Securities Market Activity and Enforcement Actions in the Early 1960s, Lecture notes of Business

Download Securities Market Activity and Enforcement Actions in the Early 1960s and more Lecture notes Business in PDF only on Docsity! 28th :AnnualReport /., - of the r; '_ "),- --- II ( c : ..), " Securities and Exchange Commission Fiscal Year Ended June 30, 1962 UNITED STATES GOVERNMENT PRINTING OFFICE, WASHINGTON , 1963 For eale by the Superintendent of Documents, U.S. Government Printing Office Wublngton 25, D.C. Price 60 Cente (paper eov..r) - - II SECURITIES AND EXCHANGE COMMISSION Headquarters Office 425 Second Street NW. Washington 25, D.C. COMMISSIONERS January 8, 1963 WILLIAM L. CARY, Chairman BYRON D. WOODSIDE J. ALLEN FREAR, JR. MANUEL F. COHEN JACK M. WHITNEY II ORVAL L. DuBOIS, Secretary TABLE OF CONTENTS Page Commissioners and staff officers _____________________________________ XI Regional and branch offiees , ________________________________________ XII Biographies of Commlssloners, ______________________________________ XIII PART I CURRENT PROBLEMS BEFORE THE COMMISSION_________ 1 Foreword_____________________________________________________ 1 Special Study of securities markets; ________ _______________ 2 The Wharton School study of investment companies., , _____________ 3 Registration of new security offerings , __ _________________ 4 Enforcement activity _ _ ________________________________________ 5 Delegation of functions______ _ __ _______________________ 6 PART II LEGISLATIVE ACTIVITIES_ _ _______ _______________ i PART III REVISION OF RULES, REGULATIONS AND FORMS_______ 9 The Securities Act of 1933___ ____________ _____ ____ ____ q Adoption of Ru1e 152A_____________________________________ 9 Adoption of Ru1e 155______________________________________ 10 Adoption of Ru1e 236 ______________________________________ 11 Amendment of Ru1e 458 ____________________________________ 11 Adoption of Ru1es 462 and 263_ _____________________________ 12 Adoption of Revised Form 8-8______________________________ 12 Adoption of Form 8-1L___________________________________ 12 The Securities Exchange Act of 1934_____________________________ 13 Adoption of Ru1es 13a-15 and 15d-15 and Form 7-K__________ 13 Adoption of Ru1e 15d-21 and Form 11-K; Amendment to Formlo-I{__________________________________________________ 13 Proposed Ru1e 19a2-L___ __ _____________________ 14 Proposed Amendments to Form 8-I{_________________________ 14 Adoption of Ru1e 15c2-4___________________________________ 15 Adoption of Ru1e 15c2-5 _ __________________________________ 15 Amendment of Ru1e 15c3-L____________ ____________________ 16 Amendment of Ru1es 17a-3 and 17a-4____________________ 16 Amendment of Ru1e 15ag-L____________ _____ _______________ 17 The Trust Indenture Act of 1939________________________________ 18 Amendment of Form T-3___________________________________ 18 The Investment Company Act of 1940_ __ ___ _____________ 18 Amendments to Ru1es 31a-l and 31a-2; adoption of Ru1e 31a-3_ 18 Adoption of exemptive ru1es applicable to licensed small business investment eompanies.L, , _____________ _______ _____ 19 v VI TABLE OF CONTENTS REVISION OF RULES, REGULATIONS AND FORMS-Continued Page The Investment Advisers Act of 1940____________________________ 19 Adoption of Rules 206(4)-1 and 206(4)-2____ ______ _______ 19 Proposed amendment to Rule 204-2_ ________________________ 20 PART IV ADMINISTRATION OF THE SECURITIES ACT OF 1933____ 22 Description of the registration process.L, , ___ _________________ 22 Registration statement and prospectus; ______________________ 22 Examination procedure.L, , _______________________ 23 Time required to complete registration __________________ ____ 23 Volume of securities registered_________________________________ 25 Registration statements filedc , , ____ _______________ __________ _ 27 Stop order proceedings _________________________________________ 28 Examinations and investigations________ __ _______________________ 33 Exemption from registration of small issues; ______________________ 34 Exempt offerings under Regulation A_________________________ 35 Suspension of exemption.Lc , , _______________________________ 36 Exempt offerings under Regulation B_________________________ 38 Exempt offerings under Regulation E_ _____________________ 39 Exempt offerings under Regulation F_________________________ 39 PART Y ADMINISTRATION OF THE SECURITIES EXCHANGE ACT OF 1934___________________________________________________________ 40 Regulation of exchanges and exchange trading___________________ 40 Registration and exemption of exchanges 40 Disciplinary aetion., _______________________________________ 41 Registration of securities on exchanges , _____________ _____________ 41 Statistics relating to registration of securities on exchanges, _____ 42 Market value of securities traded on exchanges__________ _ _ 43 Fiscal year share values and volumes_________________________ 44 Foreign stock on exchanges _________________________________ 45 Comparative exchange statistics_________ _______ _______ 46 Comparative over-the-counter statistics , _ _______ ___ __ 47 Reporting under Section 15(d)____ ______________________ _____ 48 Delisting of securities from exchanges ____________________________ 49 Delisting proceedings under Section 19(a) _____________________ 50 Unlisted trading privileges on exchanges_________________________ 51 Applications for unlisted trading privileges____________________ 52 Block distributions reported by exchanges 53 Manipulation and stabilisation, _________________________________ 54 Manipulauon_____________________________________________ 54 Stabilization , _______ __ ____________ _ 55 Insiders' security holdings and transactions., __________________ ____ 56 Ownership reports.L, , 56 Recovery of short-swing trading profits by issuer 57 Regulation of proxies________ 57 Scope of proxy regulation___________________________________ 57 Statistics relating to proxy statements________________________ 52 Stockholders' proposals, ____________________________________ 59 _ - __ - _ _______ _ _________ _ _ __ __ __ ____ __ ____ _____ __ ___________ TABU. 01<' CO.\'TEN1'S VII ADMINISTRATION OF THE SECURITIES EXCHANGE ACT OF 1934-Continued Regulation of proxies-Continued Page Ratio of soliciting to nonsoliciting companies__________________ 59 Proxy contests____________________________________________ 60 Investigations_____ __ ______ __ ___ 60 Regulation of broker-dealers and over-the-counter markets__________ 60 Registrative , ____ ____ __________ 60 Administrative proceedings; __ ____ ______________ 61 Revocation and denial proceedings_______________________ 63 Suspension proeeedings..c , , __ ___ ___ ____ 67 Other sanctions________ ________________________________ 68 Net capital rule , __ ____________ ________ _____ 69 Financial statements__ __________________ ______ ____ 70 Broker-dealer Inspeetions., _____________ ___ 71 Supervision of activities of National Association of Securities Dealers, Inc_________________________________________________________ 72 NASD disciplinary actions_____ ____ ____________ 73 Commission review of N ASD action on membership __ _________ 75 Commission review of N ASD disciplinary action, ______________ 7i PART VI ADMINISTRATION OF THE PUBLIC UTILITY HOLDING COM- PANY ACT OF 1935____________________________________________ 81 Composition of registered holding company systems________________ 82 Section 11 matters and other significant developments in active regis- tered holding company systems________________________________ 84 Section 11 matters_____ _______ _______ __ _ __ _______ 84 Other developments_______ ______ __ __ ___ ____ 86 Financing of active registered public utility holding companies and their subsidiaries., __ ___________ ____________ _ 87 Competitive bidding , __ __ __ ____________ _ 88 Protective provisions of first mortgage bonds and preferred stocks of public utility eompanies; __ ___ ____ ________ 89 Othermatters_________________________________________________ 93 Request for declaratory order_______________________________ 93 "Bottled Gas" companies___________________________________ 94 PART VII PARTICIPATION OF THE COMMISSION IN CORPORATE RE- ORGANIZATIONS UNDER CHAPTER X OF THE BANK- RUPTCY ACT____ ______ _ _ __________________________ 95 Summary of actlvities.L; _________________________________ ___ 96 Procedural and administrative matters___________________________ 97 Trustee's investlgatlon , __ ___ __ __ ____________________ 98 Advisory reports on plans of reorganization; ______________________ 98 Activities with regard to allowances______________________________ 100 Intervention in Chapter XI proceedings__________________________ 102 Publication of bar dates________________________________________ 104 PART VIII ADMINISTRATION OF THE TRUST INDENTURE ACT OF 1939__ 105 TABLE OF CONTENTS Page Table 15. Summary of cases instituted against the Commission, cases in which the Commission participated as intervenor or amicus curiae, and reorganization cases on appeal under Chapter X in which the Commission participated_____________________ 194 Table 16. Indictments returned for violation of the Acts administered by the Commission, the Mail Fraud statute (Section 1341, formerly Sec. 338, Title 18, U.S.C.) and other related Fed- eral statutes (where the Commission took part in the investi- gation and development of the case) which were pending during the 1962 fiscal year ______________________________ 195 Table 17. Injunctive proceedings brought by the Commission which were pending during the fiscal year ended June 30, 1962__________ 205 Table 18. Proceedings by the Commission to enforce subpoenas pend- ing during the fiscal year ended June 30, 1962_________ 218 Table 19. Actions pending during fiscal year ended June 30, 1962, to enforce voluntary plans under Section l1(e) to comply with Section l1(b) of the Public Utility Holding Company Act of1935________________________________________________ 219 Table 20. Contempt proceedings pending during the flseal year ended June 30, 1962__________________________________________ 220 Table 21. Petitions for review of orders of Commission pending in courts of appeals during the fiscal year ended June 30, 1962______ 221 Table 22. Miscellaneous actions involving the Commission or employees of the Commission during the fiscal year ended June 30, 1962__________________________________________________ 223 Table 23. Cases in which the Commission participated as intervenor or as amicus curiae, pending during the fiscal year ended June 30, 1962__________________________________________________ 224 Table 24. Reorganization cases under Chapter X of the Bankruptcy Act pending during the fiscal year ended June 30, 1962, in which the Commission participated when District Court orders were challenged in appellate courts, _____________________ 226 Table 25. A 29-year summary of criminal cases developed by the Com- mission-fiscal years 1934-1962_________________________ 227 Table 26. A 29-year summary classifying all defendants in criminal cases developed by the Commission-1934 to June 30, 1962______ 227 Table 27. A 29-year summary of all injunction cases instituted by the Commission-1934 to June 30, 1962, by calendar year ____ 228 COMMISSIONERS AND STAFF OFFICERS (As of January 1, 1963) TCI'm expires Commissioners June 5 WILLLI.M L. CARYof New York, Ohairman______________________________ 1966 BYROND. WOODSIDEof Virginia________________________________________ 1967 J .ALLENFREAR,JR., of Delaware 1965 MANUEL F. COHEN of Maryland______________________________________ 1963 JACK M. WHITNEY II of Illinois_______________________________________ 1964 Secretary: ORVALL. DuBOIS Staff Officers EDMUNDH. WORTHY,Director, Division of Corporation Finance. WALTERWERNER,Associate Director . .ALLANF. CONWILL,Director, Division of Corporate Regulation. SOLOMONFREEDMAN,Associate Director. PHILIP A. LoOMIS, Jr., Director, Division of Trading and Exchanges. IRVINGM. POLLACK,Associate Director. MILTONH.COHEN,Director, Special Study of Securities Markets. RALPH S. SAUL,Associate Director. RICHARDH. PAUL, Chief Counsel. PETERA. DAM}{ANN,General Counsel. DAVIDFERRER,Associate General Counsel. WALTERP. NORTH,Associate General Counsel. ANDREWBARR, Ohief Accountant. LEONARDHELFENSTEIN,Director, Office of Opinion Writing. W. VICTORRODIN,Associate Director. WILLLI.ME. BECKER,Management Analyst. FRANK J. DONATY,Comptroller. ERNESTL.DESSECKER,Records and Service Officer. HARRy POLLACK,Director of Personnel. ARTHURFLEISCHER,J'r., Executive Assistant to the ChaIrman. XI • -------------------------------- REGIONAL AND BRANCH OFFICES Regional Administrators Region 1. New York, New Jersey.-Llewellyn P. Young; John J. Devaney, Associate Regional Administrator, 225 Broadway, New York 7, N.Y. Region 2. Massachusetts, Connecticut, Rhode Island, Vermont, New Hamp- shire, Maine.-Philip E. Kendrick, Federal Building, Post Office Square, Boston 9, Mass. Region 3. Tennessee, North Carolina, South Carolina, Georgia, Alabama, Mississippi, Florida, and that part of Louisiana lying east of the Atcha- falaya River.-William Green, Suite 138, 1371 Peachtree Street, NE., Atlanta 9, Ga. Region 4. Illinois, Indiana, Iowa, Kansas City (Kans.) , Kentucky, Michi. gan, Minnesota, Missouri, Ohio, Wisconsin.-Thomas B. Hart, Bankers Building (Room 630),105 West Adams Street, Chicago 3, Ill. Region 5. Oklahoma, Arkansas, Texas, and that part of Louisiana lying west of the Atchafalaya River, and Kansas (except Kansas City).-Oran H. Allred, United States Courthouse (Room 301), 10th and Lamar Streets, Fort Worth 2, Tex. Region 6. Wyoming, Colorado, New Mexico, Nebraska, North Dakota, South Dakota, Utah.-Donald J. Stocking, 802 Midland Savings Building, 444 17th Street, Denver 2, Colo. Region 7. California, Nevada, Arizona, Hawaii.-Arthur E. Pennekamp, Pacific Building, 821 Market Street, San Francisco 3, Calif. Region 8. Washington, Oregon, Idaho, Montana, Alaska.-James E. New- ton, Hoge Building (9th floor), 705 Second Avenue, Seattle 4, Wash. Region 9. Pennsylvania, Maryland, Virginia, West Virginia, Delaware, Dis- trict of Columbia.-Alexander J. Brown, Jr., Courts Building, 810 6th Street, N.W., Washington 25, D.C. Branch Offices Cleveland 13, Ohio. Standard Building (Room 1628), 1870 Ontario Street. Detroit 26, Mich. Federal Building (Room 1074). Houston 2, Tex. Federal Office and Court Building (Room 226), 515 Rusk Avenue. Los Angeles 28, Calif. Guaranty Building (Room 809), 6381 Hollywood Boulevard, Miami 32, FIa. Ainsley Building (Suite 1112), 14 Northeast First Avenue. St. Louis, Mo. Federal :Building (Room 4266A) , 1520 Market Street. St. Paull, Minn. Main Post Officeand Customhouse (Room 1027), 180 East Kellogg Boulevard, Salt Lake City, Utah. Newhouse Building (Room 1119),10 Exchange Place. xn COMMISSIONERS Manuel F. Cohen xv Commissioner Cohen was born in Brooklyn, N.Y., on October 9, 1912. He holds a B.S. degree in social science from Brooklyn Col- lege of the College of the City of New York. He received an LL.B. degree, cum laude, from Brooklyn Law School of St. Lawrence Uni- versity in 1936, and was elected to the Philonomic Council. He is a member of the New York bar. In 1933-1934 he served as research associate in the Twentieth Century Fund studies of the securities markets. He joined the Commission 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 Di- vision of Corporation Finance. He was awarded a Rockefeller Pub- lic 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 Wash- ington 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 Brook- lyn Law School. He took officeas a member of the Commission on October 11, 1961, for the term expiring June 5, 1963. Jack M. Whitney II Commissioner Whitney was born in Huntington Beach, Calif., on May 16, 1922. He attended Millsaps College in Jackson, Miss., for 2 years, and Northwestern University School of Commerce, from which he received a B.S. degree in 1943. From 1943 to 1946 he was on active duty in the U.S. Naval Reserve, achieving the rank of Lieutenant (junior grade) in the Supply Corps. He was graduated from Northwestern University School of Law in 1949 with the degree of J.D. In law school he was an editor of the law review, and he is a member of Beta Gamma Sigma and Order of the Coif. Following graduation he became associated with the Chicago law firm of Bell, Boyd, Marshall & Lloyd, of which he was a member at the time of his appointment to the Commission. His practice was primarily in the field of corporate finance. He took officeas a member of the Commis- sion on November 9, 1961, for the term ending June 5, 1964. PART I CURRENT PROBLEMS BEFORE THE COMMISSION Foreword Fiscal year 1962 witnessed extraordinary activity in all aspects of the Commission's responsibilities. The peaks reached during fiscal 1961 in the flotation of new issues of securities, in broker-dealers and investment advisers registered with the Commission, and in the num- ber of customers men employed and branch offices maintained by securities firms were equalled or exceeded. The sustained high level of activity and the wide public participation in the securities markets continued to attract untrained salesmen as well as those who seek to take advantage of greater interest in investment by new and inexperi- enced investors. These factors compelled increased vigilance in regu- latory matters and more vigorous enforcement effort by the Commis- sion and by the self-regulatory agencies of the securities industry. During the year the Commission adopted a number of significant statements of policy and rules. At the end of the fiscal year other rules which had been published for public consideration were under study in the light of the comments received. The number of enforce- ment actions taken---eivil, criminal and administrative---eontinued to rise. Apart from the problems arising in the course of the regular activi- ties of the Commission, fiscal 1962saw the commencement of the Com- mission's Special Study of Securities Markets, the first comprehensive study of the securities markets in more than 25 years. A sharp break in securities prices toward the end of the fiscal year has also required an examination in depth of the events which preceded and accom- panied this dramatic price decline as well as the performance of im- portant market mechanisms and those professionally responsible for their operation. During the fiscal year, the Commission also received a report of a study of certain facets of open-end (mutual) investment company operations conducted for the Commission by the Wharton School of Finance and Commerce, University of Pennsylvania. This is the first detailed study made of an increasingly important investment medium since the Commission's studies which preceded passage of the Invest- ment Company Act of 1940. 1 672175-6~2 4 SECURITIES AND EXCHA-1'\'GE COMMISSION The staff of the Commission is now engaged in an evaluation of the conclusions and comments contained in the Wharton School Study, in a study of the structure of the investment company industry generally, and in a reassessment of the provisions of the Investment Company Act and the Commission's rules and regulations thereunder. This detailed analysis, together with related Commission studies now in progress, will aid the Commission in determining whether specific legislative recommendations should be made to the Congress with respect to the Act and what action, if any, should be taken to strengthen the rules and regulations under the Act. Registration of New Security Offerings Although the number of registration statements filed under the Securities Act of 1933 with respect to securities issues proposed to be publicly offered dropped off as a result of the market decline toward the end of the fiscal year, the total number of statements filed during the year, 2,307, far exceeded that for any previous year in the Com- mission's history. This figure represents an increase of 26 per cent over the record number of statements filed in the preceding year. The dollar amount represented by these statements aggregated $21.6 bil- lion, or 4.4 per cent more than the corresponding figure for the pre- vious year. During fiscal year 1962, 1,815 statements relating to offerings of $19.5 billion of securities became effective, also a record both in number and dollar amount, as graphically shown in the chart on page 5. The unprecedented number of registration statements filed placed a heavy burden upon the Commission's staff. Aside from the sheer volume of statements, a record number of 1,377 statements repre- senting 60 percent of all those filed, related to companies that had not previously been subject to the registration process. The examination of such statements tends of necessity to be more time-consuming than that of filings by issuers which have previously gone through the regis- tration process. In an effort to reduce the record backlog of registration statements on file, the staff of the Commission was forced to work :frequently on an over-time basis and the Commission effected a number of changes in processing procedures during the fiscal year. Among other things, it was decided to reduce the amount and layers of review, particularly with respect to statements relating to high grade debt securities and those filed by public utility companies, by established companies which have filed financial information with the Commission within recent periods, and by other established companies where the registration statement is meticulously prepared and the financial statements are unexceptionable. The Commission also took steps to dispose of a 'fWENTY-EIGHTH ANNUAL REPORT SECURITIES EFFECTIVELY REGISTERED WITH S.E.C. DOllARS BilliONS 1935 1962 20 DOLLAR VOLUME 16 12 NUMBER OF REGISTRATIONS 15 10 5 1935 40 45 50 (FIscal Years) 55 60 0$.4126, large group of statements which had been unsatisfactorily prepared, and had been on the docket for a long time without any corrective amendments having been filed. Enforcement Activity During the fiscal year, fraudulent sales of securities and other illegal practices in connection with securities transactions presented, as in past years, a major problem for the Commission and occupied the time of a large portion of its staff. As described in more detail in subse- quent portions of this report, the Commission continued to pursue a vigorous enforcement program. Thus, it referred 64 cases to the Department of Justice for criminal prosecution during the year, con- stituting the largest number of referrals in a single year in the Com- mission's history, and brought 89 injunction actions. In addition, a total of 503 investigations of securities transactions involving pos- - 6 SECURITIES AND EXCHANGE COMMISSION sible violations of the antifraud or other provisions of the securities acts were instituted, and 51 orders suspending the exemption from registration provided for small security issues were issued. Delegation of Functions The enactment in August 1962 of Public Law 87-592, authorizing the Commission to delegate to staff members certain of its functions, should have the effect of strengthening the Commission's administra- tion of the various acts administered by it. When implemented, the proposed delegation will relieve the Commissioners from certain rou- tine matters with which they now deal and free them to devote more attention to major matters of policy and planning. In December 1962, following extensive work by the Commission and at the staff level with a view to implementation of the law, the Commission published notice that it had under consideration the adop- tion of rules which would accomplish delegation of various routine functions to certain of its staff officials, including Division and Office heads and regional administrators, to be performed by them or under their direction by such persons as might be designated from time to time by the Chairman. PART m REVISION OF RULES, REGULATIONS AND FORMS The Commission maintains a continuing program of reviewing its rules, regulations, and forms under the various statutes administered by it in order to determine whether any changes are appropriate in the light of changing conditions, methods and procedures in business and in the financial practices of business. Certain members of the staff are specifically assigned to this task, but changes are also sug- gested, from time to time, by other members of the staff who are engaged in the examination of material filed with the Commission, and by persons outside of the Commission who are subject to the Commission's requirements or who have occasion to work with those requirements such as underwriters, attorneys, accountants, and other representatives. With a few exceptions provided for by the Admin- istrative Procedure Act, proposed new rules, regulations, and forms and proposed changes in existing rules, regulations, and forms are published in preliminary form for the purpose of obtaining the views and comments of interested persons, including issuers and various industry groups.' During the 1962 fiscal year, the Commission adopted a number of changes in its rules, regulations, and forms. Other changes which the Commission published in preliminary form for the purpose of obtaining public comments thereon were pending at the end of the fiscal year. The changes made during the fiscal year and those pend- ing at the end of the year are described below. THE SECURITIES ACT OF 1933 Adoption of Rule 152A The Commission adopted Rule 152A which provides that the offer- ing or sale of securities, evidenced by scrip certificates, order forms or similar documents, which represent fractional interests resulting 1The rules and regulations of the Commission are publtshed in the Code of Federal Regulations, the rules adopted under the various acts administered br the Commission appearing In the following parts of Title 17 of that code: Securities Act of 1933, pt. 230 Securities Excbange Act of 1934, pt. 240. Public UtlIlty Holding Company Act of 1935. pt 250. Trust Indenture Act of 1939, pt. 260. Investment Company Act of 1940, pt. 270. Investment Advisers Act of 1940, pt. 275. 9 10 SECURITIES AND EXCHANGE C01.1MISSION from a stock dividend, stock split, reverse stock split, conversion, merger or similar transaction is deemed to be a transaction by a per- son other than an issuer, underwriter or dealer within the meaning of the first clause of Section 4(1) of the Act, and therefore exempt from registration under the Act. The rule applies only to offers and sales involved in the matching and combination of fractional interests among security holders and the sale of whole shares repre- senting the remaining fractional interests not so combined. The rule applies whether the transactions are effected on behalf of the security holders by the issuer or an affiliate of the issuer or by a bank or other independent agent," Adoption of Rule 155 During the fiscal year the Commission adopted a new Rule 155.3 The new rule relates to the interpretation of the exemptions afforded by Section 4 (1) in the context of public offerings of convertible securities by or on behalf of any person who purchased such securities directly or indirectly from the issuer in a non-public transaction, or to a public offering of the securities received. upon conversion of the securities so placed. Of course, where there is an initial public offering of convertible securities, immediate registration is required in the absence of some exemption, and the rule has no application to such a situation. The new rule defines the phrase "transactions by an issuer not involving any public offering" in Section 4(1) of the Act, as not including certain public offerings of convertible securities or of securi- ties received upon such a conversion. The rule excludes from the quoted exemption two types of public offerings. The first is a public offering of a security, which is immediately convertible into another security of the same issuer, by or on behalf of any person or persons who purchased the convertible security directly or indirectly from the issuer in a non-public transaction. The other type of offering excluded from the quoted exemption is one by or on behalf of any such person or persons of the security acquired upon conversion, unless the person or persons making the public offering are not underwriters within the meaning of that term as defined in Section 2(11) of the Act. In determining whether any such person is an underwriter, the usual statutory tests are to be applied, as in other situations. In order that intermediate persons who are not connected with any public offering of such securities may not be treated as underwriters, the rule provides that any such intermediate holder of the convertible secur-ity or of the underlying security who has not acquired it with a 'Securities Act Release No. 4470 (March 28,1962). 1 Securities Act Release No. 4450 (Feb. 7, 1962). TWENTY~EIGHTH ANNUAL REPORT 11 view to its distribution and is not instrumental in making or arranging a public offering is not to be deemed an underwriter for the purpose of the rule. Of course, even though a person is instrumental in making or arranging a public offering of the underlying security, the rule does not apply if the acquisition, retention and disposition of such security are such that the person is not an underwriter within the meaning of the term as defined in Section 2 (11) of the Act. The rule applies only with respect to convertible securities issued after the effective date of the rule. Adoption of Rule 236 The Commission adopted Rule 236 which exempts from registration under the Securities Act, under certain conditions, shares of stock or similar security which are publicly offered to provide funds to be distributed to security holders in lieu of issuing fractional shares, scrip certificates, order forms, or other evidences of such fractional interest, in connection with a stock dividend, stock split, reverse stock split, conversion, merger or similar transaction. The conditions of the exemption are that the issuer is required to file and has filed reports with the Commission pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934, that the aggregate gross proceeds from the sale of the shares do not exceed $100,000 and that the issuer furnish certain information to the Commission at least 10 days prior to the offering of the shares.' From the date of adoption of the rule to the end of the 1962 fiscal year, 11 companies furnished notices to the Commission pursuant to the rule. Amendment of Rule 458 Rule 458, which deals with the payment of fees in connection with the registration of securities under the Securities Act, and prescribes the manner in which the required fees shall be paid, was amended during the fiscal year." The amendment to the rule provides that payments of fees may be rounded to the nearest dollar and that the Commission will waive any deficiency in the fee amounting to less than $1. However, in no case may the amount of the registration fee be less than $25. The amendment also provides that refunds to issuers of excess payments amounting to less than $1 will be made only upon the request of the issuer and that refunds of $1 or more may be waived by the issuer. The purpose of the amendment is to reduce the time and clerical work involved in collecting or refunding insignificant amounts. However, as indicated above, the rule preserves the right of an issuer to receive a refund of any amount due it, if it so desires. Securities Act Release 1\'0. 4470 (March 28. 1962). Securities Act Release No 4381 (.July 3, 1961). • • 14 SECURITIES AND EXCHANGE COMMISSION to be followed where an issuer elects to file information and documents pursuant to Rule 15d-21.12 Proposed Rule 19a2-1 During the 1960fiscal year the Commission invited public comments on a proposed Rule 19&2-1under the Act, which would provide that the failure or refusal of an issuer or its officers,directors, employees, or controlling persons to cooperate with the Commission in proceedings under Section 19(a) (2) or investigations under Section 21 of the Act with respect to compliance with Section 12 or 13 of the Act shall be deemed a failure to comply with the provisions of the Act or the rules and regulations thereunder for the purpose of Section 19(a) (2),13 The proposed rule would provide a basis for the issuance of an order under Section 19(a) (2) denying, suspending, or withdrawing the registration of a security in such cases. This matter was pending at the end of the fiscal year. Proposed Amendments to Form 8-K Form 8-K is the form prescribed for current reports filed pursuant to Section 13 or 15(d)' of the Securities Exchange Act. During the fiscal year, the Commission announced that it has under consideration certain proposed amendments to Form 8-K and invited public com- ments.> The amendments are intended to supersede proposed amend- ments previously published for comment." They are designed to bring promptly to the attention of investors information regarding material changes affecting the company or its affairs when it appears that the changes are of such importance that they should be reported promptly rather than at the end of the fiscal year. The amend- ments relate to matters such as the pledging of securities of the issuer or its affiliates under circumstances that a default will result in a change in control of the issuer, changes in the board of directors otherwise than by stockholder action, the acquistion or disposition of significant amounts of assets otherwise than in the ordinary course of business, interests of management and others in certain transactions, and the issuance of debt securities by subsidiaries. The proposed amendments were still under consideration at the close of the year. "Securities Excbange Act Release No. 6851 (July 23,1962). 1$ SecurIties Excbange Act Release No. 6291 (June 211,1960) : see 26tb Annual Report, p. 21 ; 21tb Annua) Report, p. 18. I< Securities Excbange Act Release :"1"0.6170(April 5, 1962). ,. Securities Exchange Act Release No. 1i979 (June 9, 1959), see 26th Annual Report, n. 22 ; 21th Annual Report. p. 19 TWENTY-EIGHTH ANNUAL REPORT 15 Adoption of Rule 15c2-4 There have been instances where, as a result of financial reverses or for other reasons, underwriters and other broker-dealers participating in distributions have failed to remit amounts collected to the issuer, or to return payments made by customers to them where such return was required unless the distribution was completed within a specified period of time. Rule 15c2-4 was adopted to deal with this type of situ- ation. The rule makes it a "fraudulent, deceptive, or manipulative act or practice" for any broker or dealer participating in any distribu- tion other than a firm-commitment underwriting, to accept any part of the sale price of any security being distributed unless (1) it is promptly transmitted to the persons entitled thereto, or (2) if the distribution is being made on an "all-or-none" basis, or on any other contingent basis, the money is put into a trust or agency account, or delivered to an escrow bank, until the event or contingency has occurred, and it is then promptly transmitted or returned to the persons entitled thereto." Adoption of Rule 15c2-5 Shortly after the close of the fiscal year, the Commission adopted Rule 15c2-5 to prevent fraudulent practices by brokers or dealers in connection with the offer or sale of securities under a program which contemplates that the securities sold to the customer will be used as collateral for a loan, whose proceeds will be used to pay the premium on a life insurance policy sold to the customer at or about the same time (an activity which in various forms has come to be known as "equity funding," "secured funding," or "life funding")." The Commission had previously expressed the view that such a plan generally involves the offer and sale of an additional security, i.e., an investment contract, which is required to be registered under the Securities Act of 1933.18 Some dealers were offering this type of program without adequate consideration of whether it was suitable for particular customers, and they failed to furnish customers with adequate information concerning the nature and extent of the obliga- tions and risks involved and the commissions and other remuneration which the dealer and his associates would receive in connection with the transactions. The rule makes it unlawful for any broker or dealer to offer, sell or attempt to induce the purchase of any security by any person if the broker or dealer, in connection therewith, offers to extend any credit to or to arrange any loan for such person, or participates in ,. Securities Exchange Act Release No. 6737 (February 21, 1M2) 11 SecurIties Exchange Act Release No. 6851 (July 17, 1962). 18 Securities Act Release No. 4491 (May 22, 1962). 16 SECURITIES AND EXCHANGE COMMISSION arranging any such loan or credit, unless, before any part of the transaction is entered into, the broker or dealer delivers to him a written statement setting forth certain material information concern- ing the arrangement being offered. In addition, the broker or dealer is required to obtain from each customer information concerning the latter's financial situation and needs, to reasonably determine that the entire transaction, including the loan arrangement, is suitable for the customer, and to deliver to him a written statement setting forth the basis upon which this determination was made. If, in connection with the transaction, it is contemplated that the prospect will cancel existing life insurance, the written statement delivered to the prospect before the transaction is entered into will have to disclose the disad- vantages, if any, which the prospect will incur because of this. Among other things, this may require disclosure that the premium on the new life insurance is higher than the premium on the old insurance; that the purchaser may be incurring additional expense because he is paying the "acquisition costs" twice; that it may take a specified additional period of time for the dividends or the cash value of the new policy to equal those under the old policy; and that the prospect may lose the benefits of the "incontestability provision" because the period during which the insurer may contest the policy for specified reasons may have expired under the old policy and the prospect may be required to "wait through" this period again under the new policy. Amendment of Rule 15c3-1 Rule 15c3-1, which provides that no broker or dealer shall permit his aggregate indebtedness to exceed 2,000% of his net capital, exempts from its requirements the members of specified exchanges whose "rules and settled practices" were deemed by the Commission to impose requirements more comprehensive than the requirements of the rule. However, a condition precedent to the continuation of any such exemption is that the exchange conduct such inspections and maintain such other procedures as are necessary to be reasonably sure that members are complying with its capital requirements. The Salt Lake Stock Exchange requested termination of the exemption for its members because it was burdensome for it to conduct the inspec- tions and other procedures necessary to a continuation of the exemp- tion. Accordingly, the Commission amended Rule 15c3-1 to delete the exemption previously available to members of that exchange." Amendment of Rules 17a-3 and 17a-4 Rule 17a-3 specifies the books and records which must be maintained by certain members of national securities exchanges and other broker- It Securities Exchange Act Release No. 6691 (Dec. 21, 1961). TWENTY-EIGHTH ANNUAL REPORT 19 Subsequent to the end of the fiscal year, the Commission adopted the amendments and the new rule.u Adoption of Exemptive Rules Applicable to Licensed Small Business Investment Companies In the fiscal year, the Commission adopted rules and a related form applicable to small business investment companies licensed by the Small Business Administration, to provide exemptions from certain requirements of Sections 11(a), 17(d), and 18(c) of the Investment Company Act.25 Rule 11a-6 exempts from the prohibitions of Sec- tions 11(a) (1) and 11(a) (3) of the Act, subject to certain condi- tions, loans and other securities transactions which would be prohib- ited by those Sections solely because an SBIC owns, holds, or controls with power to vote the voting securities of a small business concern. At the same time the Commission adopted, pursuant to Section 17(d) of the Act, an amendment to Rule 17d-1 which exempts from that rule's requirements certain transactions where banks and an affiliated SBIC make investments in the same small business concern, and a new Rule 17d-2 which prescribes a related reporting Form N-17D-1. The Commission has adopted a new Rule 18c-1 which exempts a small business investment company from the requirements of Section 18(c) so as to permit it to issue more than one class of senior security representing indebtedness so long as all such indebtedness is privately held and the company does not have outstanding any publicly held indebtedness. THE INVESTMENT ADVISERS ACT OF 1940 Adoption of Rules 206(4)-1 and 206(4)-2 Section 206(4) of the Investment Advisers Act, which was enacted in September 1960,prohibits an investment adviser from engaging in any act, practice, or course of business which is fraudulent, deceptive, or manipulative, and gives the Commission the power by rules and regulations to define and prescribe means reasonably designed to prp- vent such acts, practices, and courses of business. The Commission during the fiscal year adopted Rule 206(4) -1, effective January 1, 1962, defining certain advertisements by invest- ment advisers to be fraudulent, deceptive, or manipulative within the meaning of Section 206(4) of the Act.26 The rule is intended to imple- ment the statutory mandate by foreclosing the use of advertisements which have a tendency to mislead or deceive clients or prospective clients. "'Investment Company Act Release No. 3578 (November 28. 1962) . .. Investment Company Act Release No. 3361 (November 17. 1061) . .. Investment Advisers Act Release No. 121 (Nov. 2. 1961). 20 SECURITIES A...'W EXCHANGE COMMISSION The rule prohibits advertisements which contain testimonials or which call attention to specific past recommendations made by the in- vestment advisers which would have been profitable. Other provisions of the rule specify the circumstances under which advertisements offering graphs, charts, formulas, or other devices may be used, and prohibit advertisements which represent that any report, analysis, or other service can be obtained free or without charge unless it is en- tirely free and subject to no conditions or obligations. The rule also includes a general prohibition against the use of advertisements con- taining untrue or misleading statements. The Commission also adopted Rule 206(4)-2, effective April 2, 1962.21 The new rule is designed to implement the provisions of Section 206(4) of the Act, by requiring an investment adviser who has custody of funds or securities of any client to maintain them in such a way that they will not be jeopardized by financial reverses of the investment adviser. The rule makes it a fraudulent, deceptive or manipulative act, practice or course of business for any investment adviser who has custody or possession of funds or securities of clients to take any action with respect to any such funds or securities unless (1) the securities of each client are segregated, and held in safekeeping in a reasonably safe place; (2) clients' funds are deposited in bank ac- counts which contain only such funds, maintained in the name of the investment adviser as agent or trustee, and the latter maintains a separate record for each such account containing specified informa- tion; (3) the adviser, immediately after accepting custody or posses- sion, notifies the client in writing of the place and manner in which the funds and securities will be maintained; and (4) the adviser sends each client, at least once every 3 months, an itemized statement of the funds and securities in his custody or possession and of all trans- actions in the client's account; and (5) at least once each calendar year the funds and securities are verified by an independent public account- ant in a surprise examination and his certificate is sent to the Com- mission promptly thereafter. Since certain members of national securities exchanges and regis- tered broker-dealers must maintain specified standards of financial responsibility under the Commission's Ru1e 15c3-1 under the Securi- ties Exchange Act, or applicable rules of the exchanges of which they are members, Rule 206(4) -2 exempts from its requirements registered broker-dealers subject to and in compliance with Ru1e 15c3-1, and members of exchanges whose members are exempt from Rule 15c3-1, and who are in compliance with exchange requirements with respect If Investment Advisers Act Release No. 123 (Feb. 27, 1962). TWENTY-EIGHTH ANNUAL REPORT 21 to financial responsibility and the segregation of customers' funds or securities. Proposed Amendment to Rule 204-2 During the fiscal year the Commission invited public comment 011 a proposed amendment to Rule 204-2, which would require invest- ment advisers to maintain records containing specified information concerning securities transactions in which they or their key person- nel have any beneficial interest." The proposed amendment, which is designed to prevent fraudulent, deceptive and manipulative acts and practices, was pending at the end of the fiscal year. "lnv(~tment Advisers Aet Release No. 120 (October 16, 19M). 24 SECURITIES AXD EXCHAJ.,GE COMMISSION ever, the filing of any amendment thereto establishes a new filing date. This waiting period affords investors an opportunity to be- come familiar with the proposed offering. Information disclosed in the registration statement is disseminated during the waiting period by means of the preliminary form of prospectus. The Commission is empowered to accelerate the effective date so as to shorten the 20 day waiting period where the facts justify such action. In exercis- ing this power, the Commission is required to take into account the adequacy of the information respecting the issuer theretofore avail- able to the public, the facility with which investors can understand the nature of and the rights conferred by the securities to be reg- istered, and their relationship to the capital structure of the issuer, and the public interest and the protection of investors. The note to Rule 460 under the Act indicates, for the information of inter- ested persons, some of the more common situations in which the Com- mission considers that the statute generally requires it to deny ac- celeration of the effective date of a registration statement. The number of calendar days which elapsed from the date of the original filing to the effective date of registration for the median (average) registration statement with respect to the 1,6461 registra- tion statements that became effective during the 1962 fiscal year was 78, compared with 55 days for 1,389 registration statements in fiscal year 1961 and 43 days for 1,275 registration statements in fiscal year 1960. The increase in the elapsed time has been due primarily to the cumulative effect of the unprecedented volume of registration state- ments filed, particularly those filed by issuers that had never before filed under the Act, and the lack of sufficient personnel to process such a volume. The number of registration statements filed during fiscal year 1962 was 2,109, as compared with 1,667 and 1,469 in fiscal years 1961and 1960,respectively," The following table shows by months during the 1962 fiscal year the number of calendar days elapsed in each of the three principal stages of the registration process for the median registration state- ment, the total elapsed time and the number of registration state- ments effective. 1This figure does not Include the 198 registration statements of mutual fund companies that became effective during fiscal year 1962 that were filed pursuant to the provisions of Section 24(e) of the Investment Company Act of 1940. The total elapsed time on these 198 statements was 21 calendar days for the average registration statement. 2 These figures do not Include 198, 163, and 159 registration statements, respectively, tlled by mutual fund companies pursuant to the provisions of Section 24(e) of the Invest- ment Company Act of ] 940 during fiscal years 1962, 1961, and 1960. 'l'WENTY-EIGHTH ANNUAL REPORT 25 Time in regi8trati<m under the seourtue« .act of 1988 by month8 during the fi8cal year ended June 80, 196Z NUMBER OF CALENDAR DA YB From date of From date of From amend- Total num-I Number of origlna111ling letter of com- ment aCter ber of days regtstration Months to date of ment to date letter to in reglstra- statements staff's letter of filing effective date tion effective- of comment amendment of registra- thereafter tion July 196L _______________________ : 41 10 7 58 121 ~~;~~~~:~HH~~-:::]47 13 7 67 146 46 16 8 70 136 50 14 7 71 153 60 13 8 81 157 65 11 7 83 12'2 January 1962___________________ I 77 14 10 101 116~t;~~::::::::::::::::::: 88 13 8 109 98 87 14 7 108 156 70 13 8 91 211May ___________________________ , 37 15 7 59 141June ____________________________ 40 26 9 75 89 FIscal 1962 for median enecuve registranon statement _________ 57 14 7 78 1,646 Spe footnote 1, supra VOLUME OF SECURITIES REGISTERED During the fiscal year 1962,1,815statements in the amount of $19.5 billion became fully effective under the Securities Act of 1933, a record both in number and dollar amount. The number of statements increased 20 percent over the preceding year while dollar amount in- creased only 3 percent or $477 million, reflecting a further increase in the volume of smaller issues. The chart on Page 5 shows the number and dollar amounts of fully effective registrations from 1935 to 1962. These figures cover all registrations which became fully effective including secondary distributions and securities registered for other than cash sale, such as exchange transactions and issues reserved for conversion. Of the dollar amount of securities registered in 1962,83.3 percent was for account of issuer for cash sale, 7.8 percent for the account of issuers for other than cash sale and 8.9 percent was for the account of others, as shown below. Account for which securitiee were regi8tered under the Secul'Hies Act of 1983 dul'ing the /iBcal year 1962 compared with the fiscal years 1961 aM 1960 1962m Percent 1961 ill - Percent 1960 in - Percent millIons of total millions of total millions of total --- --- Registered for account of Issuer for cashsale _____________________________________ $16,286 83_3 $16,260 85_3 $11,738 81.7 ~~e~hf~:~~~:_~~_~~:~_~~~_~~~~~_ 1,523 7.8 1,504 79 1,623 11.3 Registered for at count of others thanIssuer ___________________________________ 1,738 89 1,306 6.8 1,006 7.0--- --- ------ --- ---Total _______________________________ 19,547 100.0 19,070 100.0 14,367 100 0 Revised. Bee footnote 2 to appendix table 2. • • 26 SECURITIES AND EXCHANGE COMMISSION Securities to be offered for cash sale for account of issuer amounted to $16.3 billion, unchanged from the previous year. However, com- mon stock increased by $1.7 billion and debt securities decreased by almost that amount. Debt securities made up $4.5 billion of the 1962 volume, preferred stock $250 million and common stock $11.5 billion. More than 80 percent of the common stock was to be offered for sale over an extended period, including stock of investment companies, stock for employee plans and stock called for by warrants and options. Appendix Table 1 shows the number of statements which became effective and total amounts registered for each of the fiscal years 1935 through 1962, and contains a classification, by type of security, of issues to be offered for cash on behalf of the issuer during those years. More detailed information for 1962 is given in Appendix Table 2. Of the issues scheduled for immediate offering following effective registration, two industry groups, communication and financial and real estate, showed marked decreases in amounts as compared with fiscal year 1961. Communication companies, which had registered $2.4 billion for public sale in the fiscal year 1961, registered only $840 million in the fiscal 1962 but in the latter period also registered a major-sized issue to he sold to employees over an extended period. Financial and real estate companies registered $770 million compared with $1.3 billion in fiscal 1961. Manufacturing companies registered $1.8 billion in fiscal 1962 and electric and gas companies $2.3 billion, almost the same as in the previous fiscal year. 1962m Percent 1961 in Percent 1960 in Percent millions of total millions of total millIOns of total------ ------ --- Issues offered for Immediate sale' Corporate.Manufacturmg _______________________ $1,818 11.2 $1,979 12. 2 $841 7.2Extraetlve ____________________________ 92 .6 105 .6 126 1.1Electnc, l(8S and water _______________ 2,327 14.3 2,385 147 2,307 19.7 Transportatron, other than rallroad ___ 57 .4 221 1.4 95 .8 Communlcatlon 1 S40 5.2 2,389 14. 7 1,000 8.5 FInancial and real estate______________ 772 4.7 1,264 7.8 1,009 8.6Trade ______________________ ._________ 287 1.8 258 1.6 163 1.4service, ______________________________ 111 .7 82 .5 100 .9 Construction and mlsc ________________ 15 .1 36 .2 8 .1 TotaL______________________________ 6,319 38.8 8,718 53.6 5,648 48.1Foreign government ___________ .________ 247 1.5 155 1.0 369 3.2---Total for Immediate sale 6,566 40.3 8,873 54.6 6,018 51.3 Issues offered over an extended perlod. ___ 9,721 59.7 7,387 45.4 5,720 48.7------ --- --- ------ Total for cash sale for account ofissuer_. _. 16,286 100.0 16,260 100.0 11,738 100.0 ________• _____________ j ___• ________ ______•________•• ________ TWEI><TY-EIGHTH ANNUAL REPORT 29 has been amended to cure the deficiencies and the Commission has lifted the stop order. The following table indicates the number of proceedings under Section 8(d) of the Act pending at the beginning of the 1962 fiscal year, the number initiated during the year, the number terminated and the number pending at the end of the year. Proceedings pending at beginning of fiscal year 6 Proceedings initiated during fiscal year___________________________ 7 13 Proceedings terminated during fiscal year by issuance of stop orders.L; 7 Proceedings terminated othe~'ise___________________________________ 1 8 Proceedings pending at the end of the 1962 fiscal year___________________ 5 Several of the proceedings which were terminated during the fiscal year are described below. American Finance Company, Inc.-The registrant, a Delaware corporation organized in 1955,engages in the automobile sales finance business primarily with overseas members of United States Armed Forces. It filed a registration statement covering a proposed offering of 2,500 units, each consisting of 1 $200 debenture, 30 shares of com- mon stock, and 10 warrants, with the price of $500per unit, for which Myron A. Lomasney (Lomasney) was named as the managing under- writer. The registration statement also covered 60,000 shares of common stock held by Lomasney and 17 persons associated with it, proposed to be offered from time to time at such prices as may prevail on the market following the completion of the offering of the Units. In the course of the proceeding the registrant stipulated to certain facts and consented to the entry of a stop order. Some of the more important deficiencies found in the registration statement are described below." The Commission held than an accountant's relationship as attorney for the registrant during the same period covered by his accounting firm's certification disqualified him and the accounting firm of which he was a partner from certifying registrant's financial statements as independent accountants. The Commission stated that "though owing a public responsibility, an attorney, in acting as the client's advisor, defender, advocate, and confidant enters into a personal rela- tionship in which his principal concern is with the interest and rights of his client. The requirement of the Act of certification by an inde- pendent accountant, on the other hand, is intended to secure for the benefit of public investors the detached objectivity of a disinterested person. The certifying accountant must be one who is in no way Securities .ActRelease No. 4465 (:March 19, 1962).• 30 S:!1:CURITIElS ANt> ElXCHANGE COMMISSION connected with the business or its management, and who does not have any relationship that might affect the independence which at times may require him to voice public criticisms of his client's accounting practices." Prior to the filing of the registration statement, Lomasney had purchased the 60,000 shares of registrant's common stock for its own account at an advantageous price, and passed some of these shares on to certain favored customers so that they too might benefit from the planned public offering of shares at a higher price. In offering these 60,000 shares to the public, Lomasney and his favored customers, a group of 17 persons, would be statutory underwriters participating in the distribution of a large block of the registrant's stock. The Commission found that in view of the large number of shares pro- posed to be offered in relation to the limited floating supply of shares, the apparent lack of cohesiveness in the selling group, and the absence of a prior market, the registration statement should have identified the sellers and their relationship to each other, the registrant, and Lomasney; and it should have disclosed that such distribution would not be coordinated or controlled by a managing underwriter and that the selling group had not provided the contractual safeguards for the protection of buyers and sellers usually provided in a conventional distribution. Accordingly, the Commission required undertakings similar to those required in Hazel Bishop, Inc» Standard Savings and Loan Association, a wholly-owned subsidiary of the registrant, was described in the registration statement as an operating savings and loan association. The Commission found that Standard was organized and operated merely as a collection agency for the registrant, in that it received allotment payments from mili- tary persons in connection with registrant's automobile sales financing business and forwarded such allotments to registrant for application on the unpaid balances of the automobile loans. The Commission held that the opening of shareholders' savings accounts, evidenced by pass books, involved the sale of unregistered securities in violation of Section 5 of the Act; that based on the facts there was not available for such securities the exemption provided by Section 3(a) (5) of the Act for securities issued by a savings and loan association "substan- tially all the business of which is confined to the making of loans to members." Faradyne Electronics Corp.-Faradyne Electronics Corp., a New Jersey corporation formed in 1959, offered and sold to public in- vestors in December 1959, while in a promotional stage, 200,000shares of its common stock at $5 per share pursuant to a registration state- Seeurlttes Act R..!t'UM' Xo 4:{71(June 7, 1961) ; See 27th Annual Report, p, 81,• TWENTY-EIGHTH ANNUAL REPUR'f 31 mont filed under the Securities Act of 1933. The four promoters together received 300,000 Class A common shares for a cash invest- ment of $20,000. A second registration statement filed in January 1961, as amended, covered a $2 million offering of convertible debentures. The prospectus included in the 1959 registration statement was found by the Commission to be materially false and misleading in several respects. One was in conveying the false impression that Faradyne intended to proceed promptly with plans to develop and produce capacitors whereas its officialsin fact contemplated that they might develop an entirely different type of business through the acquisition of the assets or stock of other companies and might use a substantial part of the proceeds from the public offering for that purpose. Faradyne in fact used a substantial portion of the proceeds to acquire the assets or stock of six other companies within a period of several months after the effective date of the registration statement, including the assets and business of Mansel Ceramics Company, of which two of Faradyne's promoters were the principal partners. The prospectus filed as part of the 1961 registration statement was also found materially misleading. It stated that Faradyne, through a subsidiary, Mansel Corporation, had paid $150,000cash in March 1960, for the assets and business of Mansel Ceramics Company and that it had agreed to make further fixed payments of $1,200,000and $200,000 plus an additional maximum contingent payment of $2,500,000, payable in annual installments comprised of 50% of Mansel Corporation's annual net profit after taxes beginning with the fiscal year ending January 31, 1961. The prospectus further stated that the obligation to make contingent payments "will termi- nate on February 1, 1980," and that if such payments are not com- pleted by that date "any balance contingently due will be forgiven." These statements were found misleading in failing to disclose mate- rial provisions of the sale agreement. First, under the sale agree- ment Mansel Corporation could have at any time after January 31, 1962, anticipated all or any part of the obligation to pay the $2,500,000,in which event the two promoters from whom the ceramics company was acquired might receive more than would have been pay- able on the basis of annual payments of 50% of Mansol Corporation's net profits. Second, the agreement also provided that in the event Mansol Corporation should incur losses for any fiscal year ended January 31, 1966, or thereafter, the period ending in 1980 would be extended 1 year £01' each such loss year. Moreover, the prospectus set forth a summary of consolidated earnings of Faradyne and its subsidiaries for the fiscal year ended January 31, 1961, which showed net income, after provision for 34 sscuurrres A..\' J) EXCHA..."'GE COMMISSION table indicates the number of such examinations and investigations with which the Commission was concerned during the fiscal year. Cases pending at the beginning of the fiscal yeflL_____________________ 17 Cases initiated during the flsca] year 18 85 Cases in which stop order procedings were authorized during thefiscal year_______________________________________________________ 1 Other cases closed during the fiscal year____________________________ 7 8 Cases pending at the end of the fiscal year_______________________________ 27 EXEMPTION FROM REGISTRATION OF SMALL ISSUES Under Section 3(b) of the Securities Act, the Commission is empowered 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 enforce- ment of the registration provisions of the Act with respect to such securities is not necessary in the public interest and for the protection of investors by reason of the small amount involved or the limited character of the public offering. The statute imposes a maximum limitation of $300,000 upon the size of the issues which may be exempted by the Commission in the exercise of this power. Acting under this authority the Commission has adopted the follow- ing 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 trans- actions. Regulation A: General exemption for United States and Canadian issues up to $300,000. Regulation B: Exemption for fractional undivided interests in oil or gas rights up to $100,000. Regulation F: Exemption for assessments on assessable stock and for assessable stock offered or sold to realize the amount of assessment thereon. Under Section 3(c) of the Securities Act, which was added by Sec- tion 307(a) of the Small Business Investment Act of 1958, the Com- mission is authorized to adopt rules and regulations exempting securities issued hy a company which is operating or proposes to TWENTY-EIGHTH ANNUAL REPORT 35 operate as a small business investment company under the Small Busi- ness Investment Act. Acting pursuant to this authority, the Com- mission has adopted a Regulation E which exempts upon certain terms and conditions limited amounts of securities issued by any small business investment company which is registered under the Investment Company Act of 1940. This regulation is substantially similar to the one provided by Regulation A adopted under Section 3(b) of the Act. Exemption from registration under Section 3(b) or 3(c) of the Act does not carry any exemption from the civil liabilities for false and misleading statements imposed upon any person by Section 12(2) or from the criminal liabilities for fraud imposed upon any person by Section 17of the Act. Exempt Offerings Under Regulation A The Commission's Regulation A implements Section 3(b) of the Securities Act of 1933and 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 registra- tion, if the company complies with the regulation. Regulation A requires that the issuer file a notification supplying basic information about the company, certain exhibits, and an offering circular which must be used in offering the securities. However, in the case of a com- pany with an earnings history which is making an offering not in excess of $50,000an offering circular need not be used. A notification is filed with the Regional Office of the Commission in the region in which the company has its principal place of business. During the 1962 fiscal year, 1,065 notifications were filed under Regulation A, covering proposed offerings of $237,238,600compared with 1,057 notifications covering proposed offerings of $239,920,549 in the 1961fiscal year. Included in the 1962total were 17notifications covering stock offerings of $4,406,907 with respect to companies engaged in the exploratory oil and gas business, 28 notifications cover- ing offerings of $5,891,302by mining companies and 23 notifications covering offerings of $5,226,927by companies featuring new inven- tions, products or processes. 36 SECURITIES AND EXCHA-.1\GE CO~:1MISSION The following table sets forth various features of the Regulation A offerings during the past 3 fiscal years: Offerings under Regulation A 2'20 216 613 165 201 691 160 208 697 , FIscal year 1 --. -...-- 1I 1962 1961 1960 ~j--------- I:lJZe: I$100,000 or less J Over $100,000 but not over $200,000 I Over $200,000 but not over $300,000 I 1,065 1,057 1,049 1-=== Und-ffs:J~~~~~_____________________ I 528 511 450 Not used 1 537 546 599 ,--------- I i.oes 1,057 1,049 Ofierors, , ~~E~o!~~rt~;~~id~~ij~i~~ii:::::::::::::::::::::::::::::::::::::::11'11 I'll l,~I 1---------- I 1,065 1,057 1,049, . Most of the offerings which were underwritten were made by com- mercial underwriters, who participated in 528 offerings in 1962, 511 offerings in 1961, and 398 offerings in 1960. The remaining offerings in which commissions were paid were handled by officers, directors, or other persons not regularly engaged in the securities business. Suspension of Exemption Regulation A provides for the suspension of an exemption there- under where, in general, no exemption IS available for the securities purported to be offered thereunder, 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 1!)()2 fiscal year, temporary suspension orders were issued in 51 eases. These cases together with 28 cases pending at the beginning of the Iiscn] year resulted in a total of 79 cases for disposi- tion. Of these 79 eases, the temporary suspension order became per- manent in 48: ill 27 by lapse of time, in 9 by withdrawal of the request for heuring, and in 12 after hearing. Thus, there were 31 cases pending at the end of the fiscal ;year. --~-~~--- i ' __ ----- __ __ __ _ , TWENTY-EIGHTH ANNUAL REPORT 39 Exempt Offerings Under Regulation E Regulation E provides a conditional exemption from registration under the Securities Act of 1933,for securities of small business invest- ment companies which are licensed under the Small Business Invest- ment 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 similar in many respects to the general exemption provided by Regulation A, requires the filing of a notifica- tion 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. Regulation E provides for the suspension of exemption in particular cases if the Commission finds that any of the terms and conditions of the regulation have not been met or complied with. There were no filings under Regulation E during the 1962 fiscal year. Exempt Offerings Under Regulation F Regulation F provides an exemption from registration under the Securities Act for assessments levied upon assessable stock and for delinquent assessment sales in amounts not exceeding $300,000 in any one year. It requires the filing of a simple notification giving brief information with respect to the issuer, its management, principal security holders, recent and proposed assessments and other security issues. The regulation requires a company to send to its stockholders, or otherwise publish, a statement of the purposes for which the pro- ceeds from the assessment are proposed to be used. If the issuer should employ any other sales literature in connection with the assess- ment, copies of such literature must be filed with the Commission. During the 1962 fiscal year, 36 notifications were filed under Regu- lation F, covering assessments of $1,300,246. Regulation F notifica- tions were filed in three of the nine regional officesof the Commission: Denver, San Francisco, and Seattle. Underwriters were not employed in any of the Regulation F assessments. Regulation F provides for the suspension of an exemption there- under, as in Regulation A, 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. One Regulation F filing was temporarily suspended in the fiscal year 1962. A request for hearing was made but was later withdrawn and the issuer consented to the issuance of a permanent suspension order. Pacific Coast Stock Exchange Philadelphia-Baltimore Stock ExcDange Pittsburgh Stock Exchange Salt Lake Stock Exchange San Francisco Mining Exchange ~lKJkane Stock Exchange PART V ADMINISTRATION OF THE SECURITIES EXCHANGE ACT OF 1934 The Securities Exchange Act of 1934 is designed to ensure the main- tenance of fair and honest markets in securities transactions on the organized exchanges and in the over-the-counter markets. Accord- ingly, the Act provides for the registration and regulation of securi- ties exchanges and the registration of securities listed on such ex- changes, and it establishes for issuers of securities so registered, finan- cial and other reporting requirements, regulation of proxy solicitations and requirements with respect to trading by directors, officers and principal security holders. The Act also provides for the registration and regulation of brokers and dealers doing business in the over-the- counter market, contains provisions designed to prevent fraudulent, deceptive and manipulative acts and practices on the exchanges and in the over-the-counter markets and authorizes the Federal Reserve Board to regulate the use of credit in securities transactions. REGULATION OF EXCHANGES AND EXCHANGE TRADING Registration and Exemption of Exchanges As of June 30, 1962, 14 stock exchanges were registered under the Exchange Act as national securities exchanges: Amertcan 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 There have been no sales of securities on the Chicago Board of Trade since 1953. The National Stock Exchange was granted regis- tration as a national securities exchange on August 16, 1960, and com- menced to operate on March 7, 1962. Four exchanges were exempted from registration by the?Commission pursuant to Section 5 of the Act: Colorado Springs Stock l';xchange Honolulu Stock Exchange 40 Richmond Stock Exchange Wheeling Stock Exchange - TWE~TY-EIGHTH ANNUAL REPORT 41 Disciplinary Action Each national securities exchange reports to the Commission disci- plinary actions taken against its members and member firms for viola- tion of the Securities Exchange Act of 1934 or of exchange rules. During the year 9 exchanges reported 96 cases of such disciplinary actions, including imposition of fines aggregating $48,575in 57 cases; the suspension from membership of 13 individuals and 5 member firms; the expulsion of 1 individual from associate membership and another from allied membership; and the censure of a number of individuals and firms. REGISTRATION OF SECURITIES ON EXCHANGES It is unlawful for a member of a national securities exchange or a broker or dealer to effect any transaction in a security on such exchange unless the security is registered on that exchange under the Securities Exchange Act or is exempt from such registration. In general, the Act exempts from registration obligations issued or guar- anteed 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. Section 12 of the Exchange Act provides that an issuer may regis- ter 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. This must include information in regard to the issuer's business, capital structure, the terms of its securities, the persons who manage or control its affairs, the remunera- tion paid to its officersand directors, the allotment of options, bonuses and profit-sharing plans, and financial statements certified by inde- pendent accountants. 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. Section 13 requires issuers having securities registered on an exchange to file periodic reports keeping current the information fur- nished in the application for registration. These periodic reports include annual reports, semiannual reports, and current reports. The principal annual report form is Form 10-K which is designed to keep 44 SECURITIES AXD EXCHAI\GE Co.MMISSION which quotations were not available. The number and market value as of December 31, 1961, of preferred and common stocks separately was as follows: Preferred stocks Common stocks Number Market value Number Market value Listed on registered exchanges 575 $8, 980, 105,000 2,198 $401,085,368, 000All other stocks G_______________________________ 50 457,666,000 218 15,461,114, 000 I 625 9,437,771,000 2,416 416, 546. 482, 000 G Stocks admitted to unlisted trading privrleges ani)" or listed on exempted exchanges. The New York Stock Exchange has reported aggregate market values of all stocks thereon monthly since December 31, 1924, when the figure was $27.1 billion. The American Stock Exchange has reported December 31 totals annually since 1936. Aggregates for stocks exclusively on the remaining exchanges have been compiled as of December 31 annually by the Commission since 1948. Share values on eectumaee, in billions of dollars New York American EXclUSiVelyl December 31 each year Stock Stock on other Total G Exchange Exchange exchanges 1936 . . $59.9 $14 8 ----_._----. $74 71937_.• . . .• ._ .. 38.9 10.2 .----------- 49 1 1q38 ._ .• . ... •. _. _. _" -. -. 47 5 10 8 58 31939 _. . . •. _. . 46 5 10 1 56 6 1940 _., _. . .. . . 41 9 8 6 .----------- 50.51941 . . 35 8 7.4 ---.-------. 43 21942 . . •. . _. _. ._ 38.8 7.8 --------- ...-. 46 6 1943. . . . . _. .. ._ 47 6 9 9 ---.-------. 57.51944 . . . .. _._ .• . 55.5 11 2 -----------. 66 71945 . . . . •.. . •. 73.8 14. 4 88 2 1946 .. _. •. . _. .• 68.6 13 2 -.-.-------- 81 8 1947 .. ._ .. •. . .. . 68 3 12 1 ----.--$3-ii. 80 4 1948. _. . •. . 67 0 11 9 81. 9 1949._. ._. . . ._. -_ 76 3 12 2 3 1 91 6 1950___ . ______ .• ____ . ___________ . _____ . _____ . ______ .. ___ 93 8 13 9 3 3 111 0 1951_____ .. _____ . _____ . ___ •. _. _______ •. _' ____ .. _________ lOll 5 16 5 3 2 129 2 1952 . . .. . .. 120 5 16.9 3.1 140 5 I~JJ:1[[~111111:i[;;;:[;\[;1111 117 3 15.3 2 8 135 4 169 1 22.1 3.6 194.8 207 7 27.1 4 0 238 8 219 2 31 0 3 8 254 0 195 6 25.5 3.1 224 2 276.7 31. 7 4 3 312 7 307.7 26.4 4.2 338 4 307 0 24 2 4 1 335 3 387.8 33.0 5 1 426 0 Total values 193&-47inclusive are for the New York Stork Exchange and the American Stock Exchange only Fiscal Year Share Values and Volumes The aggregate market values of all stocks on the exchanges as of .Tune 30 annually, and the volumes of shares traded on the exchanges in years to -Iune 30, hare been as follows: ____• __________• __ ______________________________ ________ ___• ________ __________• ________ __ _____ ____ ___________ __ ________ ___ _- _ _- - _- _- _- - - - - - - ---------~--__• ___' _______ __ ____• _______ _______• __• ____ ------------_____• __• _______ __• __________ ____ _____ ____ ____ ____________ _________________• __________• _____ _____• _____ ____• __ ____ _________• ______ ___ _____ ____ __ ___________ ________• __• __ _____ _____• __ ____ __• _____ _________ _______• ____ __ _______ ____ ___• __ _______________ ____ ___ _ ------------___ ___• ______• ___• _____ ____ ____• _______ __ ___ ___• __________ _______ __ ____ ____ ___• __ _____• _________________ ___ _____ ___• __' _______ ______ ________ ________________ ___ ___-- _ _____ _____• ________' ___ ____ __• _________ _____ _ • TWEXTY-EIGHTH AXXUAL REPORT 45 lone 30 Volumes In years to Jone30 values (bllUons) Dollar volumeSbare volume 1955 -------. --. ---- $222.8 1,324,383,000 $36, 878, MO, 0001956___________________________________________________________ 250.0 1,217,935,000 36, 226, 682, 0001957___________________________________________________________ 262.0 1,210,807,000 32, 929, 671, 0001958___________________________________________________________ 257.9 1,209,274,000 30, 862, 129, 0001959___________________________________________________________ 337.6 1,806.810,000 61, ~77. 195, 0001960. __________________________________________________________ 327.8 1,456,919,000 47,795,837,0001961. __________________________________________________________ 381.0 I, 971, 608, 000 67,029,271,0001962. 330.0 I, 796, 8111,000 58, 348, 768, 000 The June 30 values were as reported by the New York Stock Ex- change and as estimated for all other exchanges. Volumes include shares, warrants and rights. Comprehensive statistics of volumes on exchanges are included among the appendix tables in this Annual Report. Aggregate market values over the years are not strictly comparable, since they do not indicate to what extent they reflect new listings, mergers into listed companies, and removals from listing. The net increment from these sources during the year ending June 30, 1962, may be estimated at 4 to 5billion dollars. Foreign Stock on Exchanges The market value on December 31, 1961, of all shares and certifi- cates representing foreign stocks on the stock exchanges was reported at about $13.8 billion, of which $12.7billion represented Canadian and $1.1 billion represented other foreign stocks. These figures include the total market value of the Canadian stock issues traded on the exchanges; most of the other foreign stocks were represented by American Depositary Receipts or American shares, only the outstand- ing amounts of which were used in determining market value. Foreign steeles on exchanges Canadlan Other foreign Total Dec. 31, 1961 Issues Value Issues Value Issues Value Excbanges: $5, 217, 161,000New York ________________ 12 12 $894, 192, 000 24 $6,111,353,000Amerlcau _________________ 103 7,434,040,000 39 213,832,000 142 7,647,872,000Otbers only _______________ 1 1,057,000 2 8,600,000 3 9,657,000 Net total _______________ 116 12, 652, 258, 000 53 I, 116,624,000 169 13, 768, 882, 000 The number of foreign stocks on the exchanges has declined some- what in recent years, owing principally to a reduction in issues traded on the American Stock Exchange from 152 in 1956 to 142 in 1961. Trading in foreign stocks has fallen from 42.4 percent of the reported share volume on this Exchange in 1956 to 17.8percent in 1961. - _________________________________________ - _____________• ______•• ______________________________• _____ 46 SECURITIES AND EXCHANGE COMMISSION Trading in foreign stocks on the New York Stock Exchange was about 3.4 percent of the reported share volume thereon in 1956 and about 2.8percent in1961. Reported volumes in foreign shares during 1961 included about 74,200,000Canadian and 12,800,000other foreign shares on the Ameri- can Stock Exchange and about 10,200,000 Canadian and 18,100,000 other foreign shares on the New York Stock Exchange. The 87 million share volume on the American was over 3 times the 28,300,000 share volume on the New York Stock Exchange. However, in view of the higher average share prices on the latter Exchange, its dollar volume in the foreign shares would appear to have exceeded that on the American Stock Exchange. Comparative Exchange Statistics The number of stocks on the New York Stock Exchange and on the American Stock Exchange has continued to increase, and the aggre. gate number of stocks exclusively on the other exchanges has con- tinued to decline in recent years. Net number of stook» on elCchanges New York American Exclusively Total June 30 Stock Stock on other stocks on Excbange Excbange exchanges exchanges 1940 -_ 1,242 1,079 1,289 3,6101945 ... -_I 1,293 895 951 3,139 mL:: :::: : :::::::::::::::::::::::::::::::::::::::I 1,484 179 775 3,038 1,543 815 686 3,044 I5t= :===:: :====== ========:: :::========= =:: :== I 1,532 931 555 3,018 1,546 977 619 8,042 1,565 1,033 493 8,091 Aggregate share values on the New York Stock Exchange have become an increasing proportion of total share values on all the ex- changes, at least since 1948, when our series on total share values on the exchanges was established. Share values on el1Jchanges. in percentages New York American Exclusively DecemberSl Stock Stock on otber Exchange Exchange exchanges 1948. . _. _. . _._. 81.81 14. 58 8.661950 . ._. 84.50 12.52 2.98 1952 . •. .• ., "_"'_ .• _" _. 85.77 12.02 2 21 1954._._ _. .• .• _. . _. _. •. _. 86.81 11.84 1.85 1956 "_"'" e ,_ 86.80 12.20 r.so 1958 _._. _.,._. ._. _. ._. 88.49 10.14 1.37 1960_ .... -. _._ ••.•••• -.-. --" 91.56 7.22 1.22 The ratio of share volume on the regional exchanges to the total on all exchanges has continued to decline over the years. The regional exchange percentage of dollar volume has remained fairly constant. In the following presentation, shares, warrants and rights are in- _____• _______________________ --------------------________________• _ _____________________________ = ======= ___• _________________' ___• ___• ____••••• __ ___••• ____ __• _____ ______________• ___• __________ ___• ________________••• _••• __ _ __• __ _• ______ • __ _•• ______•••••••••••• ___• ••• ____•• __ ____ _•• ___• ___• ___ __• _ _•• _• _____• •••••• ____• ___ •••• ••••••••••••• ______ •• •••••• , __ •• ____ ••• _••• __' ___••••• __• __ _•• __• __• ________•• __•• _ •• _•• _ •• _•• _ _•• _••• _•• __ - •• - •••••• " __" TWENTY-EIGHTH ANNUAL REPORT 188uer8reporting under 8ection 15(d) ae of Dec. 31,1961 a 49 Stocks Issuers Market values Over the counter:Miscellaneous ___________________________________________________ 1,737 1,545 $31, 132, 640, 000Insurance _______________________________________________________ 117 108 6, 634, 340, 000Forelgn _________________________________________________________ 37 34 2, 181, 900, 000--- 1,891 1.687 38, 948, 880, 000 --- On stock exchanges' •M iscellaneous ___________________________________________________ 30 28 708, 400, 000Insurance _______________________________________________________ 3 3 1,267,000.000Foreign _________________________________________________________ 2 2 I, 532, 400, 000--- 35 33 3,507,800,000 ---TotaL ________________________________________________________ 1,926 1,720 42, 456, 680, 000 Includes only Issuers WIth stocks for which quotations were available . These issuers had stocks with only unlisted trading privileges on exchanges. They also had 31 stocks aggregatmg $937,440,000 which were only over the counter, and which have been mcluded In the over-the- counter showing of stocks and market values above DEUSTING OF SECURITIES FROM .E¥CHANGES Applications may be made to the Commission by exchanges to strike any securities or by issuers to withdraw their securities from listing and registration on exchanges pursuant to Rule 12<12-1(b) under Section 12(d) of the Exchange Act. During the fiscal year ended June 30, 1962, the Commission granted applications by exchanges and issuers to remove 60 stock issues and 45 bond issues from listing and registration. There were 64 total stock removals, since 4 stocks were each delisted by 2 exchanges. The number of issuers of stock involved was 54. The removals were as follows: A.pplications filed by: New York Stock Exchange ~erican Stock Exchange Boston Stock Exchange :Midwest Stock Exchange Pacific Coast Stock Exchange Pittsburgh Stock Exchange Salt Lake Stock Exchange San Francisco Mining Exchange Issuers Stock Bond issues issues 23 44 6 0 2 1 6 0 11 0 1 0 8 0 3 0 4 0 Total__________________________________________________ 64 45 In accordance with the practice in recent years, nearly all of the delisting applications were filed by exchanges. Only four of the applications were filed by issuers, in each instance for the purpose of reducing multiple expenses by delisting from one exchange stocks which remained listed on other exchanges. The applications by exchanges were based on factors such as limited distribution, sale of assets, or precarious financial condition. The 45 bond issues were all of foreign origin, including 17 issues of 61211~ • • _ _ _ _ _ _ _ _ _ 50 SECURITIES AND EXCHANGE CO:MMISSION "iron-curtain" countries suspended from trading in 1941, and 28 small residues of offers in exchange and settlement. The 23 stock deli stings by the New York Stock Exchange were in accordance with its delisting criteria established in 1914, and expanded from time to time thereafter. During the year, it obtained complete observance of its policy requiring solicitation of proxies for meetings of stock- holders. The eight delistings by the Salt Lake Stock Exchange resulted from its adoption on February 16, 1962, of new require- ments for retention of listed status. The American Stock Exchange on April 5, 1962, adopted new deli sting rules and criteria with respect to lack of earnings, limited distribution of securities and dis- posal of principal operating assets. DeIisting Proceedings Under Section 19(a) Section 19(a) (2) authorizes the Commission to suspend for a period not exceeding 12 months, or to withdraw, the registration of a security on a national securities exchange if, in its opinion, such action is neces- sary or appropriate for the protection of investors and, after notice and opportunity for hearing, the Commission .finds that the issuer of the security has failed to comply with any provision of the Act or the rules and regulations thereunder. The following table indicates the number of such proceedings with which the Commission was con- cerned during the 1962 fiscal year. Proceedings pending at the beginning of the fiscal year________________ 3 Proceedings initiated during the fiscal year__________________________ 1 4 Proceedings terminated during the fiscal year: By order withdrawing security from registration_________________ 2 2 Proceedings pending at the end of the fiscal year_____________________ 2 Section 19(a) (4) authorizes the Commission summarily to suspend trading in any registered security on a national securities exchange for a period not exceeding ten days if, in its opinion, such action is necessary or appropriate for the protection of investors and the public interest so requires. During the 1962 fiscal year the Commis- sion found it necessary and appropriate in four instances to use its authority to suspend summarily trading in securities registered on a national securities exchange. All of these suspensions remained in effect at the end of the fiscal year. In addition, two of the three sus- pensions which were in effect at the beginning of the fiscal year remained in effect at the end of the fiscal year. One of the two cases in which an order was issued under Section 19(a) (2) during the fiscal year withdrawing securities from registra- tion on a national securities exchange is described below. TWENTY-EIGHTH ANNUAL REPORT 51 Consolidated Development Corporation.- Registrant, a Delaware corporation organized in 1956under the name of Consolidated Cuban Petroleum Corporation to engage in the operation, development and production of oil and gas in Cuba, registered its common stock on the American Stock Exchange in 195-6. It adopted its present name in 1959, after the petroleum ventures had sustained severe financial losses. It then decided to engage in the acquisition and development of real estate in the State of Florida. Registrant admitted that it had violated Section 13 of the Exchange Act and rules thereunder, in that its application for registration of its common stock on the exchange, its annual reports for the years 1956 through 1959, inclusive, and a number of current reports filed or required to be filed were inaccurate or inadequate. Among other things, the reports failed to set forth that registrant exchanged stock with three corporations in which officers and directors of registrant were promoters, officers, directors, and major stockholders; that it issued stock to certain persons in Cuba for oil leases and services; and that in the years 1956 through 1959, several controlling share- holders and officersdisposed of a large amount of stock of registrant, which was not registered under the Securities Act, to residents of and broker-dealer firms in the United States. Further, registrant admitted that its reports were materially inaccurate in representing that all sales and exchanges of 2,147,457 shares of outstanding stock were made in Cuba and did not require registration under the Securities Act as not involving public offer- ings in the United States, and in representing that it had 1,086stock- holders when in fact it had only about 766. Registrant also omitted to disclose that in November 1959, a new Cuban law was published cancelling all applications for petroleum exploration and exploitation concessions, permitting continuation of explorations in progress where certain minimum drilling requirements were met and providing for payment to Cuba of a 60 percent royalty on petroleum produced, and the effect of such law on registrant's operations. On the basis of these and other deficiencies the Commission issued an order withdrawing the registrant's common stock from registra- tion on the exchange, which had suspended trading in the stock in December 1959.1 UNUSTED TRADING PRIVILEGES ON EXCHANGES Stocks with only unlisted trading privileges on exchanges con- tinued to decline in number, falling from 212 on June 30,1961, to 187 on June 30, 1962. The American Stock Exchange accounted for 12 1 Securities Exchange Act Release No. 6672 (November 24,1961). 54 SECURITIES AND EXCHANGE COMMISSION year periods were $455,764,000for the first 6 months and $366,572,- 000 for the last 6 months of 1959, $176,345,000and $248,343,000for the respective periods in 1960, $559,924,000and $366,590,000for 1961, and $365,915,000 for the first 6 months of 1962. The $559,924,000 total for the 6 months ending June 30, 1961 is the largest on record. <, MANIPULATION AND STABILIZATION Manipulation The Exchange Act describes and prohibits certain forms of manipu- lative activity in any security registered on a national securities exchange. The prohibited activities include wash sales and matched orders effected for the purpose of creating a false or misleading appearance of trading activity in or with respect to the market for any such security; a series of transactions intended to raise or depress the price of such security or to create actual or apparent active trad- ing for the purpose of inducing purchases or sales of such security by others; circulation by a broker, dealer, seller, or buyer, or by a person who receives consideration from a broker, dealer, seller or buyer, of information concerning market operations conducted for a rise or a decline in the price of such security; and the making of any false and misleading statement of material information by a broker, dealer, seller, or buyer regarding such security for the purpose of inducing purchases or sales. The Act also empowers the Commission to adopt rules and regulations to define and prohibit the use of these and other forms of manipulative activity in any security registered on an exchange or traded over the counter. The Commission's market surveillance staff in its Division of Trad- ing and Exchanges in Washington and in its New York Regional Office and other field offices observes the tickertape quotations of securities listed on the New York Stock Exchange and on the Ameri- can Stock Exchange, the sales and quotation sheets of the various regional exchanges, and the bid and asked prices published by the National Quotation Bureau for about 6,000 unlisted securities to observe any unusual and unexplained price variations or market activity. The financial news ticker, leading newspapers, and various financial publications and statistical services are also closely followed. When unusual and unexplained market activity in a security is observed, all known information regarding the security is examined and a decision made as to the necessity for an investigation. Most investigations are not made public so that no unfair reflection will be cast on any persons or securities and the trading markets will not be upset. These investigations, which are conducted by the Commis- sion's regional offices, take two forms. A preliminary investigation or "quiz" is conducted to rapidly discover evidence of unlawful , TWENTY-EIGHTH ANNUAL REPORT 55 activity. If it appears that more intensive investigation is necessary, a formal order of investigation, which carries with it the right to issue subpoenas, is issued by the Commission. If violations by a broker-dealer are discovered, the Commission may institute adminis- trative proceedings to determine whether or not to revoke his registra- tion or suspend or expel him from membership in the National Association of Securities Dealers, Inc., or from a national securities exchange. The Commission may also seek an injunction against any person violating the Exchange Act and it may refer information obtained in its investigation to the Department of Justice recommend- ing that persons violating the Act be criminally prosecuted. In some cases, where state action seems likely to bring quick results in pre- venting fraud or where Federal jurisdiction may be doubtful, the information obtained may be referred to state agencies for state injunctive action or criminal prosecution. The following table shows the number of quizzes and formal investi- gations pending at the beginning of fiscal 1962, the number initiated in fiscal 1962, the number closed or completed during the same period, and the number pending at the end of the fiscal year: Trading investigations Quizzes Formal In- vestigattons Pending June 30, 196L 91 16Inltlated ____________________________________________________________________ 76 5 TotaL 167 21 Closed or completed during f1sea1 year _______________________________________ 84 9Changed to formal during f1sea1 year. 5 TotaL 89 9 Pending at end or f1sea1 year 78 12 When securities are to be distributed to the public, their markets are watched very closely to make sure that the price is not unlawfully raised prior to or during the offering period. Registered offerings numbering 1,815,having a value of over $19 billion, and 1,065offerings exempt under Section 3(b) of the Securities Act, having a value of about $237 million, were so observed during the fiscal year. Other offerings numbering 141, such as secondary distributions and distri- butions of securities under special plans filed by the exchanges, having a total value of $382million, were also kept under surveillance. Stabilization Stabilization involves open-market purchases of securities to pre- vent or retard a decline in the market price in order to facilitate a distribution. It is permitted by the Exchange .Act subject to the _________________• ____________________________________ ______________________________________________________• __________ ___• ____________________________________ -------------- ____• ___• __________•• ___••• _________• _________• __________________ ••• __••••• _•• _____•_______•• _____________________ 56 SECURITIES AND EXCHANGE COMMISSION restrictions provided by the Commission's Rules 10b-6, 7, and 8. These rules are designed to confine stabilizing activity to that neces- sary for the above purpose, to require proper disclosure and to prevent unlawful manipulation. During 1962 stabilizing was effected in connection with stock offer- ings totaling 65,028,432 shares having an aggregate public offering price of $1,536,800,426 and bond offerings having a total offering price of $153,991,500. In these offerings, stabilizing transactions re- sulted in the purchase of 1,803,713 shares of stock at a cost of $46,092,610and bonds at a cost of $2,069,243. In connection with the stabilizing transactions, 10,241 stabilizing reports showing purchases and sales of securities effected by persons conducting the distribution were received and examined during the fiscal year. INSIDERS' SECURITY HOLDINGS AND TRANSACTIONS Section 16 of the Act is designed to prevent the unfair use of infor- mation by directors, officers and principal stockholders by giving publicity to their security holdings and transactions and by removing the profit incentive in short-term trading by them in securities of their company. Such persons by virtue of their position may have knowledge of the company's condition and prospects which is unavail- able to the general public and may be able to use such information to their personal advantage in transactions in the company's securities. Provisions similar to those contained in Section 16 of the Act are also contained in Section 17 of the Public Utility Holding Company Act of 1935and Section 30 of the Investment Company Act of 1940. Ownership Reports Section 16(a) of the Securities Exchange Act requires every person who is a direct or indirect beneficial owner of more than 10 percent of any class of equity securities (other than exempted securities) which is registered on a national securities exchange, or who is a director or officer of the issuer of such securities, to file reports with the Com- mission and the exchange disclosing his ownership of the issuer's equity securities. TIllS information must be kept current by the filing of subsequent reports for any month in which a change in his owner- ship occurs. Similar reports are required by Section 17(a) of the Public Utility Holding Company Act of officers, and directors, of public utility holding companies and by Section 30(f) of the Invest- ment Company Act of officers, directors, principal security holders, members of advisory boards and investment advisers or affiliated persons of investment advisers of registered closed-end investment companies. TWENTY-EIGHTH ANNUAL REPORT 59 Stockholders' Proposals During the 1962fiscal year, 44 stockholders submitted a total of 242 proposals which were included in the 122 proxy statements of 122 companies under Rule 14a-8 of Regulation 14. Typical of such stockholder proposals submitted to a vote of secu- rity holders were resolutions relating to amendments to charters or bylaws to provide for cumulative voting for the election of directors, limitations on granting stock options and their exercise by key employees and management groups, sending a postmeeting report to all stockholders, changing the place of the annual meeting of stockholders, and the approval by stockholders of management's selec- tion of independent auditors. The managements of 25 companies omitted from their proxy state- ments under the Commission's Rule 14a-8 a total of 62 additional proposals submitted by 25 individual stockholders. The principal reasons for such omissions and the numbers 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: (a) 22 proposals were withdrawn by the stockholders; (b) 14 proposals were not a proper subject matter under state law; (c) 11 proposals related to the ordinary conduct of the com- pany's business; (d) 6 proposals involved the election of directors; (e) 3 proposals concerned a personal grievance against the company; (f) 3 proposals involved substantially the same matters as had previously been submitted to security holders; (g) 2 proposals were not timely submitted; (h) 1 proposal and reasons therefore was deemed misleading. Ratio of Soliciting to Nonsoliciting Companies Of the 2,388 issuers that had securities listed and registered on national securities exchanges as of June 30, 1962, 2,221 had voting securities so listed and registered. Of these 2,221 issuers, 6 listed and registered voting securities for the first time after their annual stock- holders' meeting in fiscal 1962; of the remaining 2,215 issuers with voting securities, 1,807,or 82 percent, solicited proxies under the Com- mission's proxy rules during the 1962 fiscal year for the election of directors. 60 SECURITIES AND EXCHANGE COMMISSION Proxy Contests During the 1962 fiscal year, 17 companies were involved in proxy contests for the election of directors. A total of 253 persons, both management and nonmanagement, filed detailed statements as partic- ipants under the requirements of Rule 14a-11. Proxy statements in 10 cases involved contests for control of the- board of directors and those in 7 cases involved contests for representation on the board. Management retained control of the board of directors in 4 of the 10 contests for control, 1 was settled by negotiation, nonmanagement persons won 3 and 2 were pending as of June 30, 1962. Of the 7 cases where representation on the board of directors was involved, manage- ment retained all places on the board in 5 cases. INVESTIGATIONS Section 21(a) of the Act authorizes the Commission to make such investigations as it deems necessary to determine whether any person has violated or is about to violate any provision of the Act or any rule or regulation thereunder. The Commission is authorized, for this purpose, to administer oaths, subpoena witnesses, compel their attend- ance, take evidence and require the production of records. In addition to the investigations undertaken in enforcing the anti-fraud, broker- dealer registration, and other regulatory provisions of the Act, which are discussed in Part XI of this report under "Complaints and Investi- gations," the following investigations were undertaken in enforcing 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 the fiscal year______________ 27 Investigations initiated during the fiscal year______________________ 13 40 Investigations closed during the fiscal year_____________________________ 19 Investigations pending at the close of the fiscal year 21 REGULATION OF BROKER-DEALERS AND OVER-THE-COUNTER MARKETS Registration Section 15(a) of the Securities Exchange Act of 1934 requires the registration of all brokers and dealers who use the mails or instru- mentalities of interstate commerce to effect or induce transactions in securities in the over-the-counter market. Brokers and dealers con- ducting an exclusively intrastate business or dealing only in exempted securities, commercial paper, commercial bills or bankers' acceptances are exempt from registration. TWENTY-EIGHTH ANNUAL REPORT 61 The table below sets forth statistics on broker-dealer registrations and applications for fiscal 1962. Effective registrations at close of preceding flseal year 5,500 .Applications pending at close of preceding fiscal year 126 .Applications filed during fiscal year 1,133 Total 6,759 .Applications denied__________________________________________________ 2 .Applications withdra wn_____________________________________ 15 .Applications cancelled________________________________________________ 0 Registrations withdra wn____ __ 705 Registrations cancelled____________________ _____ 43 Registrations revoked________________________________________________ 47 Registrations suspended______________________________________________ 5 Registrations effective at end of fiscal year 5,868 .Applications pending at end of fiscal year______________________________ 81 Total 6,766 Less: Suspended registrations revoked during year_____________________ .7 Total 6,759 .29 registrations were In suspension at close of the fiscal year. Administrative Proceedings The Commission is given the power to deny or revoke the registra- tion of a broker-dealer by Section 15(b) of the Securities Exchange Act. An order of denial or revocation will be issued, after notice and opportunity for hearing, if the Commission finds that such sanction is in the public interest and the applicant or registrant, or any part- ner, officer, director, or other person directly or indirectly controlling or controlled by the applicant or registrant is subject to a statutory disqualification. The statutory disqualifications are: (1) willful false or misleading statements in the application for registration or document supplemental thereto; (2) conviction within the previous 10 years of a felony or mis- demeanor involving the purchase or sale of securities or arising out of the conduct of business as a broker-dealer; (3) injunction by a court of competent jurisdiction against en- gaging in any practices in connection with the purchase or sale of securities; and (4) willful violation of the Securities Act of 1933 or the Securi- ties Exchange Act of 1934 or any of the Commission's rules or regulations thereunder. The Commission has no authority to deny or revoke registration without finding a disqualification of the types set forth. Therefore, bad reputation or character, or inexperience in the securities business, 64 SECURITIES AND EXCHANGE COMMISSION cipal officersof North American and who admittedly controlled that company, knew or should have known that the accountant was not independent, and that, by filing an untrue registration statement, they willfully violated those Sections of the Securities Act which specify the information to be included in a registration statement and pro- spectus. Respondents had been enjoined from offering or selling North American stock in violation of the registration or anti-fraud pro- visions of the Securities Acts. On the basis of the injunction, the willful violations and respondents' consent, the Commission revoked registrant's registration and found each of the partners a cause of the revocation." Theodore A. Landau, doing business as Landau Company, and Scott Taylor & Co., Inc.-The registrations of both firms were revoked because of manipulative practices in the sale of Anaconda Lead & Silver Company stock. Scott Taylor, before acquiring a large block of Anaconda stock from Landau and proceeding to a retail dis- tribution, had asked Landau to insert quotations for the stock in the daily sheets of the National Quotation Bureau, Inc. In March and April 1959, blocks of stock of Anaconda, which had been an inactive company since 1952, were sold at 15 cents and 20 cents per share. Landau inserted bids, generally at $4.25per share, in the daily sheets from April to mid-August 1959, and Scott Taylor made a distribu- tion of the Anaconda shares in at least 29 states. The Commission found that Scott Taylor represented that the stock was being offered at the market when in fact the market was one made and controlled by Scott Taylor or by Landau. The Commission further found that Scott Taylor violated Rule 10b-6 under the Exchange Act by placing bids for the stock through an intermediary while distributing it. Sales were made by Scott Taylor through long distance telephone solicitations in which purchasers were not informed that Anaconda had been inactive since 1952,and that it had no income, machinery or equipment and practically no funds. Scott Taylor and Stephen N. Stevens, its president, consented to revocation of Scott Taylor's regis- tration and a finding that Stevens was a cause of the revocation, based on the market manipulation and on false and misleading statements made in the sale of the stock. Landau's registration was revoked because of his participation in creating a false impression of market activity in the stock and he was also held responsible for Scott Taylor's acts in furtherance of the fraudulent enterprise.' Aldrich, Scott & Co., Inc.-In this proceeding, the registrant and Edward L. Benedict, Jr., who owned 80 percent of its stock and was its Securities Exchange Act Release No. 6684 (Dec. 15, 1961). Securities Exchange Act Release No. 6792 (Aprll 30, 1962). • • TWENTY-EIGHTH ANNUAL REPORT 65 president at the time, admitted violations of the anti-fraud provisions of the Securities Acts and of the Commission's net capital require- ments and consented to revocation of registrant's registration and a finding that Benedict was a cause of such revocation. The principal issue was whether Walter Scott Aldrich, who was registrant's vice- president, secretary, and director and a 20 percent stockholder during the time of the violations, should also be found a cause. Aldrich contended, among other things, that he was inexperienced in the securities business and did not take an active part in registrant's business during this period. The Commission rejected his contention and found him a cause of registrant's revocation. It held that he was accountable for registrant's engaging in the securities business while insolvent and with a net capital deficiency, stating that a principal officer,director, and stockholder of a registered broker-dealer has at the least a duty to keep himself informed of the registrant's financial condition and to take those steps necessary to insure compliance with the Exchange Act," False and misleading statements made in the sale of securities in willful violation of the anti-fraud provisions of the Securities Acts were the bases for revocation of broker-dealer registrations in Murray Securities Corporation,S Barclay Securities Corporations' Lindsay Securities Corporation/ Hanover Securities Corporation (formerly known as Webster Securities Corp01'ation),S Irving Kastner,9 Bilt- more Securities Corp./o D. H. Victor &: Company, lnc.,ll Luther L. Bost; doing business as L. L. Bost Company/2 Francis J. Brenek: and Co., Inc./3 Jacwin &; Costa,14J[ichael J. Bogan, Jr., doing business as M. J. Bogan, Jr. &: CO.,15and for denial of registration in Union Securities (Iorporationr" Willful violation of both the anti-fraud and securities registration provisions were the bases for revocation in International Investments, Inc.,17 Empire Underwriters Corporation, Inc.,ls C. H. Abraham &: Securities Exchange Act Release No. 6597 (.July 18. 1961). Securities Exchange Act Release No. 6635 (Sept. 22, 1961). Securities Exchange Act Release No 6648 (Oct. 9, 1961). 'Securities Exchange Act Release No. 6649 (October 9,1961). Securities Exchange Act Release No. 6659 (Oct. 25, 1961) Securities Exchange Act Release No. 6659 (Oct. 25, 1961). reSecurities Exchange Act Release No. 6673 (Nov. 24,1961). 11 Securities Exchange Act Release No. 6700 (Jan. 5, 1962). 12 Securities Exchange Act Release No. 6703 (Jan. 8. 1962). 13 Securities Exchange Act Release No. 6735 (Feb. 20,1962). "Securities Exchange Act Release No. 6788 (Apr. 24, 1962). 's Securities Exchange Act Release No. 6810 (May 23,1962). 1. Securities Exchange Act Rplease No. 6749 (May 23,1962). 11 Securities Exchange Act Release No. 6598 (.July 18, 1961) . .. Securities Exchange Act Release No. 6651 (Oct. 10, 1961). 672175--6.3-6 • • • • • 66 SECURITIES AND EXCHANGE COMMISSION 00., Inc./9 A. G. Bellin Securities Oorp., 20 Phoenix Securities OOrp.,21 L. J. Mack ill Oompany, Inc.,22 Oarlton Securities, Inc.,23 Philip New- man Associates, Inc.,24 and Allstate Securities, Inc.25 The registration of D. Earle Hensley 00., Inc.26 was revoked because, among other things, registrant had engaged in the securities business before becom- ing registered as a broker-dealer, made misrepresentations in the sale of its stock, misappropriated customers' funds and securities, and was enjoined from various acts and practices. 'Willful violation of the securities registration provisions was the principal basis for revocation in Pauline Zipperman; doing business as German American Trading 00mpany,27 and Rockwell Securities 001'- poration/s where the registrant had also been enjoined against further violations of such provisions. The use of customers' funds or securities for registrant's own pur- poses, accompanied in most cases by willful violations of the Commis- sion's net capital rule or the anti-fraud provisions of the securities acts by broker-dealers doing business while insolvent, were the causes of revocation in Miller Smith ill 00., Inc.,29 Ohampion &: 00., Inc.,so and Florida Underwriting and Securities Services Oorp.": The regis- tration of Dayton Oompany S2 was revoked because it improperly hyopthecated customers' securities and in addition failed to disclose a controlling person in its registration application. Willful violation of the net capital requirements was a basis for revocation in Lambert, M. W., Inc.,sB H. S. Simmons ill 00., Inc.,s4 Strand Investment Oom- pany,35 Whitney ill Oompany, Inc.,36 and Auld &- 00., Lno." In the last-named case, the registrant was also found to have made false statements in the financial statement filed with its registration appli- cation and in an annual financial report. 111 Securities Exchange Act Release No. 6652 (Oct. 10, 1961). 20 Securltles Exchange Act Release No. 6654 (Oct. 18, 1961). 21 Securities Exchange Act Release No. 6657 (Oct. 25, 1961). 22 Securities Exchange Act Release No. 6658 (Oct. 25, 1961) .. Securities Exchange Act Release No. 6661 (Oct. 31,1961) . .. Securities Exchange Act Release No. 6708 (Jan. 17, 1962) .. Securities Exchange Act Release No. 6733 (Feb. 14, 1962) . .. Securities Exchange Act Release No. 6611 (Aug. 4, 1961). :IT Securities Exchange Act Release No. 6804 (May 15. 1962) . .. Securities Exchange Act Release No. 6751 (Mar. 9,1962) . .. Securities Exchange Act Release No. 6663 (Oct. 31,1961). aoSecurities Exchange Act Release No. 6687 (Dec. 26,1961). 31 Securities Exchange Act Release No. 6789 (Apr. 24,1962) . .. Securities Exchange Act Release No. 6616 (Aug. 17, 1961). lI# Securities Exchange Act Release No. 6633 (Sept. 21,1961) .. Securities Exchange Act Release No. 6662 (Oct. 1, 1961) .. Securities Exchange Act Release No. 6705 (Jan. 10, 1962) . .. Securities Exchange Act Release No. 6787 (Apr. 24, 1962). If Securities Exchange Act Release No. 6618 (Aug. 21.1961). • • • • TWENTY-EIGHTH ANNUAL REPORT 69 The Commission held that under the circumstances Gintel's con- duct operated as a fraud and deceit upon the purchasers from his customers' accounts and constituted a willful violation of the anti- fraud provisions of the securities acts. It found that Gintel had the responsibility of an "insider" to disclose material facts which were known to him by virtue of his position but which were not known to persons with whom he dealt and which, if known, would have affected their investment judgment. The Commission said that the director of Curtiss-Wright who had informed Cady, Roberts of the dividend cut would have been prohibited from selling the securities without disclosure, and that by logical sequence Gintel, a partner of regis- trant, was also prohibited from selling without disclosure. Gintel argued that his sales after receiving news of the dividend action were part of a continuing program of liquidating the Curtiss-Wright hold- ings in his discretionary accounts and that he was carrying out a fiduciary responsibility to his customers. The Commission rejected these arguments. It found that Gintel's sales after receiving the news were in contrast to his previous moderate rate of sales of Curtiss- Wright stock, and that he allocated short sales to his wife's account and to the account of a customer with whom he had had no prior dealings. The Commission ruled that although Gintel occupied a fiduciary relationship to his customers, that relationship could not justify his use of inside information at the expense of the general public. With respect to the argument that a disclosure requirement applicable to exchange transactions would present substantial practi- cal difficulties, the Commission stated that such problems are easily avoided where, as here, all the registered broker-dealer need do is to keep out of the market until the established procedures for public release of the information on the exchange are carried out. The Commission took no action against the registrant because it found that there was no evidence of a preconceived plan to "leak" the ad- vance information, that Gintel had acted spontaneously, and that registrant had had no opportunity to prevent the transactions. Net Capital Rule The basic purpose of Rule 1503-1, promulgated by the Commission under Section 15(c) (3) of the Exchange Act, is to safeguard funds and securities of customers dealing with registered broker-dealers. This rule, commonly known as the net capital rule, limits the amount of indebtedness which may be incurred by a broker-dealer in relation to its capital. It provides that the "aggregate indebtedness" of a broker-dealer may not exceed 20 times the amount of its "net capital" as computed under the rule, 70 SECURITIES AND EXCHANGE COMMISSION If it appears from an examination of the reports filed by a regis- tered broker-dealer with the Commission, or through inspection of its books and records, that the ratio is exceeded, the Commission normally notifies the broker-dealer of the deficiency and affords an opportunity for compliance. Unless the capital situation is promptly remedied, injunctive action may be taken by the Commission and in addition proceedings may be instituted to revoke the broker-dealer's registra- tion. During the past fiscal year, violations of the net capital rule were charged in 25 injunctive actions and in 23 revocation proceed- mgs instituted against broker-dealers. Registered broker-dealers who participate in "firm commitment" underwritings must have sufficient capital to permit the participation provided by the underwriting contract without impairing the capital- debt ratio prescribed by the rule. For the protection of issuers and customers of the broker-dealer, the Commission's staff carefully ana- lyzes the latest available information on the capital position of the participants to determine whether they will be in compliance with the rule upon assumption of the new obligations involved in the under- writings. Acceleration of the effective date of registration statements filed under the Securities Act will be denied where underwriting com- mitments may engender violations of the net capital rule by any participating underwriter. A participant found to be inadequately capitalized to take down his commitment is notified and given an opportunity to adjust his financial position to meet the requirements of the rule without reducing his commitments. If he is unable to meet such requirements, he must decrease his "firm commitment" until compliance with the rule is reached. If necessary he may have to with- draw from the underwriting or participate on a "best efforts" basis only. Financial Statements Rule 17a-5 under Section 17 (a) of the Exchange Act requires registered broker-dealers to file annual reports of financial condition with the Commission. Such reports must be certified by a certified public accountant or public accountant who is in fact independent, with certain specified limited exemptions applicable to situations where certification does not appear necessary for customer protection. Under certain circumstances member firms of national securities exchanges are exempt from the necessity of certification and an exemp- tion is available for a broker-dealer who, since his previous report, has limited his securities business to soliciting SUbscriptions as an agent for issuers, has transmitted funds and securities promptly, and has not otherwise held funds or securities for or owed monies or securities to customers. Also exempt is a broker or dealer who, from the date of TWENTY-EIGHTH ANNUAL REPORT 71 his last report, has confined his business to buying and selling evi- dences of indebtedness secured by liens on real estate and has carried no margin accounts, credit balances or securities for any customers. After his registration, a broker-dealer's first financial report must reflect his condition as of a date between the end of the 1st and 5th months after the effecive date of the registration. All reports must be filed within 45 days after the date as of which the report speaks. Through these reports the Commission and the public may evaluate the financial position and responsibility of broker-dealers. The finan- cial report is one means by which the staff of the Commission deter- mines whether the registrant is in compliance with the net capital rule. Failure to file the required reports may result in the institution of revocation proceedings. However, it is the policy of the Commission first to advise the broker-dealer of his obligations under the rule and to give him an opportunity to file the report. During the fiscal year 5,228 reports of financial condition were filed with the Commission compared to the 1961 total of 5,060. Broker-Dealer Inspections Section 17(a) of the Exchange Act provides for regular and pe- riodic inspections of registered broker-dealers. During the fiscal year the number of such inspections totaled 1,515. The inspection device is a most useful instrument in protecting investors and detecting vio- lations of the Federal securities laws. The inspection, among other things, determines a broker-dealer's financial condition, reviews his pricing practices, evaluates the safeguards employed in handling cus- tomers' funds and securities, and determines whether adequate and accurate disclosures are made to customers. The Commission's inspectors also determine whether brokers and dealers are keeping books and records as required by the Exchange Act and the Commission's rules thereunder and conforming to the margin and other requirements of Regulation T of the Federal Re- serve Board. Inspectors also look for excessive trading or switching in customers' accounts. Inspectors frequently find evidence of the sale of unregistered securities or of fraudulent practices such as use of improper sales literature or sales techniques. When inspections reveal that a broker-dealer is violating the statutes or rules, consideration is given to the type of violation and the effect on the public. The Commission does not take formal ac- tion as a result of every infraction discovered. Inspections frequent- ly reveal inadvertent violations which are discovered before becoming serious and before customers' funds or securities are in danger. When no harm has come to the investing public the registrant is informed of the violations and advised to correct the improper practices. If 74 SECURITIES AND EXCHANGE COMMISSION resentative, fine and censure. An individual may also be found to have been the cause of a violation and of the penalty imposed on an- other party for such violation. Such a cause finding can have far- reaching effects, particularly in the case of expulsion or suspension of a member from membership or suspension or revocation of registration as a registered representative. A person found to be a cause of suspension or expulsion from membership cannot be employed by any NASD member while such suspension expulsion is in effect, except with the approval of the Commission. Where an individual should have been, but was not, registered as a representative, a finding that the unregistered person was a cause of an effective expulsion, suspen- sion or revocation acts as a disqualification from membership, or con- trol of or by a member, just as if such a penalty had been imposed directly on the person found a cause. In many cases more than a single penalty may be imposed; thus, expulsion, suspension or revoca- tion might be accompanied by a fine and/or censure. In cases where the penalty is a fine, censure is customarily added. All decisions by district business conduct committees of the NASD are reviewable by the NASD board of governors on its own motion, or on the timely application of an aggrieved party. On review the board may affirm, modify, or reverse such decisions or remand them for further consideration. During the year the Association reported to the Commission its final disposition of 411 disciplinary complaint actions against 368 different member firms and 196 registered representatives. 58 With re- spect to 49 members and 26 representatives, complaints were dismissed on the basis of findings that the allegations had not been sustained. Violations were found, and some penalty was imposed, with respect to 362 members and 170 representatives. The maximum penalty of expulsion from membership was imposed in 47 decisions (one member being expelled in each of two decisions), and 9 members were suspended from membership for periods ranging from 15 days to 2 years. Fines ranging from $50 to $5,000 were im- posed on members in 236 cases, including 6 in which members were suspended and 2 in which members were expelled. In '78 cases the only penalty was censure, although members subjected to fines were usually also censured. Registered representatives found in violation of Association rules were also subjected to a wide variety of sanctions. The registrations of 74 representatives were revoked and 19 were suspended for periods ranging from 15 days to 2 years. Nine representatives were found to .. A total of 34 members was Involved In 2 reported cases each; 3 were Involved In 8; and 1 was Involved In 4. TWENTY-EIGHTH ANNUAL REPORT 75 have been causes of penalties imposed on their firms. Fines ranging from $50 to $5,000 were imposed on 33 representatives, including 5 whose registrations were suspended and 9 whose registrations were revoked. Censure was the only penalty imposed on 49 representatives found in violation. The NASD decisions during the year included 168 solely involving the NASD's so-called "free-riding" interpretation which states, in essence, that a member who fails to make a bona fide public offering of securities acquired for distribution is in violation of the NASD Rules of Fair Practice." In 15 of these "free-riding" cases, the complaints were dismissed. With respect to the remainder, fines ranging from $50 to $4,000 were imposed on members in 110 cases, while censure was the only penalty in the other 43 cases. Registered representatives were named as respondents in only 9 "free-riding" cases. In 1 such case, 13 representatives were named, but the allegations as to them were dismissed, although the firm was fined. Eight representatives were fined amounts ranging from $500 to $5.000, and 6 of these were also suspended for periods ranging from 30 days to 6 months. Commission Review of NASD Action on Membership Section 15A(b) of the Act and the bylaws 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 controlling or controlled person, is under any of the several disabilities specified in the statute or the bylaws. By these provisions Commission approval is a condition to admission to or continuance in Association member- ship of any broker-dealer who, among other things, controls or is con- trolled by a person whose registration as a broker-dealer has been revoked or who has been and is suspended or expelled from Associa- tion membership or from a national securities exchange, or whose registration as a registered representative has been revoked by the NASD or who was found to have been a cause of such an effective order. A Commission order approving or directing admission to or continu- ance in Association membership, notwithstanding a disqualification under Section 15A(b) (4) of the Act, or under an effective Association rule adopted under that Section or Section 15A(b) (3), is generally entered only after the matter has been submitted initially to the Asso- ciation by the member or applicant for membership. Where, after consideration, the Association is favorably inclined, it ordinarily files with the Commission an application on behalf of the petitioner. A .. See First OaUfornw. Oompanll. infra. p. 78. 76 SECURITIES AND EXCHANGE COMMISSION broker-dealer, however, may file an application directly with the Com- mission either with or without Association sponsorship. The Com- mission reviews the record and documents filed in support of the application and, where appropriate, obtains additional relevant and pertinent evidence. At the beginning of the fiscal year 3 such peti- tions were pending before the Commission. During the year 6 peti- tions ",'ere filed; decisions were issued in 8 cases; and 1 petition was pending at the year end. The Commission found it appropriate in the public interest to approve 6 petitions for continuance in Association membership notwithstanding employment of a disqualified person.f" In 2 other decisions the Commission by order remanded the applications to the Association for reconsideration. In remanding to the NASD, for further consideration, an applica- tion by the Association for approval of the continuance of a firm in membership while employing N. Sims Organ, the Commission stated, in an opinion written by Chairman Cary, that such an application "must be weighed in the light of our basic objective of raising stand- ards in the securities industry." In March 1961, the Commission had revoked the broker-dealer registration of a firm of which Organ was president, because of Organ's "fraudulent conduct" in the sale of Continental Mining Ex- ploration stock in 1958, while he was employed by J. H. Lederer Co., Inc., whose registration had been revoked in December 1958. Organ had represented, among other things, that the Continental stock would be a "tremendous money-maker" without disclosing that the company had suffered some $584,000 of losses. In addition to this prior violation of the Federal securities laws, the Commission took official notice of the fact that in March 1952, the Ontario Securities Commission had cancelled Organ's registration as a securities sales- man in Canada. In that proceeding, Organ, in direct contradiction of the other evidence developed, had testified under oath that he did not make sales across the border to U.S. investors, and the Chairman of the Ontario Commission had stated, "... his attempt to mislead the Commission when under oath, fairly indicates the type of repre- sentations he would resort to over the telephone, when there is little risk, if any, of his being held accountable for his actions." In applying for approval of Organ's employment by the member firm in question, the NASD took into consideration the fact (among others) that he would be subject to effective supervisory controls by 60 Securities Exchange Act Releases Nos. 6604 (J"uly 26, 1961) ; 6610 (August 2, 1961) ; 6707 (J"anuary 11, 1962) ; 6766 (March 27, 1962) ; 6783 (April 18, 1962) ; and 6805 (May 15,1962). TWENTY-EIGHTH ANNUAL REPORT 79 acquired for distribution and that, among other things, sales to insiders, including accounts in which the member or its officershave an interest, in excess of their normal investment practice (unless other- wise provided in a prospectus), or withholding or refraining from making a public offering of all or any part of its participation to make an extra profit, are contrary to high standards of commercial honor and just and equitable principles of trade. With respect particularly to a practice of sales to such accounts primarily of new issues at a time when they are being quoted or sold above the offering price (so-called "hot issues"), and therefore may be resold at a profit, the NASD had pointed out that such a practice is questionable and should be the subject of careful consideration. A March 1959clarification of the policy stated: ". . . it becomes apparent that allotments of a member's participation in a 'hot issue' to insider accounts (bona fide investments or other) in disproportionate amounts, as opposed to allotments to the public, would hardly indicate a genuine effort to sell such participation to public investors. Consideration should be given to the fairness of such ratios in the fulfillment of the member's obli- gation as a participant." In its decision, representing its first ruling on the NASD's inter- pretation with respect to "free-riding" in connection with the distri- bution of a "hot issue," the Commission expressed agreement with the NASD position that the basic requirement under the NASD's "free- riding" interpretation that a bona fide public offering be made is violated, regardless of the investment history or normal investment practice of an insider account, if a sale of a "hot issue" is made to such an account in an amount which is disproportionate in compar- ison with the amount being offered to the public by the member. The effect of such withholding, the Commission observed, is "not only to give to the insiders the opportunity for a profit on the shares with- held, which appears highly likely under the circumstances, and thereby deprive public investors of such opportunity, but also to re- strict the supply and tend to raise the market price further and enable the insiders to realize an increased profit upon subsequent sale of the shares retained by them." The Commission concluded that the NASD properly found that the sale by First California to its own Plan account of 26.6 percent of its allotment of Permanent Filter stock, at a time when the offering price of these shares was at least $1,600less than the contemporaneous market price, was disproportionate in relation to the amount sold to public investors, and that the NASD rules had been violated." It .. Securities Exchange Act Release No. 6586 (July 6, 1961). 80 SECURITIES AND EXCHANGE COMMISSION also found that the penalty imposed by the Association was not. .excessive or oppressive, The Commission sustained an order of the Association which sus- pended for 12 months the registration of Leonard H. Zigman as a registered representative. Zigman had appealed the action of the NASD, which found that he had engaged in a "serious breach" of his obligations to his employer and as a securities salesman, and that his conduct was inconsistent with just and equitable principles of trade. The violation of NASD rules involved the maintenance by Zigman of an account with his employer in a fictitious name so as to conceal its true identity and on two occasions allocating to such account portions of the employer's participation in public offerings being quoted at above the offering price and immediately thereafter disposing of the shares at a profit. The Commission rejected Zigman's explanation of his conduct as an "implausible excuse" and sustained the 12-month suspension as not excessive or oppressive." .. Securities Exchange Act Release No. 6701 (January 5, 1962). PART VI ADMINISTRATION OF THE PUBUC UTILITY HOLDING COMPANY ACT OF 1935 In administering the Public Utility Holding Company Act of 1935 the Commission regulates interstate public-utility holding company systems engaged in the electric utility business and/or in the retail distribution of gas. The Commission's jurisdiction also extends to natural gas pipeline companies and other nonutility companies which are subsidiaries of registered holding companies. Although the mat- ters under the Act dealt with by the Commission and its staff embrace a variety of intricate and complex questions of law and fact generally involving more than one area of regulation, briefly there are three principal regulatory areas. The first covers those provisions of the Act, contained principally in Section 11(b) (1), which require the physical integration of public utility companies and functionally re- lated properties of holding company systems and those provisions, contained principally in Section 11(b) (2), which require the simpli- fication of intercorporate relationships and financial structures of holding company systems. The second covers the financing opera- tions of registered holding companies and their subsidiaries, the acquisition and disposition of securities and properties, and certain accounting practices, servicing arrangements and intercompany transactions. The third includes the exemptive provisions of the Act, the provisions covering the status under the Act of persons and com- panies, and those regulating the right of a person affiliated with a public utility company to acquire securities resulting in a second such affiliation. Matters embraced within this area of regulation fre- quently come before the Commission and its staff. Many such mat- ters do not result in formal proceedings and others are reflected in such proceedings only in an indirect manner when they are related to issues principally under one of the other areas of regulation. The Branch of Public Utility Regulation of the Commission's Division of Corporate Regulation performs the principal functions under the Act. It observes and examines problems which arise in 81 6721715--63-7