45th Annual Report of the Securities and Exchange Commission

for the fiscal year ended September 30, 1979 For sale by the Supenntendent of Documents, U S. Government Pnntong Office Washongton, D.C 20402 Stock Number 046-000.00121.4 Chairman's Letter of Transmittal

The Honorable Walter F. Mondale President, U.S. Senate Washington, D.C. 20510

The Honorable Thomas P. O'Neill, Jr. Speaker, U.S. House of Representatives Washington, D.C. 20515

Gentlemen'

I am pleased to transmit the Annual Report of the United States Securities and Exchange Commission for the fiscal year ended September 30, 1979. As I have in connection with the Cornrmssion's last two Annual Reports, I would like to summarize in this letter some of the significant challenges which the Commission has faced, and achievements which it has realized, during the past year. I want also to describe several of the areas to which the Commission will be devoting its efforts in the coming year. After 45 years of successful administration of the Federal securities laws-a period during which the Cornrnission earned recoqrutron as a hiqhly effective Federal regulatory agency-It is taking a close look at whether its rules, procedures, and internal operations remain adequate and appropriate to the capital markets of the 1980s. This examination comes at a time when the Commission is already facing the challenge of stretching limited resource levels to meet its steadily Increasing responsibilities. Since 1975, during a period In which the Commission actually 1051 a significant number of staff positions, the Commission has experienced an explosion in the number and complexity of ItS regulatory responsibilities-in large part, for two specific reasons. First. SIgnificant changes have occurred in the financial markets and cornrnuruty-i- including greatly expanded market activity. increasing complexity of financial transactions, the development of a new mix of financial products being offered to the public, and the increasinqly hiqh financial leverage of the broker-dealer industry. As illustrations, during the period from 1975, the number of shares annually traded in the NASDAQ system increased over 150 percent, the number of contracts for exchange-traded options increased over 250 percent, the number of registered investment advisers increased by approximately one-half, there were approximately $100 billion worth of successful tender offers, and in the last year alone the assets of money market funds increased almost five-fold. Such remarkable growth is expected to continue-in , the volume of trading in New York Stock Exchange-listed securities on the composite tape, American Stock Exchange-listed and over-the-counter traded securities totaled 2.165 billIon shares. Just a year earlier, the January figure was less than one-half that amount; two years earlier, it was only about one-third of this year's figure. Second, during this same five-year period, Congress charged the Commission with a wide range of new regulatory responsibihties and legal oblIgations Some of these mandates to which it must allocate SIgnificant resources, such as the Freedom of Information Act, are not unique to the Cornrrussion. But other requirements are. For example, in 1975 Congress directed the Commission to facilitate the establIshment of a national market system for securities. Further, the Commission has been charged with implementing the Forerqn Corrupt Practices Act and has undertaken a greater role to achieve more effective oversiqht and self-regulation of the accounting profession. The Commission also has devoted considerable resources to reviewinq the American Law Institute's proposed Federal Securrtres Code, WhICh, it is anticipated, will be introduced In the Congress. Moreover, recent Judicial developments, which have severely hampered private rights of action, mean that in many cases, no party other than the Commission can seek judicial enforcement of the federal secunties laws.

Major changes In the Commission's operations have been necessary to cope WIth this increased workload in the face of dirnlnished staff allocation. In order to maintain the Commission's traditionally high level of investor protection, it has had to increase efficiency, reallocate personnel, reorganize structure, develop new management strategies, and rely on unpaid overtime donated by its highly-motivated staff. This drive for even more efficient utilization and allocation of our resources will, of necessity, continue in the coming year. Nonetheless, such efforts can accomplish only so much. The Commission is concerned that continually growing demands on lImited resources impair its existing programs and functions. In a number of areas, underallocation of staff, because of needs to irnrnedrately meet other demands, already has resulted in performance capabilities diminishing to a level which the Commission does not consider adequate. For example, the Cornrnissron's lnspections of many of the financral entities which It regulates are too Infrequent to be optimally effective In protecting the publIc

The Securities Markets

The Commission continued its efforts, during fiscal 1979, to implement ItS Congressional mandate to facilitate the establIshment of a national market system for securities. As part of its efforts to Identify the objectives and framework of such a system, during fiscal 1979, the Cornrnission proposed three siqnificant rules: Rule 11AcI-3 to provide price protection for public limit orders; Rule 19c-3 to limit extension of off-board trading restrictions; and Rule 11Aa2-1 to define criteria for ii securities to "qualify" for trading in a national market system. The securities industry, meanwhile, stengthened the two principal experiments In technology which may become, or help determine, a foundation of a national market system-the Intermarket Trading System and the Cincinnati multiple-dealer trading facility. Both of these projects also received authority from the Commission to continue operating until , 1983. Two additional private sector Initiatives in this area were the commitment by the participating exchanges in the Intermarket Trading System to a joint limit order protection plan, and the agreement by the New York and American Stock Exchanges to make generally available their common message switch. Trading in exchange-listed options also received a great deal of attention from the Commission during the fiscal year. In December 1978, the Special Study of the Options Markets submitted to the Commission the l,OOO-pagereport of its comprehensive 14-month study. The Commission released the staff's report publicly in , and announced the conditions under which it would permit an expansion in options trading. During the balance of the fiscal year and into fiscal 1980, the staff worked closely with the securities industry's self-regulators toward implementing many of the recommendations of the Study. Although the task was complex and difficult, the cooperation between the Commission's staff and the industry's representatives has been excellent. I anticipate that in the coming fiscal year the Commission will authorize an expansion of trading in this segment of the securities market.

The Full Disclosure System The Commission's statutory mandate to require corporations to disclose all material information to the investing public is at the heart of the capital forrnation process. In accordance with the 1977 recommendations of its Advisory Committee on Corporate Disclosure, the Commission is pursuing an on-going program designed to enhance the effectiveness of its disclosure requirements, while reducing attendant burdens to the extent practicable. During the fiscal year, the Cornrnissron took a number of important steps towards this goal As part of this program, the Commission has begun a thorough review of filings under the separate disclosure systems prescribed by its two most fundamental disclosure statutes-the Securities Act of 1933 and the Securities Exchange Act of 1934-to reduce reporting burdens and paperwork by more precisely tailoring the reportmg requirements to the characteristics of particular registrants and to the needs of their investors. This program also has been substantially advanced by the Commission's efforts, which culminated in proposals, published subsequent to the close of the fiscal year, to amend Form 10-K to serve as the cornerstone of a new "integrated" disclosure system and to centralize the instructions for financial statements in various reporting forms. In addition, during the last fiscal year, the Commission continued its efforts to encourage issuers to provide investors with forward-looking and other forms of "soft" information, such as performance projections.

iii Other actions by the Commission during fiscal 1979 designed to make the full disclosure system more effective include the adoption of significant rules governing public tender offers and "going private" transactions. In addition, important progress was made in the Commission's comprehensive examination of shareholder participation in the process of corporate accountability. That study, which began in 1977, has resulted in slqnifrcant amendments to the Commission's proxy rules in both fiscal 1978 and 1979. The study's final report is expected during 1980. One of the Commission's major initiatives during fiscal 1979 has been its efforts to facilitate capital formation by small businesses WIthout materially diminishing the protections afforded public investors. The Office of Small Business Policy, established in , serves as liaison with the small business community and generates proposals to eliminate unnecessary impediments to the ability of small businesses to raise capital in the securities markets. As a result ofthat Office's recommendations, the Commission has liberalized the rule regarding resale of restricted securities, adopted a new "short form" registration statement for certain smaller issuesof securities, and created a new exemption from registration for other types of relatively small issues of securities. In coordination with the Department of Commerce, the Commission also developed a monitoring program to asessthe impact of our regulations on small businesses, and in conjunction with the Small Business Administration, is studying the role which regional broker- dealers play in the capital formation process. In order to make the Commission's review of corporate disclosure documents more meaningful, the staff unit with primary responsibility in this area, the Division of Corporation Finance, has been reorganized with its operational branches restructured according to industry groups. The Division's new operational plan recognizes that the staff cannot adequately review every document filed, and relies, instead, on an "audit mode" and quality control techniques to enable the staff to give prompt and thorough scrutiny to key filings while devoting less resources to reviewing more routine documents.

Investment Compances and AdVIsers Staff task forces are conducting a comprehensive review of the Commission's regulation of investment companies and investment advisers. With regard to investment companies, the Commission has adopted a number of rules to lessen the costs and burdens associated with their regulation-which historically has been based, to a large extent, on the Commission's prior-clearance of transactions-by enhancing the role of directors in managing investment companies. The goal of diminishing the Comrrussion's presence in routine investment company business decisions also is reflected in the Cornrnisston's withdrawal, in March, of its "Statement of Policy" on investment company advertising and in its adoption, in August, of Rule 434d to permit investment companies much more flexibility in mass media

iv advertising. The effect of these actions place responsibility for fair presentation of investment company advertising material on boards of directors rather than on arbitrary rules and staff clearances. The Commission also has requested public comment on a proposal to relax the prohibition against an investment company's using its assets to merchandise the sale of its shares. These efforts by the Commission to de-emphasize governmental prior-clearance of investment companies' business practices, while resulting in substantial private sector benefits, will place even greater emphasis on its increasingly stretched inspection capabilities to determine that such practices comply with the Federal securities laws. As to investment advisers, the Commission has identified anomalies in the pattern of investor protection which It is striving to resolve with the least possible burden to that industry. For example, in response to a long-standing concern as to the adequacy of information provided to clients of investment advisers, the Commission adopted a new rule to require that certain investment advisers disclose to clients and prospective clients their background and business practices.

Ensuring Informed Regulation The Commission recognizes that no regulatory agency can successfully fulfill its legislative mandate unless it understands the industry it regulates and the economic consequences of its actions. Accordingly, the Commission is placing increasing emphasis on gathering and analyzing empirically-based information. As part of its efforts to better assess the consequence of its regulations, the Commission has strengthened its capability for economic analysis. The revised format of the Commission's annual report on the securities industry and the recent report on the impact of the Commission's implementation of the Conqressronally-rnandated separation of money-management and floor brokerage illustrate this capability. Such analyses of economic conditions in the industry contribute importantly to the Commission's decision-makmg processes. To further improve its oversight of the operations of the securitres markets dunng the fiscal year, the Commission Implemented a pilot project phase of its Market Oversight and Surveillance System, which will provide the Commission a much enhanced capability to surveil the marketplace. In view of the increased volume and complexity of the securities markets, the Commission's existing approaches are no longer adequate. This system will supplement, not supplant, the market surveillance performed by self-regulatory organizations, in accordance with the Commission's strong commitment to the traditional framework of the securities industry's self-regulation.

Inspection and Enforcement An essential medium for assuring compliance with the securities laws-and for assessing the impact of the Commission's regulation-is

v Its inspection program, a responsibility which is receiving an enhanced emphasis although remaining understaffed. The Commission's Inspection program of regulated entities-including self-regulatory organizations, broker-dealers, investment companies and investment advisers-provides a vital discipline and the opportunity to examine the practical effects of regulation on such entities and on the investing public. Moreover, in appropriate circumstances, the Commission in implementing its regulatory responsibilities, will initiate enforcement actions. The Annual Report relates some of the more significant enforcement actions concluded during the year. The Commission continues its longstanding commitment to such a vigorous enforcement program, which is necessary to the credibility of the Commission's programs to protect public investors and the integrity of the securities markets. This commitment has become even more compelling in recent years as court decisions have severely hampered the private rights of action by which Investors themselves might otherwise have proceeded against perpetrators of illegal practices.

Accountmq Mallers In response to its 1977 undertaking to a Senate Subcommittee to report periodically on the accounting profession's response in meeting its challenges, as well as the Commission's own initiatives in this area, the Commission, in , submitted its second Report on the Accounting Profession and the Commission's Oversight Role. The Report concluded that sufficient progress has been made to merit continued opportunity for the profession to pursue efforts at self- regulation. In accordance with such efforts, the Commission continued its close liaison in support of the work of the Financial Accounting Standards Board to address emerging accounting problems, such as the effects of inflation on financial reporting. It strongly endorses the Board's program to develop an overall conceptual framework in which to consider such problems. As part of its on-going responsibilities to oversee the accounting profession, in June 1979, the Commission issued a release concerning certain factors which may affect the independence of accountants in performing nonaudit services for publicly-held audit clients, and certain factors which should be considered in determining to engage a corporation's independent accountants to perform nonaudit services. It also proposed during the year a rule requiring that management statements on internal accounting controls be included in corporations' annual reports on Form 10-K. Further, during the fiscal year, the Commission adopted amendments to certain forms and regulations to improve disclosure requirements relating to oil and gas reserves and operations, and proposed actions to encourage review by auditors of interim financia I information. • • • vi This summary provides only a very brief synopsis of the significant activities in which the Commission is engaged throughout ItS operations. Among the many others are: the important role we play in assisting Federal courts with regard to shareholder interests in reorganizations of publicly-held companies; the installation of micrographic and computer systems which have brought to the Commission's information-handling procedures the benefits of current technology, and unprecedented efforts to employ effective evaluation, management and development capabilities to further enhance the quality of our most valuable resource-our staff. All of these efforts, and others, are covered in the pages of this Annual Report-whose format, incidentally. has been revised durinq the past two years Into a slimmer, more readable and more timely document. I believe that this is one of the most Important periods in the Commission's nearly half-century of existence. The American corporate community, the securities Industry, and the markets. themselves, are changing rapidly to meet the challenges of the 1980s. The Commission, working closely with the Congress which oversees our operations, WIth those in the private sector whom we regulate, and in the interests of Investors, is also changing to meet these challenges. I have every confidence that the Commission will strive to perform ItS responsibilities with the professionalism and dedication which Congress and the Investing public have come to expect.

Sincerely,

Harold M. Williams Chairman

Vii

Commissioners and Principal Staff Officers (As of December 31, 1979)

Term expires Commissioners June 5 HAROLD M. WILLIAMS of California, Chairman 1982 PHILIP A. LOOMIS, JR., of California 1984 JOHN R. EVANS of Utah 1983 IRVING M. POLLACK of New York 1980 ROBERTA S. KARMEL of New York 1981

Secretary: George A. Fitzsimmons Executive Assistant to the Chairman: Daniel L. Goelzer

Principal Staff Officers Benjamin Milk, Executive Director Edward F. Greene, Director, Dtoision of Corporation Finance Lee B. Spencer, Deputy Director William C. Wood, Associate Director Mary E. T. Beach, Associate Director Michael J. Connell, Associate Director Stanley Sporkin, Director, Division of Enforcement (Vacant), Deputy Director] Irwin M. Borowski, Associate Director Theodore Sonde, Associate Director David P. Doherty, Associate Director Theodore A. Levine, Associate Director Douglas S. Scarff, Director, Division of Market Requletiotv' Sheldon Rappaport, Deputy Director (Vacant), Associate Director (Vacant), Associate Director (Vacant), Associate Director Sydney H. Mendelsohn, Director, Division of Investment Management Martin C. Lybecker, Associate Director Joel Goldberg, Associate Director Aaron Levy, Director, Division of Corporate Regulation Grant Guthrie, Associate Director Ralph C. Ferrara, General Counsel Jacob H. Stillman, Associate General Counsel Robert C. Pozen, Associate General Counsel (Vacant), Associate General Counsel Paul Gonson, Solicitor to the Commissions

ix Andrew L. Rothman, Director, Office of Public Affalr$ T. A. Larson, Deputy Director A. Clarence Sampson, Chief Accountant Steven J. Golub, Deputy Chief Accountant Steven E. Levy, Director of Economic and Policy Research William Stern, Director, Office of Opinions and Review Herbert V. Efron, Associate Director R. Moshe Simon, Associate Director Warren E. Blair, Chief Administrative Law Judge Lawrence H. Haynes, Comptroller Richard J. Kanyan, Director, Office of Admmistrative Services James C. Foster, Director, Office of Personnel Joseph F. Olivo, Jr., Director, Office of Reports and Information Services John D. Adkins, Director, Office of Data Processing Justin P. Klein, Director, Office of Consumer Affairs4 Matthew R. Schneider, Director of Legislative Affairs

1 Former Deputy Director, Wallace L Trrnrneny, left the Cornrmssion on December 7. 1979 2 Former Director. Andrew M Kletn.jeft the Commission on October 12, 1979 3 Former Solrcuor. Devrd Ferber. retired from the Commission on September 28. 1979 4 Mr Klem IS now parttcrpatmq In the President 5 Executive Exchange Program and Will return to the Commission In Oc IObeT 1980 x Regional and Branch Offices

Regional Offices and Administrators Region 1. New York, New Jersey.-Stephen L. Hammerman, 26 Federal Plaza, New York, New York 10007. Region 2. Massachusetts, Connecticut, Rhode Island, Vermont, New Hampshire, Maine.-Willis H. Riccio, 150 Causeway si., Boston, Massachusetts 02114. Region 3. Tennessee, Virgin Islands, Puerto Rico, North Carolina, South Carolina, Georgia, Alabama, Mississippi, Florida, part of Louisiana.-Jule B. Greene, Suite 788, 1375 Peachtree St., N.E., Atlanta, Georgia 30309. Region 4. Illinois, Indiana, Iowa, Kansas City (Kansas), Kentucky, Michigan, Min. nesota, Missol1ri, , Wisconsin.-William D. Goldsberry, Room 1204, Ever- ett McKinley Dirksen Bldg., 219 S. Dearborn St., Chicago, Illinois 60604. Region 5. Oklahoma, Arkansas, Texas, part of Louisiana, Kansas (except Kansas City).-Michael J. Stewart, 8th Floor, 411 West Seventh St., Forth Worth, Texas 76102. Region 6. North Dakota, South Dakota, Wyoming, Nebraska, Colorado, New Mex. ico, Utah.-Robert H. Davenport, Suite 700, 410 Seventeenth St., Denver, Col. orado 80202. Region 7. California, Nevada, Arizona, Hawaii, Guam.-Leonard H. Rossen, Suite 1710, 10960 Wilshire Boulevard, , California 90024. Region 8. Washington, Oregon, Idaho, Montana, Alaska.-Jack H. Bookey, 3040 Federal Building, 915 Second Ave., Seattle, Washington 98174. Region 9. Pennsylvania, Maryland, Virginia, West Virginia, Delaware, District of Columbia.-Paul F. Leonard, Room 300, Ballston Center Tower No.3, 4015 Wilson Boulevard, Arlington, Virginia 22203. Branch Offices Detroit, Michigan 48226.-231 Lafayette St., 1044 Federal Bldg. Houston, Texas 77002.-Room 5615, Federal Office & Courts Bldg., 515 Rusk Ave. , Florida 33131.-Suite 1114, DuPont Plaza Center, 300 Biscayne Boule. vardWay. Philadelphia, Pennsylvania 19106.-Federal Bldg., Room 2204, 600 Arch St. Salt Lake City, Utah 84111.-Suite 810, Boston Bldg., One Exchange Place. San Francisco, California 94102.-450 Golden Gate Ave., Box 36042.

xi

Biographies of Commissioners

Harold M. Williams, Chairman Chairman Williams was born on January 5, 1928, in Philadelphia, Pennsylvania. He received his B.A. from UCLA in 1946, graduating Phi Beta Kappa at the age of 18. Three years later he was awarded his J.D. degree from Harvard University Law School. He joined a Los Angeles law firm in 1949 where he specialized in tax and corporation law and remained until 1955 except for an interruption to serve as a U.S. Army legal officer during the Korean emergency. He joined Hunt Foods and Industries, lnc., in 1955 as Associate Tax Counsel. He subsequently became Tax Counsel, Vice President-Finance and Executive Vice President. In 1964, he be- came President of Hunt-Wesson Foods, Inc. In 1968, he was elected President of Hunt Foods and Industries, Inc., and with the formation of Norton Simon, Inc., later that year-resulting from consolidation of Canada Dry Corporation, Hunt Foods and Industries, Inc., and McCall Corporation-he was named Chairman of the new company's Finance Committee. In 1969, he assumed the additional post of Chairman of the Board of Norton Simon, Inc. In July of 1970, Mr. Williams became Dean and Professor of Management of the UCLA Graduate School of Man- agement. During his administration, the School achieved national ranking, includ- ing recognition as the leading graduate business school in a public university. Dur- ing the 1973 energy crisis, Mr. Williams took leave to serve as full-time Energy Coordinator for the City of Los Angeles. While at UCLA, Mr. Williams also served as Director of Norton Simon, lnc., Phillips Petroleum Company, ARA Services, lnc., CNA Financial Corporation, Signal Companies, Inc., and Montgomery Street Income Securities, and as a Trustee of the Aerospace Corporation. In his service to the community, Mr. Williams acted as Co-Chairman for the Public Commission on Los Angeles County Government, a subcommittee chairman of the Mayor's ad hoc Committee on Los Angeles City Revenues, a member of the State of California Commission for Economic Development and of the California Citizens Commis- sion on Tort Reform, and a member of the SEC Advisory Committee on Corporate Disclosure.

xiii Philip A. Loomis, Jr. Commissioner Loomis was born in Colorado Springs Colorado, on June 11, 1915. He received an A.B. degree, with highest honors, from Princeton University in 1938 and an LL.B. degree, cum laude, from Yale Law School in 1941, where he was a Law Journal editor. Prior to joining the staff of the Securities and Exchange Commission, Commissioner Loomis practiced law with the firm of O'Melveny and Myers in Los Angeles, California. Commissioner Loomis joined the Commission's staff as a consultant in 1954, and the following year he was appointed Associate Director and then director of the Division of Trading and Exchanges. In 1963, Commissioner Loomis was appointed General Counsel to the Commission and served in that capacity until his appointment as a member of the Commission. Commissioner Loomis is a member of the American Bar Association and the American Law Institute. He received the Career Service Award of the National Civil Service League in 1964, the Securities and Exchange Commission Distin- guished Service Award in 1966, and the Justice Tom C. Clark Award of the Fed- eral Bar Association in 1971. He took office as a member of the Securities and Ex- change Commission on August 13, 1971, and is now serving for the term of office expiring June 5, 1984.

John R. Evans Commissioner Evans was born in Bisbee, Arizona, on June I, 1932. He received his B.S. degree in Economics in 1957, and his M.S. degree in Economics in 1959 from the University of Utah. He was a Research Assistant and later a Research Ana- lyst at the Bureau of Economics and Business Research at the University of Utah, where he was also an instructor of Economics during 1962 and 1963. He came to Washington in February 1963, as Economics Assistant to Senator Wallace F. Ben- nett of Utah. From July 1964 through June 1971 Commissioner Evans was minor- ity staff director of the U.S. Senate Committee on Banking, Housing and Urban Af- fairs and served as a member of the professional staff from June 1971 to March 1973. He took office as a member of the Securities and Exchange Commission on March 3, 1973, and is now serving for the term expiring June 5, 1983.

xiv Irving M. Pollack Commissioner Pollack was born in , New York, on April 8, 1918. He received a B.A. degree, cum laude, from Brooklyn College in 1938 and an LL.B. degree, magna cum laude, from Brooklyn Law School in 1942. Prior to joining the Commission's staff he engaged in the practice of law in New York City after serving nearly four years in the United States Army, where he gained the rank of Captain. Mr. Pollack joined the staff of the Commission's General Counsel in Oc- tober 1946. He was promoted from time to time to progressively more responsible positions in that office and in 1956 became an Assistant General Counsel. A career employee, Mr. Pollack became Director of the Division of Enforcement in August 1972 when the SEC's divisions were reorganized. He had been Director of the Division of Trading and Markets since August 1965, and previously served as As- sociate Director since October 1961. In 1967 Mr. Pollack was awarded the SEC Distinguished Service Award for Outstanding Career Service, and in 1968 he was a co-recipient of the Rockefeller Public Service Award in the field of law, legisla- tion and regulation. Mr. Pollack took the oath of office on February 13,1974 as a member of the Securities and Exchange Commission, and is now serving for the term expiring .June 5, 1980.

Roberta S. Karmel Commissioner Karmel was born May 4,1937, in Chicago, Illinois. She received a B.A. from Radcliffe College in 1959 and an LL.B. from New York University School of Law in 1962. From 1962 to 1969, Mrs. Karmel worked in the New York Regional Office of the Securities and Exchange Commission as an attorney, then attorney branch chief, then assistant regional administrator. From 1969 to 1972 she was an associate with Willkie, Farr & Gallagher in New York. Mrs Karmel was a partner in Rogers & Wells from 1972 through September 1977, and an adjunct professor at Brooklyn Law School from 1973 through 1977. She has been a memo ber of the American Bar Association Federal Regulation of Securities Committee since 1973. She has also served on the Association of the Bar of the City of New York Committee on Securities Regulation, Committee on Administrative Law, and Committee on Professional Responsibility. She is the author of numerous articles in legal journals. Mrs. Karmel took the oath of office as a member of the Securities and Exchange Commission on September 30, 1977, for a term expiring on June 5, 1981.

xv

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Table of Contents

Chairman's Transmittal Letter viii Commission and Principal Staff Officers...... ix Regional and Branch Offices...... xi Biographies of Commissioners...... xiii

Regulation of the Securities Markets . Securities Markets, Facilities and Trading . National Market System . National System for Clearance and Settlement of Securities Trans- actions...... 4 Options Trading...... 5 Market Inventory Funds...... 6 Trading by Exchange Members...... 6 Effects of the Absence of Fixed Commission Rates...... 7 Regulation of Tender and Exchange Offers by Issuers...... 8 Resale of Restricted Securities...... 8 Regulation of Brokers, Dealers and Municipal Securities Dealers . . . . . 9 Regulatory Burdens on Small Brokers and Dealers...... 9 Lost and Stolen Securities...... 9 Securities Confirmations...... 9 Uniform Dispute Resolution Procedures for Investors...... 10 Arbitration Clauses in Broker-Dealer Customer Agreements. . . . . 10 Municipal Securities Dealers...... 11 Broker-Dealer Financial Responsibility Requirements ...... 11 Securities Investor Protection Corporation ...... 11 Oversight of Self-Regulatory Organizations...... 12 Securities Exchanges...... 12 National Association of Securities Dealers...... 13 Municipal Securities Rulemaking Board...... 14 Clearing Agencies...... 14 Arbitration Facilities of Self-Regulatory Organizations...... 15 Procedures for Filing Proposed Rule Changes...... 15 Inspections of Self-Regulatory Organizations...... 15 Revenues and Expenses of Self-Regulatory Organizations ...... 17

The Disclosure System...... 19 New Developments in Disclosure Policy...... 19 Projections of Future Economic Performance...... 19 Disclosure Revisions 19

xvii Corporate Accountability; Management Background and Re- muneration ...... 20 Monitoring of Existing Guidelines...... 21 Small Business...... 22 Long Range Studies ...... • ...... 23 Tender Offer Proposal ...... 23 Going Private and Sale of Asset Transactions...... 25 Oversight of the Accounting Profession...... 25 Report on the Accounting Profession and the Commission's Over- sight Role...... 25 Management Advisory Services 26 Accounting Standards for Oil and Gas Producers 28 FASB Conceptual Framework Project ...... 28 Accounting for the Effects of Changing Prices...... 29 Reporting on Internal Accounting Control ...... 30 Unaudited Interim Financial Information ...... 31

Investment Companies and Advisers...... 33 Investment Company Act Study...... 33 Disclosure Study 34 Investment Company Advertising...... 34 Institutional Disclosure Program...... 35 Office of Investment Adviser Regulation ...... 35

Enforcement Program 37 Sanctions and Remedies...... 37 Energy Related Cases...... 38 Questionable Payments...... 39 Government and Municipal Securities 41 Industrial Development Revenue Bonds...... 43 Options, Corporate Takeovers and Tender Offers...... 43 Options...... 44 Tender Offers...... 44 Insider Trading...... 46 Other Significant Enforcement Matters...... 46

Programmatic Litigation and Legal Work...... 51 Significant Court Actions...... 51 Other Significant Projects...... 55 Implied Rights of Action...... 55 ALI Code ...... 55

Public Utility Holding Companies...... 57 Composition...... 57 Financing ...... 57 Fuel Programs ...... 57 Service Company Operations...... 58 xviii Corporate Reorganizations ...... 59

Administration and Management 61 General Management and Program Developments...... 61 Information Systems Management...... 62 Facilities Improvement 62 Major System Enhancements ...... 62 Systems Administration...... 63 Market Oversight Surveillance System...... 64 Financial Management 64 Personnel Management...... 65 Senior Executive Service...... 65 Performance Appraisal...... 66 Other Accomplishments under the CSRA...... 66 On-qoinq Programs ...... 66 Equal Employment Opportunity...... 67 Activity Under The Freedom of Information Act ...... 68 Space Management ...... 68

Footnotes...... 71

Appendix 71 The Securities Industry ...... 79 Income, Expenses and Selected Balance Sheet Items...... 79 Table I-Financial Information For Broker-Dealers 1975-1978. . . 80 Historical Financial Information of Broker-Dealers with Securities Related Revenue of $500,000 or More...... 80 Table 2-Historical Consolidated Revenue and Expenses of Broker-Dealers with Securities Related Revenue of $500,000 or More :...... 81 Table 3-Historical Balance Sheet for Broker-Dealers with Securi- ties Related Revenue of $500,000 or More...... 82 Securities Industry Dollar: 1978 ...... 82 Chart-Securities Industry Dollar: 1978...... 83 Broker-Dealers, Branch Offices, Employees...... 84 Chart-Broker-Dealers and Branch Offices...... 85 Table 4-Brokers and Dealers Registered Under the Securities Act of 1934...... 86 Table 5-Principal Business of SECO Broker-Dealers...... 87 Table 6-Applications and Registrations of Brokers and Dealers- Fiscal Year 1979 , 88 Table 7-Applications and Registrations of Municipal Securities Dealers and Transfer Agents-Fiscal Year 1979 ...... 89 Self-Regulatory Organizations-Revenues and Expenses...... 90 Table 8-Revenues and Expenses of Self-Regulatory Organiza- tions: 1973-1979...... 93 Table 9-Detailed Revenues and Expenses for each Self-Regula- tory Organization ...... 94

xix Table 10-Sources of Self-Regulatory Organization Revenue: 1973-1978...... 96 Table II-Self-Regulatory Organizations-Clearing Agencies Revenues and Expenses-Fiscal Year 1978 98 Table 12-Revenue and Expenses of Municipal Securities Rule- making Board...... 99 Exemptions...... 99 Section 12(h) Exemptions ...... 99 Exemptions for Foreign Private Issuers 99 Other Exemptions 100 Financial Institutions ...... 100 Stock Transactions of Selected Financial Institutions ...... 100 Table 13-Common Stock Transactions and Activity Rates of Se- lected Financial Institutions ...... 101 Stockholdings of Institutional Investors and Others ...... 102 Table 14-Market Value of Stockholdings of Institutional Inves- tors and Others...... 102 Table IS-Companies Registered Under the Investment Company Act of 1940 as of September 30, 1979...... 103 Table 16-Companies Registered Under the Investment Company Act of 1940 ...... 103 Table 17-New Investment Company Registrations.. 104 Table 18-lnvestment Company Registrations Terminated...... 104 Private Noninsured Pension Funds: Assets...... 104 Table 19A-Assets of Private Noninsured Pension Funds-Book Value...... 105 Table 19B-Assets of Private Noninsured Pension Funds-Market Value...... 105 Securities on Exchanges...... 105 Exchange Volume...... 105 Table 20-Market Value and Volume of Sales on Registered and Exempted Securities Exchanges...... 106 Chart-Market Value of Securities Traded On All U.S. Stock Ex- changes...... 107 NASDAQ Volume...... 106 Share and Dollar Volume by Exchange. 106 Table 21A-Share Volume by Exchanges 108 Table 21B-Dollar Volume by Exchanges , ...... 108 Special Block Distributions...... 109 Table 22-Special Block Distributions Reported by Exchanges. . . 109 Value and Number of Securities Listed on Exchanges...... 110 Table 23-Securities Listed on Exchanges-December 31, 1978. 110 Table 24-Value of Stocks Listed on Exchanges...... 111 Securities on Exchanges ...... 111 Table 25-Securities Traded on Exchanges...... 112 Table 26-Unduplicated Count of Securities on Exchanges (Sep- tember 30, 1979)...... 112 1933 Act Registrations...... 112 Effective Registration Statements Filed...... 112 xx Table 27-Effective Registrations. 113 Chart-Securities Effectively Registered With S.E.C. 1935-1979. . 114 Purpose of Registration ...... 115 Table 28-Effective Registration by Purpose and Type of Security: Fiscal Year 1979 ...... 115 Chart-Effective Registrations Cash Sale For Account of Issuers 1935-1979 ...... 116 Regulation A Offerings...... 117 Table 29-0fferingsUnder Regulation A 117 Enforcement...... 117 Types of Proceedings...... 117 Table 30- Types of Proceedings...... 118 Table 31-lnvestigations Of Possible Violations of the Acts Ad- ministered by the Commission 121 Table 32-Administrative Proceedings Instituted During Fiscal Year Ending September 30, 1979 ...... 121 Injunctive Actions 1978-1979 ...... 122 Table 33-lnjunctiveActions. 122 Criminal Proceedings...... 122 Table 34-Criminal Cases...... 122 Trading Suspensions ...... 123 Foreign Restricted List...... 123 Public Utility Holding Companies...... 125 System Companies...... 125 Table 35-Public Utility Holding Company Systems...... 125 Table 36-Key Financial Statistics of Registered Public Utility Holding Company Systems...... 126 Table 37-Public Financing of Holding Company Systems (Fiscal 1979) ...... 127 Fuel Programs...... 127 Table 38-Regulated Fuel Expenditures of Holding Company Sys- tems (Fiscal 1979)...... 128 Corporate Reorganizations...... 128 Table 39-Reorganization Proceedings Under Chapter X of the Bankruptcy Act in Which the Commission Participated (Fiscal Year 1979)...... 129 SEC Operations ...... 131 Chart-Appropriated Funds vs Fees Collected 132 Table 40-Budget Estimates and Appropriation...... 133

xxi

Regulation of the Securities Markets

Securities Markets, Facilities price protection for all public limit or. and Trading ders; refinement of pilot market link- National Market System-The past age facilities: improvement of the fiscal year saw marked acceleration in timeliness and reliability of quotation progress toward the development of a information; development of broker to national market system. market center order-routing facilities; On October 20, 1978, the Commis- consideration of a rulemaking pro- sion published for comment two pro- ceeding to preclude the application of posalsdesigned to refine the operation remaining off-board trading restric- of the consolidated transaction report- tions to securities not previously sub- Ing and quotation systems. The first of ject to those restrictions; and initiation these proposals, Rule 11Acl-2 under of a rulemaking proceeding to con. the Securities Exchange Act of 1934 sider procedures by which securities (Exchange Act), would, if adopted, im- would be designated as qualified for pose comprehensive mirurnurn reo trading in a national market system. quirements regulating the manner in In the Status Report, the Commis- which securities information vendors sion indicated that its first priority display transaction and quotation in- would be the achievement of nation. formation.' The second proposal, the wide protection for public limit orders amendment of existing Rule 17a.15, against executions at inferior prices. would, if adopted, (a) redesignate Rule The Commission expressed its belief 17a-15as Rule 11Aa3-1 under the Act; that nationwide price protection, (b) eliminate, subject to certain condi- whereby any appropriately displayed tions, the existing prohibition on re- public limit order for a qualified secu- transmission of last sale data for pur- rity would be assured of receiving an poses of creating a moving ticker execution prior to any execution by a display; and (c) set forth procedures for broker or dealer at an inferior price, amending transactions reporting plans should be a basic characteristic of a filed pursuant to the rules? The national market system. Furthermore, Commission received many valuable the Commission stated that, in addi- comments from self-regulatory orga- tion to price protection for public limit nizations and vendors of market infor- orders, it may ultimately be desirable mation and at year end both proposals to afford price protection to all dis- were awaiting further action. played orders at the market, whether On March 22, 1979, the Commission public or professional, so that any dis. issued a Status Report which, among played quotation would be entitled to other things, set forth the Commis- price protection up to the quotation sion's views as to the next steps to be size indicated. As an initial step in this taken toward development of a na- direction, the Commission indicated tional market system.! These steps in- that the proponents of the Intermarket cluded: achievement of nationwide Trading System (ITS) should be af- forded the opportunity to experiment public limit orders and a commitment with and further enhance that system to submit a definitive plan before the as a means of providing intermarket end of calendar year 1979. At the end price protection for public limit orders. of the fiscal year, the Commission was The Commission indicated that two analyzing the preliminary plan and types of initiatives would be necessary comments received in response to pro- to achieve nationwide price protection posed Rule lIAc1-3. for displayed public limit orders by In furtherance of development of means of the ITS. The first would re- comprehensive market linkage sys- quire the self-regulatory organizations tems, the Commission, on September and the securities industry to resolve 21, 1979, issued an order extending collectively the various practical and approval for operation of the ITS until technical problems associated with (a) January 31, 1983.\ At the end of the disseminating and displaying public fiscal year, all reporting self-regulatory limit order information from each mar- organizations other than the Cincinnati ket center and (b) promptly enhancing Stock Exchange (CSE) and the Na- the ITS so that it may serve as a means tional Association of Securities Deal- by which price protection for public ers (NASD) were participating in the limit orders can be afforded on an in- ITS. The Commission expects the CSE termarket basis. To this end, the Com- and NASD will commence participa- mission requested that the affected tion in the ITS in the near future. self-regulatory organizations commit During the fiscal year, the number of themselves to develop in concert and securities traded in the ITS increased to submit to the Commission a plan by from approximately 100 to 600. That which the mechanisms to provide price number is expected to continue to ex- protection for all public limit orders pand at the rate of approximately 40 would be developed and implemented, securities per month. With expansion at least on a pilot basis, not later than in the number of securities traded in the end of calendar year 1980. The sec- the system, there has been a substan- ond initiative would involve the pro- tial increase in ITS volume. Further- posal by the Commission of a rule re- more, average response times with re- quiring price protection for displayed spect to ITS commitments to trade public limit orders. received by participating market cen- On April 26, 1979, the Commission ters have been reduced, and as a result proposed for comment Rule lIAc1-3 of continuing technical enhancements under the Exchange Act which, if to the system, the Commission expects adopted, would prohibit any broker or that response times will be further re- dealer from executing any order to buy duced during fiscal year 1980. or sell a qualified security at a price in- On December 15, 1978, the Com- ferior to the price of any public limit mission approved a rule change of the order displayed at the time of execu- CSE extending the operation of the tion unless the broker or dealer assures Cincinnati multiple-dealer trading fa- that those limit orders are satisfled.s cility (CSE System) for one year, and The following month, the Commission on September 21, 1979, the Commis- received a commitment from each re- sion further extended its approval until porting self-regulatory organization to January 31, 1983.6 While CSE System develop a joint plan for protection of volume has thus far been limited, sev- public limit orders. In September eral additional broker-dealers com- 1979, the ITS participants submitted a menced participation in the CSE Sys- preliminary plan for the protection of tem during the past fiscal year. The

2 three-year extension and increased after." In its release proposing Rule broker-dealer participation should fa- 19c-3, the Commission mdicated its cilitate the Commission's ability to concern that, as companies continue evaluate the effects of trading in this to list their securities on exchanges type of system. that have rules precluding their mem- In the Status Report, the Commis- bers from making over-the-counter sion indicated its belief that, both for markets in securities listed on those purposes of enhancing brokers' ability exchanges, competition between the to seek out the best execution of their over-the-counter market and the ex- customers' orders and for purposes of changes will be effectively foreclosed assuring fair competition among mar- in an increasing number of securities. kets, some type of neutral order-rout- In addition, the Commission indicated ing system is a necessary element of a that the rule could provide it and the national market system. To assure securities industry with an opportunity progress toward this objective, the to gain valuable experience as to the Commission requested the New York dynamics of competition between ex- Stock Exchange (NYSE) and the Amer- change-oriented trading and dealer- ican Stock Exchange (Amex) to make oriented trading. The Commission available their jointly-owned common stated that the rule would also allow message switch to other market cen- evaluation of whether existing and ters; other self-regulatory organiza- developing national market system fa- tions were asked to inform the Com- cilities are sufficient to ensure an ap- mission of their interest in obtaining propriate integration of trading in dis- such a linkage. parate locations. Since the Status Report, the NYSE During June and July 1979, the hasengaged in continuing discussions Commission held hearings with re- with several self-regulatory organiza- spect to proposed Rule 19c-3 and re- tions with respect to use of the NYSE- ceived extensive comments and testi- Amex message switch. In addition, the mony both supporting and opposing NASD has proposed enhancements to adoption of the rule. At the end of the its NASDAQ inter-dealer quotation fiscal year, the Commission was con- system which would, among other sidering further regulatory action with things, create an order-routing switch respect to the rule. in NASDAQ that could be linked to the Finally, on June 15,1979, the Com- NYSE-Amex message switch and to mission proposed for comment Rule the ITS. The Commission will continue l1Aa2-1 under the Exchange Act to monitor and to encourage progress which, if adopted, would provide pro. in these areas. cedures whereby securities would be On April 26, 1979, the Commission designated for trading in a national announced commencement of a pro- market system." The proposed rule ceeding to consider proposed Rule sets forth two quantitatively different 19c-3 under the Exchange Act, which, sets of standards to be employed in if adopted, would limit extension of off- determining whether any equity secu- board trading restrictions to additional rity should be designated a national securities. The rule would preclude ap- market system security. The proposed plication of such restrictions to certain rule would require that any equity se- securities that were not traded on an curity meeting certain minimum stan- exchange on April 26, 1979, or that dards contained in the rule (tier 1 were traded on an exchange on April securities) be automatically designated 26, 1979, but failed to remain so there- a national market system security. If an

3 equity security did not meet the stan- without competitive bidding; and (b) dards applicable to tier 1 securities, NSCC's use of geographic price mu- but substantially met certain broader tualization (GPM). GPM is the practice standards (tier 2 securities), it would of charging all participants the same remain eligible for designation as a na- fees regardless of whether the partici- tional market security pursuant to the pants deal with the clearing agency at procedures set forth in a designation its main facility or through a branch plan required to be filed with the Com- office. mission by the various self-regulatory The Commission subsequently re- organizations. quested that NSCC submit reports on The standards applicable to tier 1 the two issues remanded by the court and tier 2 securities would cover both and that interested persons comment securities traded on an exchange and on NSCC's reports and on the GPM securities traded exclusively in the and competitive bidding issues gener- over-the-counter market. However, ally. 10 By the end of the fiscal year, the while the proposal provides that the Commission to date had received 11 rule will become operational upon letters in response to its request for adoption with respect to all tier 1 se- comments, including letters from all curities and those tier 2 securities but three of the registered clearing which are traded on an exchange, the agencies. In preparation for respond- rule will not become applicable to tier ing to the court's remand, the Com- 2 over-the-counter securities until the mission was reviewing those comment Commission engages in further rule- letters and the testimony and state- making. ments given at the Commission's National System for Clearance and March and hearings into the Settlement of Securities Transactions- development of a national clearance During the fiscal year, substantial and settlement system. progress was made in the Commis- On March 14, 1979, the Commission sion's effort to foster development of removed its restriction on NSCC's a national system for clearance and processing of transactions in securities settlement of securities transactions. listed on exchanges through its branch On September 19, 1978, the United offlces.» The removal of that restric- States Court of Appeals for the District tion permitted NSCC's participants to of Columbia Circuit affirmed the processthrough NSCC'sbranch offices Commission's , 1977 order for the first time both transactions in granting the appllcatron of National securities listed on exchanges and Securities Clearing Corporation transactions in securities traded in the (NSCC) for registration as a clearing over-the-counter market. The Cornmis- agency.? The Commission views the sion indicated, however, that until it registration of NSCC as a key step in had responded to the remand of the achieving the national clearance and GPM issue, NSCC could not use GPM settlement system envisioned by the for services relating to the processing Congress in Section 17A of the Ex- of transactions in securities listed on change Act. Although the court did not exchanges. disturb NSCC's registration, it did re- The Commission continued its re- mand two issues to the Commission view of the transaction completion for further consideration: (a) NSCC's rules of the securities exchanges and selection of Securities Industry Auto- of the NASD pursuant to Section 31(b) mation Corporation as the facilities of the Securities Acts Amendments of manager of its consolidated system 1975 (the 1975 Amendments). Some

4 of those rules unnecessarily restricted options may offer an alternative to competition among clearing agencies. short-term stock trading having lower Others failed to comply with the Ex- commission costs and a smaller com- change Act for other reasons. As a re- mitment of capital. They also may pro- sult of this review, over 120 exchange vide a means of shifting the risks of and NASD rules now have been unfavorable short-term stock price amended or deleted. This step re- movements from owners of stock who moved many impediments to the de- do not wish to bear those risks to those velopment of a national clearance and who are willing to assume such risks in settlement system. The Commission is anticipation of possible rewards from

continuing to discuss the amendment favorable price movements. IS The Op- or deletion of other transaction com- tions Study stated, however, that the pletion rules with the exchanges and purchase and sale of standardized op- the NASD. tions involves a high degree of finan- Progress toward a national system cial risk and that only investors who also was evident in other areas. understand those risks and who are The continued expansion of interfaces able to sustain the costs and financial among depositories has further im- losses associated with options trading mobilized securities certificates and should participate in the standardized allowed depository participants to use options markets. book entry transfers to make deliveries The Study found that, too often, throughout the country. This reduces public investors have been encouraged the need to physically move stock cer- to use standardized options Without re- tificates to settle securities trensac- gard to the suitability of options for trons among depository participants. their investment needs.» It also found In addition, The Depository Trust Com. regulatory inadequacies in the options pany included certain types of rnunic- markets and, accordingly, recom- rpal securities in its book entry system, mended certam steps that the broker. thus bringing municipal securities into age community, the self-regulatory or. a book entry environment for the first ganizations and the Commission time. These developments have reo should take to Improve the self-regu- duced costs and accelerated the settle- latory framework within which listed ment process. options trading occurs and to increase Options Trading-As previously re- protection of investors. ported,» since July 1977, there has ex- On February 22, 1979, the Commis- isted, at the Commission's request, a sion issued a release that set forth Its voluntary moratorium on expansion of plan for implementing the Options the standardized options markets, Study recommendations and for ter- pending (a) the completion of the Com. minating the options rnoratorturn.» mission's Special Study of the Options The Commission stated that, before it Market (Options Study); (b) the evalu- would permit any further expansion of ation of its findings; and (c) the reso- the options markets, certain recom- lution of the Commission's concerns mendations of the Study must be im- regarding the adequacy of the regula- plemented by the self-r equlatory tory framework within which standard- organizations and the brokerage com- ized options trading occurs.n munity. Implementation of these rec- The Report of the Options Study was ommendations generally would re- released by the Commission in Febru- quire the adoption of self-regulatory ary 1979.'4 In general, the Study found organization rules, and modifications that, to those who understand them, and improvements in the self-regula. 5 tory organizations' surveillance and orders, an options exchange can per- compliance systems and procedures, mit the rotation to be completed after as well as improved regulatory con- 4:10 p.m. New York time if notice of trols by brokerage firms. At the end of the rotation is publicly disseminated the fiscal year, the Commission had re- no later than the commencement of ceived rule proposals from the five ex- the rotation or 4:00 p.m. New York changes trading options to implement time, whichever is earlier.» The Com. some of the Options Study recommen- mission has deferred further consider- datlons.« ation of certain related rule proposals On April 24, 1979, the Commission until additional experience is gained approved the combination of the Mid- respecting the 4:10 p.m. closing hour west Stock Exchange (MSE) options and the exceptions described above. market with that of the Chicago Board Market Inventory Funds-In October Options Exchange (CBOE), to be effec- 1978, the Chairman submitted to Sen- tive upon termination of the options ator Harrison A. Williams, Jr. a staff moratorium. Upon consummation of report on market inventory funds, the combination, the MSE will no which are part of master trusts estab- longer provide a market for listed op- lished by companies to fund and ad- tions, and the CBOE will provide a minister employee benefit plans. Mar- market for those options then listed on ket inventory funds have been used the MSE. Upon listing the MSE options solely in connection with plans of in- classes, the CBOE will assume full re- dividual companies rather than in con- sponsibility for floor operations, sur- nection with pooled benefit plans of veillance and enforcement regarding separate companies. The staff found trading in those options classes.» no clear indication that these funds, as As reported previously.w on October they had been operated up to that 18, 1978, the Commission approved a time, had had an adverse impact upon four-month experiment by the options the securities markets. The report con- exchanges to extend trading hours un- cluded, however, that such funds could til 4: 10 p.m. New York time and to sus- develop a broad appeal in the future pend dally closing rotations." On April and that it would be appropriate for the 27, 1979, the Commission approved Commission and its staff to continue uniform rule proposals by the options to evaluate the operation of market in- exchanges to permit, on a permanent ventory funds and their impact on the basis, options transactions to be ef- securities markets. fected on the exchanges until 4: 10 Trading by Exchange Members-Sec- p.m. New York time and to provide tion 11(a)(1) of the Exchange Act, as that one trading rotation in any class amended in 1975, prohibits, with spec- of options may be completed where ified exceptions, any member of ana. trading in the underlying security tional securities exchange from effect- opens or reopens after 3:45 p.m. New ing any transaction on that exchange York time, even though completion of for its own account, the account of an the rotation may occur after 4:10 p.m. associated person, or an account with New York tlrne.s On July II, 1979, the respect to which it or any of its asso- Commission approved a second excep- ciated persons exercises investment tion to the 4: 10 p.m. closing time discretion. Under this section, the which provides that, if a trading rota- Commission has authority to fashion tion is commenced near the close of either more flexible or more restrictive trading because of unusual market standards in light of changing circum- conditions, such as a heavy influx of stances. Section II(a) became effec-

6 tive as to all exchange members on prohibition as part of the 1975 Amend- February 1, 1979. ments. Pursuant to that legislation, the In January 1979, the Commission Commission submitted to the Con- announced the adoption of (a) a tem- gress five reports covering the first 20 porary rule permitting exchange mem- months of commission price competi- bers to effect certain bona fide hedge tion (through December 31, 1976), de- transactions for their own accounts or scribing the effects of the unfixing of the accounts of their associated per- commission rates on the maintenance sons; (b) interpretations concerning of fair and orderly markets and on the the application of the section to trans- development of a national market sys- actions effected through the use of sev- tem for securities. eral automated tacilities operated by Analysis of commission rates is now national securities exchanges; and (c) integrated into the Commission's on- interpretations concerning certain ex- going monitoring of the financial con- emptions for specified types of pro- dition of the industry. In that connec- prietary transactions effected by ex- tion, the Commission's Directorate of change rnernbers.» Also in January Economic and Policy Research re- 1979, in connection with its continuing leased to the public on July 26, 1979, review of its regulatory program under a "Staff Report on the Securities Indus- Section 11(a), the Commission com- try in 1978" (Staff Report), which de- menced two surveys designed to elicit tailed the results of its commission data concerning (a) the effect of the rate survey in the context of a wide- section on exchange members that ranging analysis of the basic economic provide money management and bro- dynamics of the securities industry. kerage services to discretionary insti- This Staff Report is the second in a tutional accounts, and (b) market mak- continuing series of annual reports de- ing activities by certain exchange signed to provide the Commission with members. an economic basis for anticipating the In July 1979, the Commission also impact of regulatory changes upon the approved a nine-month extension, un- securities industry, investors and the til April 30, 1980, of programs de- broader economy. Beginning with the signed by the NYSE and the Amex to 1978 Staff Report, the Directorate supplement the market making ca- greatly expanded the scope of its study pacity of specialists by establishing of the securities industry to examine classes of registered market makers fundamental industry trends and rela- whose transactions are exempted from tionships in addition to the impact of the prohibitions of the section.» Dur- negotiable commission rates. The 109 the nine-month period, the Com- 1978 Staff Report analyzed, for exam- rrussion will continue its review of the ple, the profitability of New York Stock activities of those registered market Exchange member firms, the sources makers to determine whether their of and trends in revenues of these transactions should continue to qualify firms, firm expensesand balance sheet for an exemption. data, the trend toward and causes of Effects of the Absence of Fixed Com- increased concentration in the securi- mission Rates-In , the Com- ties industry, the increasing diversifi- mission prohibited the national secu- cation among the larger broker-deal- rities exchanges from prescribing fixed ers, the notable growth of discount minimum commission rates to be broker-dealers, the financial experi- charged by their members. Later that ence of exchange specialists, the eco- year, the Congress enacted a similar nomic performance of self-regulatory 7 organizations, and, of course, the eco- Regulation of Tender and Exchange nomic effects of unfixed brokerage Offers by Issuers-On August 16, commission rates. 1979, the Commission announced the In general, the reports to the Con- adoption of a new Rule 13e-4 and re- gress and the two Staff Reports con- lated Schedule 13E-4 under the Ex- cluded that competitively determined change Act, effective September 21, commission rates do not appear to 1979, to regulate the increasing num- have adversely affected the mainte- ber of cash tender and exchange offers nance of fair and orderly markets. by certain issuers for their own secu- Some of the more specific findings in rities.26Rule 13e-4 and Schedule 13E- regard to commission rates are as fol- 4 had been proposed for public com- lows. ment on December 4, 1977.27 From May 1, 1975 to the end of June Rule 13e-4 requires that (a) issuers 1979, individual investors' effective with a class of equity securities regis- commission rates, when measured as tered under Section 12 of the Ex- a percent of principal value, declined change Act; (b) issuers required to file 19.7 percent. Institutional customers, periodic reports pursuant to Section because of their larger average order 15(d) of the Exchange Act; and (c) size and greater bargaining power, closed-end investment companies reg- have negotiated discounts averaging istered under the Investment Company 53.6 percent from the pre-May 1975 Act of 1940 comply with certain dis- exchange-prescribed minimum rates. closure requirements and other provi- When commission rates are measured sions governing the manner in which in cents per share, the declines were cash tender and exchange offers may eight percent for individuals and 53.8 be made. The requirements of the rule percent for institutions. Individuals are patterned substantially on the reg- paid an average of 27.6 cents per share ulatory scheme established by Section on their June 1979 orders, which av- 14(d) of the Exchange Act and existing eraged 400 shares in size. Institutional rules thereunder which are applicable orders averaged 2,034 shares in size in the context of third party tender of- and commissions on these orders av- fers. The information required to be eraged 12.0 cents per share. Individual disclosed in Schedule 13E-4 is sub- orders of 1,000 shares or more showed stantially the same type of information commission rate discounts compara- which is required by Schedule 14D-1. ble to similarly sized institutional or- The Commission adopted Rule 13e-4 ders and Schedule 13E-4 to insure that is- Broker-dealers were affected by the suer tender offers are conducted in a elimination of fixed minimum com- manner free of deception, manipula- mission rates largely depending upon tion or fraud the extent to which they served insti- Resale of Restricted Securities-On tutional investors. Some firms which August 2, 1979, the Commission au- did a large portion of their total busi- thorized the issuance of a release» set- ness with Institutions have merged ting forth the staffs views concerning with more diversified firms or have certain issues raised by the resale of gone out of business, and a new group restricted and other securities In com- of discount broker-dealers have en. pliance with Rule 144 under the Secu- tered the industry. On the whole, these rities Act of 1933 (Securities Act). The changes now offer investors a broader release responded to interpretive ques- spectrum of services with a corre- tions raised by the amendments to that spondingly broader range of cornrnls- rule adopted by the Commission in sion rates. September 1978,29 which, among 8 other matters, permit sales under the thefts of securities of the United States rule to be made directly to a market Government and its agencies be re- maker and liberalize restrictions on the ported to SIC, instead of the Federal amount of securities which may be re- ReserveBanks, in an identical manner sold under the rule. as lost, stolen or counterfeit corporate and municipal securities; (c) incorpo- rated into the rule the temporary pilot Regulation of Brokers, Dealers period exemptions from reporting and and Municipal Securities Dealers inquiry; (d) established a new exemp- Regulatory Burdens on Small Brokers tion from required inquiry for bearer and Dealers-The Commission is securities received by a reporting in- aware of the need to evaluate the costs stitution directly from a known cus- and competitive impact of its regula- tomer to whom it had previously sold tions on brokers and dealers. Accord- the securities; and (e) required report- ingly, in adopting regulatory require- ing institutions to report suspect coun- ments, the Commission weighs the terfeit securities to a transfer agent for benefits to investor protection and the issue. other statutory goals against possible The rule also incorporated two staff compliance and competitive burdens. interpretations which exempt from re- In addition, the Commission endeavors quired inquiry (a) securities received to tailor regulatory requirements to by a reporting mstitution directly from particular business practices so as to a "drop" that is affiliated with another avoid imposing unnecessary regula- reporting institution for the purposes tory burdens. This effort can particu- of receiving and delivering certifrcates larly benefit smaller, more specialized on behalf of such institution; and (b) brokerage firms. securities received from a Federal Re- Lost and Stolen Securities-During serve Bank or Branch. At the end of fiscal 1979, several significant devel- , approximately 395,000 opments occurred in the Commission's reports of missing, lost, counterfeit or Lost and Stolen Securities Program. stolen securities, with an aggregate On November I, 1978, the Commis- market value of nearly $2.1 billion, sion announced the redesignation of had been received by SIC since the in- Securities Information Center, Inc. ception of the program on October 3, (SIC) as the Commission's designee to 1977. maintain and operate the data base of Securities Confirmations-On De- missing, lost, counterfeit and stolen cember 18, 1978, the Commission's securities for a two-year term com- new rule prescribing delivery and dis- mencing January 1, 1979.30 In addi- closure requirements for securities tion, the Commission, on March 29, transaction confirmations sent by bro- 1979, published for public comment kers and dealers to customers became various proposed amendments to the generally effective." The confirmation Commission rule governing the pro- is an important disclosure document gram." that provides an investor with infor- In response to comments received, mation pertinent to each securities the Commission, on May 23, 1979, transaction. For example, the disclo- adopted amendments to the rule32 sures required in the confirmation pro- which, among other things: (a) estab- vide investors with a basis for compar- lished registration requirements for all ing transaction costs offered by institutions subject to the rule competing broker-dealers and for mea- (reporting institution) with certain ex- suring those costs against the quality ceptions; (b) required that losses and of brokerage services provided.

9

315-805 0 - 80 - 3 In October 1978, before the effective arbitration procedures provided by date of the rule, the Commission self-regulatory organizations. For ex- adopted amendrnentss- requiring dis- ample, a record of the proceedings closures relating to odd-lot differen- would be kept upon request, the ma- tials, remuneration received in "risk- jority of arbitrators on each panel less" principal transactions in equity would not be associated with the se- securities, and market making activi- curities industry and peremptory chal- ties. Also, in October 1978, the Com- lenge of arbitrators by either party mission announced proposals to would be allowed. In addition, parties amend the confirmation rule further would be directed to cooperate in the and to adopt a new rule extending to voluntary exchange of documentary transactions in debt securities the re- evidences and would be permitted to quired disclosures of remuneration re- forward documents to the arbitrators ceived in riskless principal transac- prior to the hearing in order to expe- tlons.» At the end of fiscal year, the dite the proceedings. Commission was evaluating the public Arbitration Clauses in Broker-Dealer comments received in response to Customer Agreements-Despite its those proposals to determine whether support for arbitration, the Commis- the additional disclosure requirements sion became concerned during the fls- are appropriate. cal year about the fact that many cus- Uniform Dispute Resolution Proce- tomer agreement forms used by dures for Investors-A program to im- broker-dealers contain clauses pur. plement uniform, fair and efficient dis- porting to require arbitration of all fu- pute resolution procedures for ture disputes that might arise between investors was undertaken by the Com- the securities professional and the cus- mission in , in connection tomer. In general, broker-dealers did with its establishment of an Office of not inform customers that a number of Consumer Affairs. The Securities In- court decisions have held such ad- dustry Conference on Arbitration vance agreements to be unenforceable (SICA), a voluntary group of securities with respect to causesof action arising industry and public representatives, under the Federal securities laws. submitted proposals for a uniform dis- Without such information, customers pute resolution system contemplating might be led to believe that they had utilization of existing arbitration facil- prospectively waived any right to a ju- ities. Self-regulatory organizations dicial forum for the resolution of dis- adopted a series of rules based on putes related to securities transac- SICA proposals providing procedures tions. for small claims arbitration which were In July 1979, the Commission pub- approved by the Commission during lished a release» giving notice to bro- the fiscal year 1978. The Commission ker-dealers that the use of pre-dispute reviews the operation of arbitration fa- arbitration clauses in customer agree- cilities as part of its general oversight ment forms, without specifying the responsibilities with respect to self-reg- meaning, effect and enforceability ulatory organizations. thereof, is inconsistent with just and On December 28, 1978, SICA sub- equitable principles of trade and may mitted further proposals for a uniform raise serious questions of compliance arbitration code for investor-broker with the antifraud provisions of the disputes. The uniform code includes Federal securities laws. The Commis- provisions that are intended to im- sion emphasized its support for arbi- prove the efficiency and fairness of tration as a means of resolving dis-

10 putes between investors and securities registered with the Commission as se- professionals, but stated that prior curities broker-dealers and are there- agreements to arbitrate must reflect fore subject to the Commission's uni- current applicable judicial decisions. form net capital rule. Municipal Securities Dealers-On In the interest of minimizing dupli- July 11, 1979, the Commission pub- cative regulation, the CFTC generally lished for comment proposed amend- incorporated into Its minimum finan- ments to Rule 15bl0-12 under the Ex- cial responsibility rules provisions change Act, allowing an exemption for comparable to the Commission's net certain municipal securities brokers capital requirements applicable to the and municipal securities dealers from securities business of an FCM The the requirements of the Commission's CFTC agreed to accept Part II of the SECO (Securities and Exchange Com- Financial and Operational Combined mission Only) proqrarn.» The pro- Uniform Single (FOCUS) Report, a posed amendments are designed to quarterly report filed by broker-dealers eliminate the current dual regulation with the Commission, provided it was of municipal securities transactions ef- amended to incorporate the CFTC's fected by SECO brokers and dealers Schedule of Seqr eqation Require- which conduct business in both munic- ments and Funds on Deposit in Seg- ipal and corporate securities. regation. During the fiscal year, the Commis- On June 5, 1979, the Commission sion, pursuant to Section 17(b) of the generally incorporated into its net cap- Exchange Act, conducted one Joint ex- ital rule the CFTC's minimum financial amination of a bank municipal securi- requirements applicable to the com- ties dealer. modities business of an FCM.40It also Broker-Dealer Financial Responsibil- incorporated the CFTC's segregation ity Requirements-Many broker-deal- schedule into its FOCUS Report.v The ers subject to the Commission's uni- joint efforts of the two agencies have form net capital rule are also generally provided uniform net capital registered with the Commodity Fu- requirements for entities involved in tures Trading Commission (CFTC) as both the securities and commodities futures commission merchants businesses and will eliminate duplica- (FCMs).An FCM is, generally, a person tive reporting requirements. who engages in soliciting or in accept- Securities Investor Protection Corpo- ing orders for the purchase or sale of ration- The Securities Investor Protec- any commodity for future delivery on tion Act of 1970 (SIPA)42provides cer- or subject to the rules of any contract tain protection to customers of brokers rnarket.» The CFTC hasjurisdiction to and dealers that fail to meet their ob- impose minimum financial require- ligations to their customers SIPA IS ments on FCMs. On September 1, administered principally by the Secu- 1978, the CFTC substantially revised rities Investor Protection Corporation its minimum financial and related re- (SIPC), a nonprofit membership cor- porting requirements imposed upon poration, the members of which are all registered FCMs, which became effec- registered brokers and dealers with tive on December 20, 1978.39 Although limited exceptions. SIPC is funded the CFTC's amendments apply only to through assessments on its members, FCMs, about half of all commodity although it may borrow up to $1 billion customer business in the futures in- from the United States Treasury under dustry is done by FCMs that are also certain emergency conditions. Section

11 3(e) of SIPA requires that SIPC file pro- Oversight of Self-Regulatory posed rule and bylaw changes with the Organizations Commission. Proposed rule changes must be approved by the Commission Securities Exchanges-As of Sep- before they become effective, while tember 30, 1979, ten exchanges were proposed bylaw changes take effect registered with the Commission as na- after a prescribed period unless the tional securities exchanges pursuant Commission disapproves the bylaw to Section 6 of the Exchange Act: changes. American Stock Exchange (Amex); On September 20, 1978, SIPC sub- Boston Stock Exchange (BSE); Chi- mitted proposed bylaw changes re- cago Board Options Exchange garding the indemnification of SIPC (CBOE); Cincinnati Stock Exchange directors, and requiring SIPC members (CSE); Intermountain Stock Exchange to display the SIPC symbol at their of- (ISE); Midwest Stock Exchange (MSE); fices and to make reference to their New York Stock Exchange (NYSE); Pa- SIPC membership in certain advertise- cific Stock Exchange (PSE); Phila- ments. The Commission considered delphia Stock Exchange (Phlx); and these proposals on November 8, 1978 Spokane Stock Exchange (SSE). No and did not disapprove them. exchange is currently operating under In June 1978, SIPC adopted and sub- an exemption from registration as a mitted to the Commission three sets of national securities exchange. rules under SIPA. The Series 100 rules In connection with the Cornmis- and the Series 200 rules establish var- sion's oversight of the delisting of se- ious capacities in which a customer curities traded on national securities may have separate securities accounts exchanges, the Commission, during with a single broker-dealer and be pro- the fiscal year, granted applications by tected by SIPC on each account. The exchanges to strike 96 equity issues Series 300 rules set forth requirements and 56 debt issues from listing and for the closeout and completion of registration. The Commission also open contractual commitments be- granted applications, submitted by is- tween a SIPC member undergoing liq- suers, requesting withdrawal from list- uidation and other broker-dealers. In ing and registration for 24 equity is- October 1978, the Commission ap- sues and four debt issues. proved the Series 100 and 200 rules.v During the fiscal year, the Commis- Subsequently, in , the sion neared completion of its review of Commission approved the Series 300 its policies with respect to granting ap- rules.w The Series 300 rules replaced plications for unlisted trading privi- similar Commission rules that were leges. The Commission's review is de- promulgated before the passage of signed to develop standards which it the Securities Investor Protection Act will apply in considering whether an Amendments of 1978 which gave extension of unlisted trading privileges SIPC, rather than the Commission, the is consistent with the maintenance of authority to adopt such rules. fair and orderly markets and the pro- Because SIPC rules approved by the tection of investors under Section Commission have the same force and 12(f)(2) of the Exchange Act. While effect as Commission rules, the Com- that review continues, the Commis- mission has published those rules in a sion generally has not granted appli- separate section of the Code of Federal cations for unlisted trading privileges. Regulations. 4' In .Junew and again in Auqust-? of the 12 fiscal year, however, the Commission Dealers-The NASD is the only secu- approved applications by the MSE for rities association registered with the unlisted odd lot trading privileges in Commission. At the close of the fiscal certain securities which had become year, 2800 brokers and dealers were listed on the NYSE subsequent to the NASD members. date of a previous Commission order During the past fiscal year, the extending unlisted odd lot trading priv- NASD reported to the Commission the ileges to the MSE in 865 NYSE-listed final disposition of 289 disciplinary securitles.w complaints. In those disciplinary ac- During the fiscal year, the national tions, 143 member firms and 332 in- securities exchanges reported to the dividuals were named as respondents. Commission, pursuant to Section At the beginning of fiscal 1979, three 19(dXl) of the Exchange Act, approx- proceedings for review of NASD dis. imately 200 disciplinary actions im- ciplinary decisions were pending be- posing a variety of sanctions upon fore the Commission, and during the member firms and their employees. In year 27 additional cases were brought addition, the Commission received up for review. The Cornrrussion re- from the national securities exchanges viewed 14 of these cases and reduced 154 filings pursuant to Rule 19b-4 un- the sanctions to be imposed in some der the Exchange Act, including 98 cases. proposed rule changes and 56 notices The Commission also reviewed 39 of a stated policy, practice or interpre- NASD applications to admit a broker tation not constituting a rule change. or dealer to membership or to permit Among the significant rule filings ap- a person to become associated WIth a proved by the Commission during the member where the broker or dealer or fiscal year were: (a) a proposal by the person is subject to a statutory dis- NYSE to establish, on a two-year pilot qualification. The Commission has basis, a non-disciplinary procedure for taken no adverse action WIth respect to the reallocation of securities among 15 notices. Five notices were with- specialist units who fail to meet cer- drawn, and at the end of the fiscal year, tain minimum performance standards 19 notices were pending before the based upon the results of a perform- Commission. ance evaluation questionnairess; (b) a During the year, the Commission complete revision of the rules of the continued to review an NASD pro- CSElO;(c) amendments to the Amex posed rule submitted in fiscal 1978 to lIsting standards, expanding the uni- prohibit its members from giving dis- verse of foreign and domestic issuers counts to customers in distributions of whose securities may qualify for listing securities offered at a fixed price. The on the Amex»: (d) a nine-month exten- proposal was written in response to a sion of the respective NYSE and Amex 1976 judicial decision, Papilsky u rules regarding supplemental market Berndt,» which held that such dis- makers in equity securities"; and (e) a counts were unlawful in some CIrcum- pricing formula amendment to the stances, absent a contrary Commis- PSE's automated execution system sion or NASD ruling. In September (COMEX), to provide that orders exe- 1979, the Commission commenced cuted at the best bid or best offer as public hearings to consider the issues determined by quotes received from presented by the proposed rule. all participants in the Intermarket During the fiscal year, the Commis- Trading Systern.v sion also worked with self-regulatory National Association of Securities organizations to simplify and eliminate

13 duplication in the self. regulatory sys- by appropriate supervisory personnel. tem for brokers and dealers. The Com- In addition to consideration of MSRB mission extended until January I, rule proposals, the Commission pro- 1980, its provisional approval of four posed a rule to provide the MSRB with plans proposed by self-regulatory or- information for use in its rulemaking ganizations for allocating their respon- activities. On May 30, 1979, the Com- sibilities to perform various regulatory mission published for comment pro. functions for brokers and dealers posed Rule 15Bc7 -1 under the Ex- which belong to more than one self. change Act to make available to the regulatory organization. The plans rep- MSRB information concerning cornpli- resent agreements reached between ance examinations of municipal secu- the NASD and four exchanges: the rities brokers and municipal securities BSE, CSE, MSE and PSE. The plans dealers." The proposed rule is de- assign to the NASD much of the re- signed to establish a mechanism for sponsibility for conducting onsite ex- furnishing to the MSRB reports of com- amination of dual members and for pliance examinations, or information processing various applications. from such examinations, made by or Municipal Securities Rulemaking furnished to the Commission, the Board- As in the case of national se- NASD and the three Federal bank reg- curities exchanges and the NASD, the ulatory agencies. (In , Commission reviews proposed rule this rule was adopted by the Commis- changes of the Municipal Securities sion.») Rulemaking Board (MSRB). During the Clearing Agencies-The Commis- fiscal year, the MSRB filed 14 rule pro. sion has granted temporary registra- posals. The Commission considered a tion to 12 clearing agencies pending number of those proposals and others the development of standards for full which were pending from the previous registration of clearing agencies. The fiscal year. Commission also received applications The Commission approved a com- for temporary registration as a clearing prehensive arbitration code for the mu- agency from the Philadelphia Deposi- nicipal securities industry." The code tory Trust Company (Philadep) and the is designed to provide a means for reo Fixed Income Clearing Corporatlon.» solving disputes on an expedited and The Commission, at year end, was relatively inexpensive basis. It includes considering the numerous comment both special procedures for settling letters which were received on the reo disputes relating to customer small vised proposed standards for clearing claims and more general procedures agency registration which were pub- which can be used for claims of any lished in the previous fiscal year.w The size. Commission expects to announce the The Commission also approved a standards for full registration within rule relating to the advertising of mu- the next fiscal year. nicipal securltles.» The rule prohibits The Commission has established a a municipal securities professional Branch of Securities Processing In- from publishing or causing to be pub. spections whose primary responsibility lished an advertisement concerning is to inspect registered clearing agen- municipal securities that such profes- cies. The branch has embarked on a sional knows or has reason to know is program of inspecting each clearing false and misleading. It also requires agency and is developing formal pro- all advertisements concerning munici- cedures for the inspection of clearing pal securities to be approved in writing agencies. On July 10-13, 1979, the 14 branch conducted an extensive inspec- discovered in the course of arbitration tion of the Philadep as part of the Com- proceedings. The staff also suggested mission's consideration of whether to that the NASD attempt to reduce the grant temporary registration as a clear- time between filing and resolution of ing agency to that applicant. At the claims and to select public arbitrators end of the fiscal year, the Commis- with a greater diversity of experience. sion's staff was continuing to analyze Procedures for Filing Proposed Rule data gathered in the course of this in- Changes-Section 19(b) of the Ex- spection. After completion of this change Act, as amended by the 1975 work, the findings of this inspection Amendments, requires self-regulatory will be discussed with Philadep. (Sub- organizations to file all proposed rule sequent to the close of the fiscal year, changes with the Commission. Shortly on October 24, 1979, the Commission after Section 19(b) became effective, announced its order granting tempo- the Commission adopted Section 19b. rary registration to Philadep.») 4 and related Form 19b.4A estab- Arbitrsuon Facilities of Self-Regula- lishing procedures for self-regulatory tory Organizations-During fiscal organizations to file proposed rule year 1978, the Commission's staff in- changes and designating the types of spected arbitration facilities of the proposed rule changes that may be- NASD, Amex, and CBOE. The staff come effective upon filing. also completed its analysis of infor- In , the Commission pro. mation obtained during an inspection posed for public comment amend- of the NYSE on September 27-28, ments to Rule 19b.4 and related Form 1978. The purpose of these inspec- 19b-4A.62 Developed in light of the tions was to determine the efficiency Commission's experience in adrnims- and fairness of the procedures of these tering Section 19(b), the proposed organizations for the resolution of dis- amendments are intended to improve putes between investors and broker- and simplify the procedures for filing dealers. The inspections focused on proposed rule changes, thereby expe- the organizational structure of the ar- diting the rule review process. The bitration departments, the composi- Commission's proposals include (a) an tion of arbitration panels, the time nec- amendment to Rule 19b-4to designate essary to resolve disputes, the volume a new category of rules that may be- of cases and the range of awards. come effective upon filing and (b) As a result of these inspections, the amendments to Form 19b-4A to spec- staff recommended that the self-regu- ify, in greater detail the information re- latory organizations prepare materials quired by that form. to inform investors about the enforce- Inspections of Self-Regulatory Orga- ability of agreements to arbitrate fu- nizations-During the fiscal year, the ture disputes with broker-dealers and Commission reorganized its program about those issues for which a judicial for oversight inspections of the activi- forum might be available. The staff ties of self-regulatory organizations. also made certain comments and rec- This new program has entailed more ommendations regarding the opera- frequent and more intensive onsite in- tion of the arbitration programs. quiries into the market surveillance The staff suggested that the NYSE and compliance systems of the various permit arbitrators, through the arbitra- national securities exchanges and the tion department staff, to refer to dis- NASD. ciplinary authorities any apparent vio- In February 1979, the Commission lations of applicable rules or laws staff conducted an inspection of the

15 stock market surveillance program of In June 1979, the Commission staff the Phlx. This inspection disclosed sig- conducted an inspection of the Secu- nificant inadequacies in the market rities Qualification Section in the surveillance systems of the Phlx. NASD's NASDAQ Operations Depart- In April 1979, the Commission staff, ment. The major findings of this in- in response to a recommendation of spection were that the NASD had the Options Study, conducted an in- made marked improvements in the spection of the operations and listed manner in which it monitors periodic options market surveillance program filings of issuers for compliance with of the MSE. This inspection disclosed securities qualification criteria, that that the MSE program was inadequate there were shortcomings in the sec- for the detection of certain common tion's administration of the listing ex- options trading violations. ception process and that there were ambiguities in the NASD rules govern- In June 1979, the Commission staff, ing this process. in connection with a pending pilot Between February and July 1979, trading program, conducted an inspec- the Commission staff conducted in- tion of the NYSE program for surveil- spections of the operations of NASD lance of the activities of Registered district offices located in Philadelphia, Competitive Market Makers (RCMMs) Washington, D.C., , Kan- and Registered Competitive Traders sas City and Chicago, as well as the (RCTs). This inspection also included operations of the unit at NASD head- a review of the exchange's enforce- quarters assigned to manage and co- ment program for RCMM members. ordinate NASD district office activi- This inspection disclosed deficiencies ties. These inspections focused on the in certain of the techniques employed administration of the NASD's program by NYSE staff to detect rule violations of examinations and monitoring of by RCMMs and RCTs and other weak- member firms. These Inspections dis- nessesin casefile documentation prac- closed a number of strengths and tices. Also discovered was a failure to weaknessesin the.requlatory programs take the formal disciplinary action nee- of individual offices as well as sev- essary to enforce RCMM rules effec- eral significant weaknesses which ap- tively. peared to be national in scope. This lat- In April 1979, the Commission staff ter class of weaknesses included (a) inspected the options operations and shortcomings in the work paper re- market surveillance programs of the quirements and document mainte- PSE. This inspection disclosed cer- nance practices of NASD examiners, tain inadequacies in some of the ex- especially with regard to sales prac- change's systems which monitor com- tices; (b) the failure of some examiners pliance by market professionals with to follow procedures prescribed by the trading rules and with credit regula- NASD to detect sales practice viola- tions. tions during routine examinations of In June 1979, the Commission staff member firms; and (c) inadequate conducted an inspection of the options staffing of the district offices of both operations and market surveillance examiners and supervisory personnel. systems of the Phlx. This inspection During July 1979, the Commission disclosed significant deficiencies in the staff inspected the operations and mar- Phlx system to detect options trading ket surveillance and enforcement pro- violations and deficiencies in the en- gram of the CBOE. The inspection forcement of certain Phlx rules. team found inadequacies in the man-

16 ner in which the CBOE seeks to detect practices. The staff will continue to certain trading violations. monitor the responsiveness of the During August 1979, the Commis- CBOE to Investor concerns. sion staff inspected the options oper- After each of the foregoing inspec- ations and market surveillance and en- tions, the Commission notified the ap- forcement program of the Amex. This propriate self-regulatory organization inspection disclosed certain deficien- of its findings and asked that remedial cies in the market surveillance systems action be taken. The Commission is of the exchange and a failure to en- planning a series of follow-up inspec- force certain exchange rules. In addi- tions to ensure that appropriate reme- tion, the inspection team found a pat- dial action has been taken. tern of failure to prosecute certain Revenues and Expenses of Self-Reg- cases of apparent rule violations by ulatory Organizations-The regulatory floor members. functions of the various exchangesand During February 1979, the Cornrnis- the NASD with regard to their broker- sion staff conducted an examination of dealer members are financed through the complaint processing unit of the various fees and dues, such as listing Amex. Complaint processing is a func- fees and transaction charges. The na- tion of the Department of Rulings and ture of some of these revenue sources Inquiries, Legal and Regulatory Policy makes the financial condition of self- Division, which is also responsible for regulatory organizations dependent issuing interpretations of Amex rules. upon price fluctuations and trading The purpose of the inspection was to volume. determine the responsiveness, effi- Furthermore, the various self-regu- ciency and timeliness of the Amex latory organizations are quite different complaint handling system. The staff In the extent of their dependence on will continue to monitor that system particular sources of revenue. Some and to recommend changes where nec- sources of revenue, such as transac- essary. tion, clearing and depository fees, In May 1979, the Commission staff change directly with changes in share examined the complaint processing volume. Others are relatively fixed, function of the CBOE. The CBOE such as listing fees and membership Trading Regulation Department re- dues. Additional analysis and statisti- sponds to complaints and inquiries cal detail on share volume, revenues which are floor-related, and the Office and expenses of each self-regulatory of Inquiries and Complaints handles organization are presented In the Ap- matters related to broker-dealer sales pendix of this report.

17

The Disclosure System

New Developments in Disclosure bor" from the liability provisions of the Policy Federal securities laws for enumerated forward-Iookinq information that is The "full disclosure" system admin- reasonably based and made in good istered by the Commission is designed faith.63 The Commission's initiatives in to assure that the securities markets voluntary projection disclosure are ex- operate in an environment in which full perimental in nature and a task force and accurate material information has been set up to assure that the new about publicly traded companies IS policies embodied in the rule do not available to all interested investors. yield results inconsistent with investor During the fiscal year, the Commission protection. pursued a program designed to en- Disclosure Revisions-The Commis- hance the effectiveness of required in- sion has taken a number of steps to im- formation, while reducing attendant prove the format of disclosure, delete burdens to the extent possible. Five unnecessary requirements, add new re- major objectives have been stressed to quirements, and, generally, make dis- attain that goal: (1) Integration of dis- closure more effective and flexible. In closures required by the Securities Act one such action, the Commission of 1933 (Securities Act) and the Secu- adopted amendments to provide relief rities Exchange Act of 1934 (Exchange from certain portions of the reporting Act); (2) narrowing of the differences requirements of the annual and quar- between information supplied by reg- terly reports filed with it by registrants istrants to the Commission in formal whose equity securities are owned filings and to various segments of the either directly or indirectly by a single public through informal means; (3) im- person which itself is a reporting en- provement of disclosure requirements; tity under the Exchange Act.64 The (4) development of guidance for spe- Amendments are part of the Commis- cial situations outside the normal sys- sion's continuing effort to reduce re- tem of continual disclosure; (5) refo- porting burdens and paperwork by cusing of the staff review process; and more precisely tailoring the reporting (6) implementation of a program re- requirements to the characteristics of view of existing rules to delete or particular registrants and to the needs amend unnecessary or outmoded pro- of their investors. visions. On September 6, 1979, the Com- Projections of Future Economic Per- mission proposed the amendment of formance-In furtherance of its new Rule 12b-25 and its related form which policy of encouraging the disclosure of would result in the elimination of ex- earnings forecasts and other forward- tensions of time to file reports under looking information by registrants, the the Exchange Act and, in lieu thereof, Commission issued a release on June proposed the institution of a system 25, 1979, which announced the adop- requiring notification of a registrant's tion of Rule 175 providing "safe har- or reporting person's inability to timely

19 file reports or portions thereof.» By ance of directors at board and com- eliminating the review requirement for mittee meetings; (3) certain economic extension of time requests, the Com- and personal relationships between di- mission hopes to be able to place in- rectors or nominees and an issuer or its creased emphasis on the review of all management; and (4) resignations of Exchange Act filings. In this manner, directors. the Commission will attempt to imple- On August 13, 1979, the Commis- ment a recommendation of the Advi- sion proposed a second set of rules re- sory Committee on Corporate Disclo- lated to corporate accountablltty.w The sure which noted that a substantive proposals would require that share- review of periodic reports, consistent holders be provided with a proxy card with the quality of information sought which: (1)Indicates whether the proxy is in registration statements, is essential solicited by the board of directors; (2) to the end product of a high quality provides a means to vote for director disclosure docurnent.w nominees individually; and (3) re- The Commission also concurrently moves discretionary authority to vote proposed for comment a new Rule 12b- unmarked proxies. The proposed 26 which would require registrants to amendments also would require dis- prominently disclose, on the cover closure of prior year election results in pages of periodic reports filed pur- certain circumstances and would ex- suant to Sections 13 or 15(d), any re- pand the types of communications ex. quired portion omitted from those empt from the proxy rules. (On No- reports. It is believed that this vember 20, 1979, the Commission requirement will assist the investing adopted a version of these rules mod- public and the Commission in the re- ified to reflect certain comments re- view of Exchange Act reports. ceived.)» Corporate Accountabiltty; Manage- The Task Force on Corporate Ac- ment Background and Remuneration- countability was, at the close of the fis- Responding to numerous events that cal year, engaged in preparing a com. raised questions about the adequacy of prehensive report on the corporate corporate accountability mechanisms, governance proceeding. The staff mon- the Commission established a task itored governance disclosure appear. force in 1977 to undertake a broad ing in the proxy statements of 1,200 reexamination of its rules related to representative issuers during the 1979 shareholders communications, share- proxy season. In addition to analyzing holder participation in the corporate the results of the disclosure survey, the electoral process and corporate gov. report is expected to address such is- ernance generally.67The Commission sues as the functions of the board of determined to address in stages, the directors and its committees; sollcita- complex issues raised during the en. tions of beneficial owners of stock held suing public hearings. In December in street and nominee name; disclo- 1978, the Commission adopted final sure of corporate activities having both rule, form and schedule amendments economic and social impacts; and the designed to provide shareholders with respective roles of private sector, insti- additional information about the mat- tutional shareholders, self-regulatory ters on which their vote is solicited.w organizations, the states, the Commis- Generally, these amendments require sion and Congress in corporate ac- disclosure of: (1) The existence and countability. After review of the staff functioning of audit, nominatmq and report, the Commission will consider compensation committees; (2) attend- what further action, if any, is appropri- 20 ate and will determine whether to pub- ing disclosure requirements which are lish additional rulemaking proposals not meaningful to that industry. The or to recommend or support new leg- comment period closed on September islation affecting corporate accounta- 24, 1979, and the staff began analyz- bility. ing the comments received. In a release dated December 4, In August of 1979, the Commmis- 1978, the Commission amended cer- sion issued a release requesting com- tain disclosure forms and regulations ments on the quality and desirability of to standardize and improve the disclo- the disclosure made under the existing sure requirements relating to manage- guidelines for "Statistical DIsclosure ment remuneratton.» The Amend- by Bank Holding Companies."> These ments revised the management remu- particular guidelines have been in op- neration disclosure provisions in eration since 1976. The request is part certain registration statements, peri- of the Commission's effort to monitor odic reports and proxy and information the effect and value of its disclosure statements filed with the Commission rules and guides with a view to amend- to require tabular and other forms of ing or rescinding those rules or guides disclosures as to all remuneration re- which do not yield the expected bene- ceived from the corporation and its sub- fits. sidiaries for services during the latest On September 6, 1979, the Com- fiscal year by certain specified direc- mission requested comments on the tors, executive officers and officers. operation and efficacy of certain of its Subsequent to the adoption of these recently adopted proxy statement dis- requirements, the Commission author- closure requirements as well as certain ized the Division of Corporation Fi- other disclosure requirements relating nance (the Division) to issue its in- to the structure, functioning, and com- terpretive views regarding- certain position of boards of directors.» aspects of the amendments in order to On September 27, 1979, the Com- give guidance to reqlstrants."- mission published an interpretive re- MOnitoring of EXisting Guidelines-As lease76 focusing attention on existing a means of accomplishing its stated requirements under the Securines Act disclosure program goals, the staff of and the Exchange Act concerning en- the Division has undertaken a compre- vironmental disclosure to assist regis- hensive revisitation and review of the trants in complying with those require- disclosure requirements of the Securi- ments and to alert them that the ties Act and Exchange Act. On June Commission will continue, in appro- 25, 1979, the Commission issued, for priate cases, to take enforcement ac- public comment, comprehensive pro- tion in instances of non-compliance. posed staff guidelines for the disclo- The release, in particular, addressed sure in registration statements and these issues: (1) the need to disclose reports by electric and gas utility total estimated expenditures for envi- companies.n It is anticipated that ronmental compliance beyond two these guidelines will improve the use- years in the future; (2) the obligation to fulness to investors of the various doc- disclose particular types of environ- uments involved by specifying the mental proceedings; and (3) the cir- types of data which such documents cumstances under which companies should disclose. It is also believed that must disclose their policies or ap- the guidelines will benefit companies proaches concerning environmental by increasing the uniformity of disclo- compliance. The Commission reviewed sure within the industry and eliminat- its policies with respect to environ men-

21 tal disclosure in an administrative pro. registered on Form S-18, which is de- ceedinq'" (which is discussed in the "En- scribed below. Since the Form was forcement" section of this report). adopted on an experimental basis, the Office will make recommendations as to the continued use of or appropriate Small Business amendments to the Form. While it should be recognized that The Commission has also adopted many of the problems which face small certain revisions to Rule 144 and Reg- business today result from factors ulation A. On March 5, 1979, Rule 144 rooted in the broad economic environ- was amended to allow non-affiliates to ment rather than the Federal securities disregard the Rule's volume restric- laws, the Commission is aware that the tions under certain ctrcumstences.> rather costly and complicated process To qualify, the seller must have been of distributing securities in compliance a non-affiliate for three months and with these laws is felt by some to must have held the securities: (a) for impede unnecessarily capital forma- three years if they are listed on ana. tion by small businesses. The Commis- tional securities exchange or quoted sion has vigorously addressed itself to on the NASDAQ, or (b) for four years these problems by focusing primarily if the securities are not so listed or on its existing rules and regulations quoted and the issuer files reports and on the general problem areas un- pursuant to the Exchange Act. On der those rules which have been of the June 1, 1979, the Commission greatest interest to small businesses. adopted amendments which permit During April and May of 1978, the the use of a pre-effective selling docu- Commission held public hearings con- ment in Regulation A offerings, pro. cerning the effects of its rules and reg- vided that the securities are sold by un- ulations on the ability of small busi- derwriter(s) who are broker-dealers nessesto raise capital and the impact on registered under the Exchange Act,79 small businesses of the disclosure re- On March 29, 1979, the Commission quirements under the Securities Act. adopted Form S-18 and related amend. The Commission subsequently ments concerning simplified reqlstra- adopted revisions to its rules during fis- tion and reporting requirements for cal 1978 and has continued to imple- small issuers.80 The Form is available to ment the policy of easing the regulatory certain domestic or Canadian corporate burden on small businesses, consistent issuers for offerings of up to $5 million, with the protection of investors, during of which up to $1.5 million may be fiscal 1979. sales by existing security holders. The In June 1979, the Office of Small Form calls for narrative disclosure Business Policy was established within somewhat less extensive than that the Division. The Office: (a) serves as presently required by Form S-l and the focal point of the Commission's audited financial statements prepared small business rulemaking initiatives; in accordance with generally accepted (b) reviews and comments upon the im- accounting principles rather than in ac- pact of rule proposals on small busi- cordance with Regulation S.X. A corre- nesses; and (c) acts as liaison with sponding amendment was also adopted Congressional committees, govern. which allows issuers to include the nar- ment agencies and other groups con- rative and financial disclosure format of cerned with small business. The Office the Form S-18 in its initial Form 10-K is responsible for monitoring the qual- report.» Issuers also have the option of ity of disclosure included in offerings filing the registration statement at the 22 appropriate regional office or at the Phase I of the Experimental Technol- Headquarters Office. ogy Incentive Program (ETIP) was On September 11, 1979, the Com- completed in conjunction with the U.S. mission proposed Rule 242 which ex- Department of Commerce. In this ini- pands the availability of Section 3(b) of tial effort several policy questions re- the Securities Act to allow issuers to garding the capital markets confront- sell up to $2 million worth of securi- ing small, high technology corpora- ties, subject to provisions of integra- tions were addressed. Phase II, now in tion delineated in the Rule, without progress, implements this system and registration or compliance with the expands the scope beyond the capital more burdensome requirements found raising process to include accountmg in other exemptions from registra- disclosure, tender offers and other tion.82 The two major conceptual policy concerns relevant to small, in- changes embodied in the Rule are, novative enterprises. This effort will be first, the unregistered sale of securities supplemented in fiscal year 1980 with to an unlimited number of institutional an exarmnatron also conducted by the investors with no mandated informa- Directorate of Economic and Policy tion requirements (relying on the abil- Research, of the role regional broker- ity of such persons to obtain material age firms play in raising capital for is- information from the issuer) and, sec- suers through initial public offerings. ond, the unregistered sale of securities to a limited number of individuals (35) Tender Offer Proposal with no sophistication test which must In February 1979, the Commission be met, but with an information re- withdrew certain proposed rules with quirement similar to that found in respect to tender offers which had Form S-18. (On , 1980, the been published in 1976, and published Commission adopted Rule 242.) for comment a new proposal and a re- (On October 10, 1979, the Commis- lated schedule.« This action was part sion authorized the issuance of a re- of the Commission's ongoing program lease indicating that it will not take to establish a comprehensive regula- enforcement action against issuers tory framework with respect to tender utilizing Form S-18 to offer $1,500,000 offers. or less of debt securities for public sale The proposal would require Tender pursuant to the Securities Act without Offer Statements on Schedule 140-1 filing and qualifying the trust indenture to be filed by the bidder with the Com- under the Trust Indenture Act of 1939. mission, and sent to certain interested The proposed no-action position would persons, predicated on the date of be taken when it appears that such commencement of a tender offer. An compliance would be inconsistent with initial filing with the Commission prior both the Commission's ongoing effort to the date the tender offer is first pub- to facilitate small businesses in the lished, sent or given to security holders capital formation process and the would not be required. Rather than es- Commission's view that qualification is tablish a specific time for such filings, not required for Regulation A offerings the proposal generally would permit a of debt securitles.)» filing to be made as soon as practice- Long Range Studies-Policy research ble on the date of commencement or, by the Commission's Directorate of with respect to amendments, on the Economic and Policy Research regard- date the material change or additional ing the ability of small firms to raise tender offer material is first published, capital increased substantially in 1979. sent or given to security holders. This

23 filing standard is designed to create an ten business days after any increases efficient system in conformity with the by the bidder in the offered consider- Williams Act which will not unduly bur- ation; provide withdrawal rights for den bidders. In addition, the proposal, shares deposited by investors during which would provide the prompt com- the first 15 business days of an offer munication of information regarding and an additional ten business days in tender offers to trading markets, is in- the event of a competing offer; and tended to assist national securities ex- permit bidders to extend pro rata ac- changes and the National Association ceptance rights for periods in excess of of Securities Dealers, in carrying out those required by Section 14(d)(6). their self-regulatory resonsibilities un- Other proposed rules would require der the Federal securities laws. prompt status reports whenever the In addition to establishing compre- length of a tender offer is extended and hensive disclosure requirements appli- payment for or return of deposited se- cable to any tender offer subject to curities as soon as reasonably practi- Section 14(d) of the Exchange Act, the cable after the tender offer's termina- proposal would also provide a frame- tion. work for disseminating cash tender of- The proposal would also revise the fers, and amendments, to security present disclosure requirements relat- holders. The proposed rules would add ing to subject companies and other content and clarity to the term "pub- persons making a solicitation or rec- lished, sent or given" to security hold- ommendation in connection with a ers and are intended to afford a greater tender offer subject to Section 14(d). number of shareholders the opportu- Thus, proposed Rule 14d-10 and pro- nity to receive, consider and evaluate posed Schedule 14D-10 would replace tender offer materials. Three non-man- current Rule 14d-4 and Schedule 14D, datory methods of disseminating cash respectively. While the proposed rule tender offers would be provided: long- would require broader disclosure, a form publication; summary publica- narrower class of persons would be tion; and the use of stockholder lists subject to its requirements than is cur- and security position listings. To en- rently the case. The limitation on the sure the efficient operation of the latter types of persons who must file a pro- method, a procedure would be estab- posed Schedule 14D-1O represents an lished under which the bidder's tender effort by the Commission to avoid un- offer materials would be sent to secu- necessary regulation in the context of rity holders either by the bidder who is tender offers. furnished with stockholder lists, or by While not applying to a bidder, pro- the subject company. The choice as to posed Rule 14e-2(a) would affirm a the method used would be the option duty of disclosure on any other person of the subject company. who trades on non-public material in- To further ensure that investors have formation obtained directly from a bid- an adequate opportunity to consider der or indirectly from a bidder, such as communications from the bidder, as from persons involved or consulted by well as the subject company, in decid- the bidder in the precommencement ing whether to tender to the bidder, planning and preparation stages of a sell into the market, or hold part or all tender offer. The Commission believes of their securities, the Commission that an affirmative duty of disclosure also proposed rules that would require is necessary for the protection of inves- all tender offers to remain open for at tors because of past abuses, the vital least 30 business days and for at least importance of such market informa-

24 tion and the extraordinary nature of issuer tender offer by the public com- tender offers. pany to repurchase its shares for cash (On November 20, 1979, the Com- out of the proceeds received from the mission adopted a modified version of sale. In addition, the public company these tender offer proposals.)» proposes, as part of the transaction, to amend its certificate of incorporation to change its business to that of an Going Private and Sale of Asset investment company. In view of con- Transactions cerns that were expressed by inter- On August 2, 1979, the Commission ested shareholders regarding the adopted a new rule and schedule relat- adequacy of disclosure; difficulties en. ing to going private transactions by countered in the administrative review public companies or their affiliates.86 process; and enforcement actions This was in response to the continued which had been taken as a result of fail- occurrence of going private transac- ure to comply with the disclosure re- tions, the variety of methods employed quirements of the Exchange Act, the in such transactions, and the need for Commission authorized the Division of disclosure to investors confronted with Corporation Finance to provide infor- these transactions. The rule and sched- mation to the public about current ule are intended to augment and imple- practices and guidance to issuers in ment the present statutory provisions fulfilling their disclosure obligations.&7 by prohibiting fraudulent, deceptive and manipulative acts or practices in Oversight of the Accounting connection with going private transac- Profession tions and by prescribing new filing, dis- Report on the Accountmg Profession closure and dissemination require- and the Commission 5 Oversight Role- ments as a means reasonably designed In July 1979, the Commission submit- to prevent such acts and practices. ted to Congress its second Report on During the year, several proxy state- the Accounting Profession and the ments involving novel, multi-step sale Commission's Oversight Role. This of asset transactions were filed with the was in accordance with the Coirnmis- Commission. Typically, the subject sion's undertaking, during the June transaction involved a cash sale of sub- 1977 hearings held on the accounting stantially all of the assets of a public profession by the Subcommittee on company to another company, often a Reports, Accounting and Management private company not otherwise en- of the Senate Committee on Govern- gaged in a trade or business. The pur- mental Affairs, to report periodically chasing company expects to continue on the accounting profession's reo the business of the public selling sponse to the challenges which Con- company under the public company's gress and others have placed before it name and hires substantially all of the and on related Commission initiatives. seller's managers under long-term em- The questions raised concerning the ployment arrangements to manage the accounting profession and its future business. A significant percentage of have centered principally on the profes- the purchase price may be borrowed sion's capability, absent direct govern- by the purchaser and, if so, the assets ment regulation, to regulate and disci- purchased are usually directly or indi- pline its members, to assure their rectly pledged to secure repayment of independence, and to set auditing and the loan. In some cases, the sale of as- accounting standards. The Report con- sets, if approved, will be followed by an tained the views of the Commission and

25

315-80~O - 80 - 4 the staff on the major issues confront- AICPA. The Commission has criticized ing the accounting profession, and ana- the profession where necessary, com- lyzed in detail the recent progress plimented it, when deserved, and in made by the profession and the Com- general, has offered its views and in. mission, in dealing with them. sights concerning the self-regulation In its July 1979 Report, the Com- effort on which the profession has em- mission concluded that progress has barked. been sufficient to merit continued op- With respect to the accounting stan- portunity for the accounting profes- dard-setting process, the Commission sion to pursue its efforts at self-regu- believes that the initiative for estab- lation. Consequently, the Commission lishing and improving accounting stan- did not recommend, at the time, leg- dards should remain in the private sec. islation to supersede or control the tor, subject to Commission oversight. regulation of accountants. Further, the However, to retain that prerogative, the Commission continues to believe that FASB must continue its efforts to pro- it is too early to reach any definite con- vide leadership and take necessary ac- clusions with respect to possible future tion in controversial areas. Also, the regulatory action or legislation. If, for members of the accounting profession example, the profession's initiatives and the corporate community must en- are not successful, a legislative alter- courage the FASB to provide that lead. native might well be required. Addi- ership, support the FASB's decisions tionally, the Commission remains un- and join more actively in the standard. convinced that comprehensive direct setting process. This next year will be governmental regulation of account- a critical period in assessing the ability ing or accountants would afford the of the private sector to demonstrate its public either increased protection or a ability to move responsibly in address- more meaningful basis for confidence ing the complex, yet essential, issues in the work of public accountants. with which it is confronted. During the past year, the Commis- The process of demonstrating that sion has worked with the accounting accountants themselves, rather than profession to define the objectives of government, should (1) retain primary the self-regulatory program, to assure authority to regulate the profession; (2) that the profession's proposed imple- ensure and instill confidence in profes- mentation is consistent with those ob- sionalism and objectivity; (3) maintain jectives, and to suggest ways in which control over the quality of the work of to achieve the objectives without im- the profession's members and disci- posing specific methods. In addition, pline those who fail to adhere to its the Commission has been active dur- standards; and (4) formulate appropri- ing the past year in overseeing the ate accounting and auditing standards, profession's initiatives concerning the is one which will demand the profes- independence of auditors and the ac- sion's and the Commission's continued counting and auditing standard-setting commitment. The need for leadership processes. In this respect, the Com- regarding these essential issues is mission has given specific attention to greater than ever. Whether it will be maintaining the momentum for prog- effectively provided by the private sec- ress in such areas as reporting on in- tor and, if so, by whom, is not yet cer- ternal accounting control, scope of tain. The Commission stands ready to services performed by auditors, and consider any reasonable alternatives to the work of the Financial Accounting achieve the essential objectives. Standards Board (FASB) and of the Management Advisory Services

26 (MAS)- The issue of the appropriate Accounting Series Release No. 264 scope of services to be provided by (ASR No. 264)89in which it stated its independent public accountants to views concerning certain factors which their audit clients and the effect of such accountants should consider in assess- services on their independence has ing the possible effects upon their in- been the subject of much discussion. dependence of the performance of The problem has been addressed in nonaudit services for publicly-held au- various fora-by the accounting dit clients. In addition, because of the profession, scholars, the Commission, impact which any impairment of the the Congress, and most recently by the auditor's independence, either in fact Public Oversight Board (POB) of the or in appearance, could have on the SEC Practice Section of the Division of credibility and usefulness of the audit CPA Firms of the AICPA." report, the Commission also set forth In June 1978, the Commission, in certain factors which audit commit- Accounting Series Release No. 250 tees, boards of directors, and manage- (ASR No. 250), adopted a rule requir- ments should consider in determining ing disclosure in proxy statements of whether to engage their independent services provided by the registrant's accountants to perform nonaudit serv- principal independent accountants and ices. disclosure of whether the board of di- The possible effect upon audit in- rectors or its audit or similar commit- dependence of performing nonaudit tee had approved each service and services for audit clients is a complex considered its possible effect on inde- issue. The Commission, in identifying pendence. In ASR No. 250, the Com- the factors set forth in ASR No. 264, mission also indicated that it had not was neither proposing to proscribe par- yet determined whether it should pro- ticular nonaudit services regardless of pose rules to prohibit public account- the surrounding circumstances, nor ants from rendering certain types of seeking to deprecate the very real ben- services to their publicly-held audit efits which may accrue from certain clients. The Commission noted that auditor MAS engagements. Rather, the the SEC Practice Section had asked Commission's objective was to re-en- the POB to consider the matter and force the sensitivity of interested par- stated that the POB should be given an ties to the considerations involved in opportunity to present its conclusions judging whether particular nonaudit before the Commission acted. services should be rendered by a par- On March 9, 1979, the POB submit- ticular registrant's auditor. In each ted its report, "Scope of Services by case, the ultimate issue is one of in- CPA Firms," to the Executive Com- formed professional judgment; no set mittee of the Section. In its report, the of factors or criteria can substitute for POB concluded that proscriptive solu- the careful, case-by-case evaluation tions to the scope of services issue are which the exercise of that judgment not necessary at this time. entails. The Commission reviewed the re- ASR No. 264 did not end examina- port of the POB and concluded that it tion of the scope of services issue. The did not adequately sensitize the profes- Commission has the responsibility un- sion and its clients to the potential der the securities laws to assure that effects on the independence of ac- accountants who practice before it are countants of performance of nonaudit independent. and will continue its ov- services for audit clients. Accordingly, ersight of this area. in June 1979, the Commission issued The Commission recognizes that the

27 question of indep.endent auditor MAS tion cost per unit of oil and gas pro. activity is both difficult and controver- duced; and (4) historical information sial. If future events indicate that fur- concerning the number of productive ther action is necessary. the Commis- and dry wells drilled. The amendments sion stands ready to reconsider this expanded the disclosure of the net issue in order to assure the confidence quantities of proved reserves from "as of investors in the financial reporting of a reasonably current date" to ape. of publicly-held companies. riod of five years, and expanded the Accounting Standards for Oiland Gas types of companies which are required Producers-During the fiscal year the to disclose information concerning the Commission, aided by an Advisory estimated availability of oil and gas Committee on Oil and Gas Account- from principal sources. An exemption ing. continued its efforts to implement from these disclosure requirements its August 1978 decision to consider a was provided for registrants whose oil new method of accounting-reserve and gas activities do not exceed spec- recognition accounting (RRA)-for oil ified criteria. and gas producers. The Commission's In . the Commission decision resulted from an extensive adopted a requirement for oil and gas public proceeding conducted pursuant producers to include in their financial to both the Federal securities laws and statements for fiscal years ending after the Energy Policy and Conservation December 25, 1979. a supplemental Act of 1975. which requires that the summary of oil and gas producing ac- Commission assure the development tivities prepared on the basis of RRA. and observance of uniform accounting The information generated and the ex- practices for the oil and gas industry. perience gained from the presentation Because the feasibility of such an of this supplemental summary will pro- accounting method was not assured, vide much of the basis for an eventual the Commission outlined a series of decision by the Commission as to steps for the development and imple- whether RRA should be required as the mentation of RRA. As an initial step. accounting method for the primary fi- the Commission required that regis- nancial statements of oil and gas pro- trants disclose certain oil and gas re- ducers. serve information beginning in fiscal FASB Conceptual Framework Proj- years ending after December 25, 1978. ect- The FASB project to develop a Specifically, on December 19, 1978. conceptual framework as a basis for ad- the Commission adopted amendments dressing emerging accounting prob- to certain forms and regulations to lems is the most important financial standardize and improve its disclosure reporting matter confronting the pro- requirements relating to oil and gas re- fession. The Commission continues to serves and operetions.w The amend- support the efforts of the FASB in this ments incorporated into Regulation S- area. K requirements for disclosure of: (1) The conceptual framework project The present value of future net reve- continues to be given a high priority by nues from estimated production of the FASB. The most notable actions proved oil and gas reserves; (2) any fa- during the last year were the issuance vorable or adverse event since the end of: (1) Statement of Financial Account- of the most recent fiscal year which is ing Concepts No.1 (FAC No.1), "Ob- believed to have caused a significant jectives of Financial Reporting by Busi- change in the proved reserves; (3) the ness Enterprises" (November 1978). average sale price and average produc- which establishes the objectives of

28 general purpose external financial re- sue. The factors involved in the trade- porting by business enterprises; and (2) off between reliability and relevance are Statement of Financial Accounting the key to developing guidelines for the Standards No. 33 (FAS-33), "Financial type of information that should be in- Reporting and Changing Prices" (Sep- cluded in financial statements. Further tember 1979), which requires certain clarification of this issue is necessary large, publicly-held enterprises to dis- before display issues, such as the re- close supplementary information about porting of earnings, can finally be re- how inflation and changing prices affect solved. Additionally, the development their businesses. of the recognition criteria phase of the The FASS has made important conceptual framework project will be strides in dealing with some of the fun- critical to the FASS in its search for a damental issues inherent in the stan- definition of "earnings." It is expected dard-setting process. FAC No. I,for ex- that the FASS will give appropriate at- ample, does not limit the scope of tention and priority to these important financial reporting objectives to finan- issues. cial statements, but rather sets forth The current status of financial re- those objectives in terms of financial porting of oil and gas producing com- reporting in general. In addition, its fo- panies reflects the nature of these is- cus on users of financial information sues. The Commission's efforts to and their interest in evaluating future develop a more useful method of ac- performance, including earnings, is a counting would benefit from the exist- significant and worthwhile step. The ence of a conceptual framework. It Commission is optimistic that a con- should be recognized that in develop- sequence of that focus will be more ing the concept of reserve recognition thought, experimentation, and timely accounting, the Commission, will, of action in achieving improvements in necessity, have to deal with issues re- financial reporting. lating to the conceptual framework if A major element of the conceptual they have not, by then, been resolved. framework should be to rethink the ob- Accounting For the Effects of Chang- jectives of the primary financial state- ing Prices-The Commission believes ments-and, therefore, to rethink what that the FASS's requirement that type of information should be included large, publicly-held enterprises dis- and what information should be pre- close certain effects of general infla- sented outside the financial state- tion and of price changes in specific ments. Ideally, the most relevant infor- goods and services is a positive devel- mation would be a projection of cash opment in providing useful informa- flows for future periods. However, such tion. Accounting for the effects of in- information may be highly uncertain flation and changing prices is one of and surrogates may have to be used. the most important issues facing the The decision as to what that relevant FASS, the profession, the business information is and whether it should be community and the general public. included in the primary financial state- Conflicting reports of record profits on ments will be influenced by its meas- the one hand and inadequate earnings urability. The August 9,1979 exposure to maintain and expand capacity on draft of the FASS on qualitative char- the other, serve only to confuse the is- acteristics, "Qualitative Characteris- sue. Further, they raise questions tics: Criteria for Selecting and Evaluat- about the integrity of financial report- Ing Financial Accounting and ing. The basic question in a period of Reporting Policies," addresses this is- inflation and changing prices is how

29 best to report the effects of all eco- tends to recommend that the Commis- nomic events, and not only the effects sion take action to delete the require- of transactions with outside parties. If ment for reporting replacement cost the objective is to measure only the information once the disclosure re- general impact of inflation on business quirements of the FASB statement are entities, then a general purchasing fully effective. (On October 24, 1979, power or constant dollar approach the Commission adopted the staffs might suffice. However, that approach recommendation and determined to may not, and often does not, ade- delete the disclosure required by ASR quately portray the specific effects of 190 once the requirements of FAS 33 price changes on companies or indus- become fully effective.) tries. Therefore, it does not adequately Reporting on Internal Accounting assist investors in assessingor project- Control-Since the disclosure in the ing future cash flows or dividend pay- 1970's of widespread questionable or ing capacity-important objectives of illegal corporate payments and enact- financial reporting as set forth in FAC ment of the Foreign Corrupt Practices No.1. The Commission remains fully Act of 1977, there has been increasing committed to ensuring that users re- attention to, and interest in, the effec- ceive adequate information about the tiveness of internal accounting con- impact of changing prices on corpo- trols. The accounting profession, both rate earnings and assets. institutionally through the AICPA's The Commission recognizes that the Special Advisory Committee on Inter- effectiveness of the FASB's new stan- nal Accounting Control and individ- dard will depend, in large part, on the ually by many accounting firms, has efforts of the accounting profession responded to the need for guidance in and the corporate community in apply- evaluating systems of internal ac- ing the standard, and evaluating and counting control, and the AICPA's providing additional disclosures which Auditing Standards Board is develop- may help users assess the impact of ing standards for public reporting on changing prices on particular business internal accounting control. entities and industries. With respect In April 1979, the Commission pro- thereto, the new standard should be posed for comment rules which would viewed as a requirement for the mini- require inclusion of a statement by mum information to be presented to management on internal accounting investors-an area where the corpo- control in annual reports on Form 10- rate community must make a positive K filed with the Commission under the contribution to the standard setting Exchange Act, and in annual reports to process by volunteering additional in- security holders furnished pursuant to formation necessary to make the re- the proxy rules. The rules, if adopted, porting more useful and meaningful in would also require that such statement the particular corporate circumstan- of management be examined and re- ces. ported on by an independent public Last year, the Commission deter- accountant. The Commission believes mined to delay reexamination and ex- that information regarding the effec- pansion of its replacement cost rule, tiveness of an issuer's system of inter- adopted In Accounting Series Release nal accounting control may be neces- No. 190, so as not to conflict with the sary to enable investors to better FASB's consideration of these issues. evaluate management's performance Based on its evaluation of the FASB of its stewardship responsibilities and statement, the Commission staff in- the reliability of interim financial state-

30 ments and other unaudited financial "who has with his consent been named information generated from the ac- as having prepared ... any report") in counting system. such circumstances. On September 20, 1979, the Commission proposed At the close of the fiscal year, the for comment two alternative rules» Commission was reviewing the large either of which, if adopted, would have number of comments received on the the effect of excluding accountants is- proposed rules. suing such reports from Section 11(a) Unaudited Interim Financial Informa- liability. In encouraging reviews by tion-Since the issuance of Statement auditors of interim financial informa- of Auditing Standards No. 24 (SAS No. tion, the Commission has noted that 24) by the Auditing Standards Board of "the involvement of independent ac- The American Institute of Certified counts will add the expertise of profes- Public Accountants (AICPA) in March sional accountants with wide experi- 1979, several reports by independent ence in reporting problems .... This accountants on Interim unaudited fi- should improve individual company nancial information have been in- reporting and direct greater profes- cluded in Securities Act filings on sional attention to the general prob- Form S-16 or S-14. Such filings have lems of interim reporting."92 (On De- raised a question as to whether ac- cember 28, 1979, the Commission countants could be liable under Sec- adopted a rule having the effect of ex- tion 11(a) of the Securities Act (which cluding accountants issuing SAS No. imposes liability on every accountant 24 reports from Section 11(a)liability.)

31

Investment Companies and Advisors

The Investment Company Act agement decisions. This greater reli- Study ance on directors, in many instances, The Investment Company Act spe- permits the withdrawal of the staff asan cial study group which was established active participant in certain manage- at the end of the last fiscal year by the ment decisions while enabling the Com- Division of Investment Management mission to preserve, through its com- (the Division), continued its compre- pliance and enforcement program an hensive review of the Investment Com- active oversight capability. pany Act of 1940 and the rules, regu- Consistent with the goal of greater lations and administrative practices director responsibility and reduced under it with the aim of simplifying, to staff participation in management de- the extent practicable, the regulation of cisions, the Commission, during the investment companies, especially by fiscal year, adopted several rules which eliminating unreasonably burdensome permit certain transactions between an regulations. The guiding principal of investment company and its affiliated this effort is that whenever possible, person with regard to: (l) joint pur- and subject to safeguards necessary chase of liability insurance pollcles:» for the protection of investors, invest- (2) the receipt of cash or securities pur- ment companies and their managers suant to a portfolio company's plan of should have responsibility for manage- reorganization;94 (3) the purchase of se- ment decisions. Accordingly, the In- curities from an affiliated underwriting vestment Company Act Study (the syndlcate:» (4) certain purchase, sale Study) has sought to lessen the in- or lending transactions between affili- stances in which the staff of the Com- ated perties.w and (5) the receipt of mission need participate in the deci- stock exchange commissions by affili- sion-making process by (1) replacing ated brokers.w During that period, the administrative review of proposed in- Commission also adopted rules (l) pro- vestment company activities with rules viding unit investment trusts with start- establishing general criteria under up exemptions from the Investment which the activities are permissible; Company Act's requirements regard- and (2) refining the Investment Com- ing minimum net worth, frequency of pany Act's sometimes sweeping statu- capital gains distribution, and forward tory prohibitions so as to permit activ- pricing; 98 and (2) providing increased ity not originally contemplated as flexibility in determining when an in- being within a provision's technical vestment company must price an in- scopeor underlying purpose. vestment company's redeemable se- The linchpin of the program is curltres.» The Commission also pro- enhancement of the authority and re- posed rules to ease problems arising sponsibility of investment company when certain contracts for investment directors, particularly disinterested di- advisory or principal underwriting rectors, as primary overseers of man- services are terminated. 100 33 In addition, for several years the of current procedures for processing Commission has been considering post-effective amendments to registra- whether mutual funds (open.end man. tion statements, which form the bulk agement investment companies) of the Division's workload in the dis- should be permitted to finance distri- closure area; and a review of ways to bution of their own shares. The Com- eliminate duplicative reporting re- mission has been reluctant to permit quirements in documents transmitted funds to incur distribution expenses to investment company shareholders. because of doubts about (1) whether funds benefit from sales of their shares; Investment Company Advertising (2) whether funds' investment advisers' During the fiscal year, the Commis- conflicts of interest could be regulated sion took several actions to reduce re- adequately; and (3) whether it would be strictions applicable to the promotion fair to existing shareholders for funds to and sale of investment company shares undertake such expenses. After recon- without diminishing essential investor sidering the matter in light of the objec- protections. On March 8, 1979, the tives of the Study, the Commission on Commission withdrew its Statement of September 7, 1979, published for com- Policy on Investment Company Sales ment Rule 12b-1 under the Investment Llterature.w- The Statement of Policy, Company Act and certain related which had been in effect since 1950, rules.v» If adopted, Rule 12b.1 would was a lengthy document detailing types permit use of fund assets for distribu- of representations which would or tion if approved by shareholders, the would not be considered misleading in board of directors as a whole, and the investment company sales literature. disinterested directors. The proposed By its specificity, the Statement of Pol- rule contains conditions intended to in- icy tended to induce conformity to pre- crease the independence of the disin- scribed formats. The result may have terested directors and ensure that the been to limit innovations unduly and, directors permit such a use of fund as- at the same time, insulate sales litera- sets only after considering all pertinent ture, which complied mechanically facts and concluding that financial dis- with the Statement of Policy, but was tribution would be likely to benefit the used in a misleading way. At the same fund and its shareholders. time that it withdrew the Statement of Policy, the Commission proposed for comment Rule 156 under the Securi- Disclosure Study ties Act, an interpretive rule which In addition to the foregoing review briefly and in relatively general terms of the investment company regulatory highlighted what experience has sug- system, the Division established an- gested are problem areas in invest- other study group to undertake a thor- ment company sales Htereture.ws ough review of investment company (Subsequent to the end of the fiscal disclosure requirements under the Se- year on October 24, 1979, the Com- curities Act of 1933 (Securities Act) mission adopted Rule 156 as and the Investment Company Act. The revised. 104) new disclosure study will explore ways On August 31, 1979, the Commis- to reduce unnecessary burdens on sion adopted Rule 434d under the Se- both the industry and the staff which curities ActIO' which, in effect, permits result from present disclosure require- investment companies to include far ments. Initially, the study group will more information in mass media adver- undertake two major projects: a review tisements. In the past, investment com-

34 panies, like other issuers, have been re- to the program, but it is probably on stricted to so-called "tombstone ads" the order of two to four man years. which may contain only relatively lim- Because the program is in its first ited information about the security and year of operation and the Commission the issuer. However, Rule 434d permits has only limited resources to devote to advertisements to include any infor- its operation, the staff and the Com- mation which is taken from or which mission have, so far, been concerned fairly summarizes the full statutory with resolving technical problems with prospectus. The rule should permit in- Form 13F, interpretive questions, and vestment companies to more effec- collateral issues such as confidential tively communicate important facts, treatment. No attempt has yet been such as performance data, to investors. made to analyze or otherwise use the At the same time, in order to protect information which has been filed. After investors from misleading statements, receiving public comment, the Com- Rule 434d advertisements would be mission decided that it would be un- subject to some of the liability provi- duly burdensome to require reports in sions of the Securities Act applicable machine readable form since man- to prospectuses. agers use a variety of computer sys- tems and some compile reports man- Institutional Disclosure Program ually. The independent contractor Beginning on February 14, 1979, does prepare a magnetic tape of which more than 650 major institutional in- may be obtained from either the Com- vestment managers began filing quar- mission or the contractor. terly reports on Form 13F reporting to the Commission on their significant Office of Investment Adviser equity holdings pursuant to Rule 13f-1 Regulation under Section 13(f) of the Securities The Office was established within Exchange Act of 1934. These reports the Division of Investment Manage- are transferred to the Commission's ment in October 1978. The Office was Public Reference Room as promptly as created in recognition of the need to reasonably possible after filing, and reevaluate the Commission's advisory are normally available to the public regulatory program in light of the dra- within a day to two after they are filed. matic growth in the advisory industry The tabulations of the data on Forms and the developments in the kinds of 13F, required by Section 13(f)(3), are advisory services provided by invest- done by an independent contractor se- ment advisers. lected through the competitive bidding The Commission, in January 1979, process. The contractor is required to adopted new investment adviser re- make a variety of specified tabulations quirements concerning disclosure, re- available to the public at reasonable cordkeeping, applications for registra- prices within 10 days after receipt of tion and annual filings.'06 These re- the reports. Since the contractor pro- quirements include: (1) adoption of a vides its services without charge to the new disclosure rule (Brochure Rule) un- Commission, the only material costs to der the Investment Advisers Act of 1940 the Commission of administrating the (Investment Advisers Act) (2) amend- program are in staff time. The Com- ment of two rules under the Investment mission's various responsibilities are Advisers Act relating to recordkeeping carried out in several different offices and amendments to the investment ad- and Divisions, making it difficult to be viser registration form; (3) adoption of certain how much staff time is devoted a new annual report form for invest- 35 ment advisers; (4) revision of certain new rule makes it unlawful, except un- schedules used by investment advisers der specified circumstances and sub- and broker-dealers in connection with ject to certain conditions, for an in- the respective registration forms for vestment adviser to make a cash such persons. Concurrently with the payment to a person ("solicitor") who adoption of the above rules and forms, directly or indirectly solicits any client the Commission amended a rule and for, or refers any client to, an invest- certain forms to require disclosure of ment adviser. In addition, in June brokerage placement practices.w? A 1979, the Commission issued for public similar disclosure requirement is im- comment a proposed rule under the In- posed on investment advisers as part vestment Advisers Act which would of the Brochure Rule. Taken together, permit certain registered investment these actions will result in the Com- advisers to business development com- mission and the public being apprised panies (asdefined in the rule) to be com- of a great deal of material information pensated on the basis of a share of net about investment advisers which was capital gains upon, or net capital appre- not previously disclosed in any system- ciation of, the funds, or any portion of atic way. the funds of the business development In other significant rulemakings, in company. 109 Such means of compensa- July 1979, the Commission adopted tion is currently prohibited by the In- new requirements under the Invest- vestment Advisers Act. At the close of ment Advisers Act governing the pay- the fiscal year, the staff was reconsi- ment of cash referral fees by invest- dering the proposed rule in light of the ment advisers.ws The adoption of the comments received.

36 Enforcement Program

The Commission's enforcement pro- vided by the Federal securities laws in- gram is designed to secure as broad a clude fines and imprisonment. regulatory impact as possible with the The Federal securities laws are pri- limited resources available. To this marily remedial in nature. In recogni- end, the Commission relies heavily tion of that purpose, in the litigation upon private civil damage actions, and settlement of its proceedings the Federal securities laws, and upon self Commission makes every attempt to regulatory and state and local law en- prevent a recurrence of violative activ- forcement agencies. With respect to ity and to rectify the result of past vi- those agencies, the Commission de- olations. The Commission has been votes substantial efforts towards pro- particularly successful in securing ap- moting the effective coordination of propriate relief in injunctive actions enforcement activities. In this manner, and during fiscal year 1979 such relief the Commission seeks to make maxi- included, in one case, an order requir- mum effective use of available re- ing the defendant to return $30 million sources in order to obtain an increased alleged to have been wrongfully ob- enforcement presence concerning tainedllo; the appointment of individu- matters within its jurisdiction. als or committees for the purpose of The cases described here reflect the conducting further investigations and breadth of the Commission's respon- reporting publicly the results'»: the ap- sibilities and its enforcement re- pointment to boards of directors of sponses, and the continued vigor and persons previously unaffiliated with effectiveness of the enforcement pro- the corporatlonu-: restrictions on the gram. future employment of defendants as officers or directors of publicly-held cornpaniesus: limitations upon the vot- Sanctions and Remedies ing of securitles->: the return to pub- The Federal securities laws provide licly-held corporations of monies im- administrative, civil and criminal rem- properly obtained by insldersr»: and edies for violations of those laws.Sanc- the appointment of an independent tions in administrative proceedings for master to oversee the operations of a those subject to the Commission's reg- corporatlon'>. ulatory jurisdiction may range from In the majority of its cases,the Com- the imposition of a censure to the bar- mission is able to settle with respond- ring of a securities professional from ents or defendants on terms which se- the profession. The civil court remedy cure the necessary remedial relief. usually available to the Commission is Generally, respondents or defendants court entry of an injunction barring fur- who consent to such settlements with ther violations. The courts often enter the Commission do so without admit- orders providing for appropriate addi- ting or denying the factual allegations tional relief. Criminal sanctions pro- contained in the Commission's com-

37 plaint or order for proceedings. Thus, lated to it. The Commission's com- unless otherwise noted, in the discus- plaint alleged that, in connection with sion of cases which follows, it should the offer and sale of approximately $3 be assumed that settlements achieved million in unregistered fractional un- were upon that basis. divided working interests in oil and gas leases, the defendants made a number of untrue statements of material facts Energy-Related Cases concerning, among other things: (1) Due to the tax consequences of in- the use of "special escrow" or "trust" vestments in certain energy-related acounts for the protection of investors; products, particularly oil and gas, and (2) that investors could recover their the inherent attraction of such invest- investments in 1-'/2-2 years; (3) the ex- ments to investors, the Commission perience of the driller of oil wells; (4) has long had to devote enforcement that state securities commissioners resources to the control of fraudulent were receptive to Atlas' "openness and offerings in this field. With the advent full disclosure"; and (5) that wells of the nation's energy crisis, fraudulent drilled would produce on the average offerings (and the Commission's re- of ten barrels of oil a day per well. The sponse to them) have intensified. complaint also alleged that the defend- Investors in these offerings are often ants omitted to state material facts initially contacted as part of a nation- concerning, among other matters: (1) wide, long-distance telephone solicita- the entry of cease and desist orders in tion campaign by salesmen.u? These seven states prohibiting the sale of At- campaigns are typified by offerings las securities; (2) the misuse of at least which fail to comply with the regis- $275,000 of the proceeds of the offer- tration requirements of the Securities ings; (3) that wells in the field where Act of 1933 (Securities Act) and by the the subject wells were to be drilled making fraudulent statements to were averaging less than one barrel of investors to induce them to invest in oil per day per well; (4) that, based the offering. Investors are often per- upon the experience with production suaded to make their investments on of initial wells drilled by Atlas, inves- the basis of false statements or omis- tors could not recover their investment sions concerning, among other things, in less than eight years; and, (5) that, the funding of the entity in which the prior to their involvement with Atlas, investment is made and the use of the the oil well driller had drilled only 12 investors' funds derived from the offer- wells and the experience of the presi- ingliS; the risks associated with the in- dent and controlling shareholder of vestrnentus: the experience of the is- Atlas was as a salesman with a com. suers' pr incipalsw'; and the use of pany that had been enjoined in an ac- special accounts in which investors' tion previously brought by the Com- funds would, purportedly, be placed mission. Additionally, in connection for protectionw, One of the major in- with one of the offerings involved, the ducements to investors is the pur- complaint alleged the failure to dis- ported availability of special tax bene- close (1) contingencies in securities fits. 122 gas pipeline connections; (2) that the SEC v. Atlas 011Exploration. Inc. 123_ proceeds of the offering would be com- On July 12, 1979,the Commission filed mingled; and (3) that 22 percent of the a civil injunctive action against Atlas total proceeds of the offering would be Oil Exploration, Inc. (Atlas) and a num- paid to the president and a vice presi- ber of other entities and individuals re- dent of a related corporation.

38 Several of the issuers named as de- availability of special tax benefits when fendants in the Commission's action not available; (6) representations that consented to the entry of final judg- the fuel system would yield 100 miles ments of permanent injunction. The de- per gallon for automobiles when it was fendants were enjoined from further vi- known that that was not true; (7) omit- olations of the registration and ting to disclose that claims of 66.8 antifraud provisions of the Securities miles per gallon in certain tests were Act and the antifraud provisions of the based on unsophisticated, nonscien- Securities Exchange Act of 1934 (Ex- tific, nonverifiable and widely varying change Act). Individual defendants test results; (8) representations regard- consented to the entry of permanent in- ing the cost of the finished product junctions enjoining them from further when no facts were available to sup- violations of the antifraud provisions port any cost prediction; and, (9) omis- of the Federal securities laws. Addi- sions to disclose that funds from the tionally, another corporation and its securities sales would be paid to the principal officers and directors were individual. enjoined from further violations of the The defendants consented to the en- antifraud provisions of the Federal se- try of judgments of permanent injunc- curities laws and the defendant offi- tion enjoining them from further vio- cers and directors were ordered to file lations of the registration and antifrauc with the court an accounting setting provisions of the Federal securities forth the receipts and disbursements laws. The order of the court also re- of five of the corporation's offerings. quires the defendants to provide a SEC v. Advanced Fuel Systems, copy of the ascertainable investors in Inc.124-On December 6, 1978, the AFSI. Commission filed a complaint against Advanced Fuel Systems, Inc. (AFSI) Questionable Payments and an individual. The complaint al- The Foreign Corrupt Practices Act of leged violations of the registration pro- 1977 [Sections 13(b)(2), 30A and 31(c) visions of the Securities Act and cer- of the Exchange Act] (Foreign Corrupt tain of the antifraud provisions of the Practices Act) was signed into law in Federal securities laws based on un- December 1977. That Act prohibits is- true statements of material fact and suers from, among other things, cor- omissions to state material facts to ruptly making payments to officials of investors including: (1) that $1 million foreign governments in order to induce had been committed to AFSI for re- such officials to use either their au- search and development of a fuel sys- thority or influence to obtain business tem when in fact less than $145,000 for the issuer in that country. Among was available; (2) information that an other things, the Act also requires cor- "international financier" was backing porations to maintain systems of inter- the corporation with "unlimited funds" nal accounting controls which provide when no such backing existed; (3) reasonable assurance that certain ob- omitting to disclose to investors the jectives are met. dilution effect of previous stock splits Disclosures of unethical and illegal benefiting insiders; (4) failure to follow corporate activity resulting in part generally accepted accounting princi- from the Commission's enforcement ples when valuing a licensing agree- activities contributed to Congress' en- ment in financial statements. resulting actment of the Foreign Corrupt Prac- in an over evaluation of the agreement tices Act. During the past year, the by about 500 percent; (5) claiming the Commission's enforcement interests in 39 this area continued and three of the im- and records as to the foregoing. HCA's portant cases brought are described in audit committee will prepare a written the following summaries. report containing its findings and rec- SEC v. Hospital Corporation of Amer- ommendations and any action taken ica (HCA)12l-The Commission's com- by HCA in response to the report will plaint in the HCA case alleged viola- be described in a current report filed tions of the antifraud provisions of the with the Commission. Securities Act and the antifraud, reo SEC v. Schenley Industries, Inc. porting, and proxy provisions of the (Schenley)126- This case involved al- Exchange Act in connection with dis- legations that Schenley had expended closures regarding a contract for the at least $6 million by granting illegal management of a hospital in Saudi discounts, in the form of cash, credit, Arabia. The complaint alleged that, free merchandise or other things of prior to entering into the contract, value to selected purchasers of Schen- HCA was informed of facts which in- ley's products in violation of state liquor dicated that payments to persons of regulations. As a result, the complaint power and influence in Saudi Arabia alleged, Schenley had jeopardized its li- would have to be made by HCA in con- censes to do business in the 35 states of nection with the contract. The com- the United States in which Schenley op- plaint further alleged that a Liechten- erated as a producer, importer and stein entity which received a total of seller of alcoholic beverages. The Com. $3.393 million from HCA, purportedly mission's complaint alleged violations for consulting and other services, was of the antifraud provisions of the secu- merely a conduit for the improper pay- rities laws. ments. The Commission's complaint also alleged that HCA made false and The defendants consented to the en- misleading statements in registration try of final judgments of permanent in- statements, proxy statements, and junction. As part of its consent, Schen- other public documents filed with the ley agreed to, among other things, the Commission and in connection with appointment of a Special Agent to con- statements made to the staff of the duct an investigation of Schenley and Commission during an informal in- its subsidiaries and render a report to quiry. the Court and to the Commission de. HCA consented to the entry of a final tailing: (1) illegal political contrlbu- judgment of permanent injunction tions made by Schenley and its subsi- from violations of the antifraud provi- diaries; (2) illegal foreign payments sions of the Securities Act and the anti- made by Schenley and its subsidiaries fraud, reporting, and proxy provisions for the purpose of influencing any for- of the Exchange Act. In addition to the eign government or official thereof or injunctive relief the terms of the settle- evading the laws of a foreign sover- ment provide that HCA's audit com- eign; (3) illegal kickbacks, rebates, dis- mittee, acting with the assistance of its counts, refunds, allowances , or other counsel and its independent auditors, expenditures made by Schenley and its will conduct a review of prior investi- subsidiaries to induce the purchase of gations by HCA of (1) direct or indirect Schenley products, and the approxi- payments, if any, to agents, employ- mate dollar amount expended to the ees, or officials of foreign and domes- extent that these facts have not been tic governments and of foreign domes- previously disclosed; and (4) pending tic customers during a five year period investigations by state or Federal gov- and (2) of the accuracy of HCA's books ernmental authorities regulating the

40 liquor industry which may result in the the business activities of ISC to assure commencement of legal proceedings. that they are carried out for legitimate In addition, Rapid-American agreed purposes of ISC and not for the per. to file with the Commission a current sonal benefit of any control person, report: (a) within 30 days after the en- officer, director or employee of ISC; to try of the final judgments, setting forth determine whether ISC entered into all facts, known as of that date, con- any transactions involving expenditure cerning Schenley's practice of granting of substantial funds or assetswhich ap- illegal discounts to induce and pro- pear not to have been engaged in for mote the purchase of Schenley prod- legitimate business or are not ade- ucts; and (b) upon the filing of the Spe- quately explained on ISC's books and cial Agent's report, setting forth all records; to recover any funds or assets material facts contained therein. or enforce any liability to ISC; to over- SEC v. International Systems and see ISC's filings with the Commission; Controls Corporetionm-s-uv this action, and to authorize the agent to report his the Commission filed a complaint findings to the Court within 60 days. against International Systems and Controls Corporation (ISC) and certain officers and directors seeking injunc- Government and Municipal tive relief, appointment of a receiver Securities and other equitable relief. As indicated in last year's annual re- The complaint alleged violations of port.w the trading of government and the antifraud, reporting and proxy pro- municipal securities has increased sig- visions of the Federal securities laws as nificantly in recent years. Due to the well as violations of the accounting continuation of questionable issuing provisions of the Foreign Corrupt Prac- and trading practices in this area, the tices Act. According to the complaint Commission's enforcement interest the corporation made false and mis- has also continued. leading disclosures or failed to dis- In February 1979, the Commission close its commitments to pay a total of transmitted to Congress its Final Re- $33 million, its payment of approxi- port In the Matter of Transactions in the mately $23 million in connection with Securities of the City of New York, and the securing or solicitation of business simultaneously announced its conclu- in several foreign countries, its over- sion of the investigation in that mat- statement of its assets, earnings and ter.129 The investigation, one of the shareholders' equity. The complaint largest of most complex in the Com- further alleged that the corporation mission's history, dealt with events oc- failed to disclose that certain officers curring during the period from Octo- were the prime beneficiaries of a de- ber 1974 to when the City ferred compensation plan and that cor- faced a fiscal crisis and issued large porate funds were used to purchase, amounts of short-term securities. The furnish and maintain a summer resi- Commission had previously issued a dence for the Chairman of the Board detailed Staff Report which described of the firm. the events leading to the City's fiscal The Commission simultaneously crisis. no filed with the complaint a motion for The Final Report issued in February a preliminary injunction against ISC called for legislative action to solve the and for the appointment of a Special deficiencies in the issuance and mar. Agent of the Court to take custody and keting of municipal securities and con- control of all assets of ISC; to oversee cluded that the Commission should de-

41 vote its efforts to support such leg- University who was its government se- islative solutions. The Final Report curities trader and various individuals also stated the Commission's conclu- and securities firms. Securities in- sion that no enforcement proceedings volved in the case were government should be instituted in the matter. securities (including so-called Ginnie Among the factors cited in the Final Mae's) and reverse repurchase agree- Report for the Commission's decision ments (a pledge of securities which were the issuance of the comprehen- takes the form of a sale and buy-back sive Staff Report-»: the change in the obligation). City's administration since the issu- The Commission alleged in its com- ance of the Staff Report; various re- plaint that the University's employee medial actions taken by those who channelled securities transactions were mentioned in the Staff Report, through the securities firms and individ- most particularly by the City itself; uals who were defendants in the action, Congressional and state actions with to their benefit and to the University's respect to New York City's financial detriment. The complaint also alleged difficulties, including the Federal leg- that one of the securities firms involved islation enacted in August 1978 which charged excessive fees to the University imposes certain financial controls over and charged commissions to both sides the City and requires, among other of transactions while purportedly acting things, that the City's financial state- as a broker for the University. That firm ments be audited; and, finally, the also allegedly agreed to execute trans- Commission's determination that en- actions for the University at prices forcement action would have limited away from the market and to "park" additional remedial value and would government securities with the Univer- require the commitment of substantial sity. The complaint alleged that in the additional resources which, in light of event that the market price for securi- the above, could otherwise be used ties increased, the securities were to be more efficiently in discharging the sold back to the firm at the original Commission's responsibilities. price. In addition, the complaint al- The Final Report focused attention leged that the firm, acting as a broker on the area of municipal accounting or principal in trades with the Univer- and financial reporting and stated: sity, engaged in trades covering ap- "The Commission believes that leg- proximately $318 million in securities islation designed to standardize the upon which the firm made profits or methods used in the preparation of commissions of approximately municipal accounts and the form and $590,000. content of municipalities' financial The complaint also charged that an- statements should be accorded the other firm had defrauded the University highest legislative authority."132 by charging excessive fees and by inter- The University of Houston case-The positioning with respect to $35 million Commission continues to note in- in government securities transactions stances of questionable practices in by the University. Over $130,000 in connection with United States Govern- commissions were generated by these ment securities and related securities. transactions. In this connection, of particular impor- Finally, the complaint alleged that tance during fiscal year 1979 was the another firm was needlessly interposi- Commission's so-called "University of tioned with respect to the University's Houston" case.t» The case involved a trades in government securities to the group consisting of an employee of the financial detriment of the University

42 and that excessive fees were charged poration. The staff report discussed to the University in connection with re- disclosures made in the prosepctus for verse repurchase transactions. These the registered stock offering and com- transactions were, allegedly, employed pared them with disclosures in connec- by the University's employee as part of tion with the industrial development an investment strategy whereby gov- revenue bond offering. The staff report ernment securities were pledged in concluded: connection with cash loans. The loans '", " [T]hat risk factors and other were used in turn to purchase addi- important information relating to the tional government securities. The firm speculative nature of an investment in acted as a broker for the University in Marine that were included in the com- trades involving about $1 billion in re- mon stock prospectus are absent from verse repurchases and about $73 mil- the bond 'offering prospectus' and that lion in government securities transac- document contains considerable bul- tions. The case resulted in the issuance lish promotional information that is in- of injunctions against the principal de- appropriate in a prospectus used to sell fendants as well as a criminal proceed- securities."136 ing in which they were found guilty and Other areas of questionable activi- sentenced to four years in prlson.i» ties in connection with industrial rev- Industrial Development Revenue enue bonds which were the subject of Bonds-A persistent concern of the Commission action this year included Commission in the area of government alleged situations where bonds were securities has been abuses in the offer sold prior to issuance, but after col- and sale of industrial development rev- lecting the money from purchasers, enue bonds. These securities generally the promised bonds were not issued to are issued by municipalities to obtain customers and, instead, the customers' funds to erect industrial facilities which funds were converted to the promoter's are then leased to private corporations user»: nearly worthless bonds were for business use. Principal and interest sold to investors at 94-98 percent of on the bonds is paid only with revenues face value138; principal and interest of the private corporation. payments were made from proceeds of Industrial revenue bonds, though bond sales to conceal the fact that the subject to the antifraud provisions of private corporation was not a going the Federal securities laws, are exempt concernus: and misleading quotations from the registration requirements of were placed in interdealer quotations those laws. rnedia'w The Commission's Staff Report On Options, Corporate Takeovers Transactions In the Marine Protein Cor- poration Industrial Development Reve- and Tender Offers nue Bonds is illustrative of the types of During the fiscal year, the Commis- concerns arising in this area.m The sion brought a number of cases in sit- staff report details an unusually in- uations where the investing public was structive situation involving a corpo- harmed as a result of practices by mar- ration which had sold stock to the pub- ket professionals and others in connec- lic in an offering registered with the tion with trading in options. Addition- Commission and, shortly thereafter, ally, as the Commission noted in last also participated in an offering of in- year's annual reportwr, the recent in- dustrial revenue bonds which were is- crease in the number of corporate sued for the purpose of providing takeovers and tender offers has led to funds to construct facilities for the cor- an increasing number of Commission 43 enforcement actions in this area. In to individual customer needs, circum- this connection, the Commission has stances or objectives. brought an increasing number of cases SEC v. Santangelo & Co., 146_ This alleging insider trading based upon was another significant action by the material information regarding cor- Commission in the options area during porte takeovers and tender offers. this year. The case involved fictitious Options- The Commission's option reports of options transactions on the casesinvolved allegations that material New York Stock Exchange (NYSE) and misstatements and omissions were the American Stock Exchange (Amex). made to customers concerning, among Specifically, the Commission's com. other things, the risks inherent in op- plaint alleged that in varying periods tion trading strategiesl42; the potential in 1974, 1975, and 1976, hundreds of profits and rates of return involved in transactions in options were printed on options tradingI4'; and the suitability of the stock and options tape of the Amex tradings strategies used for lnvestorsw. when in fact no transactions had oc- In the Matter of Bear Stearns & curred. Additionally, the complaint al- Co. 14'_ This case is illustrative of the leged that during 1976 transactions in types of trading practices which the stocks which should have been re- Commission uncovered during the ported on the tape of the NYSE as sin- course of its investigations this year. In gle transactions were reported as sev- this case, the Commission's Order In- eral transactions. The complaint stituting Proceedings and Imposing further alleged that various of the de- Remedial Sanctions alleged that trans- fendants, either as specialists on the actions executed in accounts as to subject exchanges or otherwise, either which discretionary authority existed caused a substantial number of such were excessive in size and frequency in erroneous reports or had reason to light of the financial resources and know that those reports were being character of the accounts and that, in printed and failed to take reasonable connection with options trading, mao and appropriate steps to prevent such terial misstatements were made con- reports from being made. cerning the existence of margin ac- Tender Offers-The Commission's counts, the meaning and purpose of actions in the area of tender offers dur- margin call notices sent to customers, ing the past year involved situations the significance of the large number of where the Commission alleged that ma- confirmations slips received by cus- terially false and misleading statements tomers and the meaning and purpose were made to investors concerning, of correspondence sent to a customer among other matters, the purposes of with regard to activity in the cus- the tender offer-v: financing arrange- tomer's account. Additionally, the Or- ments with respect to the tender der alleged that transactions in cus- offerl48, and the intentions of the tender tomer accounts were effected which offerorl49• were not authorized by the customers The defendants, two broker-dealers including trading in the options mar- registered with the Commission and ket, trading on a principal basis, and partners of each firm, consented to the trading in a margin account. Finally, entry of judgments of permanent in. the Order alleged that transactions in junction enjoining them from violating customer accounts were effected in the antifraud provision of the Exchange unseasoned and speculative securities Act. in disregard of or without inquiry re- SEC v. BOC International Limitedvw-« garding the suitability of the securities This was one of the more significant

44 Commission actions brought in the $50 offer for all remaining Airco tender offer area during the past year. In shares. this case, the Commission filed a com- The Commission, in its complaint, plaint seeking injunctive relief against charged that SOC Ltd. violated the aoc International Limited (SOC) a antifraud provisions of the secunties United Kingdom corporation and its laws in that the tender offer materials wholly-owned subsidiary, SOC Finan- failed to disclose that in obtaining a cial Corporation (SOCF), a Delaware loan for the second tender offer, SOC corporation. The complaint alleged sought sufficient funds to acquire ad- that the defendants violated the tender ditional shares, that SOC's agreement offer and reporting provisions of the Ex- with its investment banker Included an change Act in connection with SOC's additional $1.5 million fee if SOC ac- tender offer for shares of Airco Inc. quired 100 percent of Airco, and that (Airco). Airco's investment banker had formed an opinion that a fair price for Airco According to the Commission's shares was $50-$55 per share. The complaint, SOC and Airco entered into complaint also charged that SOC a series of agreements governing po- failed to amend its statement filed with tential tender offers by one firm for the the Commission with respect to its securities of the other. Pursuant to holding of Airco shares on a timely ba- these agreements, SOC acquired a 34 sis and, when it did so, failed to dis- percent interest in Airco and subse- close the purpose of its acquisitions quently increased that interest to 49 and subsequent action. percent. The latter tender offer was oversubscribed. SOC subsequently an- SOC consented to the entry of an in- nounced a tender offer for all Airco junction requiring compliance with the shares at the same price as the pre- tender offer and reporting provisions vious offer. Pursuant to their agree- of the Federal securities laws. SOC ment, Airco disapproved the tender also agreed to pay $2.75 million to cer- offer for the remaining outstanding tain individuals who tendered Airco shares based upon the inadequacy of stock and to keep open the $7 offer to the price and sued SOC to rescind the Airco shareholders who tendered their offer. SOC withdrew the offer for all stock outstanding shares but pursuant to a SEC v. Sun Company, Inc.-In last prior agreement purchased an addi- year's annual report, the Commission tional 6 percent of Airco. The latter noted the Sun case as one of its im- purchases were designed to frustrate portant actions in the tender offer any competing offers for Airco and to area.!» That case involved, among avoid entering a bidding contest for other things, a Commission allegation Airco. Subsequently, Airco announced that the acquisition of approximately an agreement in principle for a take- 34 percent of the outstanding common over of Airco by a third company at stock of a publicly-held corporation by $50 per share. Shortly after this an- means of an offer to certain institu- nouncement, SOC and Airco an- tional investors which was not made nounced a settlement of their action, available to the general public never- pursuant to which aoc offered an ad- theless constituted a tender offer. On ditional $7 to all those who tendered July 9, 1979 the United States District their shares in the offer that resulted in Court for the Southern District of New SOC's obtaining the additional 15 per- York rendered an opinion which found cent of Airco, and agreed to make a that, indeed, that acquisition consti-

45 tuted a tender offer and was, accord- Pursuant to an offer of settlement, Op- ingly, made in violation of the tender penheimer was censured and agreed to offer provisions of the Exchange comply with certain undertakings. The Act.'" undertakings included among other Insider Trading-Among the Com- things, (1) that Oppenheimer would mission's actions in the insider trading obtain a written agreement from Hech- area during the last year, one of the ler that neither he nor members of his more important was In the Matter of immediate household will maintain Oppenheimer [; Co. 1B The Commission any accounts with any other broker- instituted proceedings in this matter to dealer, (2) that as long as he is asso- determine whether Oppenheimer & ciated with Oppenheimer neither he Co., Inc. (Oppenheimer), a registered nor his immediate family will trade in broker-dealer, failed to supervise Ira J. the stock of any company he is consid- Hechler (Hechler), a person subject to ering asa potential participant in a sale its supervision with a view to prevent. of assets transaction without obtaining ing violations of the antifraud provi- prior written approval which Oppen- sions of the Exchange Act. heimer will not give unless the trading Accordlnq to the Commission's Or- is not based upon non-public informa- der Instituting Proceedings Hechler tion, and (3) that as long as Hechler was retained by Oppenheimer asa con. is associated with Oppenheimer he will sultant for special acquisitions. Hech- make all disclosures and reports that ler occupied offices at Oppenheimer Oppenheimer's employees are re- and utilized their facilities. Transac- quired to make in accordance with Op- tions proposed and the companies rec- penheimer's regular compliance pro- ommended by Hechler as potential cedures. subjects for special acquisitions were reviewed by senior principals of Op- Other Significant Enforcement penheimer. Matters In his capacity as a consultant In the Matter of United States Steel for special acquisitions, Hechler re- Corporetioniw-« The Commission insti- searched and investigated publicly- tuted proceedings in this matter to de- held companies for sale of assets trans- termine whether certain of the filings actions and often engaged in the ne- of United States Steel Corporation gotiations involved in such transac- (USSC) made with the Commission tions. As result of these activities, were deficient with respect to USSC's Hechler obtained material non-public policy concerning environmental reg- information concerning the companies ulation, its capital expenditure for involved in such transactions as well as compliance with environmental con- the likelihood that the sale of assets trol and its involvement in legal pro- transactions would be consummated. ceedings arising from its compliance Specifically, Hechler knew that if the with environmental regulation. transactions were consummated a In 1971, in recognition that environ- company involved in the transaction mental laws could have a material eco- would make a tender offer at substan- nomic impact on corporations subject tial premiums above then prevailing to such environmental regulation, the market prices. Commission issued a release inform- The Commission determined that ing registrants that disclosure of ma- Oppenheimer failed to reasonably su- terial environmental information i~- pervise Hechler and thereby prevent c1uding environmental litigation and violations of the antifraud provisions. the capital expenditure, earning pow- 46 ers, and business charge efforts in a policy toward compliance with envi- connection with compliance with en- ronmental regulations which is reason- vironmental laws was required by ably likely to result in substantial po- Commission rules.i» In 1973, the tential fines or penalties, or other Commission adopted specific environ- significant effects on the corporation, mental rules which required disclosure it may be necessary for the registrant of material effects that compliance to disclose the magnitude of such with environmental regulation might fines, penalties and other material off. have upon a Registrant's economic po- sets in order to prevent from being sition and disclosure of any adminis- misleading with regard to required dis. trative or judicial proceedings known closures concerning such matters as to be contemplated by governmental descriptions or disclosures relating to authorities concerning violations of the corporation's business, financial environmental requlatlons.vs Subse- statements, capital expenditures for quently, the Commission adopted a environmental compliance or legal rule requiring registrants to disclose proceedings. USSC did not make such certain material estimated capital ex- additional, necessary disclosures. penditures for environmental control The Commission determined that facilities.m USSC's reports filed with the Commis- According to the Commission's Or- sion for the years and interim periods der Instituting Proceedings, USSCwas 1973 to 1977 failed to comply with the aware that compliance with environ- disclosure requirements of Section 13 mental regulations would require sub. of the Act and the applicable rules reo stantial expenditures. USSC prepared lating to disclosures of environmental its own estimates as to the cost of com- matters. USSC submitted an Offer of pliance as regulations were proposed Settlement which the Commission de- and adopted. USSC, in its filings, set termined to accept. The Commission's forth amounts spent or authorized for Order required USSC to comply with certain periods without disclosing that the undertakings set forth in its offer it had developed estimates of costs for of settlement which include, among additional years, which costs would in- other things, that USSCwill, by various volve material capital expenditures. means, provide notice to its stockhold- USSC disclosed pending judicial pro- ers of the existence of these proceed- ceedings, but failed to disclose exist. ings and the Commission's Order, that ing administrative proceedings. Addi- USSCwill amend its past filing with the tionally, USSC stated in its filings that Commission concerning envlronrnen- it intended to resolve its environmental tal matters and that USSCwill retain a problems. In fact, USSC pursued an consultant to conduct a study for the environmental policy of actively re- purpose of estimating potential costs sisting environmental requirements to USSC of complying with environ- which it maintained were unreason- mental regulations. able. While the Commission's rules do SEC v. Rapid American Corpora- not require a disclosure of a general tioniw-« The Commission filed a civil corporate policy with respect to envi- injunctive action against Rapid Ameri- ronmental regulation, if such a disclo- can Corporation (Rapid), its subsidiary sure is made it must be accurate and McCrory Corporation (McCrory), Ken- the disclosing corporation must make ton Corporation (Kenton) and Meshu- any additional disclosures necessaryto lam Riklis (Riklis), Rapid's Chairman of render the voluntary disclosure not the Board, alleging violations of the misleading. Also, if a corporation has reporting provisions of the Federal se-

47 curities laws. The complaint also al- funds and its broker-dealer subsidi- leges that Rapid, McCrory and Riklis aries, and certain directors, officers violated the proxy provisions and that and employees of these entities. The Riklis and Kenton violated the benefi- Commission's complaint alleged vio- cial ownership reporting provisions of lations of the antifraud, registration, the Federal securities laws. reporting, proxy and fiduciary obliga- According to the Commission's com- tion provisions of the Federal securi- plaint, Rapid, McCrory and Kenton ties laws. failed to disclose that they entered into The complaint alleged that the in- agreements with and paid fees to per- vestment adviser, in disregard of the sonswho were either personal creditors interests of the mutual funds and their of Riklis or persons who had a personal shareholders and in order to increase business relationship with Riklis. The profits to the adviser, promoted an agreements and transactions in ques- investment arrangement known as tion were allegedly either negotiated switching. The switching program per- or approved by Riklis at a time when mitted and encouraged the funds' he was in serious financial difficulty. shareholders to transfer their invest- The complaint also alleged that Riklis ments among the funds immediately was in a conflict of interest position in upon the placing of a telephone order. negotiating and approving transac- This program resulted in frequent fluc- tions with persons with whom he had tuations in the assets of the funds and, personal business dealings and that accordingly, an extremely high port- these conflicts were not disclosed to folio turnover with an attendant in- the Boards of Directors of Rapid, crease in brokerage expenses most of McCrory, Kenton, security holders or which were rebated to the investment the public. adviser. The defendants consented to the en- The complaint also alleged that each try of final judgments of permanent in- of the directors of the Fundpack, Inc. junction enjoining them from violating (Fundpack), in breach of his fiduciary the provisions of the Federal securities duty involving personal misconduct, laws charged in the complaint. In ad- favored the management of the funds dition to consenting to the entry of an by acquiescing in this conduct and by injunction, Rapid agreed to appoint renewing the investment advisory con- four persons who had no previous af- tract. The complaint further alleged filiation with Rapid to its board of di- that the directors failed to conduct in- rectors, and to form and maintain for quiries and consider information nec- five years a Transaction Review Com- essary for them to evaluate the switch- mittee, composed of the four new di- ing program and the self-dealing rectors, to review transactions between transactions by the investment adviser. Rapid and its officers, directors and The mutual funds consented to the control persons. McCrory agreed to entry of an order directing the appoint- abide by the undertakings of Rapid, ment of independent directors and while Kenton agreed to adopt similar special counsel. This order concludes policies. Riklis agreed to abide by the Commission's action against the the undertakings instituted by Rapid, funds; the action against other corpo- McCrory and Kenton. rate and individual defendants contin- SEC v. The Fundpeck, Inc. u9_ln this ues. case the Commission sought injunc- Pursuant to the Final Order, the tive relief against a mutual fund com- Funds are required to appoint and plex, the- investment adviser to the thereafter nominate and recommend 48 for election to their respective boards Columbia against The Starr Broadcast. of directors four individuals satlsfac- ing Group, Inc. (SSG); William F. Buck. tory to the Commission, and the funds ley Jr. (Buckley), formerly Chariman of must maintain, until at least one year the Board of SBG; Peter H. Starr (Peter after the next meeting of their share- Starr), formerly President and a direc- holders, boards of directors not less tor of SBG; Michael F. Starr (Michael than 80 percent of whose members are Starr), formerly Vice-President and a satisfactory to the Commission. The director of SBG; Gordon M. Ryan newly constituted boards are required (Ryan), formerly General Counsel and to call meetings of the Funds' share- a director of SBG; Glenn E. Burrus holders within six months, at which (Burrus), formerly a director of SBG; time they must recommend to share- Maurice L. McGill (McGill), formerly a holders the election of the required director of SBG; Mack H. Hannah, Jr. proportion of directors satisfactory to (Hannah), a director of SBG; and Co- the Commission and recommend ar- lumbia Union National Bank & Trust rangements for the future manage- Company (Columbia Union), one of ment and disposition of the funds. SBG's lenders. In addition, the Final Order requires The Commission's complaint al- that the Funds retain a Special Counsel leged that certain of SBG's officers to advise them until after the afore- directors, and others engaged in a five. mentioned shareholders' meetings. year course of business ultimately re- The Special Counsel must among sulting in the purchase. by SBG of sev- other things, (1) supervise the fil- enteen theatre properties (the Sitco ing and dissemination of registration transaction) from Sitco, Ltd. (a part- statements, prospectuses, annual and nership whose members were Buckley periodic reports and sales literature, Peter Starr, Michael Starr and Ryan) for receipts and disbursements by the the purpose of extricating Buckley, Pe- Funds, portfolio transactions and ter Starr, Michael Starr and Ryan from proxy solicitations; (2) consult with and a financial situation which would have report to the Commission and the resulted in their personal bankruptcy; Court; and (3) advise the Funds' boards that various filings of SBG failed to dis- in their consideration of arrangements close or contained misleading disclo- for the future management and dispo- sures with respect to the Sitco trans- sition of the Funds. After the perform. action: that SBG's outside directors, ance of all of his duties, the Special after acting on behalf of SBG in ap- Counsel must submit a final report to proving the Sitco transaction, failed to the Commission and the Court. insure the accuracy of SBG's disclo- The Final Order also requires that sures relating to this transaction; that within 20 days, the Funds must report Burrus, as Columbia Union's senior to shareholders concerning the Com- loan officer responsible for loans to mission's Complaint, the history of this both SBG and Sitco, Ltd., was acting litigation, and the actions taken and to in a manner which benefitted Colum- be taken pursuant to the Final Order bia Union, to the detriment of SBG, by and any other consents, undertakings, approving the Sitco transaction, and agreements or orders entered in the also failed to insure accurate disclo- action. sure of these matters. SEC v. Starr Broadcasting Group, Pursuant to the consents of the de- Inc.l60-ln February 1979, the Com- fendants, the Court enjoined SGB from mission announced the filing of a com- further violations of the reporting, plaint in the United States District of proxy, ownership reporting and margin 49 requirements provisions of the Federal of AFC to extend substantial loans on securities laws. Buckley, Michael Starr, preferential terms to officers and dlrec- Peter Starr, Ryan, and Burrus, were en. tors of AFC and to other persons asso- joined from violating the antifraud, reo ciated with AFC, its subsidiaries, Lind. porting, proxy, ownership reporting, ner or Keating. The complaint further and margin requirement provisions of alleged that as the financial condition the Federal securities laws. Columbia of the borrowers deteriorated from Union was enjoined from violations of 1973 through 1976 demands on the the reporting provisions of the Federal prior loans were not made and new securities laws. Smith, McGill, Francis loans were extended enabling the bor- and Hannah were enjoined from fur. rowers to pay interest on the prior ther violations of the reporting, loans and service loans from other. ownership reporting and margin reo The complaint also alleged that quirement provisions of the Federal Lindner and Keating caused a subsldi- securities laws. In addition to the entry of the in. ary of AFC to advance funds to Kle- junctions, certain other equitable relief karnp for the purchase of AFC stock on was ordered by the Court or under. the open market. The subsidiary failed taken by the defendants, including an to disclose these loans in a registration order to make disgorgement and an statement filed with the Commission. order compelling Buckley, Michael While the subsidiary did disclose the Starr, Ryan and Burrus to comply with extension of such loans in its annual their undertakings that none will seek report filed with the Commission, it employment asan officer or director of failed to disclose relevant facts and clr- a publicly-traded corporation respon- cumstances concerning the loans. AFC sible for filings with the Commission and its subsidiary also made false reo for a period of years. ports in filings with the Commission concerning loans to Klekamp. The SEC v. American Financial Corpora. complaint alleged numerous other vi. tion161- The Commission filed a com. plaint seeking injunctive relief and olations concerning the extension of other equitable relief against American loans by AFC subsidiaries. Financial Corporation (AFC), Carl H. The defendants consented to the en. Lindner (Lindner), President, Chairman try of final judgments of permanent in- of the Board and controlling share. junction enjoining them from further holder of AFC, Charles H. Keating Jr. violations of the antifraud, reporting (Keating) former Executive Vice-Presi- and proxy violations. Additionally, the dent and Director of AFC, and Donald order consented to by the defendants P. Klekamp (Klekamp) a former direc- required AFC to establish and main- tor of a subsidiary of AFC. The tain an audit committee of its board of complaint alleged that the defendants directors consisting of at least two di- violated the antifraud, proxy and reo rectors not having any previous busi- porting provisions of the Federal se- ness affiliations with AFC or its subsi- curities laws. diaries and to amend and correct its According to the Commission's com. prior filings with the Commission with plaint, Lindner and Keating caused, au- respect to matters alleged in the com. thorized or permitted a bank subsidiary plaint.

50 Programmatic Litigation and Legal Work

The Commission, through its Office failed to follow generally accepted ac- of the General Counsel, participates as counting standards and had no reason- a party and as amicus in a substantial able basis for their opinions regarding amount of litigation in addition to its the financial statements of these com. enforcement actions. The results in panies. The respondents filed a district these suits often affect existing inter- court action attempting to halt the pro- pretations of the Federal securities ceedings. They alleged that the Com- laws and/or the scope of the Commis- mission was without authority to sion's authority. The Office of the Gen- promulgate Rule 2(e), and had acted eral Counsel is also involved in impor- "without authority of law" In instituting tant non-Iitigatory work. The following the proceedings. On a motion from the is a summary of some of the important Commission, the district court dis- actions which were litigated in the past missed the Touche Ross action, hold- year, and the status of other projects ing that the plantiffs had failed to ex- of significance to the Commission and haust their administrative remedies. the public. On appeal, the United States Court of Appeals for the Second Circuit up- Significant Court Actions held the Commission's power to prom- Touche Ross & Co., et al v. SEC- ulgate Rule 2(e). The Court first held Touche Ross raised questions about that the traditional exhaustion doctrine the Commission's power to regulate did not apply where plaintiffs had chal- the conduct of accountants and other lenged the agency's very authority to professionals who practice before it. promulgate the rule. In such cases, ju- Rule 2(e) of the Commission's rules of dicial review would not be enhanced practice, first promulgated over 40 significantly by allowing the agency to years ago, authorizes the Commission first develop the facts or apply its ex- to censure, suspend, or bar from Com- pertise. And, although the agency mission practice, professionals found could theoretically hold its own rule in- to have engaged in various unethical valid, such a result was unlikely. or unlawful conduct. The rule reflects Turning to the merits, the Court held the Commission's need to rely heavily that, the promulgation of Rule 2(e) was on the integrity of accountants and valid as a "legitimate, reasonable and other professionals who prepare and direct adjunct to the Commission's ex- certify the accuracy of corporate filings plicit statutory power." The Court rea- vital to investors. soned that a central purpose of the se- Pursuant to Rule 2(e), the Commis- curities laws was the protection of sion had instituted proceedings investors through the requirement that against Touche Ross and three of its issuing companies disclose fully to the former partners. The order for pro- public information material to invest- ceedings alleged that in examining two ment decision-making. The Commis- public companies, the accountants had sion, with its small staff, could not pos- 51 sibly review in detail each company's remedy provisrons of the securities financial statements; necessarily, then, laws, and the effect of scienter stan- the Commission had to rely heavily on dards on the overall enforcement both legal and accounting profession- scheme contemplated by those stat- als to perform their tasks diligently utes, the United States Court of Ap- and responsibly. The Court concluded peals for the Second Circuit rejected that Rule 2(e) represents an attempt by Mr. Aaron's contention that the Su- the Commission to protect the integ- preme Court's decision in Emst & Emst rity of its most important processes, v. Hochfelder, 425 U.S. 185 (1976) in and is therefore a valid exercise of which it was held that scienter is neces- the Commission's general rulemaking sary in a private damage action under power. Section 100b),compels the same result SEC v. Aaron: SEC v. Coven-The in a Commission injunctive action. The Aaron and Coven cases raised the im- Court also rejected a scienter require- portant issue of whether the Commis- ment for Commission injunctive ac- sion must prove scienter in injunctive tions brought under Section 17(a), actions brought under the antifraud relying on its prior decision in Coven. provisions of the Securities Act of Mr. Aaron subsequently filed a petition 1933 (Securities Act) and the Securi- for certiorari in the Supreme Court. ties Exchange Act of 1934 (Exchange The imposition of a scienter require- Act). In both cases, the United States ment in all Commission proceedings Court of Appeals for the Second Cir- brought to prevent recurrence of con- cuit held that scienter need not be duct that operates as fraud or deceit on proved in such an action. public investors, and the resulting dif- The Court of Appeals' holding in ficulty in providing a defendant's state Coven involved proceedings brought of mind, would erode significantly the under Section 17(a) of the Securities Commission's ability to enforce the Act. The Court noted that the language Federal securities laws and deprive of Section 17(a) does not indicate that investors of needed protections. More- liability must be predicated in an intent over, the question of whether scienter to manipulate, deceive or defraud, and is required in an injunctive proceeding thus concluded that scienter is not an of Section 17(a) and Section 19(b) has element of a violation of that section. been and continues to be the subject The Court also stated that even negli- of substantial litigation. With respect gent conduct is sufficient to impose li- to Section lO(b), there has been great ability upon an alleged aider and abet- uncertainty in the courts of appeals tor who "should be able to conclude and the district courts as to whether that his act was likely to be used in is- scienter is an element. suance of the illegal activity ...... The Recognizing these factors, the Com- Supreme Court thereafter declined to mission, in responding to Mr. Aaron's review the Court's decision in Coven. petition for certiorari, has urged the In Aaron, the Court's holding in- Supreme Court to grant the petition in volved injunctive proceedings under order to bring certainty to the admin- both Section 17(a)of the Securities Act istration of the Federal securities laws and Section 1O(b)of the Exchange Act, and to conserve the resources now and Rule 10b.5 thereunder. Based on being expended by courts and parties, its analysis of the language of Section including the Commission, in litigat- lO(b), the legislative history of the Ex- ing these issues. (The petition for cer- change Act, the relationship between tiorari was granted by the Supreme Section 1O(b) and the express private Court on October 15. 1979.) 52 Burks v. Lasker-The issue raised in policies of the Investment Company Burks involved the extent to which and Investment Advisers Acts. The Federal policy, as articulated in the In- Court reasoned: vestment Company Act of 1940 (In- "Although [a] state statute cannot be vestment Company Act), limits the considered 'inconsistent' with federal power of directors of an investment law merely because the statute causes company to terminate derivative liti- the plaintiff to lose the litigation ... , gation brought by its shareholders. federal courts must be ever vigilant to Shareholders of an investment com- insure that application of state law pany registered under the Investment poses no significant threat to any iden- Company Act sued the company's di- tifiable federal policy or interest. ... rectors and its registered investment "And, of course, this means that un- adviser. The plaintiffs alleged that the reasonable ... or specific abberant or defendants had violated their duties hostile state rules ... will not be ap- under the Investment Company Act plied .... The consistency test guar- and the Investment Advisers Act in antees that [n]othing that the state can connection with a purchase by the do will be allowed to destroy the fed- company of Penn Central commercial eral right ... , and yet relieves federal paper. The investment company's dis. courts of the necessity to fashion an interested directors concluded that the entire body of federal corporate law suit was contrary to the best interests out of whole cloth." of the company and its shareholders Accordingly, the Court remanded and moved the district court to dismiss the case so that the Court of Appeals the action, which motion was granted. could determine the scope of directors' The United States Court of Appeals authority under State law to terminate for the Second Circuit held that the In- derivative litigation, and determine vestment Company Act deprives inde- whether State law is consistent with the pendent directors of an investment policies of the Investment Company company of authority to terminate Act and the Investment Advisers Act. nonfrivolous derivative litigation. The With respect to this latter inquiry, the Commission appeared amicus before Supreme Court observed that there the Supreme Court, contending that may well be "situations in which the the Investment Company Act does per- independent directors could reason- mit investment company directors to ably believe that the best interests of terminate such litigation, but only if the shareholders call for a decision not they are independent, fully informed, to sue .... " The implication of this and their decision is reasonable. The language is that it would be inconsist- Commission's primary purpose in par- ent with Federal policies to give effect ticipating was to persuade the Court to a board of directors' decision which that consideration of State and Federal is unreasonable-a pnnciple urged by law must be balanced and that Federal the Commission. law imposes a minimum standard on Ludlow Corporation v. SEC-In Lud- directors' decisions to terminate deriv- low, the United States Court of Ap- ative litigation, notwithstanding any peals for the District of Columbia lesser standard of State law. Circuit affirmed the order of the The Supreme Court held that State Commission approving the application law governing the authority of inde- of the Boston Stock Exchange (BSE) pendent directors to discontinue deriv- for unlisted trading privileges in the ative suits should be applied to the ex- common stock of Ludlow Corporation tent State law is consistent with the (Ludlow). Ludlow raised the issue of 53 whether an exchange, in applying for security. Prior to the Commission's ap- unlisted trading privileges in a stock, proval of the CBOE rule, members of must demonstrate that active trading the CBOE were given exclusive ap- in the stock will take place in Its mar- pointments as board brokers to accept ket. In approving the BSE's unlisted limit orders in particular options from trading application, the Commission other brokers on the floor, to store rejected such a requirement, in keep- those orders in limit order books, and ing with the Commission's long-stand- to assure timely execution of those or- ing policy, endorsed by Congress, of ders when, and if, the prevailing mar- liberally granting unlisted trading priv- ket price matched the specified limit ileges as a means of promoting com- order price. The CBOE rule eliminates petition among the nations securities the system of exclusive appointment of markets. board brokers, and instead permits the In affirming the Commission's order, CBOE directly to provide limit order the Court of Appeals emphasized the book services through employees importance which Congress attached known as "order book officials." to the liberal grant of unlisted trading In its order approving the CBOE rule privileges as a means to foster com- pursuant to Section 19(b) of the Ex- petition among exchanges, and the change Act, the Commission found role which unlisted trading must play that the rule would further several in achieving the objectives of a na- purposes of the Act-by improving the tional market system. In specific, the efficiency of the CBOE's market, en- Court also clarified that the Commis- hancing the floor surveillance capabil- sion's grant of unlisted trading privi- ities of the CBOE, and fostering com- leges does not require a determination petition between the CBOE and other that an active market will develop on options exchanges. The Court of Ap- the applicant exchange. Rather, an ap- peals, in affirming the Commission's plicant need only show that if an active order in all respects, stressed that the trading should develop, it will proceed Commission's findings were predic- in a fair and orderly manner. As a re- tive, policy-oriented decisions, and sult of Ludlow, the Commission has re- hence judicial deference to the Com- ceived renewedsupport to pursue a lib- mission's expertise was particularly ap- eral approach in granting unlisted propriate. Applying a limited scope of trading privileges, thereby enhancing review, the Court of Appeals found that the Commission's ability to facilitate the Commission's substantive findings intermarket competition in a national were not arbitrary or capricious. The market system. Court also found that the informal no- Belenke v. SEC-In Belenke, the tice and comment procedures followed United States Court of Appeals for the by the Commission comported with Seventh Circuit affirmed the Commis- the requirements of the Exchange Act. sion's order approving a proposed rule The Court thus rejected petitioners' ar- change of the Chicago Board Options gument that the more elaborate pro- Exchange (CBOE) to improve the cedures of Section 6(e) of the Ex- CBOE's system for handling and exe- change Act were inapplicable, since cuting "limit" orders of public cus- the fees fer limit order services under tomers. "Limit" orders are those which the CBOE rule were not fees "charged specify a minimum price at which a by members," but rather were fees customer is willing to sell, or alterna- charged by the CBOE itself. tively, a maximum price at which a The Belenke decision is of impor- customer is willing to buy a particular tance both to national securities ex- 54 changes and the Commission as judi- sion of the Exchange Act, in Superin- cial recognition of an exchange's tendent of Insurance v. Bankers Cas- ability to improve the operational effi- ualty & Life. While the Lewis case has ciency of its market, consistent with not yet been decided, the Court's opin- the purposes of the Exchange Act. The ion in non-securities cases, as well as Court of Appeals' decision reaffirms Touche Ross, bear on the continued in- that judicial deference should be ac- ability of private actions for the viola- corded to the decisions of the Com- tions of some of the statutory provi- mission in exercising regulatory or sions of the Federal securities laws. oversight authority over the opera- ALI Code-Over the past ten years, tions of the nation's securities mar- the American Law Institute has spon- kets. Finally, this case gives effect to sored the drafting of a Federal Secu- Congress' intent that the Commission rities Code, under the direction of Pro- have considerable flexibility in fash- fessor Louis Loss of the Harvard Law ioning its administrative procedures School. In May 1978, the Institute's where the Commission acts through membership approved a 766-page informal, legislative-type proceedings. "Proposed Official Draft" of the Code, which is designed to replace the six Other Significant Projects separate Federal statutes administered Implied Rights of Action-A number by the Commission with a single com- of caseswere decided by the Supreme prehensive and unified piece of legis- Court in the past term concerning im- lation. plied rights of action, which have a The Commission and its staff spent substantial impact with regard to the a great deal of time and effort during Federal securities laws. In Touche Ross the fiscal year analyzing and studying & Company, Inc. v. Redington, the the proposed Code in preparation for Court refused to imply a private cause its expected introduction in Congress. of action for violation of the books and The task of evaluating the benefits the recordkeeping provision of the Ex- Code would offer and the possible dif- change Act, because that provision, in ficulties it might create, in terms of the Court's view, neither conferred spe- maintaining an effective scheme of cial rights on particular parties nor pro- investor protection, is exceedingly hibited certain conduct as unlawful. complex. While in many respects the Because the Court believed that the ALI draft seeks simply to codify exrst- provision was intended by Congress to ing law, it would make significant sub- act as an early warning system-so stantive changes in many other re- that the Commission could pursue its spects. enforcement obligations after review- For example, the Code would re- ing the filings required to be made- place the current emphasis on registra- implied actions have by no means tion of individual offerings of securities been denied entirely. with a "continuous disclosure" system The Court ordered that reargument based on issuer registration, and pro- be held in Lewis v. Transamenca Mort- viding for less stringent filing and dis- gage Advisers, Inc., where the sole is- closure requirements in connection sue was whether private cause of ac- with certain distributions of the secu- tion was implied for violations of the rities of "one-year registrants" (i.e., is- antifraud provision of the Investment suers that have been registered for one Advisers Act. The Court had recog- year). In addition, certain changes nized the existence of private action would be made in tender offer regula- under the comparable antifraud provi- tion, including a ten-day preacquisi-

55 tion notice and publicity requirement, sion staff held a series of meetings with along with express preemption of State Professor Loss and his group of advis- tender offer legislation. Also, invest- ers to discuss concerns about both ment advisers would be subject for the substantive positions taken in the first time to qualification and financial Code and the drafting of various Code responsibility requirements, and the provisions. In response, Professor Loss Commission would be given rulernak- has made a substantial number of tech- ing authority over the unethical con- nical amendments to the Code. In Sep- duct of securities professionals. In the tember 1979, the Commission itself area of civil liability, there would be began meeting with Professor Loss, in many new express rights of action cre- sessions open to the public, to discuss ated, along with a grant of authority to the issues raised by the staff. As the the courts to imply private rights of ac- Code nears the beginning of Congres- tion in certain circumstances. These sional consideration, the Commission are but a few of the literally hundreds will be drawing together the results of of modifications that the Code would its review to help it determine what for- make as compared with current law. mal position to take before Congress During the initial review of the pro- with respect to the Code. posed Code, members of the Comrnis-

56 POBLIC OTILITY HOLDING COMPANIES

Composition the Commission. Of this amount, ap- proximately $1.6 billion was long-term Under the Public Utility Holding debt financing, and over $1 billion was Company Act of 1935 (Holding Com- for equity financing. These amounts pany Act), the Commission regulates represent a 24 percent decrease in interstate public utility holding com- long-term debt financing over fiscal pany systems engaged in the electric year 1978 and a 19 percent increase in utility business or in the retail distri- the sale of common and preferred bution of gas. The Commission's juris- stock. In addition, the Commission ap- diction also covers natural gas pipeline proved over $3.5 billion of short-term companies and nonutility companies debt financing and $291 million of pol- which are subsidiary companies of reg- lution control financing for the 14 reg- istered holding companies. istered holding company systems. Ta- There are presently 14 registered ble 37 in the Appendix presents the holding company systems with aggre- amount and types of securities issued gate assets, as of June 30, 1979, of under the Holding Company Act by $47.5 billion. Total holding company these holding company systems. system assets increased by over $1.1 billion in fiscal 1979, even with the loss Fuel Programs of Ohio Edison Company who was During fiscal year 1979, the Com- granted a Section 3(aX2) exemption mission authorized $460.6 million of from the Holding Company Act in fuel exploration and development cap- April 1979. Total operating revenues, ital expenditures for the holding com- as of June 30, 1979, were $17.9 bil- pany systems. These expenditures lion, a $700 million increase over the cover annual fuel programs subject to previous year. In the 14 systems there regulation under the Holding Company are 60 electric and/or gas utility sub- Act defined on geographical and func- sidiaries, 70 nonutility subsidiaries, tional terms. Table 38 in the Appendix and 20 inactive companies, or a total lists the authorization by holding com- of 168 system companies, including pany system for each fuel program. the top parent and subholding com- Largely as a result of the energy cri- panies. Table 35 in the Appendix lists sis, holding companies have embarked the systems and Table 36 lists their ag- on major and expensive new commit- gregate assets and operating reve- ments to acquire substantial additional nues. capital. Generally, the arrangements involve formation of several new sub- Financing sidiaries for producing, transporting During fiscal year 1979, approxi- and financing fuel supplies or the in- mately $2.7 billion of senior securities vestment of capital for the exploration and common stock financing of the 14 of and development drilling for min- registered systems was approved by erai reserves with a right to production

57

315-805 0 - 80 - 6 accruing to such investment. Since vested by the parent holding company. 1971, the Commission has authorized Because the subsidiary service com- expenditures of over $2.6 billion for panies are service oriented, they are fuel programs of holding companies. heavily labor intensive having 11,061 employees and assets of over $229 Service Company Operations million. During February 1979, the At the end of calendar year 1978, Commission approved a proposed there were 11 subsidiary service com- amendment to the Uniform System of panies providing managerial, account- Accounts for public utility service ing, administrative and engineering companies. The revised system of ac- services to 11 of the 14 holding com- counts will (1) provide for closer coor- panies registered under the Holding dination with the Federal Energy Reg- Company Att. The billings for services ulatory Commission's Uniform System rendered to the holding company sys- of Accounts for electric and gas public tems amount to $423 million or 2.37 utilities, (2) facilities for conduct of au- percent of the total revenues generated dit and account inspection programs, by the electric and gas operating utili- and (3) Improve reports filed by service ties of the holding company systems. companies subject to the Act. The re- All services are rendered at cost to the vised system of accounts is effective operating utilities, with several sys- January 1, 1980, for the 11 subsidiary tems including a return on capital in- service companies.

58 CORPORATE REORGANIZATIONS

The Commission's role under Chap- den, many of the cases involve only ter X of the Bankruptcy Act, which pro- trade or bank creditors and few public vides a procedure for reorganizing cor- investors. The Commission seeks to porations in the United States district participate principally in those pro- courts, differs from that under the var- ceedings in which a substantial public ious other statutes which it adminis- investor interest is involved. However, ters. The Commission does not intiate the Commission may also participate Chapter X proceedings or hold its own because an unfair plan has been or is hearings, and it has no authority to de. about to be proposed, public security termine any of the issues in such pro- holders are not represented ade- ceedings. The Commission partici- quately, the reorganization proceed- pates in proceedings under Chapter X ings are being conducted in violation to provide independent, expert assist. of important provisions of the Act, the ance to the courts, participants, and facts indicate that the Commission can investors in a highly complex area of perform a useful service, or the court corporate law and finance. It pays spe- requests the Commission's participa- cial attention to the interests of public tion. security holders who may not other- The Commission in its Chapter X ac- wise be represented effectively. tivities has divided the country into Where the scheduled indebtedness five geographical areas. The New York, of a debtor corporation exceeds $3 Chicago, Los Angeles and Seattle reo million, Section 172 of Chapter X re- gional offices of the Commission each quires the court, before approving any have responsibility for one of these plan of reorganization, to submit it to areas. Supervision and review of the the Commission for its examination regional offices' Chapter X work is the and report. If the indebtedness does responsibility of the Division of Cor. not exceed $3 million, the court may, porate Regulation of the Commission if it deems it advisable to do so, submit which, through its Branch of Reorga- the plan to the Commission before de- nization, also serves as a field office for ciding whether to approve it. When the the southeastern area of the United Commission files a report, copies or States. summaries must be sent to all security During the fiscal year, the Commis- holders and creditors when they are sion entered three new Chapter X pro- asked to vote on the plan. The Com- ceedings involving companies with ag- mission has no authority to veto a plan gregate stated assets of approximately of reorganization or to require its $69.9 million and aggregate indebt- adoption. edness of approximately $93.6 million. The Commission has not considered Including the new proceedings, the it necessary or appropriate to partici- Commission was a party in a total of pate in every Chapter X case. Apart 97 reorganization proceedings during from the excessive administrative bur- the fiscal year (a list of these proceed-

59 ings appears in Table 39 in the Appen- During the fiscal year nine proceed- dix of this report). The stated assets of ings were closed, leaving 88 in which the companies involved in these pro- the Commission was a party at year ceedings totaled approximately $4.9 end. billion and their indebtedness about $4.5 billion.

60 ADMINISTRATION AND MANAGEMENT

During the fiscal year 1979, the ommendations to assesstheir feasibil- Commission stressed, more than ever ity and to propose a plan for imple- before, its commitment to improving mentation. Based on the findings of management information systems and the task force, a plan for such a restruc- strengthening internal management turing was accepted and is intended for capabilities. This heightened emphasis implementation during fiscal 1980. At on enhanced administrative and man- the close of the fiscal year, negotia- agerial support is a direct reflection of tions were underway, with faculty from increased recognition of potential ben- the Harvard Business School, to pro- efits that can flow to the public from vide expertise and assistance in imple- better systems, procedures, plans, and menting industry specialization, a new organization structures. It is intended and cost effective filings review strat- that the initiatives of 1979 will emerge egy, and a quality control program. in the form of operational economies, An intensive workload/cost analysis increased effectiveness and greater re- of the Chicago Regional Office re- sponsiveness in the 1980's. sulted in decisions to close the Cleve- land and St. Louis Branch Offices and to consolidate these operations with General Management and those of the parent office In Chicago. Program Developments This decision was based on a changing The Commission undertook several dispersion of activities due to the projects during the fiscal year which emergence of options markets in Chi- resulted in management improve- cago, a reduction of enforcement ac- ments and program efficiencies. tivity in the branches and development A management study conducted by of specialized units in Chrcaqo, Apart the Executive Director's Office in fiscal from major operational improvements, year 1978 was the catalyst for organi- it was also concluded that there were zational changes in the Division of Cor- some cost benefits to be derived from poration Finance that will be imple- taking advantage of the economies of mented during the next fiscal year. scale available through consolidation Major recommendations for the study of activities at the principal office. concerned development of a review An organizational analysis of the Of- strategy for disclosure filings and the fice of Public Affairs led to a decision need to restructure the division's work- to split the legislative and public infor- load by industry groupings so as to al- mation functions. A new Office of Leg- low Commission staff an opportunity islative Affairs was created within the to develop expertise concerning pecu- Office of the Chairman and given re- liar industry patterns and trends, and sponsibility for handling matters relat- to allow more informed review of prior- ing to legislation and legislative liai- ity filings. During 1979, a Corporation son. The Office of Public Affairs will Finance task force studied these rec- continue to handle general public in-

61 formation and press relations func- ance. Other steps taken to improve tions. processing activities included conver- The Office of the Executive Director sion to a more efficient operating sys- conducted a major management re- tem control program and utilization of view of the Division of Market Regu- on-line programming and file mainte- lation. The study report to the director nance techniques. As a result of these and management staff of the division improvements the Commission has resulted in significant changes in both been able to continue to make signifi- internal procedures and organizational cant progress in the development and structure. The study also served as a implementation of new information basis for an increased focus, within the systems while concurrently expanding division, on such issues as communi- the use of the teleprocessing network cation, project management, training, to include all of the Commission's re- recruitment, and financial recordkeep- gional offices. The network was sched- ing and controls. uled to be further extended to include four of the largest branch offices dur- ing the first quarter of fiscal 1980, with Information Systems Manage- the remaining branches scheduled to ment come on line later in the year. In fiscal year 1979 the Commission Major System Enhancements-Major made vast progress toward improving information systems implemented dur- its information handling processes. ing 1979 included two systems for Detailed specifications regarding com- which developmental work was initi- puter processing capabilities that will ated in 1978. The first was a compre- be required to meet the agency's data hensive records management system processing needs over the next five to which, utilizing microfilm and tele- eight years were completed, and a processmg techniques, provides the formal request for delegated procure- staff with the capability for directly en- ment authority was presented to the tering and retrieving information relat- General Services Administration ing to the receipt and disposition of (GSA). In anticipation of GSA ap- various reports filed with the Commis- proval, steps were taken to develop so- sion. As part of this project, on feb- licitation documents that will result in ruary 5, 1979, the Commission offi- the installation of a new computer sys- cially adopted microfilm as a substi- tem by the end of fiscal year 1980. tute record for many of the paper files Fectlities Improvement-While much previously maintained. Under this was accomplished in fiscal year 1979 mode of operation, microfiche copies toward meeting its long-term infor- of filings can be easily and quickly mation processing needs, the Commis- reproduced and distributed to all re- sion continued to make more efficient questers, thus ensuring the highest and effective use of the existing IBM possible level of integrity as the official 360-65 computer installed in 1978. In file is centrally retained at all times. this regard, the memory capacity of Expansion of the micrographics pro- the central processing unit was in- gram to include additional Commis- creased and several components were sion files was scheduled for the first added to expand our on-line storage and second quarter in fiscal 1980. capability-two actions that enabled The second system involves an ex- the Commission to process an im- pansion of the Commission's Name mensely increased workload without and Relationship Search system. The any degradation in system perform- new process provides the staff with a

62 facility for immediate terminal access ment of a generalized, user-oriented to an index of name and associated information retrieval capability that data on companies and individuals will operate through teleprocessing having a direct or indirect relationship and data base management tech. with the Commission, and replaces a niques; expansion of an existing sys- system of manual requests which very tem for analyzing data contained in In- often required several days to process. vestment Company Annual Reports, A third system initiated in 1978, for Form N-1R; creation of an on-line sys- which extensive development work tem for retrieving index information was accomplished in 1979, is the Com. relating to releases published in the mission's Case Activity Tracking Sys- SEC Docket; and development of a se- tem (CATS). Scheduled for operational ries of computer programs for produc- testing early in fiscal year 1980 and lrn- ing a variety of reports from data filed plementation in the second quarter, by certain institutional investors and this system will promote better man. investment managers under Rules 13d, agement by providing the Commission 13f, and 13g. with an efficient means of monitoring current events and status of all active Systems Administration-In addition investigations and litigation. to these enhancements of agency in- Other important systems work pur- formation systems and automated sued in 1979 included the initiative of processing techniques, several other a prototype correspondence tracking measures were taken in fiscal year system to more effectively control the 1979 to enhance the internal manage- thousands of pieces of correspondence ment and administration of the Com- flowing through the Office of the mission's data processing activity. An Chairman, refinement and enhance- important event was the reorgnization ment of various internal personnel, of the Office of Data Processing de- position management, and cost ac- signed to make it more adaptable and counting systems; expansion of the responsive to the changing nature of complaint processing system to allow the Commission's automated data for the experimental preparation of let. processing (ADP) needs. A second un- ters and notices by means of auto- dertaking involved an intensive pro- mated electronic techniques; develop. gram to enhance interrelationship be- ment of a series of statistical programs tween the ADP staff and the users of for use by the Commission's staff in its ADP services. This was accomplished special study of the options market; through the adoption of a formal pro. expansion of the broker dealer/invest- cedure for identifying and requesting ment adviser data baseto produce var- ADP support, the creation of a Com. ious statistics incidental to a corporate mission-wide ADP liaison group, and governance study being conducted by the establishment of more effective the Division of Corporation Finance; communication procedures to insure and development of a system for main- that critical information waseffectively taining and reporting data filed pur. relayed to and from ADP personnel. suant to Section 4(2), Rule 146, of the Another step taken to increase ADP Securities Act of 1933 (Securities Act). efficiency was the elimination of inter. Developmental work on several nal cardpunching and transfer of this other information systems was also in. function to a commercial concern. In itiated during fiscal year 1979, many addition to substantial dollar savings, of which will be implemented by fiscal this action has provided the Commis- year 1980. These included establish- sion with much more flexibility in reo

63 sponding to changing data entry re- The proposed system would monitor quirements. all securities markets activities and One final issue receiving much em- seek to identify possible market irreg- phasis dunnq 1979 was ADP security. ulanties or violations of self-regulatory Recognizing that an expanded ADP organization rules and the Federal se- program would require much tighter curities laws. It would thus enhance ex- control and protection of ADP reo isting Commission facilities in areas sources, the Commission has taken such as market surveillance and in- several actions toward bolstering its spections of self-regulatory organiza- ADP security program. These included tions and broker-dealers. Such a sys- the establishment of a full-time posi- tem will neither diminish nor supplant tion of ADP security officer, the con- the efforts of self-regulatory organiza- duct of an ADP risk assessment (to be tions to regulate their market places completed early in fiscal year 1980), and market professionals; rather it is formalization of an interagericy agree- intended to provide the Commission ment for back-up computer processing with a greater capability to detect and time, and establishment of a personnel follow-up on abberrant tradinq prac- screening program for ADP staff, as tices, particularly when subjects out- mandated by the Office of Personnel side the jurisdiction of the self-regula. Management (OPM). tory organizations are involved. By providing the Commission with en- hanced Information analyzed for par- Market Oversight Surveillance ticular trading patterns, the system will System place the Commission in a better po- The Office of the Executive Director, sition to coordinate, with each self-reg- in cooperation with the DIvisions of ulatory organization, the Investigation Enforcement and Market Regulation and follow-up of particular matters. and utilizing the services of an inde- If the proposed system receives the pendent systems consultant, has been approval of the requisite governmental engaged in the study and design of a bodies, implementation is expected to market oversiqht and surveillance sys- require at least five years. Implemen- tem during the past year. That project tation will be geared to advancements has resulted in a proposed design, in the securities industry and to devel- which is presently being reviewed by opments in the evolving national mar. the Commission staff. In addition, the ket system. Commission is undertaking to imple- ment a pilot of the proposed design in Financial Management order to test the design and evaluate its The Commission collects fees for potential for enhancing the Commis- the registration of securities, securities sion's oversight and surveillance func- transactions on national securities ex- tions. Budgetary approval by the Of- changes, and miscellaneous filings, re- fice of Management and Budget (OMB) ports and applications. In fiscal year and Congress and procurement ap- '1979, the Commission collected a rec- proval by GSA will be required before ord $33 million dollars in fees, rep- any portion of the larger overall system resenting approximately 47 percent of can be implemented. By mid spring the total funds appropriated by the 1980 the Commission is hopeful that Congress for Commission operations. a determination will have been made These figures are up from $26 million, as to the scope and timetable for im- representing 42 percent of funds ap- plementation of a larger system. propriated in fiscal year 1978. Nearly

64 $4 million of the increase in collec- cial centers throughout the United tions was attributed to Securities Act States. registration fees resulting from both Although relatively small by Federal higher volumes and larger offerings, agency standards, the Commission while higher stock exchange volumes recognizes the importance of person- accounted for $2.3 million of the in- nel management as an internal part of crease. overall management effectiveness. It In 1979, the Office of the Comptrol- has, therefore, initiated innovative pro- ler initiated implementation of an au- grams leading to both more effective tomated integrated financial manage- use of personnel resources and the in- ment system. By the end of the fiscal tegration of personnel management year, the system was producing com- into general decision-making. Enact- prehensive accounting and budget ex. ment of the Civil Service Reform Act ecution reports which provide timely of 1978 (CSRA) has encouraged and information for budgetary review and accelerated these Commission initia- policy planning both Commission- tives. The intent of the CSRA is to wide and by organizational unit. place greater stress on performance, to Fiscal year 1979 also saw partial im- give managers the tools needed to plementation of"a budget formulation carry out their assignments and to hold system. Reports generated by this sys- managers accountable for the effec- tem present budgetary alternatives at tiveness of their units. As a result, a various levels of staffing and funding, very substantial investment of staff and are of considerable benefit in ana- time and funds has been devoted to the lyzing different zero base budget pos- implementation of the Act, and an sibilities. even greater commitment will be re- A position tracking system, devel- quired in fiscal year 1980. Although oped in fiscal year 1979, has been im- the full benefit of this investment will plemented and will be fully operational not be realized for several years, sig- in the first quarter of fiscal year 1980. nificant accomplishments are already Other current initiatives intended to noticeable durmq the first year of the improve financial management or con. CSRA's existence. serve resources include completion of Senior. Executive SerUlce- The Com- a budget handbook, continued auto- mission was alloted 46 senior execu- mation of payroll, fee collection and tive positions in the initial Senior Ex- budget call procedures, and establish- ecutive Service (SES) allocation, 44 of ment of uniform agency policies on the which were filled by incumbents, as use of overtime and the employment provided by the new law. of temporaries. These projects will all Extensive training was given to sen- be carried over into fiscal year 1980. ior executives regarding the objectives and policies of the senior executive service. This training included in-depth Personnel Management briefings by officials for OPM, working At the close of the fiscal year, the seminars of senior executives con- Commission's total strength was ap- ducted by the Chairman and the Ex- proximately 2,020. About two-thirds of ecutive Director, and training sessions these personnel were employed in the presented by personnel consultants. agency headquarters in Washington, This training program had as its pur- D.C.; the remaining one-third were lo- pose education of key Commission of- cated in the nine regional and six ficials as to the f1exibilities and oppor- branch offices located in major finan- tunities offered by the CSRA for

65 increased effectiveness in personnel CSRA-Procedures have been devel- management. oped and implemented for the estab- Based on a careful review of the liter- lishment of a probationary period for ature, interviews and personnel special- newly appointed managers and super- ists from academia and from the private visors, as provided in Title III of the sector, and a review of programs in CSRA. This program enables division other agencies, a performance ap- directors and office heads to promote praisal system has been developed and qualified technicians and specialists implemented for the members of the into supervisory positions, with the un- SES. This system, which will be used as derstanding that they can revert back a basis for determining assignments to prior positions after six months if and compensation, will be monitored they do not give evidence of supervi- closely to identify necessary refine- sory effectiveness. Planning is cur- ments and to ensure that it continues to rently under way for the merit pay pro- meet all of the objectives prescribed by gram required by Title V of the CSRA, the CSRA_ Finally, an Executive Re- under which supervisors and middle source Board and a Performance Re- managers would be compensated on view Board have been established to the basis of accomplishments and or- oversee and coordinate manpower ganizational performance, rather than planning, recruiting, performance ap- on the basis of length of service. praisals and other aspects of executive On-going Programs-Title III of the personnel management. CSRA authorizes acceptance of volun- Performance Appraisal-A great deal teer services where they provide edu- of research and planning has gone into cational experiences for students. The the development of performance ap- Commission is making extensive use praisal systems at the Commission. A of this provision of the CSRA through comprehensive promotion appraisal its student observer program, under program being conducted by OPM (and which law students work for the Com- reported in the 1978 Annual Report) is mission for up to 20 hours a week. The continuing. When completed, this pro- students receive course credits in lieu gram is expected to replace fairly sub- of salary, as well as a first hand ac- jective judgments with valid iI1tlicators quaintance with Federal employment. of successful performance in attorney A number of student observers have positions. In addition to achieving a already become permanent staff mem- higher degree of equity in awarding pro- bers following graduation from law motions, it is hoped that the new system school. will enable Commission managers to Despite the heavy investment of predict success in specific positions time devoted to implementation of the with a higher degree of accuracy. CSRA, the Commission continued to This effort is complemented by asep- stress and initiate improvements in arate study being undertaken by a pri- other traditional areas of human re- vate consultant and an anticipated con. source management. tract with other consultants from OPM. The Commission has continued to When these studies are completed, it is refine its attorney recruitment system, expected that they will provide the basis with the dual goal of attracting top cal- for a comprehensive, valid and equita- iber applicants and ensuring that per- ble appraisal system for managers, su- sons employed represent a cross sec- pervisors, professional staff members tion of all segments of American and clerical personnel. society. One notable achievement in Other Accomplishments Under the fiscal year 1979 was the Commission's

66 special effort to attract minority law participated in FEl's three week lead- graduates. This was accomplished by ership program. In addition, other key means of an enormously successful staff members attended the Program "job fair" to which 129 law students for Senior Managers at Harvard Busi- were invited. The students heard pre- ness School, Managerial Grid, team sentations from the Chairman, several building programs and a program Commissioners, the Executive Direc- sponsored by the National Institute of tor and the heads of all major offices, Trial Advocacy at the University of Col- resulting in the permanent employ- orado. This emphasis reflects recogni- ment of 11 minority attorneys and tion of the increased attention to exe- summer job opportunities for four sec- cutive development that is required by ond year students. Another program, the CSRA, and will be further ex- carried out under the sponsorship of panded in fiscal year 1980. the Office of General Counsel, resulted The employee counseling program in the hiring of four outstanding gradu- begun in fiscal year 1978 was ex- ates who had served as law clerks to panded in an effort to be more respon- district and appellate court judges. sive to the needs of employees, and to The highly successful upward mobil- enhance the role of the Commission ity program instituted in fiscal year as a responsible and concerned em- 1978 was continued and expanded. ployer. A discrete Employee Relations Ten additional upward mobility posi- unit was established in the Office of tions were established, bringing the to- Personnel, and its accomplishments tal number of positions under this pro- numbered among them expanded re- gram to 22. This number, however, tirement counseling, counseling on fi- only partially reflects the Commis- nancial planning, and more cornpre- sion's progress in upward mobility. As hensive counseling on insurance plans. a direct result of early successes with The Commission conducted an ag- this program, a number of entry-level gressive Vietnam Veterans Week pro- positions were established outside the gram, consistent with the spirit of the formal program; this will further assist Congressional resolution on this sub- the agency in using the capabilities of ject. The thrust of the program was to its existing staff, while at the same sensitize the staff to the particular time providing other bonafide ad. needs of the Vietnam veteran, to pro- vancement opportunities for lower mote the hiring and professional de- grade employees. velopment of these veterans, and to The Commission continued to em. recognize their post-service as well as phasize staff training in fiscal year service accomplishments. 1979. Approximately 850 of the Com- The Commission also continues to mission's 2,000 staff members at- emphasize its highly successful pro- tended formal training or development gram for the recruitment of handi- programs during the year, an approxi- capped persons. This effort reflects a mate 10 percent increase over 1978. commitment to remove artificial bar. In particular, more staff time and riers-both architectural and attitudi- funds were allocated to managerial nal-to the employment of full utili- and executive development than in any zation of individuals who, despite previous year. The Commission was handicapping conditions, are able to represented at the Federal Executive make a meaningful contribution to Institute's (FEI) seven week Senior Ex- Commission objectives. ecutive Education Program for the first Equal Employment Opportunity-In time, while five other senior managers response to Title III of the CSRA, the

67 Commission has undertaken extensive 1977, 33 in 1975, and 11 in 1973. efforts to identify underrepresentation Minorities generally registered of minorities and women on the staff, across the board gains in key profes- both by grade level and by occupa- sional and middle management posi- tion. Strategies are being implemented tions (GS-13-15)' between fiscal years to correct the underrepresentation 1977 and 1979. At the close of fiscal through enhanced recruiting efforts di- year 1977, there were only 37 minori- rected to schools with large minority ties occupying positions in these and female enrollment, maintenance grades in contrast to 49 at the end of of equal opportunity recruitment files, fiscal year 1979, for a 32.4 percent in- expansion of the upward mobility pro- crease during the two year period. Sim- gram, activation of individual training i1arly, women also showed an increase and development plans, and coopera- during this period-holding 82 GS-13 tion with OPM in eliminating many of through 15 positions, up from 56 in the complex procedures and require- 1977. ments which have raised barriers to the recruitment and hiring of minorities and women. These procedural efforts Activity Onder The Freedom Of will be combined with seminars for Information Act managers and supervisors designed to Commission rules implementing the stress recognition of EEO responslbil- Freedom of Information Act provide ities and provide instructions in the that the public may inspect or obtain strategies which may be employed to copies of records maintained by the eliminate underrepresentation. Commission, with the exception of cer- In part because of these efforts, the tain specified categories of informa- total number of women attorneys in tion. During 1979, the Commission reo the work force at the Commission con- ceived 1,318 requests for information; tinues to increase. Since 1977, 63 up 5 percent from 1978. women attorneys obtained employ- ment at the Commission, bringing their total representation to 168 as of Space Management the end of fiscal 1979. This increase Problems stemming from inade- represents a 60 percent rise in female quate and poorly planned space con- attorney employment during the two tinue to present some of the Com. year span. mission's most serious operational Correspondent to the rise in the difficulties. Headquarters personnel number of women attorneys, there has are scattered among three locations, been an overall increase in their total requiring costly, time consuming and percent of the Commission's attorney inefficient movement of equipment, work force. In 1977, women attorneys personnel and files. Some $150,000 is represented 16.4 percent of the total spent on alterations each year in an work force, whereas 22.5 percent of attempt to accommodate changing attorney positions were held by women staff requirements. In fiscal year 1979, in 1979. documentation for a consol ida ted Minority attorney employment rose Headquarters building was again pre- a healthy 21.4 percent during the pe- pared and submitted to GSA. riod between 1977 and 1979. At the In the meantime, the Office of Ad- end of fiscal year 1979, there were 51 ministrative Services and the Division minority attorneys employed at the of Corporation Finance have contin- Commission as compared to 42 in ued to work with GSA in connection

68 with the refurnishing and alterations from the sixth and seventh floors of the necessary to allow for the eventual old Federal Home Loan Bank Board movement of Commission personnel building to the third and fourth floors.

69

FOOTNOTES

'Securities Exchange Act Release No. "Securities Exchange Act Release No. 15251 (October 20, 1978), 15 SEC Docket 15575 (February 22,1979),16 SEC Docket 1370. 1163. 'Securities Exchange Act Release No. "Securities and Exchange Commission 15250 (October 20, 1978), 15 SEC Docket file Nos. SR-Amex-79-11, Securities Ex- 1355. change Act Release No. 16145 (August 29, 'SecurIties Exchange Act Release No. 1979),18 SEC Docket 195, SR-CBOE-79.9, 15671 (March 22, 1979), 17 SEC Docket 24. Securities Exchange Act Release No 16127 'Securities Exchange Act Release No. (August 21, 1979), 18 SEC Docket 162; SR. 15770 (April 26, 1979), 17 SEC Docket MSE.79.18, Securities Exchange Act Re- 369. lease No 16254 (October 5,1979),18 SEC 'Securities Exchange Act Release No. Docket 612; SR-Phlx-79.7, Securities Ex- 16214 (September 21, 1979), 18 SEC change Act Release No. 16253 (October 5, Docket 467. 1979), 18 SEC Docket 611; and SR.PSE. 79- "SecurIties Exchange Act Release Nos. 13, Securitres Exchange Act Release No 15413 (December 15, 1978) and 16215 16234 (October 2, 1979), 18 SEC Docket (September 21, 1979), 16 SEC Docket 510 561. and 18 SEC Docket 475. 19Securities Exchange Act Release No. 'Securities Exchange Act Release No. 15762 (April 24, 1979), 17 SEC Docket 15769 (April 26, 1979), 17 SEC Docket 356. 361. •Securrties Exchange Act Release No. '044th Annual Report at 13. 15926 (June 15, 1979),17 SEC Docket 950. "Securlties Exchange Act Release No. 9Bradford National Clearing Corporation et 15241 (October 18, 1978), 15 SEC Docket al. v. Securities and Exchange Comrmssron 1319. et sl , 590 F.2d 1085 (D.C. Cir 1978). "Securities Exchange Act Release No. IOSecurities Exchange Act Release No. 15765 (April 27, 1979), 17 SEC Docket 15640 (March 14, 1979), 16 SEC Docket 416. 1318. "Securities Exchange Act Release No Illd. 16017 (July 11, 1979), 17 SEC Docket "44th Annual Report at 6. 1243. "Securities Exchange Act Release Nos. "Securities Exchange Act Release No 13760 (June 18, 1977), 12 SEC Docket 15533 (, 1979), 16 SEC Docket 1275; 14056 (October 17, 1977), 13 SEC 854. Docket 366; 14057 (October 17, 1977), 13 "SecuritIes Exchange Act Release No. SEC Docket 375; 14878 (June 22, 1978), 15 16049 (July 27, 1979), 17 SEC Docket SEC Docket 98; 15026 (August 3, 1978), 15 1475. SEC Docket 494; and 14991 (July 25, 1978), 15 SEC Docket 359. "Securities Exchange Act Release No. "House Comm. on Interstate and Foreign 16112 (August 16, 1979), 18 SEC Docket Commerce, 96th Cong., 1st Sess , Report of 67. the Special Study of the Options Markets to "Securities Exchange Act Release No. the Securities and Exchange Commlssion 14234 (December 14, 1977). 13 SEC (Comm. Print 1978). Docket 999. »ta. at 1. '.Securities Act Release No 6099 (Au- '"Id. gust2, 1979), 17 SEC Docket 1422

71 "Securities Act Release No 5979 (Sep- '.Securitles Exchange Act Release No. tember 19.1978).15 SEC Docket 1109 15998 (July 5. 1979), 17 SEC Docket 1176. '.Securltles Exchange Act Release No. "Securities Exchange Act Release No. 15289. (November 1. 1978). 16 SEC Docket 15376 (December 1. 1978). 16 SEC Docket 12. 333. "Securities Exchange Act Release No. >2Securlties Exchange Act Release No. 15683 (March 29. 1979). 17 SEC Docket 16049 (July 27, 1979). 17 SEC Docket 92 1475. "SecuritIes Exchange Act Release No. »Securlnes Exchange Act Release No. 15867 (May 23. 1979). 17 SEC Docket 698 15812 (May 11. 1979). 17 SEC Docket 582 HExchange Act RuIe 1Ob-lO.Certain par- "[1976-1977 Transfer Binder] Fed. Sec. agraphs of the rule became effective on L. Rep. (CCH) '95.627 (S D.N.Y. 1976). June 1. 1977. Securities Exchange Act Re- "Securities Exchange Act Release No. lease Nos. 13508 (May 5. 1977). 12 SEC 15411 (December 13, 1978) 16 SEC Docket 299; and 14942 (July 7. 1978). 15 Docket 435. SEC Docket 245 '6Securities Exchange Act Release No. "SecuritIes Exchange Act Release No. 15936 (June 19, 1979), 17 SEC Docket 985 15219 (October 6. 1978), 15 SEC Docket l1Securities Exchange Act Release No. 1245. 15885 (May 30, 1979), 17 SEC Docket 754. "Securities Exchange Act Release No. '.Securlties Exchange Act Release No. 15220 (October 6. 1978), 15 SEC Docket 16282 (October 16. 1979). 18 SEC Docket 1260. 673. '6Securitles Exchange Act Release No. "Securitles Exchange Act Release No. 15984 (July 2, 1979), 17 SEC Docket 1167 15860 (May 23. 1979). 17 SEC Docket 695; "SecuritIes Exchange Act Release No Securities Exchange Act Release No. 16208 16018 (July 11, 1979). 17 SEC Docket (September 18. 1979), 18 SEC Docket 403 1244. "Securities Exchange Act Release No. 38Commodlty Exchange Act, 7 U.S.c. ~2 14531 (March 6, 1978).14 SEC Docket 356. (1977) 6'Securlties Exchange Act Release No. "43 FR 39956 (September 8, 1978). 16294 (October 24, 1979), 18 SEC Docket '.SeCUrltles Exchange Act Release No 728. 15898 (June 5.1979),17 SEC Docket 810 "Securlties Exchange Act Release No. "Securlties Exchange Act Release No. 15838 (May 18. 1979), 17 SEC Docket 678 15899 (June 5, 1979), 17 SEC Docket 819. 6'Securities Act Release No. 6084 (June 4215 U.S.C. ~78aaa.7811l, as amended by 25. 1979), 17 SEC Docket 1048. the Securities Investor Protection Act "Securities Exchange Act Release No Amendments of 1978. Pub. L No. 95-283. 16226 (September 27, 1979). 18 SEC 92 Stat. 249 Docket 509. "Securities Investor Protection Act Re- 6'Securities Exchange Act Release No. lease No 78 (October 20. 1978), 15 SEC 16162 (September 6. 1979). 18 SEC Docket Docket 1438. 241. "'Securlties Investor Protection Act Re- 66Report of the Advisory Committee on lease No. 86 (March 30. 1979), 17 SEC Corporate Disclosure, Chapter XIV. Page Docket 235. 427 (1977). "17 C F.R. 300100 et seq 61Securlties Exchange Act Release No. "Securities Exchange Act Release No. 13482 (April 28. 1977). 12 SEC Docket 15906 (June 8,1979).17 SEC Docket 891. 239. Securities Exchange Act Release No. "Securlties Exchange Act Release No. 13901 (August 29. 1977). 12 SEC Docket 16156 (August 31. 1979). 18 SEC Docket 1630. 237 "Securities Exchange Act Release No. '.Securitles Exchange Act Release No. 15384 (December 6. 1978), 16 SEC Docket 14800 (May 25. 1978). 14 SEC Docket 348. 1178. 6'Securities Exchange Act Release No. "Securities Exchange Act Release No. 16104 (August 13. 1979), 18 SEC Docket 15827 (May 15. 1979). 17 SEC Docket 589. 91.

72 1°Securities Exchange Act Release No. 9'Accounting Series Release No. 177 16356 (November 21, 1979) 18 SEC (September 10, 1975). Docket 997 "Investment Company Act Release No. "Securities Act Release No. 6003 (De. 10891 (October 4, 1979), 18 SEC Docket cember 4, 1978), 16 SEC Docket 320. 637. "Securities Act Release No. 6027 (Febru- "Investment Company Act Release No. ary 2, 1979), 16 SEC Docket 1138. 10890 (October 4, 1979), 18 SEC Docket 13Secunties Act Release No. 6085 (June 635. 25, 1979), 17 SEC Docket 1057. 9'lnvestment Company Act Release No. "Securities Act Release No. 6115 (Au- 10736 (June 14, 1979), 17 SEC Docket 937. gust 30, 1979), 18 SEC Docket 220. 96lnvestment Company Act Release No. "Secunties Exchange Act Release No. 10828 (August 13, 1979), 18 SEC Docket 16163 (September 6, 1979), 18 SEC Docket 122 248. 911nvestment Company Act Release No. 1.Securities Act Release No. 6130 (Sep- 10740 (June 20, 1979), 17 SEC Docket tember 27, 1979), 18 SEC Docket 453. 1021. 17lnthe Matter of Umted States Steel Cor- 981nvestment Company Act Release No. poration, Secunties Exchange Act Release 10690 (May 15, 1979), 17 SEC Docket 611. No. 16223 (September 27, 1979), 18 SEC 99lnvestment Company Act Release No. Docket 497. 10827 (August 13, 1979), 18 SEC Docket 18Securities Act Release No. 6032 (March 120. 5, 1979), 16 SEC Docket 1261 'OOlnvestmentCompany Act Release No. 19Secuntles Act Release No. 6075 (June 10809 (August 6, 1979), 18 SEC Docket 25 I, 1979), 17 SEC Docket 798. IOllnvestment Company Act Release No. 8°Securities Act Release No. 6049 (April 10862 (September 7, 1979), 18 SEC Docket 3,1979),17 SEC Docket 153. 271. »ta. IO'Securities Act Release No. 6034 (March 8'Securities Act Release No. 6121 (Sep- 8, 1979), 16 SEC Docket 1267. tember II, 1979), 18 SEC Docket 287. IO'ld. "'SecuritIes Act Release No. 6136 (Octo- I04SecuritiesAct Release No. 6140 (Octo- ber 16, 1979), 18 SEC Docket 662. ber 26, 1979), 18 SEC Docket 801. 84Securitles Act Release No. 6022 (Febru- !O'Securities Act Release No 6116 (Au- ary 15, 1979), 16 SEC Docket 973. gust 31, 1979), 18 SEC Docket 222. 8'Secuntles Act Release No 6158 (No- 106lnvestment Advisers Act Release No. vember 29, 1979), 18 SEC Docket 1053; 664 (, 1979), 16 SEC Docket Securities Act Release No_6159 (November 901 29, 1979), 18 SEC Docket 1092; and Se- !01Securities Act Release No. 6019 curitres Act Release No. 6160 (November (January 30,1979), 16 SEC Docket 837. 29, 1979), 18 SEC Docket 1111. 108lnvestment Advisers Act Release No. 8.Securities Act Release No 6100 (Au- 680 (June 19, 1979), 17 SEC Docket 1029. gust 2, 1979), 17 SEC Docket 1449. 109lnvestment Advisers Act Release No. 81Securitles Exchange Act Release No. 688 (July 12, 1979), 17 SEC Docket 1293. 15572 (February 15,1979),16 SEC Docket l1°SEC v. Lurnmis, Civ. Act. No. 75- 1155. 1089AJ2 (N.D. CaL), Litigation Release No. "44th Annual Report at 21. 8650 (, 1979), 16 SEC Docket 89Securities Exchange Act Release No. 833. 15920 (June 14, 1979), 17 SEC Docket 877. 11IE.g., SEC v. lntemetionel Telephone {; "Securities Act Release No. 6006 (De- Telegraph Corporation, Civ Act. No 78- cember 19, 1978), 16 SEC Docket 477; Se- 0807 (D D.C.), Litigation Release No. 8834 curities Act Release No. 6007 (December (August 8, 1979), 18 SEC Docket 145. 19, 1978), 16 SEC Docket 492; Securities I12E.g., SEC v. Rapid-American Corpora- Act Release No. 6008 (December 19, 1978), tion, CIV.Act. No. 79-2128, (D.D.C., filed Au- 16 SEC Docket 498. gust 16, 1979), litigation Release No. 8841 91Secunties Act Release No. 6127 (Sep- (August 16, 1979), 18 SEC Docket 149. tember 20, 1979), 18 SEC Docket 384. mE.g., SEC v. The Starr Broadcasting 73

315-805 0 - 80 - 7 Group, lnc., CIV. Act. No. 79-0357 (D.D.C., mSEC v. Atlas Exploration, lnc., supra filed February 7, 1979), Litigation Release note 10. Nos. 8667 (February 7, 1979), 16 SEC 124SECv. Advanced Fuel Systems, lnc., Docket 1084, 8702 (March 26, 1979), 17 supra note 9. SEC Docket 147,8713 (April 9, 1979), 11 I2lSEC v. Hospuei Corporation of America, SEC Docket 286, and 8792 (June 22, 1979), CIV. Act. No. 78.2027 (D.D.C., filed October 17 SEC Docket 1137. 27, 1978), Litigation Release No., 8586 114E.g., SEC v Amencan Ftnenciel Cor- (October 27, 1978), 16 SEC Docket 72. poration, Civ. Act. No. 79.1701 (D.D.C., '26SEC v. Schenley Industries, lnc., Civ. filed July 2, 1979), litigation Release No. Act. No. 79-0855 (S.D.N.Y., filed February 8806 (July 2,1979),17 SEC Docket 1219. 26, 1979), Litigation Release No. 8679 "'SEC v. Marlene Industries Corp., Civ. (February 26, 1979), 16 SEC Docket 1256 Act No 79-1959 (S.D.N.Y., filed April 26, I27SECv. Intemational Systems & Controls 1979), Litigation Release No. 8733 (April Corporetion, Civ. Act. No. 79.1760 (D.D.C., 26, 1979), 17 SEC Docket 406. filed July 9, 1979), Litigation Release No. 116SECv. The Fundpeck, lnc., Civ. Act. 8815 (July 9, 1979), 17 SEC Docket 1302. No. 79.0859 (D.D.C., filed March 21, 1979), 128SECAnnual Report 1978, at 34. Litigation Release No. 8698 (March 22, 129Securities Act Release No. 6021 1979), 17 SEC Docket 72. (February 5, 1979), 16 SEC Docket 951. 117SECv. Production 011 Corporation, Civ. 130Securities and Exchange Cornrnrssron Act. No. 135R (D. Miss.), Litigation Release Staff Report on Transactions in Securities of No. 8765 (May 24, 1979), 17 SEC Docket the City of New York, October 1977. 792. 1311bld. l1°SEC v. Advanced Fuel Systems, lnc., mSecurities Act Release No. 6021 Civ. Act. No. 78-759M (W.D. Wash., filed (February 5, 1979), 16 SEC Docket 951, December 6, 1978), Litigation Release No. 959. 8621 (December 21, 1978), 11 SEC Docket mSECv. Harwell, Civ. Act. No. H-78-1916 581: In the Matter of Asset Secunties, lnc., (S.D. Tex., filed October 5, 1978), Litigation Securities Exchange Act Release No. 16189 Release No. 8559 (October 5, 1978), 15 (September 12, 1979), 18 SEC Docket 317. SEC Docket 1242; see also Litigation Re- 119SECv. Atlas Oil Exploration, lnc., Civ. lease Nos. 8417 (May 24, 1978), 14 SEC Act. No. S-79.0259(r) (S.D. Miss., flied July Docket 1216, 8541 (September 20, 1978), 13, 1979), Litigation Release No. 8835 15 SEC Docket 1150, 8600 (November 21, (August 13, 1979), 18 SEC Docket 146; 1978), 16 SEC Docket 261 and 8690 SEC v. High Valley Investments, lnc., Civ. (March 13, 1979), 16 SEC Docket 1355. Act. No. 76-39.M (D. Mont.), Litigation Re- 134UnitedStates v. Harwell, Crim. Act. No. lease No. 8846 (August 21,1979),18 SEC 787.H.78-87 (S.D. Tex.), Litigation Release Docket 179; U.S. v. Carter, Crrrn. No. SA- No. 8600 (November 21, 1978), 16 SEC 78-CR-015 (W.D. Tex.), Litigation Release Docket 261. No. 8641 (, 1979), 16 SEC Docket 801; SEC v. Martin, Civ. Action No. I3lSecurities Exchange Act Release No. 78-918 PHX CAM (D. Arlz., filed December 15719 (April 11, 1979), 17 SEC Docket 1, 1978), 16 SEC Docket 582. 257. '''''SEC v. Atlas Oil Exploration, lnc., supra 136Ibld.at 259. note 10; U.S. v Jones, Crim. Act. No. 78- mU.S. v. Speer. Crim. Act. Nos. 77- 30019 (W.D. La., Indictment filed Septern- 10034-01 and 10062-01 (D. Kan., filed ber 30, 1978), Litigation Release No. 8566 March 15, 1977), Litigation Release Nos. (October 19, 1978) 15 SEC Docket 1349. 8758 (May 17, 1979), 17 SEC Docket 651 I2lSEC v. Atlas Oil Exploration, lnc., supra and 8800 (June 27, 1979), 17 SEC Docket note 10. 1142. 122SECv. Advanced Fuel Systems, lnc., 13°SECv. Roberts, Civ. Act. No. 78-809 supra note 9; U.S. v. Trahan, Crim. Act. No. (W.D. Mo., filed October 16, 1978), Lltlqa- 79.50008.01 (W.D. La., filed April 13, tion Release Nos. 8564 (October 17, 1978), 1979), Litigation Release No. 8760 (May 17, 15 SEC Docket 1347, and 8595 (), 17 SEC Docket 652. 6, 1978), 16 SEC Docket 139. 74 139Ibid. 21, 1979), 18 SEC Docket 180; SEC u. BOC '40lbid. International Limned, Civ. Act. No. 79.0888 14lSECAnnual Report 1978, at 31. (S.D.N.V., rIled February 24, 1979), LItiga- lOIn the Matter of E.F. Hutton & Company, tion Release No. 8673 (February 21, 1979), lnc., Securities Exchange Act Release No. 16 SEC Docket 1193. 15537 (January 30, 1979), 16 SEC Docket '49SEC v. Telco Marketing Services, lnc., 871; SEC u. Fred Blumenstein, 78 Civ. Act. supra note 39; SEC v. Unued Technologies No. 4805 (S.D.N.Y., filed October 13,1978), Corporetion, Civ. Act. No 79.1648 (D.D.C., Litigation Release No. 8569 (October 19, filed June 25, 1979), Litiqatlon Release No. 1978), 15 SEC Docket 1350; In the Matter 8793 (June 25, 1979), 17 SEC Docket 1137. of Robert T. ODonnell, Secunties Exchange '''Supra note 40. Act Release No. 15868 (May 24,1979), 17 "'SEC Annual Report 1978, at 32. SEC Docket 743. 152Litigation Release No. 8816 (July 10, wln the Matter of E.F. Hutton & Company, 1979), 17 SEC Docket 1303 lric., supra note 34; SEC u. Blumenstein, suo '''Securities Exchange Act Release No. pre note 34; In the Matter of Robert T. 15994 (July 5, 1979), 16 SEC Docket 1172. O'Donnell, supra note 34. 154Securities Exchange Act Release No. '"In the Matter of E.F. Hutton & Company, 16223 (September 27, 1979), 18 SEC lnc., supra note 34; In the Matter of Robert Docket 497. T. O'Donnell, supra note 34. "'Securities Act Release No. 5170 (July '''Securities Exchange Act Release Nos. 19,1971). 16023 and 16025 (July 16,1979),17 SEC 156SecuritiesAct Release No. 5386 (April Docket 1313.15. 20, 1973), 1 SEC Docket No. 12, p. 1. 146SECo. Santangelo & Co., Civ. Act. No. Il7Securitles Act Release No. 5704 (May 79.2097 (S.D.N. V., filed April 23, 1979), Lit. 6, 1976), 9 SEC Docket 540. igation Release No. 8729 (April 23, 1979), "'SEC v Repid-Amencen Corporation, su- 17 SEC Docket 404. pra note 3. ,oSEC u. Telco Marketing Services, lnc., '''SEC u. The Fundpack, lnc., supra note (D.D.C., filed July 13, 1979), Litigation Re- 7. lease No. 8821 (July 13, 1979), 17 SEC '60SEC v. The Starr Broadcasting Group, Docket 1362. Inc., supra note 4. '48SEC e. Fuqua Industries, lnc., Civ. Act. 161SEC u. Amencan Fmancial Corporeuon, No. 79.2204 (D.D.C., filed August 21, supra note 5. 1979), Litigation Release No. 8847 (August

75

Appendix

THE SEC(JRITIES IND(JSTRY also represented 18 percent of reve- nue. Underwriting revenue declined Income, Expenses and Selected $42 million in 1978, after a similar $44 Balance Sheet Items million decline in 1977 and represents Registered broker-dealers recorded 8 percent of total revenue. total revenue of $11.2 billion in 1978, Pre-tax income increased $46 mil- 25 percent above the level of 1977. lion, or 8 percent, in 1978 because in- Securities commissions increased 34 creased expenses nearly matched the percent in 1978, inflecting the surge in growth in revenues. Ownership equity trading volume, and represented 40 at the end of 1977 was $4,659 billion, percent of total revenue. Trading prof- reflecting an increase of $544 million its were 18 percent higher in 1978 and or 13 percent during the year.

79 Table 1 FINANCIAL INFORMATION FOR BIlOI(ER.DElliRS 1975-1978 (11111_ of DalIan1

1975 1976 1977R 1978P

A......

1 Secunties CommISSIOns $ 3,378 $ 3,657 $ 3,334 $ 4,480 2 Gain (Loss) In Trading 1,202 1,828 1,691 1,993 3 G3In (Loss) In In>estments 132 269 353 391 4 Profrt (Loss) From Undefwntlng and Seiling Groups 930 1,035 991 949 5 Revenue from Sale of Investment Company Secunhes 140 165 161 162 6 Marlin Interest Income 476 557 782 1,223 7 Other Revenue Related to Securrt .. s BUSiness 897 1,168 1,055 1,696 8 Revenue from All Other Sources 218 236 564 303 9 Total Revenue $ 7,373 $ 8,915 $ 8,931 $11,197

I.Elpooses

10 Registered Represenlahves' Compensation $ 1,284 $ 1,575 $ 1,541 $ 1,945 II Employee Compensalion and Benefits 1,413 1,664 1769 2,143 12 Iornmrsstcns and Clearance Paid to Other Brokers 524 535 585 793 13 Interest Expense 668 900 1,246 1.964 14 Communications and Data Processing 488 590 708 780 15 Occupancy and EqUipment m 485 m 439 16 Promotion 159 203 203 218 17 Regulatory Fees and Expenses 76 81 69 72 18 Compensation to Partners and Voting Stockholder Officers 488 572 553 608 19 All Other Operating Expenses 681 805 1,255 1,598 20 Total Expenses $ 6,253 $ 7,410 $ 8,340 $10,560 21 Pre-Tax Income $ 1,120 s 1,505 $ 591 $ 637

C. Assets, lJaIxl_ and CoprtJl

22 Total Assets $31,851 $48,983 $54,670 $66,470 23 liabilities a Total liabilities (excluding subordinated debt) 26,352 42842 48,794 59,500 b Subordmated debl 836 858 948 1,181 c Total liabilities (230 + 23b) $27,188 $43,700 $49743 $60,681 24 Ownership EQurly $ 4,663 $ 5,283 $ 4,927 s 5,789 25 Total lrabllrtles and Ownership EQUity $31,851 $48,983 $54,670 $66,470 Number of Firms 4,079 4,315 4,484 4,998

R = R.. ised P = Preliminary Sources Form X-17A-10 and FOCUS Reports Office 01 Secunties Industry and Sell-Regulatory Economics DIrectorate of Economic and Policy Research

Historical Financial Information related to the securities business each of Broker-Dealers with Securities rose from the previous year. Pre-tax in- Related Revenue of $500,000 or come increased 38 percent with this 23 More percent rise in revenue. Firms that reported securities-re- Brokerage firm revenue increased lated revenue of $500,000 or more 23 percent in 1978 on share volume held approximately 89 percent of the which increased 37 percent over 1977. industry's assets and reported 90 per- Commission revenue and trading prof- cent of all revenue in 1978. Balance its each increased, while underwriting sheet data for the most recent two revenue declined somewhat from 1977 years are not comparable with earlier levels. Investment profits, interest in- years because of changes made in the come, commodity and other revenue brokerage firm reporting system.

80 Table 2 HISTORICAL CONSOLIDATED REVENUE AND EXPENSES Of BRDKER.DEALERS WITH SECURITIES RELATED REVENUE OF $500,000 OR MORE 111011_ 01 DoIIonl

1970 1971 1972 1973 1974 1975 1976 1977R 1978P 1_•• 1 Securrtles CommiSSIons $2,267 $3,287 $3404 $2816 $2438 $3,220 $3516 $2984 $3964 2 Gam (loss) on FirmSecuntles Trading and Investment Accounts a Gain (loss) In trading 824 1,056 994 590 m 1143 1757 1,512 1773 b Gam (loss) In meestrnents 75 243 209 -3 55 131 253 326 356 c Ictal I'ln (los<) 898 1299 1203 587 777 1274 2010 1838 2129 Proht (loss) from Underwriting and Seiling Groups 601 957 914 494 496 914 1021 929 838 Revenue from Sale of Investment Company Secunnes 184 196 151 149 79 120 146 138 138 Margin Interest Income 379 364 527 621 622 466 550 734 1107 Fees for Account Supemsmn. Investment AdviSOry, and AdministratIve Services 64 82 99 83 85 156 207 176 232 Commodity Revenue 88 98 175 178 168 187 236 266 350 Other Revenue Related to Secunties BUSiness N/A N/A N/A N/A N/A 509 691 689 960 Revenue from All Other Sources 266 300 306 323 400 167 201 478 410

10 Total Revenue $4 747 $6583 $6,729 $5250 $5,065 $7013 $8,577 $8232 $10 128 lfI_ 11 Registered Representatives' Compensatlon s 778 $1.139 $1.198 $ 937 $ 949 $1278 $1576 $1428 $ 1714 12 Employee Compensat,on and Benefrts 1,086 1300 1392 1,184 1,097 1376 1,668 1593 1,925 13 CommiSSions Paid to Other Brokers' 128 182 186 188 151 209 168 530 707 14 Interest Expense 540 520 634 796 750 582 839 1 149 1787 15 Communications and Data Processing 370 434 488 461 463 482 590 649 694 16 Occupancy and Equipment 349 413 460 433 440 464 486 372 381 17 Promollon 157 188 214 186 172 157 202 186 1% 18 All Other Operatlnl Expenses 606 787 794 686 634 1,416 1633 1639 1,776

19 Total Expenses $4 013 $4,962 $5,365 $4,871 $4655 $5963 $7162 $7546 $ 9181

C. " .. 111 Income 20 Pre-Tax Income 734 $1621 $1365 s 378 410 $1,050 $1415 686 947

Number of FIrms 655 788 817 652 609 764 930 857 961

'Includes clearance paid to others beginning In 1977 R = Re~sed P = Preliminary Sources Form X.17A.10 and FOCUS Reports Office of Secunties Industry and Self.Regulatory Economics Directorate of Eccnomrc and Policy Research

81 r.ble 3 HISTORICAL BALANCE SHEET FOR BROKER-DEALERS WITH SECURITIES RELATED REVENUE Of $500,000 OR MORE (11'1_ 01Dolllrtl

1970 1911 1972 1973 197( 1975 1976 1977 ' 1978 A. AaoIs 1 Cash, c1ea"ng funds and other deposits $ 1,162 $ I.221 $ 1,281 $ 1,139 $ 9(0 $ 925 $ U35 $ 979 $ UOS 2 Recel.. bles from other bro,",r.dealers a Secuntles failed to deliver 2,319 2,230 2,568 1.8« 1.220 1,«6 2,215 2,375 2,m b Secunnes bofrowed 865 1,022 1,3M 1,096 889 1,366 2,091 2,307 2,819 c Other recelY3b1es 198 295 382 330 905 1.011 1,093 682 899 RecetYables from customers 7,077 9,6« 13,373 9,056 7,(50 8,(M 12,80( 13,728 15,(31 Market value or fair value of long positions," se- cuntres and commodities 10,261 11,667 11,870 9,722 10.789 12,901 21,392 28,521 33,061 5 Exchange membenhlps at market .. Iue 210 200 208 123 101 118 1(2 117 277 6 Other assets 1,392 I.M6 1.70( 1.879 1.(93 (,535 7,203 3,038 3,211 7 Total assets $23,W $27,925 $32,750 $25,189 $23.787 $30,826 $(8,075 $51,W $59,219

B.1JIbof_ 8 Money borrowed $ 8,99( $11.286 $1(,398 s 9,878 $10,m $ H88 $11,802 $26,503 $27,565 9 Payables to other broker.dealers a Secunnes failed to receIVe 2,706 H2O 2,732 1.72( 1,281 1,(16 2,152 2,598 2,(50 b Secunues borrowed 836 98( 1,28( 8(7 579 1.Q6( 1.61( 1,770 2.1(3 c Other payables 198 3(5 35( 365 1,059 1.088 1,019 1.092 888 10 Payables to customers (,m V36 5,228 (,978 3,986 (,696 6,m 5.158 7,691 11 Short posmons In seeusnes and ccmrnodities 707 907 1,525 1.158 1.038 U65 2,555 (,83( 7,097 12 Subordmated borroWings Ml 728 m M2 m 767 799 8(0 973 13 Other "abilitIes 2,3(3 2,859 2,505 2,550 2,099 7,203 17,118 (,837 5,753 1( Total "abl"tleS 20,667 2UM 28,802 22,1(2 21,056 26,887 (3,293 (7,632 5(,560

C. Ow...... , EqallJ 15 Ownership equrty 2,818 3,661 3,9(8 3,0(7 2,731 3,939 V82 H15 (,659 16 Total "abl"tles and capital $23,(8( $27,925 132.750 $25,189 $23,787 $30,826 $48,075 $51.W $59,219

Number of Frrms 655 788 817 652 609 770 932 857 961

IThe balance sheet for 1977 IS not comparable WIth preY'Ous years' data because of changes '" the reportlOg form Sources Form X.I1A-I0 and FOCUS Reports Office of secu"tleS Indust/} and self RegulatO/} EconomICS DIrectorate of EconomiC and PolIcy Research

dollar-35.9 cents-went to pay reg- Securities Industry Dollar: 1978 istered representatives and support Securities commissions represented personnel (clerical and administrative 39.1 cents of each dollar of securities employees). Another 10.7 cents was industry revenue. Another 17.5 cents spent on communications, occupancy of each dollar came from trading activ- and equipment. General partners and ities and underwriting revenue contrib- voting stockholder officers' compen- uted 8.3 cents. Together, these three sation amounted to 5.0 cents of each activities accounted for 64.9 cents of dollar, with 9.3 cents remaining for each revenue dollar. pre-tax income. This margin was 11 The largest portion of this revenue percent above the 1977 figure.

82 w ::E o o z X

w ::l Z w w> a: u.. o en w o II: ::l o en

83 Broker-Dealers, Branch Offices, There were approximately 36,500 Employees full-time registered representatives as- sociated with members of the New The number of broker-dealers in- creased from 4,484 in 1977 to 4,998 in York Stock Exchange at the end of 1978. Following the upward trend of 1977. broker-dealers, the number of branch offices increased to 6,706.

84 Broker-Dealers and Branch Offices

o 3000 6000 9000 T T ~~:~~~~~~~~~~~~~~~:I~.:....:~:~tlli~\~\;\~{(~::.:.:t~~~\~j~j~j\j~jt~:r.:;;./:~i~j~l4255 1972 I I 7334 I .;:~::~.'~~:::':::::::~:~:~:~~~~~~I'..:;:~:I~~~~~~I""..:./\nt?~ 4088 1973 I I 7223 I '~1~1t:~:':'::i:1::~::;':.::.t~:1t:r~:r;::'::':~:i:i:~:;::1~;~1~1;:1r::::'i:::i:\J~~~~\~14081 1974 I I 6301 I ~~::::::~:r:::~::~;:;}.:.:..../i.:~::t:::~:~::ti~~~.;.:;;:~:;;~;1:~i{~:::~~\i:i:::.;.;:;~:;:t~14113 I 1975 I 626 7 I i:i:ii;1:i:::l1:::::::1;~\;:~:::~;ii1}~(}:~::;::.::.t(1t~:?:~::i:.::::t:{~:.:'J4315 1 1976 I 6290 I t=t::::: ..:::., ~::/ij?i:i i;;:":::.:.:::.t~/?:::::"':'::~:':'fb1{\;: :-,::.j~H 4484 1977 I I 6498 I .:::: P -,:::.(:tIt.: .. .~)~~~f:::'.(\t~.'''14998 :::~~t\::.:.:.:.:.:.r;:~t~~~":~:.b" '. .... I 1978 t I 6706 . 1 I ,

.::(t'i:" :J Broker -Dealers Branch Offices t: "",, .... '-- __ I

Rr Revised Er Esttrnate

SOURCE X-17A-l0 AND FOCUS REPORTS

85 Tlble 4 BROKERS AND DEALERSREGISTERED UNDER THE SECURInES ACT OF 1934-EFFECTIVE REGISmnONS AS OF SEPTEMBER 30, 1979 ClASSIFIED BY TYPE OF ORGANIZATION AND BY LOCAnON OF PRINCIPAL OFFICE

Number of PropndlllS, Number of Registrants p.rt ners, OffIl:.... etc Sole Sole locatIOn of Pnnelpll OffiCes Pro- p.rt. Cor. Pro- p.rt. Co< ToIIl pr> nero poq. ToIIl ,,> nero p0ll- et". ships bons etor. shiPS tKIIIS ships shiPS

AI.bam. 28 2 1 25 142 2 3 137 AlISkI 0 0 0 0 0 0 0 0 Anzona 22 3 I 18 80 3 5 71 ArlilnSls 18 2 0 16 79 2 0 77 Callforma 533 166 60 307 2.489 166 279 20« CoI".do 66 2 5 59 365 2 62 301 ConnectICut 66 9 8 49 360 9 41 310 Oefaware II 3 0 8 36 3 0 33 iJlstnct of Columbia 33 2 5 26 270 2 25 243 A",da 161 15 6 140 533 15 12 ~ Georfa 44 1 2 41 288 1 4 283 HawaII 14 0 1 13 75 0 2 73 Idaho 8 2 0 6 24 2 0 22 IIl1l101s 1.854 1.358 145 351 3,438 1.358 694 1,386 Indiana .. 5 1 38 245 5 2 238 Iowa 29 2 0 27 134 2 0 132 Kansas 28 2 2 24 143 2 9 132 !(entucky 10 1 0 9 68 1 0 67 loutslana 24 5 4 15 188 5 16 167 Mame 8 0 3 5 41 0 19 22 Maryland 46 5 4 37 312 5 122 185 MasSlchusetts 151 24 14 113 879 24 85 770 Michigan 57 5 4 48 369 5 105 259 Minnesota 76 1 0 75 612 1 0 611 MISSISSIppi 19 0 3 16 80 0 7 73 MISSOUri 63 2 4 57 683 2 107 m Montana 4 1 0 3 23 1 0 22 Nehnslil 13 0 0 13 92 0 0 92 Nevada 2 1 0 1 4 I 0 3 New Hampshire 5 I 1 3 17 1 3 13 New Jeney 194 37 25 132 685 37 68 580 New MeXICO 8 1 0 7 37 I 0 36 New York (excludmg NY City) 279 87 24 168 1,092 87 202 803 North CaroilOa 29 4 0 25 145 4 0 141 North Dakota 4 0 0 4 16 0 0 16 OhiO 86 4 13 69 570 4 193 373 ~ahoma 25 4 0 21 123 4 0 119 Oregon 29 1 1 27 118 1 4 113 PennsylY301a 218 29 48 141 1.092 29 186 877 Rhode I~and 18 5 2 II 46 5 8 33 South CaroilOa 9 1 1 7 34 1 2 31 South Dakota 1 0 0 I II 0 0 II Tennessee 45 2 2 41 312 2 29 281 Texas 156 15 7 134 1,063 15 31 1,017 Utah 30 2 2 26 135 2 7 126 Vermont 4 1 1 2 21 1 2 18 Virginia 29 4 4 21 284 4 15 265 WoshlOgton 60 5 0 55 315 5 0 310 west Virginia 6 I 0 5 20 1 0 19 WisconSin 41 8 0 33 378 8 0 370 Wyoming 6 1 0 5 22 1 0 21

Total (excludlOg NY Crty) 4.714 1.832 404 2,478 18.588 1,832 2.349 14.407 New York City 1.512 593 269 650 9.045 593 2119 6.333 Subtotal 6,226 2.425 673 3,128 27.633 2.421 4.468 20,740 For"gn 20 0 2 18 138 0 9 129 Grand Total 6.246 2.425 675 3.146 27,771 2.m 4.417 20.869

'Registrants whose pnnclpal offices are located In foreign countnes Of other luns(hctJons not lISted llndudes directors OffiCers, trustees and all other persons occupying Similar status performing smsar functIons 'AllocatIons made on the basrs of locatIOn of pnnelpll off.ces of registrants, not actual locatIOns of person~ 'Includes .11 forms of "ianllahons other than sole "opnetorshlps and partnershIps

86 Table 5 PRINCIPAL BUSINESS OF SECO BROKER.DEALERS

Fiscal year~nd 1977 1978 1979

Exchange member pflmanly engaged In exchange ccmmesien business 18 15 6 Exchange member pnmanly engaged In floor activities 11 18 8 Broker or dealer In general secunbes business 61 65 33 Mutual fund underwrlter* 9 11 7 Mutual fund distributor. 5 4 1 Broker or dealer seiling vanable annuity contracts 10 11 8 Solicitor of saVings and loan accounts 5 6 5 Real estate syndicator and mortgage broker and banker 33 35 31 Real estate condormmurn Interests. 3 5 1 limited partnership interests" 13 15 71 Broker or dealer seiling 011and gas Interests 11 10 19 Put and call broker or dealer Of option writer (non-exchange options) 3 5 4 Broker Of dealer seiling secunnes of only one Issuer or essocrated ISSUers (other than mutual funds) 11 13 33 Broker or dealer sellmg church secunties 10 11 9 Government bond dealer (other than mUOIcipaQ 1 3 0 Broker or dealer In rnumopal bonds" 5 5 4 8foker or dealer In other secunties business 46 18 38 No secunnes busmess 11 15 15

Totals 309 316" 305'"

.Not tabulated In prior years, new category on the Form SECD-4-76 "Based on data pronded by 316 of the 346 broker dealers ••• Based on data prtmded by 305 of the 387 broker-dealers

87 T,bI.6 APPUCATIONS AND REGISTRATIONS Of BROIlERS AND DEAL£RS F/SCIIv.... 1979

8IOItEB-DDI.EB APPUCATIOIIS

ApplicatIOns pendIRg at close of precedIRg year ess ApplicatIOns recerred dUring I/SCII 1979 1,379

TollIl appllcallons for dlsposrlJon 2,2« llosposrllon of ApplicatIOns Accepted to< filing 1,025 Returned 328 Wrthdrawn 0 Denied 0 Total applications dISposed of l.353

ApphcatlOns pendIRg as of September 30 1979 891

BIOIEI-DDI.EB BEGISTBATIOIIS

Effectr .. registratIOns at close of precedIRg year 6.007 Regrstratlons effectIVe dUring fiscal 1979 1,025 Total registrations 7,032 Registrations termmated dunng fiscal 1979 Withdrawn 784 Rewked 0 Cancelled 2 Total registrations terminated 786

Total registratIOns at end of fiscal 1979 6,246

INVESTllEIIT AD¥ISlB APPUCAnOIlS

ApphcatlOns pendIRg at close of precedIRg year 926 ApplicatIOns received dunng fiscal 1979 1,291

Total apphcanons for dlSposr!lon 2,217 DISposition of applicatIOns Accepted for filing 688 Returned 480 Withdrawn 0 Denied 0 Total apphcatons drsposed of 1.168

Apphcatlons pendIRg as of September 30, 1979 1.049

INVESTllEIIT AD¥ISlB BEGISTBAnONS

EffectIVe registrations at close of preceding year 5,205 RegIstrations effectl" dUring fIScal 1979 688 Total registrations 5,893 Reglstrallons terminated dUring fiscal 1979 Wrthdrawn 229 Rewked 0 Cancelled 0 Total reglstratKJnS termmated 229

Total regIstratIOns at end 01 fiscal 1979 5,664

88 Table 7 APPUCATIONS AND REGISTRATIONS OF MUNICIPAL SECURITIES DEALERS AIID TRANSFER AGENTS f"Cal Y.. r 1979

IIl111lC1~ALSECUlmES DEAl£1S APPUCAT1011S

APllhcatoons pend,ng It dose of precedlnl ,..r 21 APllhcatoons receNOd dunnl f,seal 1979 11 ToIIl IpphcatlOllS for dlSj)OSlbon 32 DlsposrIlOn of Apphcabons Accepted lor "lInl 10 Returned 1 Wrthdrawn o Denied o ToIIl IPllhcabons dISposed of 11 Appllcat,ons pendlnl as of Septembe, 30, 1979 21

IIUIICI~AL SECUlmES DEAl£1S IfGISTUTIOIIS

Effect"" re&.stratIOnS It dose of precedlnl ,.., 336 R"IIslratlOns effect"" dunnl fiseal 1979 10 ToIIl 'er.strat,ons 346 HOIIstrabons term,nated dunnl fiscal 1979 Withdrawn Cancelled Suspended Toul 'erlstritoons term,nated

Total rer,stratlons It end of f'SClI 1979 346

TlMSftI AGENTS APPUCAT1011S

ApplicatIOns pendlnl It close of precedlnl ,..r 19 Appllcat,ons 'ecetwed dunnl "seal 1979 34

Toul apphcatons for dlSpo$lt.on 53 Ilrsposrt,on of appllcahons Accepted for f,lInl 32 Returned 3 Withdrawn o Den'ed o Total appllclllOns dISposed of 35 ApplicatIons pendmg as of September 30, 1979 18

TlMSftI AGENTS IEGISTUT1011S

Effect,ve re&'strIllOns at close of p,eced,nl ,..r 861 RerlSl,at,ons effect"" dU'lnl f'SClI 1979 32

Total registratIOns 893 Rer,st,at,ons terminated dunnl "seal 1979 Wdhdrawn Cancelled Suspended Toul 'erlstrabons term,nated Total reglstratrons at end of fiscal 1979 891

89

315-805 0 - 80 - 8 Self-Regulatory Organization dues. The substantial growth in trading Revenue and Expenses volume during 1978 provides an op- portunity to examine how changes in Self-regulatory organizations re- volume affect each organization's fi- ceive approximately 70 percent of nancial results. The revenue increase their revenue from four sources: trans- which accompanied the growth in action charges, listing fees, communi- share volume was not as dramatic-l0 cation fees and depository fees. The percent above 1977. Since operating nature of these revenue sources makes costs are largely fixed, however, the the financial condition of self-regula- growth in revenue yielded dramatically tory organizations highly dependent improved pre-tax income. In 1978 the on trading volume. net income of self-regulatory organi- Total share volume of securities zations was nearly $30 million, more traded on all national securities ex- than the net income of the previous changes and over-the-counter in- two years combined. creased 37 percent between calendar The New York Stock Exchange year 1977 and 1978, bringing 1978 (NYSE) derived 44 percent of its reve- share volume to 12.6 billion. As a re- nue from its volume-related transaction sult of this increased trading activity, and depository fees in 1978. Relatively combined self-regulatory organization fixed sources of revenue, such as listing revenue increased to $261 million, up fees paid by corporations and commu- $24 million from the 1977 total. nications fees and memberships dues Changes in major revenue compo- paid by brokers, generated another 42 nents between 1977 and 1978 were as percent of revenue, and miscellaneous follows: sources accounted for the remaining 14 • Revenue from transaction fees in- percent. Pre-tax income in 1978, at creased to $52 million, from $37 mil- $18.8 million, was 75 percent higher lion; than in 1977. • Revenue from communication The American Stock Exchange fees decreased $1 million to $41 mil. (AMEX) generated only 23 percent of its lion; 1978 revenue from volume-related • Revenue from listing fees in- transaction fees. Its listing and com- creased $800,000 to $43 million; and munication fees and memberships • Revenue from depository fees in- dues, however, each generated revenue creased $8.7 million, to $47 million. at a higher annual rate in 1978 than The expenses of the self-regulatory 1977. Pre-tax income for 1978 was organizations are concentrated in two more than twice the 1977 figure. areas, employee costs and communi- Over-the-counter trading of listed cations and data processing costs. and unlisted issues in 1978 was 36 per- These costs accounted for 74 percent cent above the 1977 level. NASD rev- of the $232 million in self-regulatory enue, however, is derived from sources organization expenditures for 1978. which do not vary with trading volume. The individual organizations are Registration, corporate finance and quite different in their dependence on listing fees, together with membership particular sources of revenue. Some dues, provided 87 percent of revenue. sources of revenue, such as transac- Revenue in 1978, consequently, was tion, clearing and depository fees only three percent above 1977 annual change directly with changes in share revenue, and pre-tax income slipped volume. Others are relatively fixed, 55 percent. such as listing fees and membership The Midwest Stock Exchange's 1978

90 revenue was substantially reduced as the date of the securities, and (3) an a result of the discontinuance of the annual fee of $100 which, for this fiscal exchange's broker service bureau. year, it continued to be possible to off- Nearly 72 percent of revenue, however, set by underwriting fees paid within the is still volume-related, and the com- calendar year. The underwriting as- bined effects of the discontinued sessment fee accounted for 70 percent losses and the growth in trading vol- of the MSRB income during the fiscal ume resulted in pre-tax income of year 1979. The balance of MSRB in- $720 thousand in 1978. Pre-tax losses come was from other fees and interest were over $1 million in 1977. income . ...,The Pacific, Philadelphia and Boston During fiscal year 1979, the MSRB Exchanges also depend on volume-re- had total expenses of $866,323. The lated fees for most of their revenue. major expense items were staff salaries Sixty-five percent of Pacific's, 81 per- and employee benefits, including cent of Philadelphia's and 80 percent MSRB contribution to an employee re- of Boston's revenue comes from such tirement plan established in 1978 (41 sources. The record trading volume in percent); meetings and travel (26.8 1978 raised Pacific's 1978 pre-tax in- percent); and mailing list, rule manual, come to a level nearly 12 times as high postage and other printing (14.9 per- as the 1977 figure. Philadelphia expe- cent). Expenses exceeded income by rienced a seven-fold increase, and Bos- $275,363, due, in part, to a significant ton's pre-tax income figure in 1978 was reduction in assessment fees received. 10 times higher than in 1977. As of September 3D, 1979, the MSRB The Chicago Board Options Ex- has a surplus of $632,823. change, which is also highly dependent on volume-related sources of revenue, Aggregate clearing agency revenues had a pre-tax profit of nearly $2.6 mil- increased approximately $16 million lion in 1978, compared with a pre-tax in 1978 to approximately $119 million. loss of $500 thousand in 1977. The Aggregate clearing agency expenses Cincinnati Exchange, which began an increased approximately $12 million electronic trading experiment in 1978, in 1978 to approximately $112 million. now receives less in floor usage reve- The 1978 increases in aggregate nue and more in communications fees. clearing agency revenues and ex- While its 1978 revenues were higher penses of 16 percent and 12 percent than the previous year, 1978 operating respectively represent a significant net losses were $7 thousand, versus $20 improvement over 1977 when the re- thousand in pre-tax income in 1977. spective increases were 10 percent and The MSRB income of $590,960 dur- 12 percent. The 37 percent increase in ing fiscal year 1979 (See Table 12) was trading volume for 1978 over 1977 derived primarily from three fees es- discussed supra is the fundamental tablished by rules adopted under the reason for clearing agency revenues in- Exchange Act. Municipal securities creasing at a greater rate than ex- brokers and municipal securities deal- penses. The 1978 aggregate revenue ers are assessed (1) an initial fee of increase of 16 percent is net of re- $100, (2) an underwriting assessment funds, discounted fees or rebates fee equal to .001 percent of the face (collectively, refunds) of unneeded rev- value of all municipal securities they enue made by some clearing agencies purchase from an issuer as part of a to their participants. These refunds, new issue which has a final stated ma- which have the effect of reducing fees turity of not less than two years from charged, totaled approximately $12 91 million in 1978 as compared to ap- declined during the previous several proximately $6 million in 1977. years when expenses increased at a The 1978 net excess of revenues greater rate than revenues. Expenses over expenses provided some clearing exceeded revenues for only one clear- agencies with an opportunity to replen- ing agency in 1978 compared with five ish their retained earnings which had in 1977.

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98 y.bIt 12 REVENUE AND EXPENSES OF MUNICIPAL SECURITIES RULEMAKING BOARD Vea, ended September 30 1979 1978

...Assessment- fees. $413,841 $ 513,708 Annuollees 95,554 96,301 Inlballees 17.600 16,800 Inlefesl,n<:ome 62.328 51.667 Other 1,637 590,960 678.476 ~ Satanes and employee benelrls 355,721 376,839 MeebnlS and travel 232,738 212.467 MIlIonl lost, Board manual and o!Iler pnnbnl and postale 129,667 132.870 Rent telephone and other occupancy costs 65.939 62.385 Prof.... o.. 1and otIler sennces. 42.436 32.886 Payroillaxes 17.620 18,163 Depreciation and amortlzabon 13,669 13,624 Other 8,533 5,469 866.323 854.703

Excess of expenses over revenues (275,363) (176,221) Fund balance, betmnrnl of yea, 908,186 1,084.413

Fund balance, end of year $632,823 S 908,186

EXEMPTIONS minated under Section 12(d) or 12(g)(4) of the Exchange Act.i At the Section 12(h) Exemptions start of the next and each succeeding Section 12(h) of the Exchange Act fiscal year, if the class of securities is authorizes the Commission to grant a held by less than 300 shareholders of complete or partial exemption from record, this suspension of the duty to the registration provisions of Section file would continue under Section 12(g) or from other disclosure and in- 15(d). The resulting reduction in 12(h) sider trading provisions of the act applications from issuers who termi- when such granting is not contrary to nate under Section 12(d) or 12 (g)(4) is the public interest or the protection of expected to reduce the processing investors. time for other 12(h) applications. For the year beginning October 1, 1978, 43 applications were still pend- Exemptions for Foreign Private ing and 176 applications were filed Issuers during the year. Of these 219 applica- Rule 12g3-2 provides various ex- tions, 156 were granted, 9 were with- emptions from the registration provi- drawn and 2 were denied. Fifty-two ap- sions of Section 12(g) of the Exchange plications were pending at the close of Act for the securities of foreign private the year, of which 26 had been pub- issuers. Perhaps the most important of lished for notice. these is that contained in subpara- On September 17, 1979 the Com- graph (b) thereof which provides an ex- mission adopted Rule 12h-4 which au- emption for certain foreign issuers tomatically suspends an issuer's duty which submit on a current basis ma- to file Section 13(a) reports as to a terial specified in the rule. Such ma- class of securities pursuant to Section 15(d) of the Exchange Act for the 'Securtties Exchange Act Release No. balance of the issuer's fiscal year if the 16211 (September 17. 1979), 18 SEC registration of such securities is ter- Docket 413. 99 terial includes that information about not appear to constitute manipulative which investors ought reasonably to be or deceptive devices or contrivances informed and which the issuer: (1) has comprehended within the purposes of made public pursuant to the law of the the rule. In addition, Rule 1Ob-13under country of domicile or in which it is In- the Exchange Act prohibits purchases corporated or organized; (2) has filed of certain securities by persons making with a foreign stock exchange on a tender offer or exchange offer from which its securities are traded and the time the offer is publicly an- which was made public by such ex- nounced until the termination of the change, and/or (3) has distributed to offer. One exemption from Rule lOb- Its security holders. Perlodically, the 13 was granted to permit an issuer to Commission publishes a list of those effect concurrent tender and exchange foreign issuers which appear to be cur- offers inasmuch as the transaction did rent under the exemptive provision. not appear to constitute a manipula- The most current list is as of August tive or deceptive device or contrivance 31, 1979 and contains a total of 161 comprehended within the purposes of foreign Issuers? the rule. The Commission also granted to one Other Exemptions individual a temporary waiver of the The Commission received and requirement in MSRB rule G-3 that a granted two requests for exemption person acting as a financral and oper- from the broker-dealer registration re- ations principal take and pass the quirernent of Section 15(a) of the Ex- MSRB Financial Operations Principal change Act. Exemptions were granted Qualification Examination. to the the National Association of In- vestment Clubs In connection with Its stock purchase program and to Mortex FINANCIAL INSTITUTIONS Inc. In connection with Its automated mortgage tradinq facility. The Com- Stock Transactions of Selected Financial Institutions rnissron determined In each case that an exemption would be consistent with During 1978, prrva te noninsured the pubhc interest and the protection pension funds, open-end investment of Investors. companies, life insurance companies, Exchange Act Rule 10b.6 imposes and property-liability insurance com- certain prohibitions upon trading in se- panies purchased $47.7 billion of com- cunties by persons interested in a dis- mon stock and sold $42.7 billion, re- tribution of such securitres. During the sulting in net purchases of $5.0 billion. fiscal year, the Commission granted In 1977 purchases were $36.9 billion, approximately 600 exemptions pur- sales $34.5 billion, and net purchases suant to paragraph (f) of Rule lOb-6 $2.4 billion. Their 1978 common stock under circumstances indicating that activity rate was 26.2 percent as com- proposed purchase transactions did pared to 20.6 percent one year earlier.

2Securlties Exchange Act Release No 16212 (September 21, 1979), 18 SEC Docket 462

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101 STOCKHOLDINGS OF as the 4.6 percent upswing in the ag- INSTITUTIONAL INVESTORS gregate market value of all stock out- AND OTHERS standing. Thus, the share of total stock outstanding that was held by these in- At year-end 1978, the eleven in- stitutions was 34.4 percent at year-end stitutional groups listed below held 1978 the same as it was a year earlier. $358.0 billion of total corporate stock During 1978, the shares held by other outstanding (both common and pre- domestic investors, which consist of ferred). In comparison, they accounted individuals, broker-dealers and insti- for $342.2 billion of the stock held a tutions not listed, dropped to 59.4 per- year earlier. The resulting 4.6 percent cent from 60.0 percent. Foreign inves- increase in the value of the stockhold- tors share of stockholdings increased ings of these institutions was the same to 6.2 percent.

Table 14 MARKET VALUE OF STOCKHOlDlNGS OF INSTITUTIONAL INVESTORS AND OTHERS (Billions .f 0011.1... End of Yur)

1971 1971 1973 1974 1975 1976 1977 1978

I Pnvate Nomnsured Pension Funds 887 1I52 905 633R 886 1097 1019 1079 2 Open End Investment Companies 526 580 433 303 387 430 362 341 3 Other Investment Compames 69 74 66 47 53 59 27 4 life Insurance Companies 206 268 259 219 281 342 3~ ~R 355 5 Property-liability Insurance Companies] 166 218 197 128 142 169 173R 197 6 Personal Trust Funds2 941 1I0 2 947 677 810 930 90 s: 931 7 Common Trust Funds1 58 74 66 43 59 78 NA NA 8 Mutual Saangs Banks 35 45 42 37 44 44 48 48 9 State and local Retirement Funds 154 222 202 203 243 301 300 333 10 Foundations 250 285 245 184 227 271 261 270 1I Educatronal Endowments 90 107 96 67 88 104 98 102

12 Subtotal 3382 4127 3458 2541R 3220 3825 3527R 3683 13 Less Institutional Holdings of Investment CompanyShares 58 65 67 65 86 100 105 103

14 Total lnstrtuuunal Investors 3324 4062 3391 2476R 3134 372 5 3422R 3580 15 ForeIgn Investors3 329 413 370 284 526 639 601 647 16 Other DomesticInvestors' 6384 6906 5253 3657R 4835 6233 5930 6186

!7 TotalStockOutstanding' 10037 1I38 I 9014 6417 8495 10597 9953R 10413

R ... reused 'Excludes holdings of insurance company stock 'Data for years through 1976 exclude common trust fund holdings which were separately available Common trust data were not separately available after 1976 and personal trust fund data therefore Include assets held In these cormngled funds Jlncludes estimate of stock held as dnect Investment lComputed as tesrdual (line 16 =17 -14 -15) lnctudes both mdmduals and institutional groups not listed above 51ncludes both common and preferred stock Excludes Investment company shares but Includes foreign Issues outstanding In the U S

102 Table 15 COMPANIES REGISTERED UNDER tHE INVESTMENT COMPANY ACT OF 1940 AS OF SEPTEMBER 30, 1979

Number of Registered Campa",es ApprOlumate Market Value 01 Assets of Act". Inactive! Total Active Companies (Millions)

M.naeement open-end eMutu.1 Funds') 833 53 886 83.67. Funds haYln&no load 276 16 292 32.839 V.nable .nnurty.separate accounts 52 2 54 1.561 Caprtal levera&e companIeS 1 0 2 28 All other load funds 503 35 538 49.148

M.na&ement closed-end 165 56 221 7.855 Sm.1l business Investment companies 36 6 42 270 Capital levera&e companIeS 7 0 7 330 All other closelHnd companoes 121 50 172 7.255

UnIt Investment trust 368 23 391 17.oo8b Vanable annuIty-separate accounts 69 I 70 1.067 All other unit mvestment trusts 299 22 311 15941

Faee-amount certificate companies 33

Tot.1 1.371 136 1.507 108.572

'In.ellve relers to re&lstered companies which as 01 September 30. 1979. were 10 the process of being IIquld.ted or merged, or h.ve Illed en apphcatron pursuant to Section 8(f) of the Act fOf dereglsuabon, or which have otherwise gone out of enstence and remam registered only until such time as the CommiSSIon ISSUesorder under Seenon 8(n termln.t,ng the" reglstrahon

b Includes .bout 3 6 billIOn of assets of trusts which ,nvest 10 secunties 01 other mvestment companies subst.ntlllly.1l 01 them mutu.1 funds

Table 16 COMPANIES REGISTERED UNDER tHE INVESTMENT COMPANY ACT OF 1940

ApprOXimate market value Frscal year ended Registered Registered Registration Registered 01 assets September 30 at begmnlng durmg teennated at end 01 01 active of year year dunng year year CQrnpanles (millions)

1941 0 450 14 436 1.500 1941 436 17 46 407 2.400 1943 407 14 31 390 1.300 1944 390 18 27 371 1.200 1945 371 14 19 366 3250 1946 366 13 18 361 3,750 1947 361 11 21 351 3.600 1948 351 18 11 359 3,815 1949 359 12 13 358 3,700 1950 358 26 18 366 4,700 1951 366 11 10 368 5.600 1952 368 13 14 367 6800 1953 367 17 15 369 7000 1954 369 20 5 384 8700 1955 384 37 34 387 11.000 1956 387 46 34 399 14.000 1957 399 49 16 431 15.000 1958 432 42 21 453 17,000 1959 453 70 11 512 10.000 1960 512 67 9 570 13.500 1961 570 118 25 663 19,000 1962 663 97 33 727 17.300 1963 717 48 48 717 36.000 1964 717 52 48 731 41600 1965 731 50 54 727 44.600 1966 717 78 30 775 49800 1967 755 108 41 842 58.197 1968 841 167 41 967 69,731 1969 967 222 12 1.167 71,465 1970 1.167 187 16 1.318 56.337 1971 1.318 111 98 1.351 78.109 1972 1.351 91 108 1.334 80,816 1973 1.334 91 64 1.361 73.149 1974 1.361 106 90 1.377 61287 1975 1.377 88 66 1.399 74.191 1976 1.399 63 86 1,376 80,564 1977' 1.403 91 57 1.437 76.904 1978 1.437 98 64 1471 93921 1979 1.471 83 47 1.507 108572

, Began Fiscal Year Endmg September 30. 1977 103 Table 17 NEW INVESTMENT COMPANY REIGSTRATIONS 1979

Management open-end No-loads 7 Vanable anmnties 1 All others 42 Sub-total 50

Management closed-end SBIC's 1 All others 12

Sub-total 13

Unit mvestment trust Variable annumes 4 All others 16 Sub-total 20

Face amount certificates Total Registered 83

Table 18 INVESTMENT COMPANY REGISTRATIONS TERMINATED 1979

Management open-end No-loads 5 Vanable anmntres 1 All others 30 Sub-total 36

Management closed-end SBIC's All others Sub-total

Unit mvestment trust Vanable annuities All others

Sub-total

Face amount cernncates

Total terminated 47

Private Noninsured Pension lion. The book value of common stock Funds: Assets holdings increased to $100.4 billion at year-end 1978 from $97.0 billion the The assets of private noninsured previous year. Valued at market, those pension funds totaled $202.2 billion at holdings also increased to $106.7 bll- book value and $201.5 billion at mar- lion, or 53.0 percent of total assets, at ket value on December 31, 1978. A the end of 1978 from $100.9 billion, or year earlier their comparable asset to- 55.6 percent of total assets, one year tals were $181.5 billion and $181.6 bil- earlier. 104 Table 19A ASSETS OF PRIVATE NON INSURED PENSION FUNDS Book Value, End of Year (Millions of Dollars)

1971 1972 1973 1974 1975 1976 1977 1978

Ca,h and DePOSIt, 1641 1857 2,336 4,286 2962 2199 3721 8110 US Government Secunties 2732 3,689 4404 5533 10764 14713 20138 19695 Corporate and Other Bonds 29013 28207 30,334 35029 37809 39,070 45580 53824 Preferred Stock 1,767 1481 1258 1129 1 188 1250 1168 1274 Common Stock 62780 74585 80,593 79319 83654 93359 96984 100 424 Own Company 3,608 3868 4,098 4588 5075 NA NA NA Other Compames 59172 70717 76495 74,731 78,579 NA NA NA Mortgages 3,660 2,728 2377 2,372 2383 2,369 2497 2789 Other Assets 4826 4,933 5,229 6063 6406 7454 11 421 16121

Total Assets 106419 117 530 126531 133731 145166 160414 181509 202237

N A Not AVailable Note Includes deferred profit shanng funds and pension funds of cotporatrons umons rnuttremplerer groups and nonprotrt ergamzations

Table 19B ASSETS OF PRIVATE NON INSURED PENSION FUNDS Markel Value, End of Year (Millions of Dollars)

1971 1972 1973 1974 1975 1976 1977 1978

Ca,h and DePOSIts 1,641 1,857 2,336 4286 2962 2199 3721 8110 U S Government Securities 2772 3700 4474 5582 11 097 14,918 20017 18767 Corporate and Other Bonds 26,111 26,232 27,664 30815 34519 37858 41,754 48633 Preferred Stock 2014 1,869 985 703 892 1212 1009 1162 Common Stock 86636 113 369 89,538 62582 87669 108483 100863 106732 Own Company 7691 8750 6947 5230 6,958 NA NA NA Other Iompames 78,945 104,619 82591 57352 80711 NA NA NA Mortgages 3184 2427 2108 2063 2139 2160 2362 2554 Other Assets 4560 4,908 5,140 5681 6341 7073 10,838 15585

Total Asset' 126,921 154,363 132 247 111,724 145622 173,906 181,564 201545

N A Not AVailable Note Includes deferred profit sharing funds and pension funds of corporations omens muttremployer groups, and nonproflt organtzahcns

SECURITIES ON EXCHANGES volume of 922.2 million shares was up 41.5 percent from the 1977 figure. Exchange Volume Share volume on regional exchanges Dollar volume of all equity securities increased 30.9 percent from the 1977 transactions on registered exchanges figure to 992.2 million shares, valued totaled $268.5 billion in 1978. Of this at $23.6 billion. total, $249.3 billion or 92.8 percent The Chicago Board Options Ex- represented stock trading, $18.9 bil- change contract volume for 1978 was lion or 7.0 percent, option trading, and 33.7 million, up 35.9 percent from the balance, trading in rights and war- 24.8 million in 1977. The value was rants. The value of New York Stock $13.7 billion, an increase of 71.6 per- Exchange transactions was $210.6 bil- cent from $8.0 billion in 1977. The lion in 1978. NYSE share volume in- American Stock Exchange Option vol- creased 35.7 percent from the 1977 to. ume was 17.6 million contracts in tal. On the American Stock Exchange, 1978, an increase of 74.3 percent from value of shares traded increased 78.2 the 10.1 million contracts in 1978, an percent to $15.2 billion. The AMEX increase of 74.3 percent from the 10.1

105

315-805 0 - 80 - 9 million contracts in 1977. The value of 1978. Pacific Stock Exchange contract AMEX options trading in 1978 was volume in 1978 was 3.1 million with a $3.5 billion. Philadelphia Stock Ex- value of $766 million. The Midwest change option volume was 2.9 million Stock Exchange contract volume was in 1978 up 43.9 percent from the 1977 2.3 million contracts with a value of volume with a value of $472 million in $419 million in 1978.

Table 20 MARKET VAWE AND VOWME OF SALES ON REGISTERED AND EXEMPTED SECURmES EXCHANGES' (All data are In thousands)

Stocks' Options} Warrants Rlihts Total Market Market Number Market Number Market Humber Market Number Value Value of Value of Value of Value of (Dollars) (Dollars) Shares (Dollars) Contracts (Dollars) Units (Dollars) Units

All Reilstered E,changes for past SIX years

Calendar Year 1973 187.158.618 177.879.464 5723.424 448.498 1.119 973.076 124,740 11.082 51.515 1974 125.285.044 118434721 4.846492 1,660222 5.683 389.251 67.174 4.301 37.167 1975 166.901.078 157.260586 6.231.516 6.423.469 14.428 285.859 97225 9024 52.928 1976 206959.037 194.969.057 7035,755 11,734.222 31.425 248.124 53.603 7.634 35.843 1977 198.292.217 187.202.855 7.023.165 10.899.135 39.622 184.435 67.841 5,792 43.940 1978 268.508724 249.257.272 9482.710 18.953204 59847 343,723 68.064 2.323 13.889

Breakdown of 1978 Data by RegIStered [,chanie

All RegIStered Exchanies -American Stock Exchange 18.943.355 15.204.973 992.179 3.525.010 17.619 212966 35.468 407 568 'Boston Stock E,change 1,535923 1.535.839 57.665 0 0 81 43 2 235 .Cmcmnatl Stock Exchange 433.287 433.287 15.127 0 0 0 0 0 0 Midwest Stock E,change 10.880.316 10.461,239 343.185 419.077 2.288 0 0 0 0 'New York Stock Exchange 210550436 210426.412 7.617.958 0 0 122.589 28.988 1,435 12,796 PaCIfic Stock Exchange 7.872.090 7.099.249 297.904 766.462 3.063 5,900 3,018 479 289 'Ph,ladelph" Stock Exchanie 4,560,103 4.085.804 142,687 519.910 3166 2,189 547 0 0 Intermountam Stock Exchange 815 815 2.281 0 0 0 0 0 0 Spokane Stock E,change 9.655 9,655 13.723 0 0 0 0 0 0 'Chicago Board Options 13722,745 0 0 13,722,745 33712 0 0 0 0

All Exempted Exchanges for past SIX years

Calendar Year 1973 1,899 1.897 260 0 0 0 0 1974 1174 1.174 149 0 0 0 0 1975 524 524 69 0 0 0 0 1976 383 383 94 0 0 0 0 1977 298 298 64 0 0 0 0 1978 0 0 0 0 0 0 0

-Reports of those exchanges marked WIth an asterisk cover transactions cleared durmg the calender month, clearances occur for the most part on the fifth day after that on which the trade actually was effected Reports for other e,changes cover transactions effected on trade dates of calendar month 'Data on the value and volume of secunhes sales are reported In connection With fees pard under Section 31 of the Secunnes Exchange Act of 1934 They mclude all secuntres sales effected on exchanges except sales of bonds of the UnIted States Government ehrch are not subject to the fee The data cover odd- Jot as well as round-lot transacnons llncludes voting trust certifIcates, cernfrcates of depoSIt for stocks, and Amencan Deposltary Receipts for stocks but excludes rights and warrants lExerclses are not mcluded In these totals.

NASDAQ Volume trading volume reflects the number of shares bought and sold by market NASDAQ share volume and price in- makers plus their net inventory formation for over-the-counter trading changes. has been reported on a daily basis since November 1, 1971. At the end of 1978, there were 2,582 issues in the Share and Dollar Volume by NASDAQ system, an increase of 0.3 Exchange percent from 2,575 in 1977. Volume Share volume of all stocks, rights for 1978 was 2.8 billion shares, up 47.0 and warrents totaled 9.6 billion, a 34.1 percent from 1.9 billion in 1977. This percent increase from 7.1 billion in

106 Market Value Of Securities Traded On All (I.S. Stock Exchanges

Dollars Billions 280

h"Stocks. R,ghts ....:); & Warrants

Ej OptIons 240

200

, " ~, . ' f 160 e ~~ " .J' '; -:. 'p' , . " .i " :.. ~ /" " )...... "' .... ,.", " "

120

::r ...... '9" / , ,

80

" 18.9 o 1968 69 70 71 72 73 74 75 76 77 1978

107 1978. New York Stock Exchange ac- and warrants was $249.6 billion, a 33.2 counted for 80.08 percent of all share J percent increase from $187.4 billion in volume; American Stock Exchange, 1978. New York Stock Exchange dom- 10.75 percent; and Midwest and Pa- inated the dollar volume accounting cific Stock Exchanges, 3.59 and 3.15 for 84.35 percent of the total. Ameri- percent, respectively. can and Midwest Stock Exchanges had Dollar volume of all stocks, rights 6.18 and 4.19 percent of the total.

Table 21A SHARE VOLUME BY EXCHANGES'

Total Share In Percentage Year Volume (thousands) NYSE AMEX MIDW PSE PHIE BOSE CNSE OtherZ

1935 68t 97t 7313 1242 191 269 110 096 003 776 1940 377 897 7544 1310 211 278 133 119 008 387 1945 769,018 6587 2131 177 298 106 066 005 630 1950 893320 7632 1354 216 311 097 065 009 316 1955 1.311401 6885 1919 209 308 085 048 005 541 1960 1428552 6908 2246 222 314 089 039 004 141 1961 2121050 6565 2584 224 345 080 030 004 133 1962 1699346 7t 84 2026 236 297 087 031 004 095 1963 1,874,718 7317 1889 233 283 083 029 004 110 1964 2118326 72 81 1942 243 265 093 029 003 086 1965 1663495 7010 2259 263 234 082 026 005 064 1966 3,306386 6954 2289 257 268 086 040 005 051 1967 4,641215 6468 2845 236 246 087 043 002 057 1968 5406582 6200 2974 263 265 089 078 001 095 1969 5,133498 6317 2761 284 347 122 051 000 100 1970 4835222 7t 27 1901 316 368 163 051 002 057 197t 6,172,668 7t 34 1842 352 372 191 043 003 0« 1972 6518132 7047 1821 371 413 221 059 003 045 1973 5899678 7492 1375 409 368 219 07t 004 039 1974 4950,833 7847 1027 439 348 182 086 004 044 1975 6371545 8105 897 406 310 154 085 013 015 1976 7125201 8003 935 387 393 141 078 044 017 1977 7,134882 7954 973 395 37t 149 066 064 028 1978 9364,763 8008 1075 359 315 150 061 016 016

'Share Volume for exchanges rncludes Stocks Rights and Warrants "Others rnclude all exchanges not listed above

Table 21B DOLLAR VOLUME BY EXCHANGES'

Total Dollar In Percentage Year Volume (thousands) NYSE AMEX MIDW PSE PHIE BOSE CNSE Other'

1935 15396139 8664 783 132 139 088 134 004 056 1940 8419772 8517 768 207 152 III 191 009 045 1945 16284552 8275 1081 200 178 096 116 006 048 1950 21 808284 8591 685 235 219 103 112 011 044 1955 38039107 8631 698 244 190 103 078 009 047 1960 45276616 8386 935 272 195 104 060 007 003 1961 64,032,924 8248 10 71 275 199 103 049 007 005 1962 54823 153 8637 681 275 200 105 046 007 004 1963 64403991 8523 752 272 239 106 042 006 004 1964 72415297 8354 846 315 248 114 042 006 004 1965 89498711 8182 991 344 243 112 042 008 003 1966 123643475 7981 11 84 314 285 110 056 007 002 1967 162136,387 77 31 1448 308 279 113 067 003 003 1968 197061776 7357 1800 312 266 113 104 001 008 1969 176,343 146 7350 17 60 339 312 143 067 001 012 1970 131707946 7844 1111 376 381 199 067 003 004 197t 186375 130 7907 998 400 379 229 058 005 003 1972 205956263 7777 1037 429 394 256 075 005 005 1973 178863621 8207 606 454 355 245 100 006 001 1974 118828272 8362 439 489 350 202 123 006 001 1975 157555360 8504 366 482 325 172 I 18 017 000 1976 195,224 815 8435 388 476 383 169 094 053 000 1977 187393082 8396 460 479 353 162 074 075 001 1918 249603320 84 35 618 419 285 164 062 017 000

IDollar Volume for exchanges mcludes Stocks RIghts and Warrants lOt hers Include all exchanges not listed above

108 Special Block Distributions ployed 3 times, accounting for 7.0 per- cent of the total number of special In 1978, the total number of special block distributions in 1978, but, with block distributions decreased by 31.7 an aggregate value of $36.2 million, percent. The value of these distri- these offerings accounted for only 5.9 butions increased 117.0 percent to percent of the value of all special block $610.0 million from $280.9 billion in distributions. 1977. Secondary distributions accounted The exchange distribution method for 86.0 percent of the total number of was employed 3 times in 1978. The special block distributions in 1978 and value of exchange distributions was 93.4 percent of the total value of these $4.3 million, representing less than 1 distributions. percent of the value of all special block The special offering method wasem- distributions.

Table 22 SPECIAL BLOCK DISTRIBUTIONS REPORTED BY EXCHANGES

(Value In thousands)

Secondary dtstnbuhons Exchange drstnbuuons Special offerings Year Number Shares Value Number Shares Value Number Shares Value sold sold sold

1942 116 2397454 82840 0 0 0 79 812390 22694 1943 81 4270580 127462 0 0 0 80 1097338 31054 1944 94 4097298 13\ 760 0 0 0 87 1053667 32454 1945 115 9457358 191961 0 0 0 79 947231 29878 1946 100 6481 291 232398 0 0 0 23 308134 11002 1947 73 3961572 124671 0 0 0 14 31417U 9133 1948 95 7302,410 17\ 991 0 0 0 21 238879 5466 1949 86 3737249 104061 0 0 0 31 500211 10 956 1950 77 4180681 88743 0 0 0 10 150308 4940 1951 88 5193756 146459 0 0 0 17 313 013 10751 1951 76 4123158 149117 0 0 0 11 357897 9931 1953 68 6906017 108119 0 0 0 17 380680 10486 1954 84 s 738 359 218490 \7 705781 24664 14 189772 6670 1955 116 6756767 344871 19 258348 10111 9 161850 7123 1956 146 II 696 174 510966 17 156481 4645 8 131755 4557 1957 99 9314599 339062 33 390831 15855 5 63408 1845 1958 111 9508505 361886 38 610876 19454 5 88151 3186 19\9 148 17330941 811336 18 545038 16491 3 33500 3730 1960 91 11439065 414688 20 441644 11 108 3 63663 5439 1961 130 19910013 926514 33 1126266 58071 2 35000 1504 1961 \9 11143656 658780 41 1345076 65459 1 48100 588 1963 100 18937935 814984 71 1891233 107498 0 0 0 1964 110 19462343 909811 68 2553237 97711 0 0 0 1965 141 31 153319 1603107 57 2334177 86479 0 0 0 1966 126 29045038 1523373 \2 3042 \99 118349 0 0 0 1967 143 30783604 1 154479 51 3452856 115404 0 0 0 1968 174 36110489 1571600 35 1669938 93518 1 33\1 63 1969 141 38114799 1144186 31 1706571 51198 0 0 0 1970 71 17,830008 504561 35 1066590 48118 0 0 0 1971 104 71801,143 1007517 30 1595 104 65765 0 0 0 1971 119 82365749 3116116 16 1469666 30156 0 0 0 1973 120 30825890 1 151087 19 802311 9140 91 6661111 79889 1974 45 7511200 133838 4 82100 6836 33 1911755 16805 1975 51 34149069 1409933 14 483846 8300 14 1251915 11511 1976 57 24089636 581560 16 751600 13 613 11 1475841 18459 1977 39 9848986 261157 6 295264 5241 18 1074190 14519 1978 37 15233141 \69478 3 79000 4321 3 130675 36209

109 Value and Number of Securities billion or 5.9 percent. Stocks with pri- Listed on Exchanges mary listing on the AMEX accounted The market value of stocks and for 4.5 percent of the total and were bonds listed on U.S. Stock Exchanges valued at $39 billion. The value of at year-end 1978 was $1,335 billion, an AMEX stocks increased $2 billion or increase 3.4 percent from the previous 4.3 percent in 1978. Stocks with pri- year-end figure of $1,291 billion. The mary listing on all other exchanges total was composed of $865 billion in were valued at $2.9 billion, a decrease stocks and $470 billion in bonds. The of 12.1 percent from the 1977 total. value of listed stocks increased 5.8 The net number of stocks and bonds percent in 1978 and the value of listed listed on exchanges increased 176 is- bonds decreased less than 1 percent. sues or 21.4 percent in 1978. The New Stocks with primary listing on the New York and Pacific Stock Exchanges York Stock Exchange were valued at listed 291 and 4 additional securities, $823 billion and represented 95.1 per- respectively. Spokane showed no cent of the common and preferred change while all other exchanges showed a drop in the number of list- stock listed on all U.S. exchanges. The value of NYSE listed stocks increased ings. Honolulu Stock Exchange ceased from their 1977 year-end total by $46 operations December 31, 1977.

Table 23 SECURITIES LISTED ON EXCHANGESI December 31. 1978

Common Preferred Bonds Total Secunties Market Market Market Market Number Value Number Value Number Value Number Value (Million) (Million) (Million) (Million) Registered Amencan 964 $ 37097 100 $ 2145 193 $ 3,886 I,m $ 43,128 Boston 64 247 2 1 1 1 67 249 Cincinnati 6 31 3 8 5 42 14 81 Midwest 16 256 5 58 0 0 21 314 New York 1,552 798,764 642 23,971 2,895 464,895 5,089 1,287,630 Pacific 39 861 9 180 24 540 72 1581 Philadelphia 21 122 91 1.072 20 1,124 132 2318 Intermountain 27 50 0 0 0 0 27 50 Spokane 24 6 0 0 0 0 24 6 Total 2,713 $837,434 852 $27,435 3.138 $470,488 6,703 $1,335,357

Includes the following foreign stocks. Registered New York 36 $ 23,117 1 81 169 $ 8,061 206 31,259 American 66 13,521 0 0 8 NA. 74 13,521 Pacific 3 $ 139 0 0 0 $ 0 3 139 Total 105 s 36,777 81 I77 $ 8,061 283 «,919

~x:~f~ss:'~r~leshwhich w~ suspended from trading at the end of the year. and secunnes which because of maetrvrty had no available quotes U U DC xc ange eea operations on December 31 1977 +less than 05 million, but greater than zero

110 Table 24 VALUE OF STOCKS LISTED ON EXCHANGES (Oollars m billions)

Nl!W York American ExclusIvely Dec 31 Stock Stock On Other Total Exchange Exchange Exchanges 1936 599 148 747 1937 389 101 491 1938 475 108 583 1939 465 101 566 1940 419 86 505 1941 358 74 431 1941 388 78 466 1943 476 99 575 19« 555 111 667 1945 738 144 881 1946 686 131 818 1947 683 111 804 1948 670 119 30 819 1949 763 111 31 916 1950 938 139 33 1110 1951 1095 165 31 1191 1951 1105 169 31 1405 1953 1173 153 18 1354 1954 1691 111 36 1948 1955 1077 171 40 1388 1956 2192 310 38 1540 1957 1956 255 31 1142 1958 1767 317 43 3117 1959 3077 154 41 3373 1960 3070 142 41 3353 1961 3878 330 53 4261 1962 3458 144 40 3741 1963 411 3 261 43 4417 1964 4743 282 43 5068 1965 5375 309 47 5731 1966 4315 179 40 5144 1967 6058 430 39 6517 1968 6923 612 60 7595 1969 6295 477 54 6816 1970 6364 395 48 6807 1971 7418 491 47 7956 1971 8715 556 56 9327 1973 721 0 387 41 7638 1974 511 1 233 29 5373 1975 6851 193 43 718 7 1976 8583 360 41 8985 1977 776 7 376 41 8185 1978 8117 391 19 8648

Securities on Exchanges and registered on the New York Stock As of September 30, 1979, a total of Exchange, accounting for 60.5 percent 6,783 securities, representing 3,129 is- of the stock issues and 90.2 percent of suers, were admitted to trading on se- the bond issues Data below on "Se- curities exchanges in the United curities Traded on Exchanges" in- States. This compares with 6,777 is- volves some duplication since it in- sues, involving 3,179 issuers, a year cludes both solely and dually listed earlier. Over 5,000 issues were listed securities.

111 Table 25 SECURITIES TRADED ON EXCHAJIGES Issuers Stocks Bondsl

TemJlonm~ Reflstered exempted Unlisted Total AmerICan 1,049 1,0« (3 1,088 209 Boston 805 133 715 8(8 15 ChICago Board of OptIOns 1 1 1 Chicago Board of Trade 3 1 2 3 Cincinnati 3(0 « 309 353 15 Intermountain (8 (] 1 (8 Midwest 590 3(0 318 659 28 New York 1,910 2,223 2,225 2,803 Pacific Coast 808 797 166 9M 115 PBS 908 337 731 1068 77 Spobne 35 J( ( 38

'Issues exempted under Section 3(.XI2) of the Act, such as oblrgatlons of US GoYemment, the states, .nd cmes, are not Included In thIS table

Table 26 UNDUPUCATED COUNT OF SECURITIES ON EXCHANGES (September 30, 1979)

RegiSlered exch.nges Stocks Bonds Tota' Inwlved

Registered and listed 3,638 3,090 6.728 3,099 Temporarily exempted from registration 3 2 5 2 Admitted to unlisted trading Jln~leges 36 !( 50 28 Tot.1 3,677 3,106 6.783 3.129

1933 ACT REGISTRATIONS Rule 24f-2 (l7CFR270.24f-2) effective November 3, 1977, the dollar value of Effective Registration investment company registrations are Statements Filed no longer available. During the fiscal year ending Sep- Among the registration statements tember 30, 1979, 3,112 registration effective, there were 684 first-time reg- statements valued at $77 billion be- istrants in fiscal 1979 as compared came effective. The number of effec- with 647 in fiscal 1978. tive registrations in fiscal 1979 rose 2.5 percent from fiscal 1978. The value The number of registration state- of registration statements increased ments filed rose 0.8 percent to 3,229 18.5 percent in 1979 from $65 billion in fiscal 1979 from 3,204 in the pre- in fiscal 1978. With the adoption of vious fiscal year.

112 Table 27 EFFECTIVE REGISTRATIONS (DoIIIrslftll,U-J

Tot.1 Cash Sale for Account of Issuers

Fiscal year Number Bonds of V.lue Common Debentures Preferred Ictal St.tements Stock and Notes Stock

Fiscal Year ended June 30 19351 284 913 168 490 28 686 1936 689 4,835 531 3,153 252 3,936 1937 840 4,851 802 2,426 406 3,634 1938 412 2,101 474 666 209 1349 1939 344 2,579 318 1,593 109 2,020 1940 306 1,787 210 1,112 110 1,432 1941 313 2,611 196 1721 164 2081 1942 193 2,003 263 1,041 162 1466 1943 123 659 137 316 32 485 1944 221 1,760 272 732 343 1,347 1945 340 3,225 456 1351 407 2714 1946 651 7,073 1,331 3,102 991 5424 1947 493 6,732 1,150 2,937 787 4,874 1948 435 6,405 1,678 2,817 537 5,032 1949 429 5,333 1,083 2795 326 4,204 1950 487 5,307 1,786 2,127 468 4381 1951 487 6,459 1,904 2,838 427 5,169 1952 635 9,500 3,332 3346 851 7,529 1953 593 7,507 2,808 3,093 424 6,325 1954 631 9,174 2,610 4,240 531 7,381 1955 779 10,960 3,864 3951 462 8277 1956 906 13,096 4,544 4,123 539 9,206 1957 876 14,624 5,858 5,689 472 12,019 1958 813 16,490 5,998 6,857 427 13282 1959 1,070 15,657 6,387 5,265 443 12,095 1960 1,426 14,367 7,260 4,224 253 11,737 1961 1,550 19,070 9,850 6162 248 16260 1962 1,844 19,547 11,521 4,512 253 16236 1963 1,157 14790 7,227 4372 270 11,869 1964 1,121 16,860 10,006 4554 224 14,784 1965 1,266 19,437 10,638 3,710 307 14,655 1966 1,523 30,109 18,218 7,061 444 25723 1967 1,649 34,218 15,083 12309 558 27,950 1968 2,417 54,076 22092 14036 1,140 37,268 1969 3,645 86,810 39,614 11,674 751 52039 1970 3,389 59,137 28,939 18,436 823 48,193 1971 2,989 69,562 27,455 27,637 3,360 58452 1972 3,712 62,487 26,518 20,127 3,237 49,882 1973 3,285 59,310 26,615 14,841 2,578 44,034 1974 2,890 56,924 19,811 20,997 2,274 43,082 1975 2,780 77 457 30 502 37557 2201 70260 1976 2,813 87,733 37,115 29,373 3013 69501 Jransrtmn Qu.rter July-September 1976 639 15,010 6,767 5,066 413 12246 Frscal year ended September 30 1977(r) 2,915 92580 47,116 28,026 2,426 77,568 1978 3,037 65,043' 25330' 23,251 2,128 50,709 1979 3,112 77,375 22697 28,894 1,714 53305

Cumul.t"e Iotal 62,519 $1,193,543 $498,534 $395,100 $38,522 $932,156

r = revised 'For 10 months ended June 30 1935 'The adoption of Rule 24f.2 (17 CFR270 24f 2) effeel"e November 3, 1977 made rt Impossible to report the dollar value of secunnes registered b, ,"vestment companies Note The Total Cash Sale differs from earlier presentations due to changes," rounding procedures

113

Purpose of Registration registrations were for immediate offer- Effective registrations for cash sale ings. Registrations of extended offer- ings totaled $14.3 billion with em- for the account of corporate issuers amounted to $34 billion! in fiscal 1979 ployee plan offerings accounting for $10.8 billion. as compared to $29 billion in fiscal 1978. With respect to distribution of Securities registered for the account of the issuer for other than cash sale these registrations between equity and totaled billion, billion of debt offerings, equity offerings in- $23.0 $14.7 which was common stock. The bulk creased from $10.0 billion in fiscal of these registrations were common 1978 to $10.1 billion-a 1 percent in- stock issues relating to exchange of- crease. Corporate debt offerings in- fers, mergers and consolidations. In creased from $19.0 billion to $24.2 bil- fiscal common stock effectively lion-a 27.4 percent increase. 1979 registered for this purpose totaled $9.8 Among the securities registered for billion, an increase of 58.1 percent cash sale in fiscal 1979, nearly all debt from fiscal 1978. issues were for immediate offerings, Registrations for the purpose of sec- whereas 41.2 percent of the equity ondary offerings (proceeds going to selling security holders) typically con- !The adoption of Rule 24f-2 (17 CFR cern sales of common stock. In fiscal 270.24f.2) effective November 3, 1977. 1979 these registrations amounted to made it impossible to report the dollar $1.1 billion, or a 7.7 percent decline valueof securitiesregistered. from fiscal 1978.

Table 28 EFFECTIVE REGISTRATIONS BY PURPOSE AND TYPE OF SECURITY: FISCAL YEAR: 1979 (Doll... In lIo1loan.1 Type of secUrity Bond, Preferred Common Purpose of registratIOns Total debentures Stock Stock and notes

All reglstratoons (estimated value) $77.375 $33,135 $5,784 $38456 For account of Issuer for cash sale 53,303 18,894 1,711 11697 Immediate offermg 38,963 18,894 1,661 8408 Corporate 34,167 14,198 1,661 8,408 Offered to Genefal Public 33,411 14,169 1,659 7,584 SecUrity Holders 856 19 3 814 Foreign Governments 4,696 4696 0 o Extended cash sale and other ISSUes 14339 0 50 14,189 For account of Issuer for other than cash sale 13,011 4138 4,057 14,715 Secundary Offerings 1,061 3 15 1044 Cash Sale 457 0 4 453 Other 605 3 11 591

115 Effective Registrations Cash Sale For Account Of Issuers 1935-1979 Dollars. BillIon,," 50 I ,1 ,1 ,I

40 d I ,I I J I II , l II , I

30

20 Common Stock

10

Preferr~d Stock ...: •••••••••• :.' •••••• ~ .. o ...... 1935 40 45 50 55 60 65 70 75 * 79 (F,sca'Vears)

116 *BEGINNING IN 1977. FISCAL YEARS END IN SEPTEllBER RATHER THAN JUNE. Regulation A Offerings predominated. It should be noted, that During fiscal year 1979, 347 notifi- the ceiling for Regulation A was raised cations were filed for proposed offer- to $1.5 million on September II, ings under Regulation A. Issues be- 1978. tween $500,000-$1,500,000 in size

Table 29 OFFERINGS UNDER REGULATION A

Frscal Fiscal Fiscal 1979 1978 1977

SIZe $100,000 or less 10 23 17 $100,00D-$200,000 33 33 30 $200,000-$300,000 27 36 30 $300,000-$400,000 30 25 24 $400000-$500,000 44 120 117 $500,000-$1,500,000 203 5 0 Total 347 242 218

Underwriters Used 98 55 52 Not Used 249 187 166 Total 347 242 218

OfferOfs ISSUIng Companies 331 223 205 Stockholders 3 5 7 Issuers and Stockholders 10lntly 13 14 6 Total 347 242 218

ENFORCEMENT rities law VIolators, and administrative proceedings pertaining to broker- Types of Proceedings dealer firms and/or individuals associ- As the table below reflects, the se- ated with such firms which may lead to curities laws provide for a wide range various remedial sanctions as required of enforcement actions by the Com- in the public interest. When an injunc- mission. The most common types of tion is entered by a court, violation of actions are injunctive proceedings in- the court's decree is a basis for crimi- stituted in the Federal district courts to nal contempt action against the viola- enjoin continued or threatened secu- tor.

117 Table 30 TYPES OF PROCEEDINGS

ADMINISTRATIVE PROCEEDINGS

Persons Subject to Acts Ionsnrutmg Sanction and Basrs for Enforcement ActIOn

Broker dealer I muftlcrpJI securrtles dealer, Investment achlser or ISSO

Willful nolatmn of secunhes acts prnnsmn or rule aldmg or abetting such Censure or umrtanon on actmttes revocation suspension or denral of regrs- notetron failure reasonably to SUpervise others Willful misstatement or onus. tratron bar or suspension from assccranon (1934 Act ~~ 15B(cX1)-{4) von en filing With the Iomrnrssron conviction of or injunction against certain 15(bX4)-{6) Ad"sers Act ~~ 1D3(e)-{nJ • cnmes or conduct

Repered securrbes ISSOCIItKM'l

Organization or rules not conforming to statutory requirements Suspension of registration or limitation of actmnes functions or operauons (1934 Act ~ 19(hXl))

ViolatIOn of Of mabllity to comply With the 1934 Act rules thereunder or Its Suspennen or revocation of registration censure or limitation of actmnes own rules unjustrfred tenure to enforce compliance WIth the foregomg or Iuncncns or operations (1934 Act ~ 19(hXl)) WIth rules of the Muntclpal Securities Rutemaung Board by a member or person associated With a member

Member of revstered secUrities association, Of assoaated penon

Being subject to Iammrssren order pursuant to 1934 Act S 15{b) Willful Suspension or expulsion from the association bar or suspension from asso- Violation of or effecting transaction for other person With reason to believe cranon With member ot assocratron (1934 Act s~19(hX1)-{3)) that person was VIOlating secunnes acts pronsions rules thereunder or rules of Municipal Secuntres Rulemaung Board

NatlOMl secuntles exchange

OrganIZatIOn or rules not conferrrung to statutory requirements Suspension of regtstrahcn or limitation of actmties functions or operanons (1934 Act ~ 19(hXl))

VIOlatIOn of or inability to comply WIth 1934 Act rules thereunder or ItS own Suspension or revocation of registration censure or hrrntanon of actmnes rules umustmed failure to enforce compliance With the foregOing by a mem tunctmns or operations (1934 Act ~ 19(hX1l) ber or person associated WIth a member

Member of natKMIal securrtIes ezchlnrt. 01 iSSOClated persons

Being subject to tomnussron order pursuant to 1934 Act S 15(b) Willful Suspension or erpulsron from exchange bar or suspension from assooation VIOlation of or effecting trensacnen for other person With reason to behese With member (1934 Act ~~ 19(hX1)-{3)) that person was Violating secuntres acts pronnens or rules thereunder

RellSlered cI.. nnr 'rene,

VIOlatIOn of or inabIlity to comply With 1934 Act rules thereunder or ItS own Suspension or revocatIOn of registration censure or nmnanon of actmtres rules failure to enforce compliance With ItS own rules by partie.pants functions or operations (1934 Act ~ 19(hXl))

PJrttclpant In rfllStered dunna 'IeftCJ

Being subject to tommrsson order pursuant to 1934 Act ~ 15(bX4) Willful Suspension or expulsron from cleanng agency (1934 Act ~ 19(hX1)) VIolation of or effecting transaction for other person WIth reason to believe that person was Violating pronsons of clearing agency rules

Secuntles .nfonnlt .... proc .....

VlOlatton of or mabillty to comply With pronnons of 1934 Act or rules there- censure or operanenal hrmtations suspension or revocation of regrstratton under (1934 Act ~ llA(bX6))

Transfer_t

Willful nolatron of or mabllity 10 comply With 1934 Act ~~ 17 or 17A or Censure or limitation of actmues demal suspension or revocation of reg regulations thereunder tstratmn (1934 Act ~ 17A(cX3))

-., penon

Willful VIOlation of secunttes act prtmnon or rule aiding or abetting such Temporary or permanent prohrbmon from serving 10 certam capactres for Vlolatton WIllful misstatement In filing With Iommrsson registered Investment company (Investment Company Act ~ 9(b))

'Statutory references' are as follows '1933 Act the Secunties Act of 1933 '1934 Act' the Securmes Exchange Act of 1934 "tnsestrnent Company Act the Investment Company Act of 1940 'Ad"sers Act the Investment Ad"sers Act of 1940 "Hotdlng Compan, Act' the Publrc Utility Holding Company Act of 1935 "lrust tndeature Act the Trust Indenture Act of 1939 and SIPA the Secuenes Investor Protection Act of 1970

118 Table 3D-Continued TYPES OF PROCEEDINGS

ADMINISTRATIVE PROCEEDINGS

Persons Subject to, Acts Constituting Sanction and BaSIS for. Enforcement ActIOn

Officer Of dlrec'" .f self...... ,Ofpn_

Willful nolatron of 1934 Act, rules thereunder. or the orgamzanon's own rules Removal from offICe or censure (1934 Act. ~ 19(hX4)) Willful abuse of authority or unjustified failure to enforce compliance PrIncIpal .1 _._

Engagmg In busmess as a broker dealer after appointment of 51PC trustee Bar or suspension from bema or bemg associated wtth a broker dealer (SIPA ~ IlJ(b))

1933 Act revstratlDll slItemont

Statement materially maccurate or Incomplete Stop order suspending ettectneness (1933 Act ~ 8(d))

Investment company has not attained $100,000 net worth 90 days after state Stop order (Investment Company Act ~ 14{a)) ment became effective

P...... sub/Kl t. s.a- 12, 13 OfI5(dl of tile 1934Aet.

Material noncompliance With such provIsions Order directing compliance (1934 Act ~ 15(cX4))

SeaJnlles ISSUe

Noncompliance by Issuer With 1934 Act or rules thereunder Denial, suspension of effective date suspension or revocation of regrstratmn on natienal secunties exchange (1934 Act ~ 11(f))

Public Interest requires tradmg suspension Summary suspension of over the-counter or exchange trading (1934 Act. ~ 11(k)

Ilet1stered ,"westmont compan,

Failure to file Investment Company Act registration statement OJ requtred RevocatIOn of regIstratIOn (Investment Company Act ~ 8(e)) report, fllmg matenally Incomplete or misleading statement of report

Company has not attained $100000 net worth 90 days after 1933 Act reg- Resocatron or suspension of regrstratron (Investment Company Act ~ 14(a)) Istration statement became effective

Rttomey, lecountant, Of ather pm ..... n•• r .. pert

lack of reqursrte qualifications to represent others lackmg In character or Permanent or temporary demal of pnnlege to appear or practice before the integrity, unethical or Improper pnfesnonal conduct. Willful VIOlation of se- Commission (17 Cf R !i 1012(eXl) cunties laws or rules or aiding and abetting such Violation

Altom., suspended Of dISbarred bJ Automatic suspension from appearance or practice before the Commission (17 aJIIIt, .. pert's hc..... r..... d Of C f R ~ 1011(eX1)) suspended; co ... t\IDII of a I...., or mlSdemeanar ImoI"nl moral turpitude

Permanent injunctIOn agamst or finding of secunnss nolatron In CommlSSlon- Temporary suspensron from appearance or practice before tomrmsson (17 mstrtuted action fmdlng of secunties VIOlation by tornnussen In adrmnrs- C f R ~ 1011(eX3) trative proceedings

Ilember .f Il.noclpal Sec.nlles Ral.... kln' BoIrd

Willful VIOlation of secunties laws rules thereunder or rules of the Board Censure or removal from otnce (1934 Act !i 156(cX811

CIVIL PROCEEDINGS IN fEDERAL DISTRICT COURTS

Persons Subject to Acts Constltutmg Sanction and BaSISfor Enforcement Action

An, person

Engaging m or about to engage In acts or practices VIolating secunties acts tnrunctron agarnst acts or practices which constrtute or would constitute VI- rules or orders thereunder (including rules of a registered self regulatory olations (plus other eqUitable relief under court's general equIty powers) (1933 organizatIOn) Act Sec 11J(b), 1934 Act Sec 11(d) 1935 Act Sec 18(0 Investment Com- pany Act ~ 41(e) Ad",elS Act. ~ 109(e) Trust Indenture Act ~ 311)

Noncompliance With prcunons of law, rule, or regulation under 1933 1934 Writ of mandamus InjunctIOn or order directing compliance (1933 Act or Holding Company Acts order Issued by CommISSIOn rules of a registered ~ 1IJ(c), 1934 Act ~ 11(e), Holdmg Company Act ~ 18(g») self regulatory crgamzation or undertaking 10 a registratIon statement

119 Table 311-Continued TYPES OF PROCEEOINGS CIVil PROCEEDINGS IN FEDERAL DISTRICT COURTS

Persons Subject 10 Acts Icnstttuttng Sanction and Basts for Enforcement Action

Secuntles Innstor ProtecttOfl CorporltlOfl

Refusal to commit funds or act for the pretecnon of customers Order directing discharge of oblIgatIOns or other appropriate relief (SIPA, ~ lIb)~

IbtMIRII securrtle5 exchange or recrstered $Kuntle! ISSOClabon

Noncompliance by Its members and persons associated with Its members with Wrrt of mandamus mrunctron or order directing such exchange or assocration the 1934 Act rules and orders thereunder or rules of the exchange or as- to enlorce comphance (1934 Act ~ 21(e)) sociation

Noncompliance by Its partropants with Its own rules Writ of mandamus mgmcnen or order dlrectmg cteanng agency to enforce comphance (1934 Act ~ 21(e»)

Issut!' subject to reporting requirements

Failure 10 IIIe reports requned under ~ 15(d) of 1934 Act Forterture at $100 per d,y (1934 Act ~ 32(b)

Re(lSlered IOmtment compon, " affilllt.

Name of company or of sectlflty rssued by It deceptive or rmsleading lnjuoctmn agamst use of name (Investment Company Act ~ 35(d))

Officerl director, member of odmo" board, admor, depo$ltor, or underwriter of Investment company

Engage In act or practice consntutmg breach of fidUCIary duty ,"wiVing per- lmuncten against acting In certam capacities for Investment company and sonal misconduct other approprtate rehef (Investment Company Act 93&(,))

An, penon hmng hdu",,, duty "'Pectlnl rOC01ptof compenslt'D11 from Inmlmenl compln,

Breach of fidUCiary duty Inlunct,on (Investmenl Comp.ny Act ~ 3&(,) RHfRRAl 10 ATTORNEY GENERAL FOR CRIMINAL PROSECUTION

BaSIS for Enforcement Action Sanction or Rehef

Willful violation of securities acts or rules thereunder or Willful misstatement MaXimum penalties $10,000 tme and 5 years Imprisonment an exchange In any document required to be flied by secuntres laws and rules or by self m,y be frned up to $500 ODD a pubhc-utrhtr holding compamupto $200.000 regulatory erganrzation m connection wIth an application for membership (1933 Act Sees 2Il(b). 24 1934 Act Sets 21(d) 32(,) 1935 Act Sees 18(0 pertrcrpaton or to become associated WIth a member thereof 29. 1939 Act Sec 325 Investment Co Act Sees 42(e) 49, Ad"sers Act Secs 209(e) 211) REFERRAL TO ATTORNEV GENERAL FOR CRIMINAL PROSECUTION

Persons Subject to Acts Constituting Sanction and BaSIS for Enforcement Action

Willful Violation of secunnes acts or rules thereunder or Willful misstatement MaXimum penalties $10000 Ime and 5 years Imprisonment an exchange In any document required to be filed by secuntres laws and rules or by self m,y be lined upto $500000 a puhhc-utrhty holdrng company up to $200 000 regulatory organization In connection WIth an application for membership (1933 Act Sees 31l(b) 24.1934 Act Secs 21(d) 32(.) Holdrng Company Act pernopatmn Of to become associated With a member thereof Sees 18(0 29. 1939 Act Sec 325 Investment Company Act Sees 42(e) 49 Advisers Act Sees 209(e) 211)

An, 1SSlIfr "tllch ~oflt .. SectIOfl lOA/.! of M'Xlmum pen,lty $1000000 hne (1934 Act Sec 32(eXI)) ltIe 1934 Act.

Any officer or dlrettor of In 1SSUff, or any M'Xlmum penalty $10000 frne and 5 years impnsonment (1934 Act Sec shdholder KlInl on behlll of such ISSUer, 32(CX2)) who WIllfUlly .... It.. Sect10n 3OA/.! of the 1934 Act

Any ,,"pi.,.. or 'IOnl (subJect to th. MaXImum pen,lJr $10 000 frne and 5 years impnsonment (1934 Act Set IUnsd'etIOfI 01 the Unrted Slit'" 01 32(CX3») ., ....., found 10 hm .... .,ed SectIOfl 3O.I(.! 01 the 1934 Act, "ho Wlltfu'ly "med out the oct or proch" constrtUlJnl such IlOl_

120 Table 3D-Continued TYPES OF PROCEEDINGS

REFERRAL TO ATIORNEY GENERAL fOR CRIMINAL PROSECUTION

Persons Subject to Acts Constituting Sanction and BaSIS for Enforcement ActIon

~yperson

Willful VIolation of securities acts or rules thereunder or WIllful misstatement Maximum penalties SIO 000 fine and 5 years unpnsonrnent an exchange If! any document required to be filed by secunnes laws and rules 01 by self- may be fined up to $500 000 a pubnc utJllty holding company up to regulatory organization In connection WIth an apphcetmn for mernbersfup $200000 (1933 Acl Sees 21J(b) 24 1934 Act Sees 21(d) 32(,) Holding participation or to become associated With a member thereof Company Act Sees 18{O 29 1939 Act Sec 325 Investment Company Act Secs 42(e) 49 Ad"sers Act Sees 209(e) 217)

~y ISSU.. wh'ch at.. Sed ... 30A(.) 01 MaXimum penalty $1000 000 nne (1934 Act Sec 32\CX1H U1e 1934 Act (1 111 corrupt pract,ces)

Any officer 01 duector of an ISSUer, or In, MaXimum penalty $10 000 fine and 5 years rrnpnsonment 11934 Act Sec stockholder .cllng on b.h.11 01 such 1SSUOf, 311CX111 who wlilfull, .... at.. Sectoon 30A(.) 01 U1e 1934 Act

~, employee .. ogent (sub,ect to the MaXimum penalty $10 000 fme and 5 years rmpnsonment (1934 Act Sec ,unsdlcl ... 01 the Un,ted Stat.. ) .f 321CX311 .. ISSuerlound to h...... at.d Sedoon 30A(.) of the 1934 Act, who w,lIlully earned out the act Of prKtlCe constrtubng such .Dlat ...

Table 31 INVESTIGATIONS OF POSSIBLE VIOLATIONS OF THE ACTS ADMINISTERED BY THE COMMISSION

Pending September 30 1978 1356 Opened 296

Total for llrstnbutmn 1651 Closed 481

Pending September 30 1979 1171

During the fiscal year ending Sep- recommendation of the DIvision of En- tember 30, 1979, 157 formal orders forcement. were issued by the Commission upon

Table 32 ADMINISTRATIVE PROCEEDINGS INSTITUTED DURING FISCAL YEAR ENDING SEPTEMBER 30, 1979

Broker Dealer Proceedings 42 Investment AdVIser Proceedings 25 Stop Order Reg A Suspension and Other Disclosure Cases 14

121

315-805 a - 80 - 10 Injunctive Actions 1978-1979 peals In reorqanizatron matters and 42 appeals in injunction and miscella- During fiscal 1979, 108 suits for in- neous cases. SEC participated and junctions and 28 miscellaneous ac- filed 15 amicus curiae briefs in 15 tions were Instituted in the United cases. States district courts by the Commis- During fiscal 1979, the General sron, and 37 district court proceedings Counsel referred to the Department of were brought against the Commission. Justice 45 criminal reference reports. During that year this office handled 11 (This figure Includes 4 criminal con- appellate cases involving petitions for tempt actions.) review of Cornrnissron decisions, 3 ap-

Table 33 INJUNCTIVE ACTIONS

Cases In/unctions Defendants FIscal Year Instituted Ordered EnJomed

1970 III 97 448 1971 140 114 495 1972 119 113 511 1973 178 145 654 1974 148 289 613 1975 174 453 749 1976 158 435 722 1977 166 336 715 1978 135 289 607 1979 108 253 511

Criminal Proceedings affirmed in 3 cases that had been ap- pealed, and appeals were still pending During the past fiscal year 45 cases in 8 other criminal cases at the close were referred or access was granted to of the fiscal year. Of 20 defendants in the Department of Justice. (This figure 14 criminal contempt cases handled includes 4 criminal contempt actions.) during the fiscal year, 10 defendants As a result of these actions and those were convicted, prosecution was de- prior referrals, 42 indictments were re- clined as to 5 defendants, and 7 de- turned against 112 defendants during fendants in 7 cases are still pending. the fiscal year. There were also 87 con- Three cases are pending in a Suspense victions in 56 cases. Convictions were Cateqory.

Table 34 CRIMINAL CASES

Number of cases FIscal referred/access Number of Defendants Convictions year Justice Dept Indictments Indrcted

1970 35 36 102 55 1971 22 16 83 89 1972 38 28 67 75 1973 49 40 178 83 1974 67 40 169 81 1975 88 53 199 116 1976 116 23 118 97 1977 100 68 230 135 1978 109 50 144 174 1979 45 42 112 87

122 Trading Suspensions sued by companies on the Foreign Re- stricted List, this does not necessarily During fiscal 1979, the Commission prevent promoters from illegally offer- suspended trading in the securities of ing such securities directly to investors 23 companies, a decrease of 73 per- in the United States by mail, by tele- cent from the 86 securities suspended phone, and sometimes by personal so- in fiscal 1978 and a 79 percent de- licitation. During the past fiscal year, crease from the 111 securities sus- there were no new corporations added pended in fiscaI 1977. Of the 23 com- to the Foreign Restricted List. The total panies whose securities were the number of corporations on the list is subject of trading suspensions in fiscal 101. 1979, 10 were suspended because of delinquency in filing required reports The complete list of all foreign cor- with the Commission. In most other in. porations and other foreign entities on stances, the trading suspension was the Foreign Restricted List on Septem- ordered either because of substantial ber 30, 1978, is as follows: questions as to the adequacy, accuracy or availability of public information concerning the company's financial Aguacate Consolidated Mines, Incor- condition or business operations, or porated (Costa Rica) because transactions in the company's Alan MacTavish, Ltd. (England) securities suggested possible manipu- Allegheny Mining and Exploration lation or other violations. Company, Ltd. (Canada) Allied Fund for Capital Appreciation (AFCA, S.A.) (Panama) Amalgamated Rare Earth Mines, Ltd. Foreign Restricted List (Canada) The Commission maintains and pub- American Industrial Research S.A., lishes a Foreign Restricted List which also known as Investigacion Indus- is designed to put broker-dealers, fi- trial Americana, S.A. (Mexico) nancial institutions, investors and oth- American International Mining (Ba- ers on notice of unlawful distribution hamas) of foreign securities in the United American Mobile Telephone and Tape States. The list consists of names of Co., Ltd. (Canada) foreign companies whose securities Antel International Corporation, Ltd. the Commission has reason to believe (Canada) have been, or are being, offered for Antoine Silver Mines, Ltd. (Canada) public sale in the United States in vio- ASCA Enterprises Limited (Hong lation of the registration requirements Kong) of Section 5 of the Securities Act. The Atholl Brose (Exports) Ltd. (England) offer and sale of unregistered securi- Atholl Brose, Ltd. (England) ties deprives investors of all the pro- Atlantic and Pacific Bank and Trust tections afforded by the Securities Act, Co., Ltd. (Bahamas) including the right to receive a pro- Banco de Guadalajara (Mexico) spectus containing the information re- Bank of Sark (United Kingdom) quired by the Act for the purpose of Briar Court Mines, Ltd. (Canada) enabling the investor to determine British Overseas Mutual Fund Corpo- whether the investment is suitable for ration Ltd. (Canada) him. While most broker-dealers refuse California & Caracas Mining Corp., to effect transactions in securities is- Ltd. (Canada)

123 Canterra Development Corporation, Hebilla Mining Corporation (Costa Ltd. (Canada) Rica) Cardwell Oil Corporation, Ltd. (Can- Hemisphere Land Corporation Limited ada) (Bahamas) Caribbean Empire Company, Ltd. Henry Ost & Son, Ltd. (England) (British Honduras) International Communications Corpo- Caye Chapel Club, Ltd. (British Hondu- ration (British West Indies) ras) International Trade Development of Central and Southern Industries Corp. Costa Rica, S.A. (panama) Ironco Mining & Smelting Company Cerro Azul Coffee Plantation (panama) Ltd. (Canada) Cia. RIOBanana, S A (Costa Rica) James G. Allan & Sons () City Bank A.S. () J.P. Morgan & Company, Ltd., of Lon- Claw Lake Molybdenum Mines, Ltd. don, England (not to be confused (Canada) with J.P. Morgan & Co., lncorpo- Claravella Corporation (Costa Rica) rated, New York) Compressed Air Corporation, Limited Jupiter Explorations, Ltd. (Canada) (Bahamas) Continental and Southern Industries, Kenilworth Mines, Ltd. (Canada) S.A. (Panama) Klondike Yukon Mming Company Credito Mineroy Mercantil (Mexico) (Canada) Crossroads Corporation, S.A. (Pan- Kokanee Moly Mines, Ltd. (Canada) ama) Land Sales Corporation (Canada) Darren Exploration Company, S.A. Los Dos Hermanos, S.A. (Spain) (Panama) Lynbar Mining Corp., Ltd. (Canada) Derkglen, Ltd. (England) Mercantile Bank & Trust Company, De Veers Consolidated Minmg Corpo- Limited ration, S.A. (Panama) Norart Minerals Limited (Canada) Doncannon Spirits, Ltd. (Bahamas) Normandie Trust Company, S.A. (Pan- Durman, Ltd., formerly known as ama) Bankers International Investment Northern Survey (Canada) Corporation (Bahamas) Northern Trust Company, S.A. Empresia Minera Caudalosa de Pan- (Switzerland) ama, S.A. (Panama) Northland Minerals, Ltd. (Canada) Ethel Copper Mines, Ltd. (Canada) Obsco Corporation, Ltd. (Canada) Euroforeign Banking Corporation, Ltd. Pacific Northwest Developments, Ltd. (Panama) (Canada) -Financiera Comermex (Mexico) Panamerican Bank & Trust Company Financiera de Eomento Industrial (Panama) (Mexico) Paulpic Gold Mines, Ltd. (Canada) Financiera Metropolitana (MexICo) Pyrotex Mining and Exploration Co., Finansbanken a/s (Denmark) Ltd. (Canada) First Liberty Fund, Ltd. (Bahamas) Radio Hill Mines Co., Ltd. (Canada) Global Explorations, Inc. (Panama) Rodney Gold Mines Limited (Canada) Global Insurance Company, Limited Royal Greyhound and Turf Holdings (British West Indies) Limited (South Africa) Globus Anlaqe-Verrnlttlunqsqesells- S.A. Valles & Co., Inc. (Phillipines) chaft MBH (Germany) San Salvador Savings & Loan Co., Ltd. Golden Age Mines, Ltd. (Canada) (Bahamas) 124 Santack Mines Limited (Canada) PUBLIC UTILITY HOLDING Security Capital Fiscal & Guaranty COMPANIES Corporation, S.A. (Panama) System Companies Silver Stack Mines, Ltd. (Canada) At fiscal year 1979, there were 14 Societe Anonyme de Refinancement holding companies registered under (Switzerland) the Act of which 13 are "active". In the Strathmore Distillery Company, Ltd. 14 registered systems, there were 60 (Scotland) electric and/or gas utility subsidiaries, 90 non-utility subsidiaries, and 20 in- Strathross Blending Company Limited active companies, or a total of 168 sys- (England) tem companies including the top par- Swiss Caribbean Development & Fi- ent and subholding companies. The nance Corporation (Switzerland) following table lists the active systems.

Table 35 PUBLIC UTILITY HOLDING COMPANY SYSTEMS

Solely Regrstered Registered Holding Hntdmg Operating Electnc and/or Gas Nonutility Inactive Tot,l Cornpanies Companies lltthty Substdrartes Subsidiaries Companies Compames Other

Allegheny Power System (APS) o 4 8 3 smencan Etectnc Power Company (AEP) 12 10 28 3' Central and South West Corporation (CSW) 3 4 JO Ib "'Colonlal Gas Energy System (CGES) 2 t2 17 Columbia Gas System (CGS) 8 10 19 Consolidated Natural Gas Company (eNG) 5 6 12 Eastern Utllrtles ASSOCiates(fUAl 3 I 7 4c General Pubhc UtilIties (GPU) 4 5 10 M.ddle South lltthtres (MSUI 7 2 13 jb National Fuel Gas Company (NfG) 1 3 5 New England Etectuc System (NEES) 4 2 7 4c Northeast lltthtres (NEUI 5 8 10 4c Philadelphia Electnc Power Co (PEP) I o 3 Southern Company (SCI 5 3 9

Total Companies 13 60 70 20 168

a Beach Bottom Power Co Inc bArklahoma Corp cYankee AtomIC Electric Co 30% NEES 31 5~ NEU -50'1. APS -32'1. CSW 45'1. tuA 50'1. AEP 34'1. MSU Connecticut Yankee AtomIC Power Co 15% NEES 44% OhIO Valley Elee Corp & Subs 34% Oklahoma Gas & £Iec NEU 45'1. EUA tndana Kentucky Elec Corp Vermont Yankee Nuclear Power Corp 20% NEES 12% -electnc utrutr NEU 25'1. EUA -378'1. AEP Mame Yankee Atorruc Power Co 20% NEES 15% NEU 115'1. APS 4'1. fUA 49 7% B other cornpames -Statutory utility subsidranes

125 Table 36 KEY FINANCIAL STATISTICS OF REGISTERED PUBLIC UTILITY HOLDING COMPANY SYSTEMS

As of June 30 1979 (000 ormttedj Name of Company Total Assets Operating ReYenues

Allegheny Power System (APS) s 2754956 $ 933886 American Hectnc Power Company Inc (AEPl 8345337 2624968 Central and South West Corporation (C&SWj 3312473 1374618 Colomal Gas Energy System (CGES)' 100918 44443 Columbra Gas System Inc The (CGS) 3467108 2560385 Consolidated Natural Gas Company (CNG) 2374954 1745798 Eastern Utilities Associates (EUA) 329962 163997 General Public Utllittes Corporation (GPU) 4894928 1385832 Middle South lltrhttes Inc (MSUI 6056223 1669778 Natronaf Fuel Gas Company (NFG) 599272 580114 New England Electric System (NEES) 1883844 818531 Northeast Utrhtres (NEU) 3063662 968683 Phrladelptna Electric Power Co (PEPI 60789 6829 Southern Company The (SCI 10281 747 2980889 $47526 173 $17858751

'Asof July 31 1979 'As01December 31 1978

126 Table 37 PUBLIC FINANCING OF HOLDING COMPANY SYSTEMS (Fisc.11979J

In Millions of Dollars

long term Pollution Stock Short Notes and-or Control Term Bonds Debentures Fmancmgs Preferred Common Debt

Allegheny Power System Inc I I 800 700 Monogahela Power Co 450 150 500 Potomac Edison Power Co 480 West Penn PONer Co 840 American Electric Power Co 1360 1650 Appalachian Power Co 1050 500 400 1000 Indiana MIchigan Hectuc Co 800 100 400 1500 Kentucky Power Co 350 Ohio Power Co 400 1500 OhIO Valley E'ectnc Co 1010 Central & South West Corp 550 1500 Central PONel & LIght Co 500 1000 Pubhc Semce of Oklahoma 750 900 Southwestern Erectnc Po ....er Co 750 West Texas Utll!tlesCo 150 350 Central & South West Services 10 Celcrnal Gas Energy Co 55 Lowell Gas Co 69 Cape Cod Gas el1 41 Columbia Gas System 1750 450 1700 Consolidated Natural Gas Co 750 100 Eastern UlllltresAssocrates 115 150 Blackstone Valley Etectuc 150 Eastern Edison 475 General Pubht Utilities 1500 Jersey Central Power & LIght Co 500 700 1400 MetropolItan Edison Co 970 Pennsylvania Hectnc Co 500 1160 Middle South utumes 1415 1750 Arkansas MIssouri Power Co 66 Arkansas Power & light Co 600 400 lOUISIana Power & Light Co 600 83 950 1300 Middle South Energy 4000 MISSISSiPPi Power & LIght Co 100 New Orleans Pubhc Service 150 National Fuel Gas Co 400 345 New England Electric System 600 150 Gramte State Electric 10 Massachusetts Electric 150 Narragansett Etectnc 170 New England Power Co 780 Northeast Utilities 400 150 Connecticut ught & Power Co 1500 Hartford Electnt light Co 350 Holyoke Water Power Co 60 Northeast Utilities Service Co 30 Western Massachusetts Electric Co 100 400 Philadelphia Hectnc Power Co 43 SUSQuehanna Power Co 40 Southern Company The 1340 1000 Alabama Power Co 1500 Georgia Power Co 1150 44 800 500 Gulf Power Co 300 100 930 MISSISSiPPi Power Co 100 Connecticut Yankee AtomIC Power 150 Yankee AtomiC Hectnc Co 160 Total $1181 I $3369 11913 13305 1717 5 $3513 9

Total= 164811 million

Fuel Programs cover annual fuel programs subject to During fiscal year 1979, the Com- requlation under the Holding Company mission authorized $460.6 million of Act defrned on geographIcal and func- fuel exploration and development cap- tional terms. The following table hsts ital expenditures for the holding com- the authorization by holding company pany systems. These expenditures system for each fuel program.

127 Table 38 REGULATED EXPENDITURES OF HOLDING COMPANY SYSTEMS (Flsc,11979)

(In Millions of Dollars)

Coal lignite Fuel Gas and/or Exploration & lhamum Nuclear Fuel Co,I Transportation Holdmg Company Systems all Exploration Development Exptoratron Procurement Gasification &Stolage American Electnc Power Co s $1150 $ $ 780 s 5 Central & South West Co,p 266 91 13 658 Columbia Gas System Inc 185 tonsendeteo Natural Gas Co 40 Middle South Uuhnes 174 33 69 427 New England Hectnc System 250 Northeast Utilities 300 Southern Company 156 $690 $1274 $82 $1507 $225 $828

Iotal = $4606 rrnluon

FUEL PROGRAMS DUring fiscal year 1979 the Commission autbonzec $460 6 million of fuel explotatrons and development capital expenditures for the holding company systems Of thrs amount $1964 million was for fossIl fuel exptoratrcn and development llranurrn exploration and teasing of nuclear fuel amounted to $158 9 million Approxl mately S82 million of fuel transportancn and storage was for coal hopper cars and mamtenance equipment These expenditures cover annual fuel programs subject to regulanon under the Hotdrng Company Act defined on geographical and functional terms

CORPORATE REORGANIZA nONS the fiscal year. The stated assets of the companies involved in these proceed- In the fiscal year, the Commission ings totaled approximately $4.9 billion entered three new Chapter X proceed- and their indebtedness about $4.5 bil- ings involving companies with aggre. lion. gate stated assets of approximately During the fiscal year, nine proceed- $69.9 million and aggregate indebt. ings were closed, leaving 88 in which edness of approximately $93.6 million. the Commission was a party at year Including the new proceedings, the end. Commission was a party in a total of 97 reorganization proceedings during

128 Table 39 REORGANIZATION PROCEEDINGS UNDER CHAPTER X OF THE BANKRUPTCY ACT IN WHICH THE COMMISSION PARTICIPATED (Fa 'ur 1979) SEC Notice ot Debtor Dlstnct PetitIon Appearance Court Filed Filed

Aldersgate Foundation, Inc M 0 Fla Sept 12 1974 Oct 3 1974 Amencan Associated Systems, Inc EO Ky Dec 24 1970 Feb 26 1971 Amentan land Corp 3 SO OhiO Aug 8, 1973 Sept 25, 1973 Amencan Mortgage & Investment Co n S C Dec 13 1974 Feb 6 1975 Arlan's Dept Stores Inc] SON Y March 8 1974 March 8 1974

Bankers Trust] SO Ind Oct 1966 No, 1 1966 Bankers Trust Co 3 SO MISS Oec 16 1976 April 5 1977 Beck Industnes, Inc SON Y May 27 1971 July 30, 1971 Bermec Corp , SON Y Apnl 16 1971 Apnl 19 1971 Beverly Hills Bancorp CO Cal Apol 11 1974 May 14, 1974

Brethren's Home, The SO OhiO No' 23 1977 Dec 27 1977 Bubble Up Delaware, Inc CO Cal Aug 31 1970 Oct 19, 1970 BXP Construction Corp SON Y Jan 15 1974 June 10 1974 CIPCorp' SO OhiO May 23 1975 June 26 1975 Carolma Caribbean Corp WO N C Feb 2B 1975 Apnl 17 1975

CItizens Mortgage Investment Trust! o Mass Oct 5 197B No, 1, 1978 Coast Investors, Inc 3 WO Wash Apnl 1 1964 June 10, 1964 Combmed Metals ReductIOn Co ONe, Sept 30 1970 Sept 7, 1972 Commonwealth Corp NO Fla June 28 1974 July 17 1974 Commonwealth FlOanclal Corp] EO Pa Dec 4 1967 Dec 13, 1967

Conhnentallnvestment Corp o Mass Oct 31 1978 Oct 31 1978 Conlmental Mortgage In,estors o Mass Oct 11 1976 Oct 11 1976 Contmental Vendmg Machme Corp 3 EON Y July 10 1963 Aug 7 1963 Davenport Hotel, Inc] EO Wash Dec 10, 1972 Jan 26 1973 Detroit Port Development Corp 3 EO MlCh Sept 14 1976 No' 17, 1976

DIversified EqUity Corp SO Ind Jan 24 1977 Feb 17, 1977 Dlverslfled Mountaineer Corp 1 SOW Va Feb 8, 1974 Apnl 24 1974 Dumont Airplane & Manne SON Y Oct 22 1958 No' 10, 1958 Duplan Corp SON Y Oct 5 1976 Oct 5 1976 ET & T leasmg Inc J e Md Oec 20, 1974 June 5, 1975

Farnngton Manufacturing Co 3 EO Va Oec 22, 1970 Jan 14 1971 First Baptist Church, Inc of Margate, Fla SOFia Sept 10 1973 Oct I 1973 FIrst Home Investment Corp of Kansas, Inc l o Kan Apnl 24 1973 Apnl 24, 1973 First Research Corp J SOFia March 2, 1970 April 14, 1970 Fort Cobb, Okla Irngatlon Fuel Authonty WO Okla Apfll 20 1979 July 16, 1979

GACCorp SOFIa May 19 1976 June 14 1976 GEBCO msestment Corp W 0 Pa Feb 8, 1977 March 24 1977 Wm Gluckm Co , ltd SON Y Feb 22, 1973 March 6 1973 Gro-Plant Industries, Inc 2 NO Fla Aug 30 1972 Sept 13 1972 Gualanty Trust Co WO Okla Apnl 9 1979 Apnl 9 1979

Gullco lnrestment Corp WO Okla March 12, 1974 March 28 1974 Gult llmon Corp M 0 La Aug 19 1974 No, 5 1974 Harmony loan Inc EO Ky Jan 31 1973 Jan 31 1973 HawaII Corp D Hawan March 17 1977 March 17, 1977 Hawkeye Land, ltd' SO Iowa Oec 19 1973 Jan 21 1974 Home-Stake Producllon Co NO Okla Sept 20 1973 Oct 1973 Houston Educational Foundatmn Inc 1 SO Texas Feb 16 1971 March 1971 Impeflal-Amencan Resources Fund Inc o Colo Feb 15 1971 March 1972 lmpenal '400 National, Inc 2 n N J Feb 18 1966 Feb 23 1966 lnduna BUSiness & Investment Trust2 SO Ind Oct 10 1966 No, 4, 1966

Interstate Stores, Inc' SON Y June 13, 1974 June 13 1974 Investors Associated Inc l W 0 Wash March 3 1965 March 17 1965 Investors Fundmg Corp of New York SON Y Oct 21 1974 Oct 21 1974 J 0 Jewell, Inc J NO Ga Oct 20 1971 No, 7 1972 King Resources Co l o Colo Aug 16 197I Oct 19, 1971 Lake Wmnebago Development Co Inc WO Mo Oct 14 1970 Oct 16 1970 lusk Corp o Am Oct 28 1965 No, 15 1965 Dolly Madison Industries Inc l EO Pa June 13 1970 July 6 1970 Mid-City Baptist Church' EO La July 30 1968 Oct 23 1968 Mount Everest Corp l EO Pa May 19 1974 June 18 1974

See footnotes at end 01 table

129 Table 39--eontinued REORGANIZATION PROCEEDINGS UNDER CHAPTER X OF THE BANKRUPTCY ACT IN WHICH THE COMMISSION PARTICIPATED (rlSCll Yu, 19791 SEC Nottce of Debtor District Petmen of Appearance Court Filed Filed

NatlOnal Telephone Co. Inc Conn July 10 1975 May 17 1976 Nevada Industrial Guaranty Co o Nev May 7 1963 July 1 1963 North Amencan Acceptance Corp NO Ga March 5 1974 March 18 1974 North Western Mortgage Investors Corp 3 W 0 Wash Dec 111973 Dec 11 1973 Omega-Alpha Inc 3 NO Texas Jan 10 1975 Jan 10 1975 Pactflc Homes CD Cal Dec 9 1977 Feb 1, 1978 Pan Amencan hnencral Corp D Hawau Oct 2 1972 Jan 9, 1973 Parkvlew Gem Inc W 0 Mo Dec 18 1973 Dec 18 1973 Pocono Downs Inc M 0 Pa Aug 10 1975 Aug 10, 1975 John Rich Enterprises Inc 1 o Utah Jan 16 1970 Feb 6 1970 Reliance lndustnes Inc o Hawau May 14 1976 Aug 10 1976 RIker Delaware Corp o N J April 11 1967 May 13 1967 Royal Inns of Amenca Inc SO Cal April 14 1975 June 14 1975 Scranton Corp 1 M 0 Pa April 3 1959 April 15 1959 Sierra Iradmg Corp J o Colo July 7 1970 July 11 1970

Sound Mortgage Co Inc j W 0 Wash July 17 1965 Aug 31. 1965 Southern land TItle Corp [0 La Dec 7 1966 Dec 31 1966 Stanndco Developers Inc WON Y Feb 5 1974 March 7, 1974 Stirling Harner Corp WON Y July 11. 1972 July 14 1971 Sunset lnternatrona! Petroleum Corp3 NO Texas May 17 1970 June 10 1970

1MT Trailer Ferry Inc 3 SOria June 17 1957 Nov 11, 1957 Thermo-Dyne Inc] W 0 Okla Feb 14 1978 June 5 1978 Iilco Inc j o Kans reb 7 1973 reb 11, 1973 Tower Eredrt Corp] M 0 Fla April 13 1966 Sept 6, 1966 Tfaders Compress Co .I WO Okla May 11 1971 June 6 1972

Irens-tntematrona! Computer Investment? NO Cal March 11 1971 July 16 1971 Inmty Baptist Church of Jacksonvrue. Inc NO Fla June 24 1977 Oct 3, 1977 "U" Drstnct BUIldmg Corp j W 0 Wash Dec 9 1974 Dec 9, 1974 US Fmancral Inc SO Cal Sept 13 1975 Nov 3 1975 UniversIty Baptist Church of Jacksonnne Honda Inc M 0 Fla May 13 1977 Oct 3 1977

Virgin Island Properties Inc 1 o V I Oct 11 1971 April 11 1971 Washington Group Inc M 0 N C June 10 1977 July 15 1977 Webb & Knapp Inc 1 SON Y May 7 1965 May 11. 1965 Western Growth Capital Corp o Am reb 10 1967 May 16 1968 Westgate tehforma Corp SO Cal Feb 16 1974 March 8 1974

Wonderbowl Inc CO Cal March 10 1967 June 7 1967 Yale Express System Inc' SON Y May 14 1965 May 18 1965

'Comrmssron filed notices of appearance 10 fiscal year 1979 2ReorgaOlzatlOn proceedrngs closed during fiscal year 1979 'Plan has been substantially consummated but no final decree has been entered because of pendrng matters

130 SEC OPERAnONS These figures are up from $26 million, The Commission collects fees for representing 42 percent of funds ap- the registration of securities, securities propriated in fiscal year 1978. Nearly transactions on national securities ex- $4 million of the increase in collec- changes, and miscellaneous filings, re- tions was attributed to Securities Act ports and applications. In fiscal year registration fees resulting from both 1979, the Commission collected a re- higher volumes and larger offerings, cord $33 million dollars in fees, rep- while higher stock exchange volumes resenting approximately 47 percent of accounted for $2.3 million of the in- the total funds appropriated by the crease. Congress for Commission operations.

131 Appropriated Funds vs Fees Collected Dollars Millions 70

60

50

40

30

20

10

o 1971 72 73 74 75 76

....!I Es umoced

132 ::::g ~ ~ N- IN N

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000 O~~ O~~ o '"

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o

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133

U. S. GOVERNMENT PRINTING OFFICE 1980 0 - 315-805