' the Commission opposed the trustee's petition for authority to employ an investment firm both as financial

adviser and as exclusive agent for the trustee in the sale of any of the

debtor's assets because, under the agreement, the firm was to receive a

fixed fee as financial adviser and compensation as sales agent based on

a percentage of the proceeds received in any sale. The Commission took

the position that this arrangement might involve a conflict of interest,

since the firm's advice might be influenced by the fact that a sale would

bring it compensation as sales agent. After several hearings the court

authorized the employment of the firm only as financial adviser on the

basis of a monthly interim fee, with final compensation to 'be determined by the court, upon application, at the termination of the firm's

services.

In Webb &:Knapp, bw.,8 the Chemical Bank New York Trust Company, a creditor secured by a pledge of a large block of stock owned by

the debtor, petitioned the court for a modification of its earlier injunctive orders so as to permit the bank to foreclose on the stock. The

Commission took the position, with which the court agreed, that foreclosure should not be permitted, at least until the court had the benefit

of the trustee's recommendations as to the possibility of utilizing this

stock in connection with a plan of reorganization. The petition was

denied without prejudice.

In Indiana Business and Investment Trust,9 the court restrained a

mortgagee of real property of the debtor from exercising its rights to

the income from the mortgaged property under an assignment clause

in the mortgage. The court held that the trustee may utilize income

from the mortgaged property for operating and maintenance expenses

attributable to such property. It also held that the trustee, upon petition, could use the income for "general overhead expenses directly related to the servicing of all properties of the estate."

In Oanandaigua Enterprises Oorp.,lOthe Court of Appeals for the

Second Circuit 11 granted the Commission's motion to dismiss an appeal by the first mortagagee from an order of the district court fixing

a date for the filing of plans of reorganization, after which date plans

may be filed only by leave of court. The Commission's motion pointed

out that the appellant had had abundant opportunity to submit a

plan, and that if stockholders and creditors were given an unlimited

S.D. Texas, No. 66-H-62.

S.D.N.Y., No. 65-B-865.

S.D. rna, No. IP-66-B-2382.

l.W.D.N.Y., No. Bk-63-1954.

11 No. 31423 (June 26, 1967).

•

•

•
132 SECURITIES AND EXCHANGE COMMISSION

right to file amendments and substitute plans at any time, they would

be able to delay proceedings interminably.

In Imperial '¥JO' Nationcil, bW.,12 the district court directed that

co-owners of a motel, in which the debtor held a 75 percent partnership

interest, account for the financial operations of the motel to the reorganization trustee. The co-owners contended that the reorganization

court lacked summary jurisdiction and that the trustee was required

to sue in a plenary action. The Commission contended that the district

court had summary jurisdiction over the entire complex of motels

which made up the debtor's business and, accordingly, over funds

derived from operation of the motels. The district court stated that the

accounting was a preliminary inquiry to determine whether the coowners held assets of the debtor and that whether the court would order

any turnover of such assets would be considered upon completion of the

accounting. The co-owners appealed but the court of appeals 18 granted

the Commission's motion to dismiss the appeal because the district

court's order was entered for the purpose of assisting it in determining its jurisdiction and not for the purpose of deciding the merits of

the accounting.

In Minneapolis Scientific Oontrols Oorp.,14 and in General United

Corporation; Inc.,15 the Commission took the position that stockholders of these companies, who had been defrauded in violation of

Section 10 (b) of the Securities Exchange Act of 1934:and Rule 10b-5

thereunder, had claims arising therefrom on the basis of which they

were entitled to participate as creditors in any plan of reorganization.

After the close of the fiscal year the referee in bankruptcy in

General United concluded that the Commission lacked standing to

present this issue, and the Commission is seeking review by the district

judge.

In Swan-Finch Oil Oorp.,xe the confirmed plan of reorganization

provided for full payment of creditor claims, but was silent as to interest accrued during the proceeding. The Commission took the position that creditors are entitled to such interest (1) if the estate is

solvent, or (2) where the claim is secured and the value of the security

exceeds the principal balance due on the claim. The court, agreeing

with the Commission, awarded interest to the secured creditor and

reserved decision on whether interest is to be paid to all other creditors

until it is determined whether the debtor is solvent.

In F. L. J Mobs 00.,11 the Commission has opposed a petition filed by

U D. N.J., No. B-656-65.

,. a.A. 3, No. 16,478 (May 11,1967)

.. D. Minn., No. 4-66-BkY-117.

15 D. Kansas, No. 3763-B-1.

II S.D.N.Y., No. 93046.

IT E.D. Mich., No. 42235.

•
THIRTY-THIRD ANNUAL REPORT 133

the trustees with the reorganization court to restrain the New York

Stock Exchange and the Commission from delisting the debtor's common stock and to order the restoration of trading of the stock on the

Exchange. The Exchange had suspended trading in the debtor's stock

in 1958, and in 1959 the Exchange filed an application with the Commission, which is still pending, pursuant to Section 12(d) of the Securities Exchange Act of 1934, to strike the debtor's common stock

from listing and registration. It is the Commission's position that

a Chapter X court has no jurisdiction to enjoin an administrative proceeding for delisting and that the Commission has exclusive jurisdiction over such matters, subject to statutory review by the court of

appeals.

In another matter involved in the same proceeding," the court, over

the objections of the Commission, approved the appointment of the

two Chapter X trustees as members of the board of directors of the

reorganized company and their election by the board as chairman and

vice-chairman, respectively. The Commission took the position that,

the trustees and their attorney, who must be disinterested, should not

be permitted to assume management or executive positions with the

reorganized company.

In Yale Empress System, Inc.,19 the district court denied a motion

of a secured creditor to reclaim a substantial number of truck trailers

and truck bodies. In reversing the district court,"? the court of appeals

held that the right of reclamation depends upon equitable considerations and not upon whether a security agreement is labeled a "conditional sales contract" or a "chattel mortgage." 21 The court of appeals

remanded the case to the district court to determine, in light of these

principles, whether the secured creditor was entitled to reclamation or,

in the alternative, to rental payments for the use of the trucks and

trailers during the reorganization."

TRUSTEE'S INVESTIGATION

A complete accounting for the stewardship of corporate affairs by

the prior management is a requisite under Chapter X. One of the

primary duties of the trustee is to make a thorough study of the debtor

to assure the discovery and collection of all assets of the estate, including claims against officers, directors, or controlling persons who may

have mismanaged the debtor's affairs. The staff of the Commission

often aids the trustee in his investigation.

JS F. L. Jacobs 00., E.D. Mich., No. 42235.

U S.D.N.Y., No. 65B-404.

.. 250 F. Supp.249 (S.D.N.Y., 1966).

n Fruehauf Corporation v. Yale Express System, 370 F.2d 433 (C.A. 2, 1966).

"This decision overrules In re Lake's Laundry, IIlC.,79 F.2d 326 (C.A. 2, 1935).
134 SECURITIES AND EXCHANGE COMMISSION

As previously reported," the trustee in Oontinental Vending

Machine 00rp.24 filed a civil suit against the former management and

directors of the debtor, its accountants and others, seeking $41 million

in damages. He began taking depositions of the accountants and before

completion of the depositions a criminal indictment was returned

against three members of the accounting firm and others, charging

mail fraud and securities law violations based upon false statements

in the debtor's annual report and in reports filed with the Commission. The district court in which the indictments are pending 25

enjoined the trustee from taking civil depositions of those persons

who were already under indictment because the subject matter of the

civil examination was expected to cover matters related to the indictment. The court of appeals 26 reversed (2-1) the order of the district

court and the Supreme Court 27 has granted certiorari.

In Webb dbKnapp, Inc.,28 the trustee was authorized to bring three

major lawsuits, one of them an action against the indenture trustee,

based on the latter's alleged breach of trust, to recover on behalf of

debenture holders the entire principal amount of debentures outstanding ($4,298,000). The Commission supported the trustee's petition

even though the proceeds of recovery would be paid to the debenture

holders rather than to the estate. 29

InEdward N. Siegler & 00.,30 the trustees, together with a Chicago,

TIlinois investment firm, brought a plenary suit against First National

Bank of Lincolnwood (Ill.) and 25 individuals, seeking a total of

$3,150,000 in compensatory and exemplary damages for losses from

allegedly fraudulent stock transactions. The reorganization court had

approved an agreement, as reported previously;" under which the

customers of the debtor received, in effect, full satisfaction of their

claims with funds contributed by the Midwest Stock Exchange and

Hartzmark & Co., a Cleveland, Ohio, broker-dealer firm which took

over the debtor's customer accounts. Any proceeds from the suit would

go to unsecured creditors, payment to whom was deferred in order to

permit full satisfaction of customer accounts.

2J 32nd Annual Report, p, 90.

.. E.D.N.Y., No. 63-B-003.

,. 262 F. Supp. 64 (S.D.N.Y., 1966) .

.. U.S. v. Simon, et aZ,373 F.2d 649 (C.A. 2, 1967).

07 Simon, et aZv. Wharton, Trustee, Oct. Term 1967, No. 1185 .

.. S.D.N.Y., No. 65--B-365.

The other two lawsuits are an action against former directors of the debtor

for alleged waste and mismanagement of corporate assets, seeking damages of

$50 million, and an action seeking damages of $1,160,000 against the former

president and chairman of the board of the debtor and certain others who

allegedly usurped a corporate opportunity belonging to the debtor.

30 N.D. Ohio, No. 66-2957.

1I1 32nd Annual Report, p. 92.

'"
TEaRTY-TErrRD~AL REPORT 135

REPORTS ON PLANS OF REORGANIZATION

Generally, the Commission files a formal advisory report only in a

case involving a substantial public investor interest and presenting

significant problems. When no such formal report is filed, the Commission may state its view briefly by letter, or authorize its counsel to

make an oral or written presentation to amplify the Commission's

views. During this fiscal year the Commission did not publish any

formal advisory reports; its views on seven plans involved in four

proceedings were presented orally at the hearings on approval of the

plans."

In TMT Trailer Fe7'1"J!,lno.,33 the Supreme Court granted the

petition for a writ of certiorari 34 filed by the stockholders protective

committee to review decisions of the Court of Appeals for the Fifth

Circuit which had affirmed orders of the district court confirming a

plan of reorganization from which the debtor's 7,000 stockholders were

excluded." In response to an order of the Supreme Court inviting the

United States to express its views, a memorandum was submitted on

behalf of the Commission supporting the petition. The principal

contentions of the Commission and the committee are: (1) that the

plan is objectionable in that it contemplates employment of the trustee

as president of the reorganized company; (2) that stockholders should

have been afforded a hearing on their contention that they have claims

against the debtor arising out of the sale of the debtor's stock to them

in violation of the Federal securities laws and are entitled to participate in any plan as creditors; and (3) that the plan is not fair in excluding stockholders because the district court's finding of insolvency

had been based on an inadequate record as to valuation, and the court,

without hearings, had allowed substantial, seriously contested, claims

almost in full.

InHydrocarbon Ohemicals, lno.,36 the plan of reorganization, which

the court confirmed, provided that the plan proponents together with

unsecured creditors who elected to receive new common stock of the

reorganized debtor in payment of their claims would receive 85 percent of the new common stock to be outstanding, and that the debtor's

public stockholders would receive 15 percent of the new stock. The

Commission did not object to the plan but proposed amendments to

OJ In re Hydrocarbon Chemicale, Inc., D. N.J., No. B-743--63; In re Intercontinental Motels us; W.D. N.C., No. 1716-1723; In re Minneapolis Scientific

Oontrote Oorp., D. Minn., No. 4-66-Bky-117 (four plans); In re Oceanside

Properties, Ino., D. Hawaii, No. 67-109.

33 S.D. Fla., No. 3659-M .

.. Protective Oommittee, etc. v. Anderson, Oct. Term 1967,No. 38.

.. 32nd Annual Report, pp. 92-93; 31st Annual Report, p. 100. For previous reports see also 30th Annual Report, p, 105, 29th Annual Report, pp. 91-92.

.. D. N.J., No. B-743--63.
136 SECURITIES AND EXCHANGE COMMISSION

include preemptive rights and representation on the initial board of

directors for present stockholders who would have a minority stock

equity in the reorganized company. The court adopted these

recommendations.

In Oceanside Properties, Inc.,37 the plan of reorganization was based

primarily upon the construction and sale of five condominium apartment buildings in the Hawaii area within a 30-month period. The

Commission supported the plan but urged that it should not be confirmed unless firm commitments were obtained for the interim and

long-term financing contemplated by the plan.

InAtlas Sewing Oeniers, Inc.,3Balthough an order had been entered

by the district court in July 1965 declaring the plan of reorganization

to have been substantially consummated pursuant to Section 229, the

new securities and cash required to be issued to creditors and stockholders under the plan were never issued. In April 1967, the district

court, after lengthy hearings, held that the plan proponent had not

fulfilled his contractual obligations to provide certain additional funds

under the plan and that a group of banks had gained a position of

dominion and control over the debtor's affairs, causing it to close down

its business except for the collection of several million dollars of

pledged accounts receivable. The district court appointed a receiver

for the debtor's assets and suggested that proceedings be instituted to

surcharge the banks and others. On appeal by the plan proponent and

the banks, the court of appeals," among other things, agreed with the

Commission that the jurisdiction of a Chapter X court continues over

a debtor corporation's affairs until the plan of reorganization has been

substantially consummated in fact and that, at least until such time,

persons entrusted with the handling of any debtor's assets act at their

peril without the approval of the district court."

ACTIVITffiS WITH REGARD TO ALLOWANCES

Every reorganization case ultimately presents the difficult problem

of determining the allowance of compensation to be paid to the various

parties for services rendered and for expenses incurred in the proceeding. The Commission, which under Section 242 of the Bankruptcy

87 D. Hawaii, No. 67-109

.. S.D. Fla., No. 168--62-M-Bk-EC.

-380 F. 2d41 (C.A. 5, 1967) .

.. In Florida-Pat8and Oorp., a Chapter X case in which the Commission did not

participate, the Chapter X trustee was convicted of criminal abuse of trust by

the district court in Miami, Florida, and sentenced to 2 years probation for

knowingly and fraudUlently selling real property of the debtor to a company

with which he was affiliated as financial adviser, and for receiving remuneration from the purchaser as compensation for the transfer of the property (S.D.

Fla., No. 4516-M).

•
THIRTY-THIRD ANNUAL REPORT 137

Act may not receive any allowance for the services it renders, has

sought to assist the courts in assuring economy of administration and

in allocating compensation equitably on the basis of the claimants'

contributions to the administration of estates and the formulation

of plans. During the fiscal year, 197 applications for compensation

totaling about $6.9million were reviewed.

In Hydrocarbon Ohemioaie, Inc.,41 17 applicants requested final

allowances aggregating $1,053,855. The Commission recommended

allowances of $343,648, and the court awarded $465,000.The court, in

accordance with the Commission's recommendation, denied a fee to

the debtor's attorney who had made a short sale of the debtor's stock

just prior to the inception of the Chapter XI proceeding and had

purchased shares of the debtor's stock to cover the short sale, just

after the Chapter XI petition was filed. The Commission urged denial

of an allowance both on equitable principles and on the ground that

Section 249 of Chapter X was applicable to securities transactions

during the superseded Chapter XI proceeding, since Section 328 of

Chapter XI, pursuant to which the Chapter X petition was filed,"

provides that the amended Chapter X petition shall "for all purposes

of Chapter X ... be deemed to have been originally filed under such

chapter." The court also adopted the Commission's recommendation

that two attorneys who had been retained by the debtor's attorney

during the Chapter XI proceeding should be denied a fee because their

retention had not been authorized as provided under General Order

44 of the Bankruptcy Act.43 In Oosmo Oapital, Inc.,44 the court granted

the Commission's objections and refused to award any fees or reimbursement of expenses to members of a stockholders' protective committee who had purchased shares of the debtor's stock, in violation of

Section 249, after they had solicited powers of attorney from stockholders.

In Imperial 'lIJO' National, Inc.,45 the debtor had paid a total of

$67,595 in fees to two law firms 6 days prior to filing a Chapter XI

petition. After an amended Chapter X petition was filed under Section

328, as reported previously," the Chapter X trustee moved, pursuant

to Section 60d, for examination by the court of the fees paid and a

recovery by the estate of the portion of the fees in excess of a reasonable

amount. The Commission, supporting the Chapter X trustee, recommended that amounts in excess of $4,000 should be returned to the

41 D. N.J., No. B-743-63

.. See 80th Annual Report, p. 108.

.. All attorneys have filed motions for leave to appeal to the Court of Appeals

for the Third Circuit.

.. N.D. IlL, No. 63-B-3880 .

.. D. N.J., No. B-656-65

.. 82nd Annual Report, pp. 94-95.

•

•
138 SECURITIES AND EXCHANGE COMMISSION

estate. The court, after the close of the fiscal year, ordered that the

firms refund to the estate all sums paid to them in connection with the

proceedings, except a nominal filing fee, and that the award of reasonable fees be determined and made at the conclusion of the Chapter X

proceeding.

InBamkers Tru.st,47 the court, in its order awarding interim allowances to the trustee and trustee's counsel, stressed the need for accurate

daily time records so that in the future it could determine, among

other things, whether there had been an unnecessary duplication of

effort by the applicants." In Republic Aluminum 00.,49 the trustee

applied for a final allowance. The Commission advised the court that,

because of contradictory and apparently unreconcilable estimates of

the time spent by the trustee on services rendered in this and another

Chapter X proceeding in which he had concurrently served as trustee,

it was impossible to make an informed judgment as to the value of his

services in the pending case. The Commission recommended that the

trustee should be afforded an opportunity to clarify his time estimates

on the record before it recommended any allowance to him.

In Yuba Oonsolidated Industries, I'lW.,5012 applicants requested

allowances totaling about $1,949,000 and the Commission recommended

a total of about $1,110,000. The awards made by the court aggregated

approximately $1,567,000. The court, among other things, disagreed

with the Commission's view that time spent by attorneys for committees in reading and reviewing pleadings and merely attending court

hearings was largely unproductive time, for which little, if any, compensation should be paid."

In Coast Investors, I'lW.,52the Commission recommended an allowance of $18,000 to counsel for a committee and the district court,

allowing $10,000, stated that a different standard for allowances in

Chapter X applies when, as in this case, the plan provides for an

orderly liquidation over a period of years, rather than a reorganization as a going concern. In its brief in support of counsel's petition

for leave to appeal, the Commission urged that the governing standard

for allowances is the same since Chapter X contemplates that a reorganization may take the form of a liquidation. The court of appeals

granted the petition and the case is pending."

•• S.D. Ind., No. IP-66-B-2375 .

.. See In re Hudson <f Manhattan Railroad Co., 339 F.2d 114, 115 (O.A. 2,

1964); In re Nazareth Fair Grounds <f Farmers Market, Inc., 374 F.2d 595

(O.A. 2, 1967) .

•• N.D. Texas, No. 3-507 •

.. N.D. Calif., No. 64103.

51 Of. Milbank, Tweed <f Hope v. McCue, 111 F.2d 100, 101 (O.A. 4, 1940) .

.. W.D. Wash., No. 53448 .

.. o.s, 9, No. 21573.
TIDRTY-TIDRD ANNUAL REPORT 139

InAnglo-American Properties, Inc.,54 the Commission, though not

participating in the Chapter X proceeding, filed a brief amicus curiae

in the court of appeals 55 in opposition to the motion of the appellant,

a secured creditor, to stay the hearings in the district court on applications for interim allowances on behalf of the trustee and his attorney,

pending a determination of its appeal in which it urged that the

trustee and his attorney were not disinterested. In a separate appeal

the same appellant contended that the Chapter X petition, which the

district court had approved, was not filed in good faith. In its brief,

the Commission argued that the trustee and his attorney were entitled

to an allowance for their services in the Chapter X proceeding even

if it were determined on appeal that they were not disinterested, provided that full disclosure of all the facts was made at the time of their

appointment, or if the appellant should succeed in his other appeal and

the Chapter X petition be dismissed for lack of good faith. The court

of appeals denied a stay and subsequently both appeals were settled.

The allowance of interim fees during the course of the proceeding

has continued to receive the 'attention of the courts. While Chapter X

does not expressly provide for interim or partial allowances, courts

have awarded interim fees to the trustee and his counsel in order to

alleviate any economic hardship to them which may result from postponing all payments of fees until the conclusion of the Chapter X

proceeding." The amounts awarded, however, have been generally

well below the possible amounts of any final allowances. They are considered to be partial payments on account and do not reflect or measure

the value of the services rendered to the date of the interim allowance.

Section 24'7 requires that the judge consider applications for allowances at a hearing, notice of which is to be given to creditors, stockholders, the Commission and other interested parties. At the suggestion

of the Commission, the courts 'have adopted a procedure in respect of

interim allowances which differs somewhat from that described in an

earlier annual report. 57 Under the present practice, notice is given of a

hearing at which the court is to establish a schedule for hearing applications for future interim allowances. At the conclusion of this hearing

a second notice is given to creditors and stockholders of hearings

scheduled on specified dates in the future at which the court will

consider applications for interim allowances and the maximum

amounts which may be awarded at such future hearings. In this manner

the requirements of the statute are met without an undue burden upon

.. S.D. Miss., No. 2171-B.

65 Rosenthat and Rosenthal, InG. v, Tibbetts, Trustee (C.A. 5, No. 24170) .

.. See, e.a., In re Keystone Realty HoZding Oo., 117 F.2d 1003 (C.A. 3, 1941),

and In re McGann Mfg. co; 188 F.2d 110 (C.A. 3, 1951).

•, See 6th Annual Report (1940), pp. 63-M.
140 SECURITIES AND EXCHANGE COMMISSION

the estate and an opportunity is afforded all parties for adequate

scrutiny of interim fees for which periodic applications may be :filed

by the trustee and his counsel.

INTERVENTION IN CHAPTER XI PROCEEDINGS

Chapter XI of the Bankruptcy Act provides a procedure by which

debtors can effect arrangements with respect to their unsecured debts

under court supervision. From time to time it appears that the proper

protection of public investors and the needs of the company for

rehabilitation require a more thoroughgoing reorganization than is

possible under the summary procedures of Chapter XI. The Commission or any other party in interest is authorized, under Section 328 of

Chapter XI, to make application to the court to dismiss the Chapter

XI proceeding unless the debtor's petition is amended to comply with

requirements of Chapter X, or a creditors' petition under Chapter X

is filed.

In Arlington Discount OO.,fi8 the debtor was engaged in the business

of purchasing, at a discount, second mortgages and installment land

contract receivables. It proposed an arrangement under Chapter XI

whereby the 400 holders of $1,194,000 of subordinated certificates of

indebtedness would receive 5 percent of their claims in cash at confirmation, 60 percent in noninterest-bearing notes and the balance in

preferred stock. The Commission's motion under Section 328 was

based on the need for an impartial investigation of management

activities and for a comprehensive reorganization under Chapter X,

including an adjustment of secured debt, rather than a simple composition of unsecured debts. The court granted the Commission's

motion and the debtor filed an amended Chapter X petition, which

the court approved.

In Embarcadero Ranchos, I'JUJ.,fi9 the Commission had filed a motion

under Section 328 in July 1962. Prior to the hearing on the motion the

Chapter XI receiver had negotiated a sale of the land owned by the

debtor and requested that the Commission withdraw its motion because

it appeared that the public investors, who held mortgages on the land,

might be paid in full from the proceeds of the sale. The Commission

agreed not to press its motion, pending consummation of the sale. The

sale was closed in October 1966, and the public investors were paid in

full including interest to date of payment. The Commission thereupon

withdrew its motion .

.. S.D. Ohio, No. 48421 .

.. S.D. Calif., No. 131812Y.
PART IX

SUPPORTING ACTIVITIES

PUBLIC INFORMATION SERVICES

Dissemination of Infonnation

As the discussion in prior sections of this Report indicates, most

large corporations (except banks and insurance companies) in which

there is a substantial public investor interest have filed registration

statements or registration applications under the Securities Act or

the Securities Exchange Act with the Commission and are required to

file annual and other periodic reports. Widespread public dissemination of the financial and other data included in these documents is

essential if public investors generally are to benefit by the disclosure

requirements of the securities laws. This is accomplished in part by

distribution of the prospectus or offering circular in connection with

new offerings. Much of the data is also reprinted and receives general

circulation through the medium of securities manuals and other financial publications, thus becoming available to broker-dealer and investment adviser firms, trust departments and other financial institutions

and, through them, to public investors generally.

Various activities of the Commission also facilitate public dissemination of information filed as well as other information. Among these

is the issuance of a daily "News Digest" which contains (1) a resume of

each proposal for the public offering of securities for which a Securities Act registration statement is filed; (2) a list of issuers of securities traded over-the-counter which have filed registration statements

under the Securities Exchange Act; (3) a list of companies which have

filed interim reports disclosing significant corporate developments;

(4) a summary of all notices of filings of applications and declarations, and of all orders, decisions, rules and rule proposals issued by

the Commission; (5) announcements of the Commission's participation in corporate reorganization proceedings under Chapter X of the

Bankruptcy Act and of the filing of advisory reports of the Commission on the fairness and feasibility of reorganization plans; (6) a brief

report regarding actions of courts in litigation resulting from the

Commission's law enforcement program; and (7) a brief reference to

each statistical report issued by the Commission. During the year, the

News Digest included summary reports on the 1,637 registration statements filed with the Commission, 900 notices of filings, orders, decisions, rules and rule proposals issued by the Commission, 227 develop141
142 SECURITIES AND EXCHANGE COMMISSION

ments in litigation under its enforcement program., 13 releases on

corporate reorganization proceedings, and 78 statistical releases.

The News Digest is made immediately available to the press, and

it is also reprinted and distributed by the Government Printing

Office, on a subscription basis, to some 2,368 investors, securities

firms, practicing lawyers and others. In addition, the Commission

maintains mailing lists for the distribution of the full text of its

orders, decisions, ru1es and rule proposals. er,

These informational activities are supplemented by public discussions from time to time of legal, accounting and other problems arising in the administration of the Federal securities laws. During the

year, members of the Commission and numerous staff officers made

speeches before various professional, business and other groups interested in the Federal securities laws and their administration and

participated in panel discussions of like nature. Participation in these

discussions not only serves to keep attorneys, accountants, corporate

executives and others abreast of developments in the administration of

those laws, but it also is of considerable value to the Commission in

learning first-hand about the problems experienced by those who seek

to comply with those laws. In order to facilitate such compliance the

Commission also issues from time to time general interpretive releases

and policy statements explaining the operation of particular provisions

of the Federal securities laws and outlining policies and practices of

the Commission. An example of such a general interpretive statement

is the Commission's net capital release discussed at page 71.

Publications.-'In addition to the daily News Digest, and releases

concerning Commission action under the Acts administered by it and

litigation involving securities violations, the Commission issues a number of other publications, including the following:

Weekly:

Weekly Trading Data on New York Exchanges: Round-lot and odd-lot

transactions effected on the New York and American Stock Exchanges

(information is also included in the Statistical Bulletin).

Monthly:

Statistical Bulletin,"

Official Summary of Securities Transactions and Holdings of Officers, Directors and Principal Stockholders."

Quarterly:

Financial Report, U.S. Manuracturtng Corporations (jointly with the Federal Trade Commtsslon.)« (Statistical Series Release summarizing this

report is available from the Publications Unit.)

Plant and Equipment Expenditures of U.S. Corporations (jointly with the

Department of Commerce).

New Securities Offerings.

Volume and Composition of Individuals' Saving.

Working Capital of U.S. Corporations.

Stock Transactions of Financial Institutions.

See footnotes on following page.
THIRTY-THIRD ANNUAL REPORT 143

Annually:

Annual RePOrt of the Oommtsaton,s

Securities Traded on Exchanges under the Securities Exchange Act of 1934.

List of Companies Registered under the Investment Company Act of 1940.

Classification, Assets and Location of Registered Investment Companies under the Investment Company Act of 1940.b

Private Noninsured Pension Funds (assets available quarterly in the Statistical Bulletin).

Directory of Companies Filing Annual Reports,v

Other Publlcatrou- :

Dceisions and Reports of the Commission (Volumes 40 and 41 only) ."

Securities and Exchange Commission-The Work of the Securities and

Exchange Commission.

Commission Report on Public Policy Implications of Investment Company

Growth.s

Availability of Information for Public Inspection

The many thousands of registration statements, applications, declarations and annual and other periodic reports filed with the Commission each year are available for public inspection at the Commission's

principal officein Washington, D.C. In addition, at each regional office

of the Commission there are available for inspection copies of prospectuses used in recent offerings of securities registered under the Securities Act; registration statements, recent annual reports and definitive proxy statements filed pursuant to the Exchange Act by companies

having their principal office in the particular region; broker-dealer

and investment adviser applications, amendments thereto, and brokerdealer financial reports originating in the region; and letters of notification under Regulation A filed in the region. Additional material is

available in the New York, Chicago and San Francisco regional offices.

Members of the public may purchase copies of material in the Commission's public files. Under the existing contract with a printing

company for the reproduction of such material, the cost is 9 cents per

page for pages not exceeding 8113" x 14" in size. The detailed price

schedule may be obtained from the Publications Unit of the Commission. (Release No. 34-8109.) A charge of $2 is imposed for each certification of a document by the Commission. Visitors to the Public Reference Room in Washington may make immediate reproductions of

material on coin-operated copiers. Similar machines are located in the

New York and Ohicago regional offices.

Each year many thousands of requests for copies of and information

from the public files of the Commission are received by the Public

Reference Section in Washington, D.C. During the 1967 fiscal year,

6,932 persons examined material on file in Washington and several

a Must be ordered from the Superintendent of Documents, Government Printing Office,Wa!'hington, D.C. 20402.

b This document is available in photocopy form. Purchasers are billed by the

printing company which prepares the photocopies.

281-577--68-1,1
144 SECURITIES AND EXCHANGE COMMISSION

thousand others examined files in the New York and Chicago regional

offices. More than 15,593 searches were made for individuals requesting information and approximately 2,478 letters were written with

respect to information requested.

Implementation of Public Information Act.-To implement the

provisions of the Public Information Amendment to Section 3 of the

Administrative Procedure Act,l which became effective on July 4,1967,

the Commission amended its rule pertaining to records and information, 17 CFR 200.80.2 The rule specifies the categories of documentary

materials available to the public upon request at the Commission's

principal office, and the materials which are also available at regional

offices. It establishes a procedure to be followed in requesting records

or copies thereof, provides a method of administrative appeal from

the denial of access to any record, and provides for the imposition of

fees when more than one-half man-hour of work is performed by members of the Commission's staff to locate and make available records

requested.

All materials previously available for public inspection and copying

continue to be available under the new provisions. In addition, some

documents contained in Commission files previously considered nonpublic, certain materials developed for use by the Commission's staff,

including indexes of Commission decisions, and a current index as

specified in the statute and covering Commission adjudicatory opinions and orders issued after July 1, 1967, will now be available to

the public.

PERSONNEL AND FINANCIAL MANAGEMENT

Organizational Changes

During fiscal year 1967, certain organizational changes were effected

in accordance with the Commission's policy of continuing review of

all its operations to assure maximum utilization of manpower and

the most efficient and economical operations possible.

In July 1966, a number of changes were effected in the Division

of Trading and Markets. The Office of Criminal Reference and the

Office of Proceedings, which performed similar functions, were consolidated; the Branch of Distribution and Stabilization was abolished;

and the three Branches of Enforcement were consolidated into two

Branches.

In December 1966, the Commission discontinued its Branch Office

in St. Paul, Minnesota. The investigative work previously done by

that office in the St. Paul-Minneapolis area was taken over by the

Chicago Regional Office. It is expected that this change will increase

'80 Stat. 250, as codifI.ed, 81 Stat. 54, 5 U.S.C.I552.

• securities Act Release No. 4871 (June 30,1967).
THIRTY-THIRD ANNUAL REPORT 145

the effectiveness of the Commission's work in that area. The elimination of three positions and related expenses will also result in an annual

savings of about $40,000, which will be applied to higher priority

activities.

In March 1967, a realignment of certain functions and staff in the

New York Regional Office, designed to strengthen its enforcement and

regulatory programs and activities, was effected. An additional Assistant Regional Administrator for enforcement was appointed to share

with the existing Assistant Regional Administrator for enforcement

primary responsibility for directing the enforcement activities of the

New York Office. At the same time, the Assistant Regional Administrator for regulation was given the additional responsibility of directing the work of the Branches of Small Issues and Interpretations.

Recruitment and Training Programs

In fiscal 1967, the Commission continued its efforts to recruit "quality" graduates to fill its entrance level positions. The Chairman sent

a personal letter to the deans of undergraduate and graduate schools

of business and of law schools explaining the Commission's staffing

needs and seeking their assistance in identifying outstanding students

interested in Federal employment. Campus visitations were arranged

and Commission recruiters from the Headquarters Office and the

various regional offices interviewed numerous students. The G8-9

entrance salary of $7,696 for recent graduates of law schools was found

to be competitive with salaries paid by most law firms. Competition

for graduates of business schools was much more severe and the Commission found that it could not meet the average salary of $10,000 offered by private industry to the superior applicant possessing a Master

of Business Administration degree.

The Commission continued during the year to supplement its on-thejob training of professional employees with more formalized training

sessions. The Division of Corporate Regulation conducted a 2-week

seminar on the Investment Company Act for personnel of the Division

as well as those regional office employees who are concerned with investment company matters. The lectures given during the seminar

covered matters involved in the performance of current staff duties

as well as various new and unusual types of investment companies

now coming to the fore, such as variable annuity life insurance companies, insurance "packages," swap funds, speculative funds, and dual

policy funds. The Division of Trading and Markets conducted an enforcement seminar designed to strengthen skills and increase knowledge in the enforcement aspects of the Commission's work, and the

Division of Corporation Finance sponsored a series of lectures by outside authorities on corporate mergers and acquisitions. These training
SECURITIES AND EXCHANGE COMM

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AS OF JULY 1967 
TEaRTY-TEITRD ~AL REPORT 147

sessions were attended by employees of the sponsoring divisions, other

home office employees, and personnel from the regional offices.

An unusual experiment in legal education in the Federal service

conducted during the fiscal year was the SEC Staff Seminar on current problems in securities regulation. Selected staff attorneys participated in the seminar. As distinguished from the more narrow focus

of normal staff training, this seminar focused on some of the broad

policy problems facing the Commission.

In the summer of 1967 an unusual feature was introduced into the

Commission's training program for summer finance and law students.

Members of the Commission met with the interns in a session entitled

"At the Commission Table." The interns were given background material on certain major matters which had been considered by the

Commission and were afforded the opportunity to discuss these matters with the Commissioners. Following the session with the Commissioners, knowledgeable staff members discussed at greater length

the problems which were raised with the Commission.

In fiscal 1967, the Commission tripled the amount of funds allocated

for training conducted outside the agency. A total of 133 employees

were able to attend courses given by the Civil Service Commission,

and by various schools, universities and professional associations.

The Commission participated in the educational program developed

jointly by the Bureau of the Budget and the Civil Service Commission

to provide intensive training in modern analytic methods required to

implement a planning-programing-budgeting system within the Commission. One employee attended Carnegie Institute of Technology for

a year and another attended a 3-week residence seminar at the University of Virginia.

In anticipation of greater utilization of the Commission's IBM 360

computer, selected employees have been sent to the IBM Education

Center to acquire basic knowledge in computer capabilities. Also, in

cooperation with IBM, field investigators have been exposed to the

use of computers in brokerage operations in anticipation that most

of the large brokerage houses will become fully automated as to their

"back office" procedures in the foreseeable future. In addition, a

planned training program geared to the specific needs of individual

employees directly engaged in computer work is now in operation. It

takes into account the development of new and more advanced hardware or more sophisticated systems which offer more opportunities

for computerization of Commission processes.

Merit Awards to Employees

As part of its Twelfth Annual Service and Merit Awards Ceremony

held in October 1966, the Commission gave "Distinguished Service
148 SECURITIES AND EXCHANGE COMMISSION 

Awards" to Messrs. Philip A. Loomis, Jr., General Counsel; Thomas 

B. Hart, Administrator of the Chicago Regional Office; and William 

E. Becker, Chief Management Analyst. Nineteen employees were given 

30-year pins for SEC service. Within-grade salary increases in recognition of high quality performance were granted to 81 employees. 

These awards are authorized by the Salary Reform Act of 1962. In 

addition, cash awards totaling $9,920 were presented to 65 employees 

for superior performance and 5 employees were awarded a total of 

$245 for adopted suggestions. 

On the occasion of his 25th anniversary with the Commission, Chairman Manuel I?. Cohen received a special length of service award 

which displayed official medallions of the five Presidents-Rooser,elt, 

Truman, Eisenhower, Kennedy and Johnson-under whom he has 

served. 

Employee Benefit Programs 

In May 1966, coincident with the Commission's move into the new 

building, the SEC Recreation and Welfare Association commenced 

the operation in the tmo sub-basements of a parking garage for 90 

automobiles under a 10-year lease negotiated with the owners of the 

building. The Commission actively encouraged the Association to 

entkr into this venture in order to assure that members of the staff 

would have parking facilities at reasonable rates. As another employee 

service, at no cost to the Commission, the Association also sponsors 

accident, income protection, and dependent life insurance programs 

at low-cost group rates. 

Pereonnel Strength; Financial Management 

The following wmparat.ive tabIe shows the personnel strength of 

the Commission as of June 30,1966 and 1967 : 

1 Jme ao.lsse 1 June80. Is67 

StaB: 


HeadgoartemOnce................................................. 
 aeglona1Ornoes..................................................... 


The table on page 150 shows the st.atus of the Commission's budget 

estimates for the fiscal years 1963 to 1968, from the initial submission 

to the Bureau of. the Budget to final enactment of the annual 

appropriation. 

The Commission is required by law 60 collect fees for (1)registration of securities under the Securities Act; (2) qualification of trnst 

indentures; (3) registration of exchanges; (4) certification of docu880 
TEURTY-THIRD ~ A REPORT L 149

menta fled with the Commission; and from (5) brokers and dealers 

who are registered with the Commission but who are not members of a 

registered securities association (the Nntional Association of Securities Dealers (NASD) is the only such organization) .& 

The following table shows the Commission's appropriation, total 

fees collected, percentage of fees collected to total appropriation, and 

the net cost to the taxpayers of Commission operations for the &cal 

years 1965,1966 and 1967. 

'Tbe ~rincipal rates are as follows: (1)for registration of secnrltles, lfi0 ot 

1Percent ot the maximum. aggregate price ot securities proposed to be oeered. 

or 20 cents per $1,000, with a minimum fee of $100; (2) tor registration of 

exchanges, Y500 of 1percent of the aggregate dollar mount ot the salas of 

securities tranmrted on the exchanges; and (3) with respect to non-NA@D 

members, the rates are as epc1fled in Rule 16b4-1under the Securities Exchange 

Ad. 
150 SECURITIES AND EXCHANGE COMMISSION

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PART X

APPENDIX

STATISTICAL TABLES

--- 

TABLE1.-A 53-gem recm'd of registrations effective under the Securdiea Act p f 1933-&a1 years 1956-1967 

Por 0a8h ~slelor account olkuBI. 

Number 


Fiscal 7-1.ended June 30 of state AU rsgtg 

meats S tratlons 

and notes 

8 statements r&*terln4 hluMe6 Dagwllnry 

by FJNI. 6-12 ard inehl~i~xi . iFur LO m0~1l.seodcd lul.o30, 18x5. 
-- 

--- 

- - 

-- 

154 SECURITIES AND EXCHANGE COMMISSION 

TABLE 2.-Eegistratims eflective under the Securities Act 41.1933,fiscal year ended 

June 30, 1967 

PA== 1.-DISTRIBUTION BY MONTHS 

lAmaunts in thousands 01 dollars 11 

Cl A11 wistratlons Pmposed lor sale lor aeeount of Issuers rI I , --- Year and month Number Number Totals a Corporate 1 

of state- of Amount ments Issues l Nomber Number of Amount of Amount issnes 2 1sa"es e 

1968 

July ...................... 105 128 $1,353,183
 August................... 147 186 3,012,853 

85 $878,181 45 $%I28


Eeptember............... I48 2,403,214 65 1.4W.485 96 112 1,623,377 09
 OCtobPr..~.~............. S+3 118 1.6YM3 88 1,204,725 38 7Q7 M3 


November ...........-... 110 137 2,215,866 

1.M.587 45 611'828 


December ................ 114 134 2,688,211 

100 2,m1,976 M 813'344
 110 2,304,086 .la 1,oadsn 

1907 

January.................. 104 130 2,626,986
 Febrnary ................ 103 127 2088453 

108 2,308,3m 42 769.138 


M~mh.................... 141 174 

10 184251 41 874,076 


April..................... 208 251 4,597,885 


1436:176 134 8:~6:531 67 1,744,837 


May...................... 206 255 

206 4,157.1*4 81 1 681 653
 3.833.M 184 2,99i,070 76 1'160'117 

Total, fi3cai year I 20 3,285,686 116 2:14<m June....-............... 210 268 4,286,243 


1967~............. I 1.649 2,023 34,218,Om 1,678 W,8M,121 707 13,440,5511 


/ 

P~nr2.-PURPOSE OF REOISTRATION AND TYPE OF SECURITY 

[Amounts in thm& of douanrl 

Type of security 

' PU~DDSB olreglstratian an m

Bonds de- Prelmed Common 

bent& stack stack r md not&* 

Allregistrstions (estimated valoe) .................. 
 For 8000"nt of issuer lot. cbsh sale............... S34.n8,098 $14 629,423 51,098,362 $20,689,314 


For immsdiete offering&................... 27 850 121 12 3ca 898 ass 453 16, oaz.7~ 
 14124:428 1<1~,3904 4g4:a16 1,484,176 Corporate.............................. 13,440,661 11.W,2.a10 494, 346 I,&, 115
 Offered to: General ublio~. 

~ecurity%olders.:~::::::: 11 371 828 10 170 ml 4~8,884 782,843 1:m:z:sz6 1;osa'ars e3 IW e74.m Otherspedslgmups............ 275,798 288:360 17,175
 Pareign ovemmente .................. ~(262
 683,814 683 871 0 0 POIextende~cs~h 13 826 696 162;~~ M.112 13,698,688 saleand otherissu ess.... For -count of issuer for other thanobsh sale... 4:676:818 181,225 181,964 4,180,430 For wunt of other tbsn issuer ................ 
 For OBS~8z.h ......................... 5692,868 83 289 342,110 1,316,llS 


................................ 1::: 868.810 11'208 606 947,108
 other 733,MO az:cs~ 342,436 369.014 I I I I 

888 lwtnotes st end of part 401 table. 
TIDRTY-TIDRD ANNUAL REPORT 155

, , , , , , , , , , , , , , , ... , , .. , , . , , , , ,

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156 SECURITIES AND EXCHANGE COMMISSION

'0

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TmRTY-THIRD ANNUAL REPORT 157

-- ------ 

158 SECURITIES AND EXCHANGE COMMISSION 

TABLE4.-Number of securdy isbum and issuers on ezchanges 

PART1.-UNDUPLICATED COUNT AS OF JUNE 30 1067 OP THE NUMBER op s~~~~ 

AND BOND ISSUES ADMITTED TO TRADINa 0k E~CHANOES.AND THE NUMBE~ 

OF ISSUERS INVOLVED. 

Total -S Ststas under the Act I Bands stocks and tnvdwd

-\ 

bands 

Registered purwaot to Section 12011 ................... 1.362 4,370 Temporarily 2,m
 exempted from registration by Commlg sion rule.............................................. I4 24
 Admitted to mlisted tradio pr~wegason ~istered 6 

exchanges pursuant ta Sactkn 1&0................... 
 Listed on exempted exchanges under exemption orders 12 105 n 

Admittsd 

01 the Dammlssion .................................... 66 6 61 47
 to unlisted trading privileges on exempted 

srchangas under eremptlon orders of the Commlssioa --- 13 0 13 13 

TOM ............................................ 3,180 1.a3 4.673 -

2,718 


1 Registered: Seotion120I) ofthe Aot provides thatsseourit~ma~ beregistared onanatlonalseeuritleper. change by the issuer6ling an applioatian wlth the exchange and with the Commissioncontalning smed 

information. 

Tem orarily exempted: Theseare stacksalasrtain baoka andothersecuritlesrssultinglrommergers ma. solidatt)00~ etc. which tbs Commission has bY Published mles eremptad from registrationunder a&ed 

conditions had hr stated periods. Admitted taunlistedtradin privileges Seotmnl2(0,asynendsd,providos ineflsot thatsecuritiss~hi~h were admitted ta unlisted trafing Prhiieies (i:;.. without applicstions lor llsiingfiled by the issuers) before 

Jaly 1,1964, may continua such ststus. Additional seouritiesmay bs granted unlisted trading prirllsges on exchanges only ifthe arelisted and reghtoied on another exchange. ~istedon erempte~sxchanp. certain erchangeswere snsmpted *om ~uregistrstiononder section 

the Act because of the limita volume of trsnsactions. The Commission's eremptlon order specifleain 

Mtance that securities whichrerelisted onthselchange8t the date aisuoh order may oontinue to be"sted 

thereon,and thet thorealter noadditional seourities may be llsted except uwn mmpnance with Se~tioas 

12m). (0,BnLyd). onustadon xemptederohanges:TheC~mis9iOn'se~~mtionordersp~oUieslne~ohInstanc~th~t ssnni. 

tie8 whioh were admitted to unuted trading privllegas an t%e exohan at the date olsuoh order mn. tinueruoh rlvile~es,and+at no sdditionaiseouritiasmay be admittzto wdistedtradixprimeges soept oponmmpEaneewxth Sect~onlz(t). 

Par 2.-NUMBER OF STOCK AND BOND ISSUES ON EACE EXCHANGE AS OF JUNE 

30,lW. CLASSIFIED BY TRADING STATUS, AND NUMBER OF ISSUERS INVOLVED 

Excbaoges IsuStwks Bonds 

err R X

-

U

-

XL

--

XU Totd R X U XI. Total 

American............. 1.CQ4 966 3 14 ............ 10 s3 2 18 .. 10s
 BoBton............... 493 SL 1 443 .----..-.... 6m 10 .................. 10
 Chic o Board of e ........ 3 6 - - 3 ............ 3 ............................... Cincmmati............ I84 32 -. 57 ........-.. 189 9 s ............ 10
 Colorado Springs' -... 10 ................... 10 ...... 10 ............................... 
 Detroit............... 286 96 1 2m ........-... 206 ...............................
 H i............ 61 ................... 41 13 7 ................... 6 6
 idw west.-.---........447 a40 I 141 .-.......--.m 12 .................. 12
 Nhtion~l.............. 15 16 ........................ 16 1 .................. 1 
 New York ............ 1,473 1.686 7 .--...............I, 693 1,250 12 ............ 1,262
 Pdo Coast......... 683 461 1 217 ........-... 669 .................. 27 


Philedelphia-Baltimore-Wafhington ... 657 179 2 560 ............ 741 5 .................. SQ


P t t.......... sI3 36 a4 ............ 120, 1 1 


Richmond' ........... 16 ................... 25 ...... Zb ................... 
 Salt Lake............. 60 63 ..... 3 ............ 61 
 san PranoLso &llniing 24 24 ........................ 24 


Spokane-.-....--..--. ZS 22 ..-... 6 ............ 
 23

Sgmbols; R-registered; X-tam -ib exempted. U-dmitted to oulided trading privileges. XLllsted on an exempted exchange; dLadrmttad to hsted trading ridegss on an erampted erdhange. Nota-I=ues?=em~ted under Seotlon 3(8)(121 of the Act, sooh as o%Iigstions a1 the U.S. Gosamment, 

the States and oles, are not Included in this tsbla 

*Exempted eaohanges. 
THIRTY-THIRD ANNUAL REPORT 

TABLE5.-Value of stocks on exchanges 

(billions of dollars) 

I Total valuas lQ3E47indushsars mi the Nsw York Stmk Exchange and the Americsn St& E=changs only. 
-- 

-- 

--- 

--- 

--- 

160 SECURITIES AND EXCHANGE COMMISSION 

TABLE6.-Dollar uolume and share volume of sales effected on eecurilies ezchonges in the calendar year 1986 and the 6-month period ended June SO, 1967 

IAmounts in thousands] 


PUT I.-12 MONTHS ENDED DEC. 31, 1866 


Bonds 

Tatd 

Exchanges 

Raked exshanges. ln,813.8%2 


Amerlran................ 
 Boston................... 
 Chiewo Bonrd of Trade.. 

c1noLnnati........-...... 
 Debolt.................. 7rM.054 0 


Midwest ................. 39 


Nstlorial................ 0 


New York............... 
 Paoifio Coad ............. 
 Philadelphia-Baltimore


Washington........... 1,365,685 13 


Plttsbwgh............... 61,782 0 


Salt Lake................ 6,878 0 


Ssn FranofseoMining.... 2,288 0 

Spokane................. 10.053 0 0 


Eremptederchanges 13,766 

Colorsda Sprlngs ........ ln 0
 HOnOlu1~................ 11,354 22
 Rlchmond ............... 2,m 0 


PART11.4MONTHS ENDED JUNE SO, 1987 

Bonds Staaks Rights and 

Total wanants 

Exchangs dollar 

volume Dollar Princfml DDolLv Share DoUar Num.

--

solume amount volume 'volume volume ber oi 

WltS 

R&td exchanga. SO.&. 232 --

2,788,180 2,4lZ.Z72 77,423,623 ---

2,1@,986 240,618 19.W 

Amdcao.....r.......... 10, 608938 225173 170,783 10,062,684 Bmton.................. 578,891 218,052 14841 


Chlwo Board ofTrad.. 473,307 

0 

0 

0 

0 

0 473,3Q5 0 3,4810 0 

1 

0 

2 

CLnclnnati .............. 33 138 24 35 33 711 851 1 1


MidWest

Detmit................... 348'760 0 0 348:768 7.388 1 4
 ................. 2,358:270 62 61 2,356,166 W.887
 Nstbd................. 6,585 0 0 5695 1069 

52 

0 

85 

New Y0rk.----- 0
 ......... 83.S23,780 2.W7W 2,236,212 W,840:403 1,414:%6
 pacific cosst ............. 17.662 an6 

Phlladdphla-Bdtimore z,ne,w, 147 7 2.27I, 676 64338 47l3 757 

Washlogton_........... 886.M . 895,732 U),470 188 268 PlttshW.........-----.26.412 0 0
 8dt M e................ 26,472 633 0 0 


San Franoisoo Mining.... $2 0 

0 

0 

0 % 2% 0 0 

0 Spokane................. 4,186 0 0 4296 4Q41 0 

0 

0 
 ' -

Exsmptsd erchsngs. 1l.w 37 8 11,b83 765 0 0 

Honolulu

COW0 Springs. ........ 0 0 0 0 0 0
 ................ 10.390 37 8 10,352 0 

0 

0
 Richmond............... 1,210 i 0 0 1,210 la5 30 0 0


.Less than XU unlts or $5X. 

Vole-Dm 01. Ih* V~UB an I VOillnrd of se.unl.~ l.1~on f1.u WFLItnlrl exehanlw are mported I!, corb

neellun vlto feel yu? ulrlrr Jcellun al 01 1l.o dmxrIt8us F~clunge hct of 18%. Inelud~dare dl 8cdtlar 

odd-Id1 ea w-11 n3 roi!rd.lut rrlralelions. ailmlrlnl on exchange3 ~r~eyt r.1- of boo& ol the U.S.

001.&nment uh:ehamuotsal,lec! t*tbsfac. ClmpsrnS.ad~t &~e~lsvr#l yl.rl by tltaoxempfd excham. 

Reponsol rua~cniehr:~;ar f,r a glv.::r mo:uit mvar tw.uitiuos c-leAral Qu~l.p-the edeodar month. Ckr. 

aneasxen~r~lls occx o~ihe4111 t)usitle*~ day sl~evthdtom wnl;h rbatrhle LTS, rn=tdi. Yimlhsammnnded BC~ WLII not ~ecrasrUy Mld lo tlse t't& o~ shoae
THIRTY-THIRD ANNUAL REPORT

TABLE 7.-Comparative share 8ales and dollar volume8 on exchange8

161

Year Share sales NYS AMS l\!SE PCS PBS BSE DSE PIT CIN Other

% % % % % % % % % %

------ -- -------- 1935___________ 681,970, 500 73.13 1242 1.91 2.69 0.76 0.96 0.85 0.34 0.03 6.91 1940___________ 377, 896, 572 75.44 13.20 211 2.78 1.02 1.19 .82 .31 .08 2.05 1945___________ 769,018, 138 65.87 21. 31 1.77 2.98 .66 .66 .79 .40 .05 5.51 1950___________ 893, 320, 458 76.32 13.54 2.16 3.11 .79 .6S .55 .18 .09 2.61 1955___________ 1,321,400,711 68.8.; 19.19 2.09 3.08 .75 .48 .39 .10 .05 5.02 1956___________ 1, 182,487, 085 66.31 21. 01 2.32 3.25 .72 .47 .49 .11 .05 5.27 1957___________ 1,293, 021,856 70.70 18.14 2.33 2.73 .98 .40 .39 .13 .06 4.14 1958___________ 1, 400,578, 512 71. 31 19.14 2.13 2.99 .73 .45 .35 .11 .05 2.74 1959___________ 1,699,696,619 65 59 24.50 2.00 2.81 .90 .37 .31 .07 .04 3.41 1960___________ 1,441,047,564 6848 22.27 2.20 3.11 .89 .39 .34 .06 .05 2.21 1961. __________ 2, 142,623, 490 6499 25.58 2.22 3.42 .79 .31 .31 .05 .04 2.29 1962___________ 1, 711,945, 297 71.32 20.12 234 2.95 .87 .31 .36 .05 .05 1.63 1963___________ 1,880, 798, 423 72.94 1884 233 2.83 .84 .29 .47 .04 .04 1.38 1964___________ 2, 126,373,821 72.54 19.35 2.43 2.64 .93 .29 .54 .05 .04 1.19 1965___________ 2, 671,011,839 6991 22.53 2.63 234 .82 .27 .53 .04 .05 .38 1966___________ 3, 312, 383, 466 69.37 22.85 2.57 2.68 .86 .40 .46 .04 .05 .72

Slxmonths

to June 30, 1967_________ 2,198,964,580 65.84 26.99 2.32 2.55 .85 .39 .34 .02 .03 .67

Dollar volume (in thousands)

1935___________ $16,396,139 86.64 7.83 1.32 1.39 .68 1.34 .40 .20 .04 .16 1940___________ 8,419,772 85.17 7.68 2.07 1.52 .92 1.91 .36 .19 .09 .09 1945___________ 16,284,552 82.75 10.81 2.00 1. 78 .82 1.16 .35 .14 .06 .13 1950___________ 21,808,284 85.91 6.85 2.35 2.19 .92 1.12 .39 .11 .11 .05 1955___________ 38,039,107 86.31 6.98 2.44 1.90 .90 .78 .39 .13 .09 .08 1956. __________ 35,143,115 84.95 7.77 2.76 2.08 .96 .80 .42 .12 .08 .07 1957. __________ 32,214,846 85.61 7.33 2.69 2.02 1.00 .76 .42 .12 .08 .07 1958___________ 38,419,560 85.42 7.45 2.71 2.11 1.01 .71 .37 .09 .08 .05 1959___________ 62,001,255 83,66 9.53 2.67 1.94 1.01 .66 .33 .08 .07 .05 1960___________ 40,306,603 83.81 9.35 2.73 1.95 1.04 .60 .34 .06 .08 .04 196L __________ 64,071,623 82.44 10.71 2.76 2.00 1.04 .50 .37 .06 .07 .06 1962___________ 54,855,894 86.32 6.81 2.76 2.00 1.05 .46 .42 .06 .07 .05 1963___________ 64,438,073 85.19 7.52 2.73 2.39 1.07 .42 .52 .05 .06 .05 1964___________ 72,461,750 83.49 8.46 3.16 2.48 1.15 .43 .66 .06 .06 .05 1965___________ 89,549,093 81.78 9.91 3.40 2.43 1.13 .43 .70 .05 .08 .04 1966___________ 123,666,443 79.78 11.84 3.14 2.85 1.10 .57 .67 .04 .08 .03

Slxmonths

to June 30, 2.93 1.15 .61 .45 .03 .04 .03 1967_________ 77,680,635 78.48 13.24 3.04

Note.-Annnal sales, including stocks, warrants and rights, as reported by all U.S. exchanges to the Commission. FIgures for merged exchanges are included in those of the exchanges Into which they were

merged. Details for all years prior to 1955 appear in Table 71n the Appendix of the 32nd Annual Report.

Symbols.-NYS, New York Stock Exchange; AMS, American Stock Exchange; MSE, Midwest Stock

Exchange; PCS, Pacific Coast Stock Exchange; PBS, Ptnladelphia-Balttmore-weshmgton Stock Exchange;

BS~~~ton Stock Exchange; DSE, Detroit Stock Exchange; PIT, Pittsburgh Stock Exchange; CIN,

Cin tl Stock Exchange.
162 
 GECURITIES AND EXCHANGE COMM~SSION 


TABL~ 8.-Block distributions of stocks repwted by ezchanges 

K'Blue in thousands of dollars] 

1 Bpedal afferlngs I Exchange dMributions / Beoondw dktrlbutlo n. 

Ye7 

Num Sbares Value Num- Sham Value Num- Sharer valse 1 1 1 1 1 1 1 

I 

b sol6 ba' Ud 61 / Ud 1


Nole-The first SPRIRI oflrnng 18ldnw.r+.d a erl~.cfivrPdb. 14
 IYZ: tho plan olerchnnps dl.lribuflon "IL9 made *lalro .\u g. 21. 11s ir-.>rldnrv dLtnbu11 ns 31" "01 mad0 ~ursn~lll 10 an? pllo but generd$

osrhawap roqpua nnarnlwn to u', laln nPy*ly! tho exella!.;e lo pdnlel~lalo m a 80; nlarg dmnhutloo 

alderewn mwell ~llslnbul~onl~ UIc<I u; 11) ILL Co~rirnls$lon .
THIRTY-TRIRD ANNUAL REPORT 163 

TABLE9.-Unlisted Stocks on Ezchenges 

PAsr 1.-NUMBER OF STOCKS ON THE EXCHANGES AS OF JUNE 30. IN571 

Amerlosn........:............................................ 
 Bmtm........................................................ 
 Cblw Board of Trade...................................... 
 Chbsti.................................................... 
 Delmit....................................................... 
 Honolulu..................................................... 
 Midwest...................................................... 
 PBD~ECoast................................................. 
 Philadelphia-BsiltimorbWashingtan ........................... 
 Plttsbwsh.................................................... 
 salt L&* .................................................... 
 spoksns...................................................... 


Total ..................................................1 103 1 399 1 1,426 


PAST 2.-UNLISTED SHARE VOLUME ON THE EXCHANGES--CALENDAR YEAR 1086 

Lkted and registeredon anotherenchange

unust:a 

OdY Admitted 

prlor to 
164 SECURITIES AND EXCHANGE COMMISSION

TABLE IO.-Summary of cases instituted in the courts by the CommissUm under the

Securities Act of 1933, the Securities Exchange Act of 191'14,the Public Utility Holding Company Act of 1935, the Investment Company Act of 1940, and the

Investment Advisers Act of 1940.

Total Total Cases Cases Cases In- Total Cases

cases in- caes pending pending stttuted cases closed stituted closed at end at end during pending during

Types of cases up to end up to end of 1967 of 1966 1967 during 1967

of 1967 of 1967 fiscal fiscal fiscal 1967 fiscal

fiscal fiscal year year year fiscal year year year year

--- --- --- --- --- --- Actions to enjoin violations of 137 the above Acts _______________ 1,555 1,480 75 69 68 62

Actions to enforce subpoenas

under the Securities Act and

the Securities Exchange Act.. 122 111 11 11 3 14 3

Actions to carry out voluntary

plans to comply WIth Section 11Cb) of the Holding 2 1 Company Act ________________ 150 149 1 0 2 Miscellaneous actlons ___________ 57 57 0 0 0 0 0

Total ____________________ --- --- --- --- --- 1,884 1,797 87 80 73 153 66
- -- 

THIRTY-THIRD ANNUAL REPORT 165 

Tnsw 11.-A $&year summary of aU injzlmtion cases imlitzlted by the Commission 

1934 to June SO, 1987, by calendar year 

Numberotcase8lmHtuted Number of eases in whtoh 

by the Cdon and lnjunctlons were granted the namber of defend- and the number of de 

Calsndar ~ ~ year antsinvolved lendsnts wlotned I
 - - Caw Dafendants Cases Defendants 

1831............................................ 7 24 2 4 


19U... ......................................... 36 242 17 EU 


1936 42 116 38 108 


1987.. ................................-........ 96 WI 91 211 


IN.. .......................................... 70 162 78 163 


1950............................................ 67 164 81 186 


1949............................................ 10 100 42 88 


19U............. ..- 0 112 86 W 


1942............. ... 21 73 10 64 


194.3............. 19 81 18 72 


1844................. ..-. .............--. la 80 14 36 


1945................. ..--- 21 74 n m 


1945............................................ 21 46 16 34 


1847............................................ 10 10 10 47 


19K........................................... 19 U 16 16 


1949.......... ..........--.- 26 69 24 66 


19m... ........................-............... n 7a 26 71 


J96l............................................ 22 67 17 4a 


19m.. ...........................--........... 21 103 18 60 
 1 w............................................ Xl 
 U
 2.3
 68


1964........................................... 
 B 69 22 82


1966............................................ 
 2a 64 19 43


1866............................................ 68 
 12a 42 88


Ea 192 82 '23
 1967............................................ 
 1968.. .......................................... 
 71 408 61 1Ea


1959............................................ Ea 208 71 178 


1980............................................ 88 no 81 222 


1'231............................................ 84 363 86 27a 


19Ba............................................ 88 4.23 82 22P 
 1663............................................ 91 868 98 363 


19BP............................................ 76 276 88 a62 


1085............................................ ?a 8a 68 zn 


1OB6............................................ €4 236 60 181 


10~7(taJune ao) ................................ 45 in as 117 


Total.................................... 1.m 6,861 . 11.414 4,128 


BmdMARY 

p~~ 

I~hsem:unuls show dw o~itlon or eeres by YEN ofdlm~irionu~ddo not n8earadlg reneef the UP* S~~IO.01 tile mea s~lownBs Kaviup: been imttoted lo t11o same s-. I Inrlluddt 24 mrarwhteb warewonted twiu,Ln thlsoolonln 1,~muse inlunerloas ~BLR-dflorent dclmd- eat8 In the same aps were grnnrrd Ln dJflor,nc ysrw. iincludes I4 derendam, ur 8 e m in strtch inlunettaas have been ohl~nal a~ lo23 aodelendants. 4 InJhlde8 (a) aetiwu disu,~ed(U 10 %51ddend lntp.: 0,) nctlou dtxool!nuerl. sbate~l, sbanda~~ed. 

atlnolaial or ~otrlod(mto 11 dereod~l; (c) actloas Lo al.tch Jod umnl we.+ dad 1sM 42 dar~rrdanul: 

(dl ~nlwLo whleh prcaecorlon wu stayed on Bflyulstlon to &ontlnue mkwndool thaqed 18s to 4 


defendants). 

166 SECURITIES AND EXCHANGE COMMISSION

TABLE 12.-Summary of casesinstituted against the Commission, petitions for review

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

Commission participated.

Total Total Cases Cases Cases In- Total Cases cases In- cases pending pending stitnted cases closed

Types of cases stltnted closed at end at end during pending during

nptoend up to end of1967 of 1966 1967 during 1967

of 1967 of 1967 fuca! fuca! fuca! 1967 tIsca1

tIsca1 tIsca1 year year year tIsca1 year

year year year

--- -------------- Actions to enjoin enforcement of Securities Act, Securities Exchange Act and Public Utility Holding Company

Act with the excebtion of subpoenas issued y the Commission, 2 5 2 7 5 _________________ 76 74

Actions to enjoin enforcement of or compliance with sub-

~D:8S Issued by the Com- 15 14 1 0 3 3 2 IWSSlOn.. _____________________

Petitions for review of Commission's orders by courts of

appeals under the various

Acts admlnlstered by the 11 21 11 Commlssion __________________ 301 291 10 10

MIscellaneous actions against

the Commission or officers of the Commission and cases ill

which the Conunfsslon par- ::I'::=~~~~:~: _____306 287 19 22 15 37 18

Appellate proceedlngs under

Chapter X In which the Commission particlpated ____ 214 210 4 6 4 10 6

TotaL ------- ------- --- --- 912 876 36 43 35 781

42 ___________________ ---
THIRTY-THIRD ANNUAL REPORT 167

TABLE 13.-A 94--year 8ummary of criminal cases developed by the Commission-«

1994- through 1987 by fiscal year 1

(See Table 14 for classification of defendants as broker-dealers, etc.)

Number Number of of persons Number these de- Number as to or such Number fendants as Number

of eases whom cases In of de- Number Number to whom of these

referred prosecu- which fendants of these of these proeeedmgs defend- Fiscal year to Dept. tion was Indict- IndICted defend- defend- have been ants as to aUusbce recom- ments in such ants con- ants sc- disrmssed on whom in each mended have eases victed qwtted motion of cases are

year In each been United pending' year obtamed States

Attys.

--- ------ --- 1934 7 36 3 32 17 0 15 0 1935_____________ 29 177 14 149 84 5 60 0 1936. ____________ 43 379 34 368 164 46 158 0 1937_____________ 42 128 30 144 78 32 34 0 1938_____________ 40 113 33 134 75 13 46 0 1939_____________ 62 245 47 292 199 33 60 0 1940_____________ 69 174 51 200 96 38 66 0 1941. ____________ 54 150 47 145 94 15 36 0 1942_____________ 50 144 46 194 108 23 63 0 1943_____________ 31 91 28 108 62 10 36 0 1944_____________ 27 69 24 79 48 6 25 () 1945_____________ 19 47 18 61 36 10 15 0 1946_____________ 16 44 14 40 13 8 19 0 1947_____________ 20 50 13 34 9 6 20 0 1948_____________ 16 32 15 29 20 3 6 0 1949_____________ 27 44 25 67 19 13 25 0 1950_____________ 18 28 15 27 21 1 6 0 1951. ____________ 29 42 24 48 37 5 6 0 1952_____________ 14 26 13 24 17 4 3 0 1953_____________ 18 32 15 33 20 7 6 0 1954_____________ 19 44 19 52 29 10 13 0 1955_____________ 8 12 8 13 7 0 6 0 1956_____________ 17 43 16 44 28 6 11 0 1957_____________ 26 132 18 80 35 6 15 25 1958_____________ 15 51 14 37 17 5 11 4 1959_____________ 45 217 39 234 117 20 34 63 1960_____________ 63 281 44 207 113 11 48 35 1961_____________ 42 240 42 276 132 22 27 95 1962_____________ 60 191 61 152 85 14 60 3 1963_____________ 48 168 39 117 72 7 29 9 1964_____________ 48 164 37 173 93 10 16 54 1965_____________ 49 167 44 155 64 5 19 67 1966_____________ 44 118 37 173 66 4 10 93 1967_____________ '44 212 18 111 8 0 0 103

TotaL ____ --- --- --- --- --- 1,129 4, 091 '935 4,022 2,083 395 993 551

I The figures given for each year reflect actions taken and the status of cases as of the end of the most

recent fiscal year with respect to cases referred to the Department of Justice dnrlng the year specified. For

example, convictions obtained In fiscal 1967 with respect to cases referred during fiscal 1966 are Included

under fiscal 1966. While the table shows only 8 convictions under 1967~the total number of convictions

far cases referred during that year and prior years was 127, lIS noted In tne text of this report. There were

53 Indictments returned in 45 eases during fiscal year 1967.

J The number of defendants In a case is sometimes Increased by the Department of Justice over the number

against whom prosecution was recommended by the Commission. Also more than one Indictment may

result from a single reference.

See Table 15 for breakdown of pendIng cases. , Eighteen of these references Involving 51 proposed defendants, and 11 prior references Involving 43

proposed defendants, were still being processed by the Department of Justice lIS of the close of the fiscal

year.

I Elgbt hundred and seventeen of these cases have been completed lIS to 1 or more defendants. ConvictIons have been obtained In 659 or 81 percent olauch cases. Only 168 or 19 percent of such cases have resulted

In acquittals or dismissals lIS to all defendants; this includes numerous cases In which IndlctInents were

dismissed without trial because of the death of defendants or for other admInIstrative reasons. See note 6, infra. In the 32nd Annual Report n, 6 should have read: "Eight hundred of these cases have been compreted as to 1 or more defendants. COnvictions have been obtained In 644 or 80.6 percent of such cases. Only

156 or 19.6 percent of such cases have resulted In acquittals or dismissals as to all defendants; this Includes

numerous cases In which IndlctInents were dismissed without trIaJ because of the death of defendants or

for other admlnlstratlve reasons. Bee n, 6, infra."

Includes 82 defendants who died atter IndictInent.

_____ • _______

•

•

•

•
168 SECURITIES AND EXCHANGE COMMISSION

TABLE 14.-A 34-year summary classifying all defendants in criminal cases developed

by the Commission-1934 to June 30, 1961

Number as to whom cases were Number 88

Number Number Number dismissed to whom Indicted Oonvicted Acqwtted on motion cases are ofUnlted pending States

AttorneyS

Registered broker-dealers 1 (including principals of snch firms); ••........ •.... 638 370 44 147 77 Employees of snch registered broker- dealers __...... _...... _.__•...•• _._______ 367 163 21 70 113 Persons In general securities business bnt

J~a~~~~~~~~~~~~~;;;:~~c;~~~= 861 429 68 304 60 2,156 1,121 262 472 301

TotaL_ ..... _.___. _..... _____........ 4,022 2,083 395 993 551

1Includes persons registered at or prior to tlnIe of indictment. , The persons referred to In this column, while not engaged In a general bnslness In securities, were almost

without exception prosecuted for violatlons of law Involvmg securities transactions,

TABLE I5.-Summary of criminal cases developed by the Commission which were pending at June 30, 1967

Number Number ofsnch defendants as of such to whom cases are still pending Number of defendants and reasons therefor

Pending, referred to D:;partment Cases defendants as to whom

ofJusttce In the fisc year: In snch cases have cases been Not yet Awaltlng Awaltlng completed appre- trial appeal 1

hended

--- --- 1957____ •.. ___•......... ____..•..... _. 1 25 0 0 25 0 1958. •.. .... _. ........ 1 4 0 0 4 0 1959.• __._ ....... _•........ _. _.•...... 7 63 0 16 47 1 1960__ . _. _._._ ...... ___•....... __•••.. 6 36 0 7 28 0 1961. _ •.•... __._ ........ __••...•.. ____ 13 96 0 32 63 6 1962•.. _._._._. ___._ .••.. _. ___.•...... 2 3 0 0 3 1 1963_ ...• ___...... _.••........ ____•... 2 11 2 0 9 3 1964. ___ ._ ••...•. _.•......• _...•.....• 7 60 6 1 63 7 1966. ...... •••. .• .•...... 23 75 8 1 66 7 1966. _ .••..... ___....... ___••..•.. _._. 23 118 25 0 93 9 1967__ ._ ••.... __... '.'. ___._ ...•. __. __ 14 104 1 1 102 0

------- Total_ ._.•.. __._.•....... _.. ____ 98 593 42 58 493 '3'

SUMMARY

~~~ Total =r~~_' defendants as to...:whom:.:.:.:.:.:.:.:.:. cases:.:.:.:.:.:.:.:.:.:.:.:.:.:.:.:.:.:.:.:.:.:. are pending , . __:.:.:.:.:.:.:.:.

. :.:.:.:.:.:.:.:.:.:.:.:.:.:.:.•.• ._ .. _._. .•• ..... :.::645 ~~ I The figures In thIs column represent defendants who have been convicted and whose appeals are pend.

Ing, These defendants are also Included In the figures In column 3. , As of the close of the fiscal year, Indictments had not yet been returned as to 94 proposed defendants

In 29cases referred to the Department of Justice. These are reflected only In the recapitulation of totals at the bottom of the table. The figure for total cases pending Includes M cases In a Suspense Category.

U 5 GOVERNMENT PRINTING OFfiCE- 1968

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