Annual Report 1959

of the

!I s.Securities and Exchange II Commission

Fiscal Year Ended June 30, 1959

UNITED STATES GOVERNMENT PRINTING OFFICE, WASHINGTON • 1959

For IIB1e by the Superintendent 01 Docwnenu, U.S. Government PrintinS Office WaehiDgton 25, D.C. - Price'l (paper coyer) SECURITIES AND EXCHANGE COMMISSION Headquarters Office 425 Second Street NW. Washington 25, D.C. COMMISSIONERS

January 6,1960

EDWARD N. GADSBY, Chairman ANDREW DOWNEY ORRICK HAROLD C. PATTERSON EARL F. HASTINGS JAMES C. SARGENT • ORVAL L. DuBoIS, Secretary

II LETTER OF TRANSMITTAL

SECURITIES AND EXCHANGE Co:I\OnSSION, Washington, D.O., January 6, 1960. SIR: On behalf of the Securities and Exchange Commission, I have the honor to transmit to you the Twenty-Fifth Annual Report of the Commission covering the fiscal year July 1, 1958, to June 30, 1959, in accordance with the provisions of section 23 (b) of the Securities Exchange Act of 1934, approved June 6, 1934; section 23 of the Public Utility Holding Company Act of 1935, approved August 26, 1935; section 46 (a) of the Investment Company Act of 1940, approved August 22, 1940; section 216 of the Investment Advisers Act of 1940, approved August 22,1940; and section 3 of the act of June 29,1949, amending the Bretton Woods Agreement Act. Respectfully, EDWARD N. GADSBY, Ohairman. THE PRESIDENT OF THE SENATE, THE SPEAKER OF THE HOUSE OF REPRESENTATIVES, Washington, D.O. m

TABLE OF CONTENTS Pan Foreword______XlU Original Commission and former eommissioners., _ _ XL Present Commission and staff offieers; _ XLI Regional and branch offices______XLU Biographies of oommissioners., _ _ XLIII

PART I CURRENT PROBLEMS BEFORE THE COMMISSION-______1 Fraud in the sale of securities______2 Manipulation in the securities markets______4 Exemptions from registration and pre-filing publicity______4 Regulation of the exohanges; _ _ 6 Regulation of the over-the-counter markets______7 Inspection of investment companies______7 Other factors in the securities markets______8

PART II LEGISLATIVE ACTIVITIES______9 Statutory amendments proposed by the COmmission______9 Other legislative proposals______12 Congressional hearinga, ______14

PART III REVISION OF RULES, REGULATIONS AND FORMS______15 The Securities Act of 1933______15 Amendment of Rule 133______15 Amendment of Rule 135______16 Proposed rule changes relating to assessable stock______17 Proposed Rule 144______17 Adoption of Rule 151 ... 18 Amendment of Rule 434A______18 Adoption of Regulation E-______19 Adoption of Form N-5______19 Adoption of Form 8-14______20 The Securities Exchange Act of 1934______20 Adoption of Rule 16b-8______20 Amendment of Form 8-K______21 The Investment Company Act of 1940______21 Adoption of Rule 3c-L______21 Adoption of Rule 10f-3-Permitting acquisition of securities of underwriting syndicates______22 Adoption of Rule 22d-l-Relating to variations in sales load ofre- deemable seeuritles, 23

Adoption of Form N-5-Registration form for small business in- J vestment companies______25 y VI TABLE OF CONTENTS

PART IV Page ADMINISTRATION OF THE SECURITIES ACT OF 1933 _ 26 Description of the registration process: Registration statement and prospectus _ 26 Examina~onprocedure _ 27 Time required to complete registration _ 27 Volume of securities registered.. _ 28 Registration statements filed.. - _ 31 Results obtained by the registration process _ 32 Stop orderproceedings _ 35 Examinations and investigations _ 43 Exemption from registration of small issues _ 44 Exempt offerings under Regulation A _ 45 Suspension of exemption _ 46 Exempt offerings under Regulation B _ 49 Litigation under the Securities Act of 1933 _ 50 Litigation involving violations of registration and antifraud provisions _ 50 Litigation relating to stop order proceedings ~ _ 56 Participation as amicus curiae _ 57

PART V ADMINISTRATION OF THE SECURITIES EXCHANGE ACT OF 1934______58 Regulation of exchanges and exchange trading______58 Registration and exemption of exchanges______58 Disciplinary actions______58 Commission rate study______59 Activities of floor traders and specialists______60 Registration of securities on exchanges______60 Statistics relating to registration______61 Market value of securities traded on exchanges______62 Assets of domestic companies with common stocks on exehauges., 64 Foreign stock on exchanges______65 Comparative over-the-counter statistics______65 Delisting of securities from exchanges______68 Delisting proceedings under section 19(a)______71 Unlisted trading privileges on exchanges______71 Applications for unlisted trading privileges______74 Block distributions reported by exchanges______75 Manipulation and stabilizatlon., ______76 Manipula~on______76 Stabilization ______79 Insiders' security holdings and transactions______80 O~ership reports______81 Recovery of short swing trading profits by issuer______82 Regulation of proxies; ______82 Scope of proxy regulation______82 Statistics relating to proxy statements______83 Stockholder proposals; __ _ 83 Ratio of soliciting to non-soliciting companies______84 Proxy contests______84 TABLE OF CONTENTS VII

ADMINISTRATION OF THE SECURITIES EXCHANGE ACT OF 1934-Continued ,Page Regulation of broker-dealers and over-the-counter markets______84 Registration; ______84 Administrative proceedings; 85 Net capital rule______105 Financial statementa.; ______105 Broker-dealer inspections, ______106 Supervision of activities of National Association of Securities Dealers, Inc______108 NASD disciplinary actions______109 Commission review of NASD disciplinary action______111 Commission review of N ASD action on membership ______113 Litigation under the Securities Exchange Act of 1934______114 Anti-fraud litigation ______114 Cases under the net capital rule______116 Litigation involving broker-dealer registration and reporting requirements______117 Proxy litigation , ______118 Contempt proceedings______118 Participation as amicus curiae______119

PART VI ADMINISTRATION OF THE PUBLIC UTILITY HOLDING COM- PANY ACT OF 1935______120 Composition of registered holding company systems-summary of changes______120 Developments in individual registered systems______123 Financing of active registered public utility holding companies and their subsidiaries______134 Competitive bidding; ______136 Protective provisions of first mortgage bonds and preferred stocks of public utility companies______137

PART VII PARTICIPATION OF THE COMMISSION IN CORPORATE RE- ORGANIZATIONS UNDER CHAPTER X OF THE BANKRUPTCY ACT, AS AMENDED______142 Summary of activities______142 The Commission as a party to proceedings______143 Procedural matters; ______144 Problems in connection with the administration of estates ,_____ 145 'I'ruetee's investigations ~_____ 147 Activities regarding protective committees______147 Activities with regard to allowances______148 Advisory reports on plans of reorganization ~______150

PART VIII ADMINISTRATION OF THE TRUST INDENTURE ACT OF 1939____ 156 vm TABLE OF -CONTEN',l'S

PART IX

ADMINISTRATION OF THE INVESTMENT COMPANY ACT Page OF 1940______157 Companies registered under the Act______157 Growth of investment company assets______158 Program for inspection of investment companies :.__ 159 Study of size of investment companies______160 Current informatlon., _ __ 160 Applications and proceedings______161 Litigation under the Investment Company Act of 1940______164

PART X ADMINISTRATION OF THE INVESTMENT ADVISERS ACT OF 1940______167

PART XI OTHER ACTIVITIES OF THE COMMISSION______171 Courtproceedings______171 Civil proeeedings , __ 171 Criminal proceedings______171 Disciplinary proceedings against persons practicing before the Commission.,.; ______184 Complaints and investigations______185 Enforcement problems with respect to Canadian securities______188 Canadian restricted list______189 Section of securities violations :______191 Applications for nondisclosure of certain information______192 Activities of the Commission in accounting and auditing______193 International Bank for Reconstruction and Development and Inter-American Development Bank______200 Opinions of the Commission______201 Statistics and special studies______202 Public dissemination of information______205 Information available for public inspection______205 Publications______207 Organization______207 Personnel, Budget and Finance______209 Personnel program______210

PART XII APPENDIX-STATISTICAL TABLES Table 1. A 25-year record of registrations under the Securities Act of 1933__ 215 Part 1. Number and amount of registrations and amount registered for cash sale for account of issuers, 1935-59______215 Part 2. Purpose of registration and industry classification for each five fiscal years from 1935 to 1959 and for each fiscal year from 1955 to 1959______216 Table 2. Registrations fully effective under the Securities Act of 1933, fiscal year ended June 30, 1959 :..______217 Part 1. Distribution by months______217 Part 2. Purpose of registration and type of security______217 Part 3. Purpose of registration and industry of registrant______218 Part 4. Use of proceeds and industry of registrant______219 TABLE OF CONTENTS IX

Table 3. New securities offered for cash sale in the United States, 1934-58 Page and by months January 1958-June 1959______220 Part 1. Type of offering______220 Part 2. Type of security______222 Part 3. Type of issuer ______224 Part 4. Private placement of corporate securities______226 Table 4. Proposed uses of net proceeds from the sale of new corporate securities offered for cash in the United States, 1934.-58 and by months January 1958-June 1959______228 Part 1. All corporate '______228 Part 2. Manufacturingc , , ______229 Part 3. Extractive.; , ______230 Part 4. Electric, gas and water______230 Part 5, Raikoad______231 Part 6. Transportation other than railroad______231 Part 7. Communieation , ______232 Part 8. Financial and real estate______233 Part 9. Commercial and miscellaneous______234 Table 5. A summary of corporate securities publicly offered and privately placed in each year from 1934 through June 1959______235 Table 6. Notifications filed pursuant to Regulation A under the Securities Act of 1933 for the fiscal years 1935-59______236 Table 7. Suspension orders issued pursuant to Regulations A and D under the Securities Act of 1933 during the fiscal year 1959 ______236 Table 8. Brokers and dealers registered under the Securities Exchange Act of 1934- effective registrations as of June 30, 1959, classified by type of organization and by location of principal office______241 Table 9. Number of stock and bond issues listed and registered on national securities exchanges and the number of issuers involved as of the close of each fiscal year, 1936 through 1959______242 Table 10. Number of issuers listing and registering securities for the first time on a national securities exchange and the number of issuers as to which the registration of pll securities was terminated during the fiscal years 1936 through 1959______243 Table n. Number of issuers and security issues on exchanges, as of June 30, 1959______244 Part 1. Number of issuers and security issues on exchanges______244 Part 2. Number of stock and bond issues______244 Table 12. Unlisted stocks on securities exchanges______245 Part 1. Number of stocks on the exchanges in the various categories as of June 30,1959______245 Part 2. Unlisted share volume on the exchanges-calendar year 1958_ _ 245 'I'able 13. Dollar volume and share volume of sales effected on securities exchanges in the 12-month period ended December 31,1958 and the 6-month period ended June 30, 1959______246 Table 14. Block distributions, 1942-58______247 Table 15. Comparative share sales and dollar volume on exchanges, 1935- 58 and 6 months to June 30,1959______248 Table 16. Number of proxy statements filed under Regulation 14, the number that included stockholder proposals under Rule 14a-8, the number of such proposals, and the net number of stockholders whose proposals were included, fiscal years 1939-59______249 x TABLE OF CONTENTS

Table 17. Number of original and amended reports filed by directors, officers, and principal stockholders under section 16 (a) of the Securities Exchange Act of 1934, section 17(a) of the Public Utility Holding Company Act of 1935, and section 30 (f) of the Investment Company Act of 1940, showing their beneficial ownership of, and their transactions in, equity securities of the Page registrant, fiscal years 1935-59______250 Table 18. Number and principal types of periodic reports filed under section 13 of the Securities Exchange Act of 1934 by issuers having securities listed and registered on national securities exchanges during the fiscal years 1939 through 1959, and the number of such issuers as of the close of the fiscal year______250 Table 19. Number and principal types of periodic reports filed under section 15(d) of the Securities Exchange Act of 1934 by issuers having registered securities under the Securities Act of 1933, fiscal years 1937-59______251 Table 20. Reorganization proceedings under Chapter X of the Bankrupt- cy Act in which the Commission participated, fiscal years 193!}- 59______251 Table 21. Reorganization proceedings under Chapter X of the Bankrupt- cy Act in which the Commission participated during the fiscal year 1959______252 Table 22. Number of indentures filed and qualified under the "Trust Inden- ture Act of 1939 and the dollar amount of debt securities involved, fiscal years 1940-59______253 Table 23. Number of investment companies registered under the Invest- ment Company Act of 1940 and the approximate dollar amount of gross assets at the end of each fiscal year, 1941- 1959______253 Table 24. Number of annual and other periodic reports and sales literature filed by registered investment companies and other persons under the Investment Company Act of 1940, fiscal years 1941-59 J______254 Table 25. Summary of cases instituted in the courts by the Commission under the Securities Act of 1933, the Securities Exchange Act of 1934, the Public Utility Holding Company Act of 1935, the Investment Company Act of 1940, and the Investment Advisers Act of 1940______254 Table 26. Summary of cases instituted against the Commission, cases in which the Commission participated as intervenor or amicus curiae, and reorganization cases on appeal under Chapter X in which the Commission participated______255 Table 27. Injunctive proceedings brought by the Commission under the Securities Act of 1933, the Securities Exchange Act of 1934, the Public Utility Holding Company Act of 1935, the Invest- ment Advisers Act of 1940, and the Investment Company Act of 1940, which were pending during the fiscal year ended June 30, 1959______256 Table 28. Indictments returned for violation of the acts administered by the Commission, the Mail Fraud Statute (sec. 1341, formerly sec. 338, title 18, U.S.C.), and other related Federal statutes (where the Commission took part in the investigation and development of the case) which were pending during the 1959 fiscal year______257 TABLE OF CONTENTS XI

Table 29. Petitions for review of orders 'of the Commission under the Securities Act of 1933, the Securities Exchange Act of 1934, the Public Utility Holding Company Act of 1935, and the Investment Company Act of 1940, pending in courts of ap- Page peals during the fiscal year ended June 30, 1959______274 Table 30. Contempt proceedings pending during the fiscal year ended June 30, 1959______276 Part 1. Civil Contempt Proceedings., _ _ 276 Part 2. Criminal Contempt Proceedings______276 Table 31. Cases in which the Commission participated as intervenor or as amicus curiae, pending during the fiscal year ended June 30, 1959______277 Table 32. Proceedings by the Commission to enforce subpoenas under the Securities Act of 1933 and the Securities Exchange Act of 1934, pending durmg the fiscal year ended June 30, 1959__ 279 Table 33. Miscellaneous actions involving the Commission or employees of the Commission during the fiscal year ended June 30, 1959_ 280 Table 34. Actions pending during fiscal year ended June 30, 1959, to enforce voluntary plans under section l1(e) to comply with section 11(b) of the Public Utility Holding Company Act of 1935______281 Table 35. Actions under section l1(d) of the Public Utility Holding Com- pany Act of 1935 pending during the fiscal year ended June 30, 1959, to enforce compliance with the Commission's order issued under section l1(b) of that act______283 Table 36. Reorganization cases under Chapter X of the Bankruptcy Act pending during the fiscal year ended June 30, 1959, in which the Commission participated when district court orders were challenged in appellate courts , ______284 Table 37. A 26-year summary of criminal cases developed by the Com- mission, fiscal years 1934-59______286 Table 38. Summary of criminal cases developed by the Commission which were still pending at June 30,1959______287 Table 39. A 26-year summary classifying all defendants in criminal cases developed by the Commission, 1934 to June 30, 1959_____ 287 Table 40. A 26-year summary of all injunction cases instituted by the Commission, 1934 to June 30, 1959, by calendar year_____ 288

FOREWORD A little over 25 years has passed since adoption of the first Federal securities law which, like subsequent enactments, was designed to protect the interests of investors and of the public generally. On this "silver anniversary" of the organization of the Securities and Ex- change Commission to administer those laws, it is fitting in this 25th Annual Report to review the causes, objectives and principal features of the statutes under which the Commission is charged with responsibilities in the interest of protecting investors and the public. The Federal securities laws were not designed to prevent investors from losing money in the stock market j indeed, it is extremely doubtful whether any laws could do this in a free economy. These laws seek, by requiring disclosure of the facts about issues of securities offered in interstate commerce or traded on exchanges, by prohibiting fraud in such transactions, and by other means, to secure the dissemination of accurate information to investors and to foster sound securities markets. More fundamentally, they aim to require that those who deal with the investments of the American people observe high standards of conduct. If the present financial markets are compared with those of thirty years ago, it may reasonably be concluded that these basic objectives have been realized. This is so notwithstanding the fact that the present level of economic and financial activity, with resulting opportuni- ties for fraud and malpractice, puts the structure of Federal securities regulation to a most severe test. One of the basic objectives of the Federal securities laws in providing protection for investors was to bring about a restoration of investor confidence in securities and the securities markets. Such confidence had been severely shaken as a result of the stock market debacle of 1929 and its aftermath. Restoration of investor confidence was important not only to those in the securities industry whose live- lihood depended upon it, but was of tremendous importance to our whole economy. In order to grow and prosper, business and industry require large amounts of capital for plant expansion, new equipment and working capital, and the availability of such capital depends in large measure upon the investing public's confidence in securities as a safe and profitable medium for the investment of its savings. The restoration and maintenance of investor confidence are thus intimately related to industrial growth and a healthy economy. :xm XIV FOREWORD

On September 1, 1929, the market value of all stocks listed on the New York Stock Exchange amounted to $89 billion. By the middle of 1932 their market value had declined to $15 billion. As of June 30, 1959, stocks listed on that Exchange had an aggregate market value of almost $300 billion. Also significant are the data with respect to the public offerings. During the last 5 fiscal years (1955-59), there have been 4,336 registered public offerings of securities aggregating nearly $71 billion in amount-or an average of 867 offerings amounting to $14 billion per year. For the prior 20 fiscal years (1935-54), the number of registered offerings averaged 446 and were in the average amount of $4:1h billion per year. Although figures for the years prior to 1934 are not strictly comparable, it 'appears that less than $400 million of new issues were offered in the depression year 1933, while about $10 billion were offered in the peak year 1929, much of which proved worthless. It is interesting to note in this connection that, according to available data, business invested about $11 billion in new plant and equipment in 1929. Capital outlays by business averaged $4% billion per year during the 3 years 1934-35-36, increased to an average of $10 billion during the years 1944-45-46 and reached an average of $30 billion in the years 1954-55-56. New capital investment amounted, to a record $37 billion in 1957 and $30 billion in 1958; and it is anticipated that such investments will increase to $33 billion in 1959. To complete the picture, gross national product, which amounted to $104 billion in 1929, averaged $73 billion per year for the period 1934-35-36, $212 billion for 1944-45-46, and $393 billion for 1954-55-56. The figure grew to $442 billion for each of the years 1957 and 1958, and is expected to reach an all-time high of $485 billion for 1959. A true measurement of the benefits which have derived from Federal securities administration is of course impossible, but some indication of the advancements made in behalf of investor protection appears in a comparison of the financial community and the nature of its operations today with that which existed prior to the federal regulation of securities. The picture of financial and corporate practices existing in the earlier era, as unfolded in congressional and other investigations, some conducted by the Commission itself, demonstrated the need for legislation action. Responsible persons in financial institutions, corporate executives and many others entrusted with the savings of investors, to whom they owed a high degree of fiduciary care and responsibility, had abused the trust thus reposed in them. With respect particularly to the sale of new securities, the House of Representatives in its report FOREWORD xv on the first legislative enactment in the securities field (Report :No. 85,73d Congress, First Session) stated, in part: "During. the post-war decade some 50 billions of new securities were floated in the United States. Fully half or $25,000,000,000 worth of securities floated during this period have become worthless. These cold figures spell tragedy in the lives of thousands of individuals who invested their life savings, accumulated after years of effort, in these worthless securities. The flotation of such a mass of essentially fraudulent securities was made possible because of the complete abandonment by many underwriters and dealers in securities of those standards of fair, honest and prudent dealing that should be basic to the encouragement of investment in any enterprise. .Alluring promises of vast wealth' were freely made with little or no attempt to bring to the investor's attention those facts essential to estimating the worth of any security. High-pressure salesmanship rather than careful counsel was the rule in this most dangerous of enterprises." These and other abuses contributed to a collapse of values, and their revelation seriously undermined the confidence of the investing public in the capital markets and in securities as media of investment. The orgy of speculation which had existed in the stock market, coupled with the fraud, manipulation and other malpractices then prevalent, could lead only to disaster. One of the evils was the artificial stimulation of interest in, and the manipulation of the market price of, a given security so that it might be "dumped" on unsuspecting investors at the higher price and with a handsome profit to the manipulator. "Pool" operations were numerous, the operators timing their purchases and sales in a manner which created market activity at increasingly higher prices and thereby stimulated participation by the investing public, whose purchases further accentuated the market rise. When the price reached its desired level, the pool operators "pulled the plug", dumping their securities on the market at the higher price, whereupon the market price slumped to its original level or lower. The operators also participated in "bear raids", and, assuming a short position in a particular stock, engaged in a series of transactions which drove the market price of the stock down to a level at which they could cover their short position at a profit. These and similar operations resulted in a situation in which no one could be sure that market prices for securities bore any reasonable relation to intrinsic values or reflected the impersonal forces of supply and demand. In fact, the investigation record demonstrated that during 1929 the prices of over 100 stocks on the New York Stock Exchange were subject to manipulation by massive pool operations. One of the principal contributing factors to the success of the manipulator was the inability of investors and their advisers to obtain reliable financial and other information upon which to evaluate securi- XVI FOREWORD ties, and manipulators were further aided by the dissemination of false and misleading information, tips and rumors which flooded the market place. There were other factors which were shown to have contributed to the fundamental weakness of the pre-SEC securities market. Principal among these was the extensive use of credit to finance speculative activities or the purchase of stock on margin. Speculators ignored the fact that the yield on stocks purchased on margin was far less than the interest on their debit balances with brokers. There was almost no limit to the amount of credit which a broker might extend to his customer. As a result, a slight decline in the market price of securities could, and did, set off a chain reaction- the customer was sold out in a declining market at a loss because he had insufficient funds to put up additional margin; such distress sales further accentuated the market decline and caused other margin customers to be sold out; and brokers who had over-extended themselves with banks in order to finance excessive speculation by customers were hard-pressed for capital and some even became insolvent, thus further endangering the position of other customers. The misuse of corporate information by management officials and other "insiders" was also common practice. Executive officers who owed a high degree of fiduciary responsibility to the company and its stockholders withheld vital information about the company, its operations and earnings, while accumulating a personal position in its stock, placing themselves in position to capitalize on any fluctuation in the price of the stock when the news was released to the public. Moreover, the entrenched position of management was fortified by lax standards governing the solicitation of proxies by means of which management perpetuated itself in power. An extensive investigation of electric and gas utility holding companies conducted by the Federal Trade Commission, which has often been termed the most comprehensive study of any industry undertaken by the Federal government, had disclosed widespread abuses in the formation and operation of utility holding company systems, including (1) inadequate disclosure to investors of the information necessary to appraise the financial position and earning power of the companies whose securities they purchase; (2) issuance of securities against fictitious and unsound values; (3) overloading of operating companies with debt and fixed charges, which tended to prevent voluntary rate reductions; (4) imposition of excessive charges upon operating companies for various services such as management, construction work and the purchase of supplies and equipment; (5) the control by holding companies of the accounting practices and rate, dividend and other policies of their operating subsidiaries so as to FOREWORD XVII complicate and obstruct State regulation; (6) the control of holding companies and subsidiaries through disproportionately small investment; and (7) the extension of holding company system control and domination over far-flung utility properties without regard to the integration and coordination of related properties. Starting with operating company common stocks, representing fractional investments in the properties themselves, the holding companies issued billions of dollars of debt securities and preferred stocks and pyramided holding company upon holding company in such a way that control represented by the voting stock of the top company was based on little or no actual investment in the operating properties at the bottom level, at which level alone were generated the earnings and income to support the entire system. The imposition of leverage security upon leverage security had the result that a small percentage increase in operating company income would be phenomenally mag- nified at the level of the top holding company's most junior equity securities. But this factor of magnification worked in reverse when income declined. Electric and gas operating companies actually suffered less during the depression days of the early 1930s than almost any other substantial segment of our economy. Their operating revenues dropped no more than about 15 percent from the peak levels of the 1920s. That drop, however, was enough to bring down in ruins many of the fantastic corporate superstructures that had been imposed on top of the operating companies. Several of the largest holding companies were forced into bankruptcy. The investing public which had been induced to purchase their securities suffered tragic losses of untold millions of dollars. It has been estimated that, from 1924 to 1930,utility holding companies floated some $5 billion of securities, the great bulk of which went not to build or improve utility properties but to purchase already outstanding voting securities of operating utility companies. The businesses of some of the companies acquired had no remote relationship to that of an electric or gas utility and one system even included a baseball team. The build-up, without any economic justifi- cation, of huge utility empires stretching across the nation was exem- pilfied by one holding company which grew in gross assets from $6 million in 1923 to $1 billion in 1929, only to become insolvent and require years for its reorganization and rehabilitation-not, however, without tremendous losses to the investing public. From September 1929 to April 1936, 53 utility holding companies with about $1.7billion of securities outstanding went into receivership or bankruptcy. An additional 23 holding companies with about $535 million of outstanding securities defaulted on interest and offered re- 529523--59--2 XVIII FOREWORD adjustment plans. At December 1940, registered holding companies had about $2.5 billion of preferred stock outstanding of which $1.4 billion had dividend arrearages amounting to $476million. The financial practices of the holding companies had also resulted in serious injury to many of their operating subsidiaries. From September 1929 to April 1936, 36 utility subsidiaries, with outstanding securities of $445 million, went into bankruptcy or receivership. An additional 16 such companies with $152 million of outstanding securities offered readjustment or extension plans after defaulting on interest. Of preferred stocks of operating subsidiaries aggregating about $1.6 billion at December 1940, some $453 million had dividend arearages amounting to about $165 million. Another investigation, conducted by the Commission in the mid- 1930's,of companies engaging in the business of investing, reinvesting and trading in securities and which offer their own securities for public sale in order to obtain investment capital, clearly indicated the need for regulation of this important segment of our financial community. Here again, the evidence showed a callous disregard by certain management officials of their fiduciary obligations to investors and, in many instances, a course of conduct which clearly constituted fraud. Among the practices revealed by the Commission's investigation were the purchase and sale of portfolio securities by and between the company, its management officials and other affiliated interests, for the personal profit of the insiders. The sale of investment company shares through false and fraudulent representations was a common practice. This investigation also disclosed that no machinery existed for enforcing fiduciary responsibilities of individuals and firms which were engaged in the business of advising others, for compensation, with respect to their purchases and sales of securities, and that serious abuses were possible and probable. Another Commission investigation disclosed practices which evidenced a need for independent trustees to provide protection of the interests of security holders in the areas of corporate reorganizations of insolvent corporations and the issuance and sale of debt securities pursuant to mortgage and other indentures. 'Yith these exposures of malpractices Congress stepped into the breach and imposed, upon those engaged in the purchase and sale of securities, standards of conduct which should long since have been universally recognized by them as basic to any proper relationship to public investors. In fact, they were based upon the fundamental concepts of fiduciary obligation which the law already imposed on those managing other people's money and securities. FOREWORD XIX

The first remedial measure, the Securities Act of 1933, dealt with the capital formation process so essential to industrial growth. In urging the passage of this legislation, which he characterized as the "Truth in Securities" law, President Roosevelt stated that what was sought was "a return to a clearer understanding of the ancient truth that those who manage ... other people's money are trustees ... " The primary aim of the legislation was to provide public disclosure of all financial and other data bearing upon the worth of securities so that they might be realistically evaluated by investors. It also sought to outlaw fraud in the sale of securities under a broadened concept of fraud not limited by technical common law definitions. Disclosure under the Securities Act is accomplished in a two-step process: (1) by filing a registration statement with the Commission containing certain required financial and other data; and (2) by making available to purchasers and to investors who receive written offers to sell through the mails, a prospectus containing all pertinent facts upon which the company's operations may be appraised and its securities evaluated. Among other things, the prospectus must contain information with respect to the character, size and profitableness of the business; the capitalization of the issuer; the purpose of the proposed offering of securities and the use to which the proceeds are to be applied; outstanding options for the purchase of securities of the issuer; remuneration of officers and directors, including bonus and profit- sharing arrangements; contractual or other arrangements with management officials or other affiliated interests; pending or threatened legal proceedings; and the underwriting and other terms of the offering. Moreover, the prospectus must include a balance sheet and three-year earnings statement, certified by an independent public accountant. When the registration statement is filed, the securities covered thereby may be offered for public sale, either orally or by means of certain written instruments prescribed by Commission rules. But the securities may not be sold until the registration statement becomes or is made effective. The duration of this "waiting period", usually several weeks, depends upon the degree of initial compliance with the disclosure requirements. The waiting period provides an opportunity, explicitly provided for in the statute and the Commission's rules, for widespread dissemination in the financial community and among dealers and the investing public, of the salient factual disclosures, financial and otherwise, contained in the registration statement. Thus, opportunity is given the investing public to be informed of the essential facts about the company and the securities it proposes to offer for public sale before the public investor is committed to their purchase. xx FOREWORD During this waiting period, also, the Commission conducts a thorough examination of the registration statement and prospectus to determine, as best it can, that all required facts have been disclosed, accurately and completely, and that there are no "half truths" due to the omission to state facts required to be stated in order to make not misleading the disclosures and representations made. If in its examination the Commission finds that the registration statement is inaccurate or incomplete in respect of material fads, the Commission may, after notice and opportunity for hearing, issue a "stop order" suspending the registration statement, which operates to bar distribution of the securities so long as the stop order remains in effect. The order may be lifted when and if the registration statement is amended to correct the deficienciesupon which the stop order was based. Normally, however, resort to the stop order procedure is not essential to a determination of compliance with the disclosure requirement, and the issuing company is advised of and given an opportunity to file any revision, correction or clarification of disclosures which the examination may show to be necessary to an understanding of the facts. An analysis of an issuing company's balance sheet and earnings statement is of paramount importance in the evaluation of securities. The value of financial statements is directly dependent on the soundness of the accounting principles and practices observed in their preparation and on the adequacy and reliability of the work performed by public accountants who certify as to their fairness. Uni- formity in auditing practices and consistency in accounting presentation are essential to public reliance upon and an understanding of the earnings and other data presented and to a proper comparison with the financial statements of other companies. Therefore, a major objective of the Commission has been to improve accounting and auditing standards and to assist in the establishment and maintenance of high standards of professional conduct by certifying accountants. The accounting rules, decisions and opinions of the Commission, in conjunction with authoritative pronouncements by professional accounting societies and by other governmental agencies, have achieved a substantial clarification and improvement in the accounting and auditing principles and practices generally followed in the preparation of financial statements throughout the financial community, whether or not the particular issuing company is directly subject to the Commission's regulations. Moreover, the Commission's requirement that an accountant who certifies financial statements filed with it shall be "independent" of his client, has extended and fortified the ethical standards customarily observed by certifying accountants. FOREWORn XXI

The Commission's examination relates only to the accuracy and adequacy of the disclosures. The Commission is not empowered to, and does not, appraise the merits of the securities or otherwise pass upon the soundness of the venture. In fact, the Act declares it to be unlawful to represent to investors that the Commission has approved or otherwise passed on the merits of registered securities or found the registration disclosures accurate and complete. However, it should be noted in this connection that heavy penalties attach to the filing of registration statements which are false and misleading. More- over, investors who suffer losses in the purchase of registered securities have important recovery rights (which they may pursue in Fed- eral or State courts) if the disclosures contained in registration statements are false and misleading. 'Vhile the Commission cannot and does not vouch for the accuracy and adequacy of registration disclosures, its examination, coupled with the penalties against false filings and the recovery rights of investors, tend to contribute to the general reliability of the disclosures. Dissemination of information contained in the registration statement is basic to the statutory objective of investor protection. This is accomplished by the large-scale distribution of the prospectus to all members of the underwriting and distributing or selling groups as well as to prospective investors. The law requires the delivery of the prospectus to any person to whom a written offer is made through the mails, and to each and every purchaser. This dissemination of information is supplemented by the extensive redistribution of the registration disclosures by the various securities manuals and other investment advisory and statistical services, which are readily available to all broker and dealer firms, trust departments and others. Thus, new securities may be evaluated by a broad cross-section of the investing public. The registration process has been an effective instrument for the restoration of investor confidence. The fad that there has been a $15 billion average volume of public offerings of registered securities during the past four years, and that capital expenditures during that period have reached record heights, is eloquent testimony to the smooth functioning of the capital formation processes today and of the steady flow of private capital into industry. The second enactment in the field of Federal securities regulation was the Securities Exchange Act of 1934, which sought to outlaw misrepresentation, manipulation and other abusive practices in our securities markets and to establish and maintain just and equitable principles of trade which would be conducive to open, fair and orderly markets. xxn FOREWORD

The Congress recognized that the dearth of reliable financial and other information in the pre-SEC days had made it difficult, if not impossible, to evaluate adequately and realistically securities traded on exchanges, and that this paucity of information facilitated the dissemination of false information about the issuing companies and their securities and the manipulation of the prices of securities. Accord- ingly, the 1934act extended the disclosure principle by requiring every company which has securities listed on an exchange to register with the Commission and to file annual and other periodic reports disclosing financial and other data which the investing public needs in eval- uating the company's securities. A similar periodic reporting requirement is imposed by this law upon the larger companies whose securities have been registered for public offering under the Securities Act, whether or not they are listed on an exchange. The Commission is given authority to require that these financial statements be certified by independent public accountants. On June 30, 1959, securities of 2,236 issuing companies were listed and registered on national securities exchanges. The volume of trading on the exchanges in these securities during the year ended that date was about $50 billion, and their aggregate market value at the year end was about $350 billion. The very size of these figures is evidence of the importance to investors of reliable financial and other information with respect to the issuing companies and their securities. The data contained in the reports of these companies receives widespread dissemination through securities manuals, statistical and advisory services, the financial press and otherwise, and has an important impact upon the evaluation of their securities by the investing public. The disclosure principle was further extended by two additional provisions of this law, applicable to "insider" trading in listed securities and to the solicitation of proxies from the holders of such securities. 'With respect to the former, the 1934 act requires that insiders (officers, directors, and 10% owners) report regularly to the Commission and the exchange their holdings of and transactions in all equity securities of the particular issuer with whom they are affiliated. The number of these reports of holdings and transactions of insiders now exceeds 39,000 annually. Furthermore, in order to curb the misuse of "inside" information by such persons which had been so prevalent prior to enactment of the statute, insiders are made liable to account to their companies for their profits on any purchase and sale, or sale and purchase, which occurs within a six-month period. Moreover, management officialsof listed companies must disclose in their solicitation of proxies basic financial and other information reflecting the company's financial condition and the results of its opera- FOREWORD XXIII

tions-information which reflects management's stewardship. To enable investors in such companies to vote intelligently upon all corporate matters requiring stockholder approval, whether the election of directors, authorization for the issuance of additional securities, merger with another company or otherwise, the Commission has promulgated a set of "proxy rules" which require disclosure of the basic facts pertinent to the subject matter of the vote. In addition, the form of proxy must give the stockholder freedom of action to vote for or against different proposals, and may not bind him to vote on an all-or-none basis. The Commission's proxy rules also entitle independent or minority stockholders to include, in management solicitations, any proper proposals which they wish to have put to a vote of the stockholders. Under the rules, independent solicitations of proxies by minority stockholders, including the solicitation of proxies for the election of their own nominees to the board, are also facilitated. The 1934 act also provides for the registration of stock exchanges and of brokers and dealers who engage in the over-the-counter securities business. A prerequisite to stock exchange registration is a requirement that the rules of the exchange shall proscribe practices by members which may not be just and equitable to public investors, and the exchange must be empowered to suspend, expel or otherwise dis- cipline members for violations of those rules. The Commission has a residual power to see that exchange rules are modified or supplemented to accomplish these objectives. Today, 14 national securities exchanges are registered with the Commission. This system of self-regulation, which recognizes that exchanges are vested with a public interest and that the exchanges themselves have the primary responsibility for establishing, maintaining and enforcing just and equitable principles of trade, is an important factor in the market place today. It also has its counterpart in the over-the- counter markets, contained in a 1938 amendment to the law providing for the organization of associations of over-the-counter dealers which would "police" their membership. One such institution, the National Association of Securities Dealers, Inc. ("NASD"), has been organized and now has over 4,000 members. It has adopted and enforces a code of fair practice governing the conduct of its members and their relationships to investors. As previously indicated, brokers and dealers must register with the Commission before they may engage in the securities business in interstate commerce. At the end of the 1959 fiscal year, 4,907 brokers and dealers were registered with the Commission. The Commission may deny or revoke the registration of a broker-dealer in cases of fraud in securities transactions, or other misconduct in the securities XXIV FOREWORD

business, where the Commission, after notice and opportunity for hearing, finds such denial or revocation in the public interest. Like- wise, the Commission may, on similar grounds, suspend or expel a member from membership in the NASD or in a stock exchange. The Commission maintains an active surveillance of securities trading practices, both on exchanges and in the over-the-counter markets. It also has adopted numerous rules which establish standards of conduct governing the activities of brokers and dealers and prohibit acts and practices inimical to the interests of investors. Two of these are worthy of special note. One prohibits short selling on an exchange which would tend to precipitate or accentuate a price decline. An- other requires that brokers and dealers maintain at all times a minimum capital position in relation to their liabilities to other persons so that the funds and securities of customers in their custody will not be jeopardized. This rule minimizes the possibility that sudden re- verses will cause a firm to become insolvent and thereby endanger customers' free credit balances and securities held in custody. It may be noted in this connection that the Commission carries on a program of broker-dealer inspections to ensure compliance with its net capital rule and otherwise to see that the activities of brokers and dealers are conducted properly. No less important to the stability and orderliness of the stock market today are the rules of the Board of Governors of the Federal Reserve System which regulate the amount of credit which brokers and banks may extend on the purchase of listed securities by investors. The margin requirement has fluctuated over the years from a low of 25 percent in 1934 to 100 percent (no margin) during the war years, in accordance with that Board's view as to proper margin in light of the over-all credit position of the Nation. By curbing excessive speculation, the rules have added a stabilizing influence in the market. The necessity for frequent and drastic "margin calls" has thus been reduced, offering further stability to the market. The Commission has the duty of enforcing compliance by brokers and dealers in securities with the rules so established. Both the 1933and 1934acts authorize the Commission to take testimony under oath and to subpoena books and records for the purpose of developing the facts with respect to possible securities violations, and to seek Federal court orders of injunction against the continuance of acts and practices violative of the laws or Commission rules thereunder. They also provide for criminal prosecution (through the Department of Justice) of any individual, firm or corporation if evidence developed in the Commission's investigations establishes that they have engaged in fraud, manipulation or other misconduct in connection with the purchase and sale of securities or have otherwise willfully violated the law. FOREWORD xxv

The record of investigation and enforcement actions of the C0111- mission is a formidable one, far too long to be recited here. That record is detailed in the several annual reports which have been filed by the Commission with Congress over the years. It may be noted that many violations of the law are discovered and stopped before any substantial damage to investors has occurred. In other cases, the Commission's investigations have resulted in restitution of investors' funds in substantial amount. Of perhaps even greater importance to the investing public is the deterrent effect which the statutory sanctions and the Commission's enforcement powers have upon those who might otherwise have, and exercise, a free hand to defraud innocent investors. The legislation designed to meet the problems posed by the abuses disclosed in the investigation of the electric and gas utility industry was embodied in the Public Utility Holding Company Act of 1933. The principal objective of this statute was to free local operating utility companies from the control and domination of absentee and uneconomic holding companies, and to permit them to be regulated more effectively by the States in which they operate. In 1930, 1;) holding company systems controlled 80 percent of the privately owned electric generating capacity in this country, and similar concentration existed in the gas utility field. As previously indicated, these countrywide utility empires were put together with little regard for efficient and economic service of electricity and gas to consumers and without regard for the investors whose funds had been used to concentrate a maximum of control and profit in the hands of a few. The act called for a breakup of the huge utility combines and, generally speaking, sought to restrict the operations of utility holding companies to one or more systems whose operations are integrated and confined to a single State and States contiguous thereto. It also had as one of its major objectives the simplification of the corporate and capital structures of holding company systems and the redistri- hution of voting power among security holders on a fair and equitable basis. In 1940, when the statutory program of integration and simplification actually got under way, 12 of the registered systems each conducted retail operations in 10 or more States, and 17 additional systems operated in 5 to 9 States. At one time or another since 1938, these systems contained a total of 2,387 companies, many engaged in miscellaneous unrelated nonutility businesses, and many being sub- holding companies serving no demonstrable economic function. Drastic surgery was called for to simplify these structures, to restore some semblance of sane and sensible corporate and capital structures and to redistribute voting power and control on a fair and equitable XXVI FOREWORD basis consistent with a realistic evaluation of the rights of the various and conflicting interests of security holders. The volume and complexity of the corporate and capital structures which "ere required to be simplified, and the nature and scope of the geographical dispersion of the properties required to be integrated presented extremely difficult and novel problems which it was the task of the Commission to resolve. Opponents of the legislation had asserted that the law would cause dumping and forced liquidation of securities, demoralizing the market therefor, and they characterized the integration and simplification requirements as a "death sentence" for the utility industry. The Congress, on the other hand, contemplated that this program should not destroy any legitimate investment values, and the Commission was given a mandate to bring about the required integration and simplification in keeping with that objective. The opposition of industry which marked the passage of this reform measure was continued after its enactment. Most of the larger companies refused to register with the Commission, as the law required, and it was not until the Supreme Court upheld the constitutionality of the registration requirement in 1938that these companies bowed to the registration requirement. They continued, however, to resist the law's integration and simplification requirements. The act contemplated that industry would be given an opportunity to propose voluntary plans which would effectuate the objectives of integration and simplification, but it also wisely empowered the Com- mission to take necessary action to that end if the industry failed so to do. For the most part, at least initially, the industry was unyield- ing, and it became necessary for the Commission to invoke its power to issue administrative orders directing compliance with the requirements of the law. Of course, such orders could only be issued after notice and opportunity for hearing and after the development of an evidentiary record. Many of the orders requiring integration and simplification were challenged in the courts, on constitutional and other grounds, but all were ultimately sustained. After the Commission had thus established the general pattern of compliance, holding company systems came forward with voluntary plans for divestment of nonretainable properties and securities of nonretainable subsidiaries. Such plans had to comply with the statutory mandate in this respect and had to be fair and equitable to all affected security holders. Plans proposed for simplification of corporate and capital structures also had to be tested in the same manner. In ruling upon these plans, the Commission developed the so- called "investment value" doctrine under which the claims of security holders are evaluated for purposes of reorganization on u going-con- FOREWORD

cern basis rather than on the liquidation basis followed in reorganizations in equity receivership and bankruptcy proceedings where the claims are treated as matured. Under the investment value doctrine, which was duly sustained by the courts, plans of reorganization were approved which accorded participation to senior claimants upon the basis of the present worth of their securities on a going-concern basis, and similarly to junior security holders on the basis of their secondary claim to future earnings, even though they would not have had a right to participate if the senior claims were evaluated upon the basis of their liquidation preferences. Compliance with the integration and simplification requirements took various forms. They included mergers and consolidations, separation of large systems into smaller, integrated systems, divestment of nonutility properties unrelated to the utility business, sale of nonretainable utility properties to other systems with whose properties they could be integrated, sale of the securities of nonretainable subsidiaries to the public at competitive bidding or pursuant to a rights offering to stockholders of the parent company and distribution of securities pro rata among stockholders. The fundamental economic soundness of the act and the methods prescribed for its administration have been demonstrated by the results achieved, and the directive of Congress that the program could and should be effectuated without injury to investors has been carried out. Although tremendous values were salvaged by integration and simplification, that process unavoidably entailed the realization of losses by many investors who had purchased securities on the basis of anticipated values which had been but a mirage, or had been dis- sipated by the holding companies themselves. All the damage could not possibly be undone--the dollar amount of securities which had been issued was in some instances vastly in excess of the values that could be realized by the salvage and rebuilding process. The integration and simplification program represented the most comprehensive undertaking ever assumed by the Government to re- habilitate an entire major industry. In the process, the number of companies now comprising the 18 active registered holding company systems has been reduced to 176-and only 3 of the systems operate in more than 4 States and none operates in more than 9. Today, the securities of the divested companies and of those registered companies which have completed their integration and simplification programs have an excellent market acceptance. The utility industry as a whole is enjoying financial health and stability, and has been able to finance expansion programs of unprecedented proportions largely out of new money raised from the public sale of securities. It is interesting to note in this connection that a study made by the Commission in 1951 XXVIII FOREWORD of the market values of the common stocks of 12 holding companies between the dates of their registration with the Commission and Sep- tember 24, 1951,showed that in each instance the market value of the company's stock increased during that period and in almost all instances the rate of increase substantially exceeded the rate of increase in the Dow Jones utilities averages. Holders of utility preferred stocks have similarly benefited in that all dividend arrearages have been satisfied and the holders have been accorded securities and cash representing the fair value of their investments. In actuality, then, the feared integration and simplification provisions of the law have been vindicated and those who condemned the act have come to praise it. That which was once denounced as a death sentence to the progress of the utility industry is now generally regarded as having been the means of its regeneration . . The 176 companies which remain subject to the Commission's continuing; jurisdiction under the act must comply with its regulatory provisions governing their purchase and sale of utility securities and properties, dividend payments (in circumstances where such payment might result in a corporate abuse), intercompany loans, solicitation of proxies, and insiders' transactions. The act also forbids registered holding companies to charge for services to their subsidiaries and requires that all services performed for any company in a holding company system by a mutual or subsidiary service company be rendered at cost, fairly and equitably allocated. 'With respect to the issuance and sale of securities, the act generally provides that the Commission shall not authorize their sale unless it finds that the security meets certain tests, including the requirement that the security must be reasonably adapted to the earning power of the company and its issuance necessary and appropriate to the economical and efficient operation of the issuer's business and not detrimental to the public interest or the interest of investors or consumers. The Commission has adhered to the policy of requiring sound capital structures containing adequate common stock equity. The Commis- sion also must find that fees, commissions and other remuneration paid in connection with the sale are not unreasonable. It is recognized that the cost of capital is an important element of expense affecting utility rates and that utility companies are under a duty to obtain their capital at the lowest cost consistent with a sound financial structure. One of the evils disclosed by the investigation was the absence of arms-length bargaining in the sale of securities and utility assets, which was in large measure an outgrowth of the "tradi- tional banker" relationships between certain large investment banking firms and particular holding company systems. Such relationships had given these bankers a virtual monopoly over the financing FOREWORD of system companies and had generally resulted in exorbitant underwriting commissions. To implement the statutory objective that underwriting fees and commissions be reasonable in amount, to eliminate investment, banker control and to assure the maintenance of competitive conditions, the Commission in 1941 adopted a rule under the act which generally requires that securities of registered holding companies and their subsidiaries be sold by means of competitive bidding. Since the adoption of that rule, there has been active competition among investment bankers for the purchase of utility securities. Approxi- mately $11 billion of utility securities of various classes have been sold by means of competitive bidding under the rule in the past 17 years. The rule allows an exception from competitive bidding under special circumstances and upon a showing that a negotiated underwriting or a direct placement would be more advantageous and that competitive conditions are otherwise maintained. Some $2.3 billion of securities have been excepted from the rule since it was adopted. The effect of the competitive bidding rule actually extends beyond the limited number of companies subject to its requirements, for the prices obtained and the underwriting spread paid by these companies in their offering and sale of securities through competitive bidding have set the standard for all security offerings, whether or not subject to the rule. Competitive bidding is regularly required by the Inter- state Commerce Commission, the Federal Power Commission, and many State regulatory commissions. This technique was in effect in some areas before 1941, but it is clear that its adoption by the SEC has been instrumental in achieving the wide acceptance which is now given to it. Moreover, it has been employed by a number of utility companies who were under no compulsion to do so. There can be little doubt that the competitive bidding rule has been responsible in a substantial degree for the noticeable decrease in the cost of flotation of securities over the past two decades. In furtherance of the statutory objectives of economy in the raising of capital and the protection of the interests of investors, consumers and the public, the Commission has from time to time promulgated other rules and policy statements governing the financing of registered system companies. Notable among these are statements of policy governing "protective provisions" which must be included in mortgage indentures pursuant to which debt securities are issued and sold and in corporate charters governing the rights and interests of preferred stockholders. 'With respect to bond indentures, for example, the bonds must be redeemable at any time at reasonable redemption premiums, certain asset and earnings tests must be met if a company wishes to issue additional bonds, a sinking fund is required as well as xxx FOREWORn a renewal and replacement Coyenant which, in effect, requires the COIU. pany to expend for property additions an amount reflecting the depreciation taking place in the mortgaged properties, and certain restrictions are imposed upon the acquisition of properties subject to a prior lien and upon the amount of common stock dividends the company may pay. With respect to preferred stock, the charter must include provisions that dividends shall be cumulative, that the preferred shall be redeemable at any time at a reasonable redemption premium, and that the preferred shareholders are entitled to elect a majority of the members of the board of directors in the event of the accumulation of a year's arrearages in the payment of dividends on the preferred. Further- more, the payment of dividends upon the common stock must be restricted if the common stock equity falls below a certain prescribed percentage of the company's total capitalization and surplus, and a favorable vote of the holders of a certain percentage of the outstanding preferred shares is required before certain corporate actions affecting their interests may be taken. It is apparent that the accomplishments under the Holding Company Act and particularly in connection with the vast integration and simplification program have been considerable. 'Vhile the integration and simplification programs for some ten of the registered systems have not been completely effectuated, the Commission is hopeful that the remaining problems, some of a more or less serious nature, may soon be resolved and the overall program of utility integration and simplification consummated. The continued expansion of utility systems, of course, including the creation of new holding companies through the purchase of utility securities or the acquisition by existing registered systems of the assets or securities of other nonaffiliated companies, has created and will from time to time continue to create new problems of integration and simplification. A number of holding company systems will continue to be subject to the Commission's jurisdiction under the act for an indefinite period. The many aspects of their financial and related activities will call for the continued exercise of the Commission's jurisdiction, as in the past, to assure that the public interest is protected and to guard against the recurrence of the evils which gave rise to the enactment of the law. In addition, new technological developments, such as the use of atomic energy, the pooling together of facilities by various nonaffiliated systems for the purpose of effecting economies in the generation of electric energy and other similar challenges will no doubt continue to command the Commission's attention in the years to come. The Holding Company Act authorized the Commission to conduct a study and investigation of investment trusts. After 5 years of in- FOREWORD XXXI tensive and exhaustive inquiry into the entire industry, the Commis- sion recommended comprehensive legislation for its regulation. Vigorous opposition to the extent of the regulation proposed in the original bill led to conferences between the Commission and industry representatives, resulting in a compromise statute which passed both Houses of Congress unanimously as the Investment Company Act of 1940. This unanimity was no doubt due in large part to the Com- mission's expose of the sordid history of the organization and operation of certain investment trusts and to a recognition on the part of the more responsible element in the industry that Federal regulation was not only necessary in the interest of investor protection but was also essential to the full acceptance by the public of investment companies as a feature of our financial system. The Commission's study showed that investment companies had all too often been organized and operated in such a way as to further the selfish interests of the sponsors and insiders at the expense of the stockholders to whom they owed a high fiduciary duty. Subordina- tion of the interests of stockholders took many forms, In some cases, the promoters, management officials and controlling persons unloaded worthless securities and dubious investments upon the investment company, or took for their own account profitable ventures offered to the company. In others, the investment company financed clients of insiders or companies in which insiders were personally interested. In- siders also engaged in practices which permitted them to obtain large profits without any risk by trading in the securities issued by the investment company, to the pecuniary detriment of' its investors. They also engaged in practices which increased their distribution profits and management fees and resulted in substantial dilution of the investors' interests. Many other abuses came to light, including sales and promotional literature designed to create the false impression that investment companies were not unlike savings banks and insurance companies, except that they were not limited to legal investments. The sales load in some types of companies exceeded 30 percent of the net amount invested. The 1940 act seeks to obtain a degree of independence in the board of directors and to prohibit self-dealing and the taking of excessive commissions or profits by affiliated persons or companies. It seeks to achieve greater participation by stockholders by requiring them to act on basic policies, to restrict the types of securities which may be issued by investment companies and to guard against inadequate and unfeasible capital structures, to require transmission of informative reports to stockholders, including financial statements certified by independent accountants when the Commission so pre- scribes, and to eliminate improper selling practices. Persons guilty of securities frauds are barred from serving- as officers and directors. XXXII FOREWORD

Underwriters, investment bankers and dealers may not constitute more than a minority of the board of directors. Basic to Commission regulation under this law is the requirement that companies engaged in investing, reinvesting and trading in securities register with the Commission and file periodic financial and other reports. The registration statement must include a declaration of policy by the investment company on various aspects of its business, including its investment policy, and the company may not deviate from its stated policy without the consent of the holders of a majority of its outstanding voting securities. Transactions with affiliated persons and companies are prohibited, although the Commission, upon application by the company, may grant an exemption from such prohibition if it finds that the terms of the transaction are fair and reasonable, that no "over-reaching" on the part of any individual is involved and that the transaction is consistent with the company's established policies and with the intent and purposes of the law. A registered investment company must, subject to Commission rules, maintain its assets under a custodianship agreement with a bank or a member of a national securities exchange, or under a safekeeping arrangement with a bank. Officers and employees who have access to the assets of the company or authority to direct their disposition must be bonded. The act also empowers the Commission, where necessary, to seek court injunctive orders to prevent transactions, acts and practices in contravention of its provisions or rules of the Commission thereunder. If the activity constitutes gross misconduct or gross abuse of trust in the management of investment companies, the Commission may apply to the court for removal of management officials responsible therefor, for the appointment of trustees or receivers where necessary to preserve the company's assets and for an order compelling the restitution of funds to stockholders. In one case, for example, the controlling stockholder caused the investment company to liquidate capital assets to meet interest requirements and pay current expenses, including salaries and rentals to himself, and to acquire control of a race track. In an action initiated by the Commission, the court appointed a receiver and enjoined the controlling stockholder and other defendants from serving as officers and trustees of the company. Similarly, in another action brought by the Commission an officer'who caused an investment company to make unsecured loans to various business corporations he controlled was enjoined from serving any investment company in any capacity in the future. Injunctions and appointments of receivers have been obtained where the sales literature falsely stated that the investment company was guaranteed against loss by the United States Government and where the officers and directors attempted to unload worthless securities upon the investment company. FOREWORD XXXIII

An important aspect of the Commission's administration of this law has been its insistence upon the elimination of abusive practices in the offering and sale of investment company securities. Several years ago some companies were found to be employing sales literature of a misleading character, such as representations that a particular security was as safe an investment as a United States savings bond. Leading members of the industry cooperated with the Commission in a study of the sales literature and sales practices being employed. Following this study, the Commission issued a Statement of Policy setting forth various types of advertising and sales literature considered to be in violation of the law, and the industry has cooperated with the Commission in administering it. In the administration of the act, the Commission must rule upon various applications by investment companies for exemptions from specified provisions. The exemption most frequently sought concerns transactions involving the purchase and sale of property or securities between investment companies and affiliated interests. In order to receive an exemption, the applicant must establish to the satisfaction of the Commission that the terms of the proposed transaction are fair and reasonable and do not involve overreaching. Many difficult problems of evaluation and potential conflict of interest are presented in these cases. Since 1940, more than 1,200 exemption applications have been acted upon by the Commission. The growth of investment companies since 1940 has been phenom- enal. At June 30, 1941, 436 companies with aggregate assets of $2.5 billion were registered with th~ Commission. The number of registered companies has varied since that date, with a low of 352 in 1947 and a present high of 512. The aggregate assets of the 512 companies at June 30, 1959, was $20 billion, or eight times the size of the 436 companies in 1941. The Congress recognized that investment companies might become so large as to raise problems concerning "concentration of control of wealth and industry" and other questions, and the act directs the Commission to conduct a study of such problems and to report the results thereof to Congress. Such a study is now in progress. In a recent decision of the Supreme Court, it was held that "variable annuity" contracts were "investment contracts" subject to the Com- mission's jurisdiction under the Securities Act and the Investment Company Act. As a result, these contracts must satisfy the registration and disclosure requirements of the Securities Act, and the issuing companies must register as investment companies and comply with the other provisions of the Investment Company Act. The Commis- sion is now endeavoring to resolve the problem of fitting this type of FOREWORD investment company into the pattern of regulation which the 1940 act established. Closely related to the Commission's surveillance of over-the-counter securities dealers and of investment companies is its administration of the Investment Advisers Act of 1940. The regulatory provisions of that act, however, touch only a few aspects of a field not yet adequately covered. Although modeled on the broker-dealer registration provisions of the 1934 act, and dictated by certain abuses indicated by the Commission's investment trust study, it has few "regulatory teeth." It does not give the Commission the same control over the activities of the investment advisers (including power to impose sanctions) now applicable to brokers and dealers, and is considered to be largely a mere "census-taking" statute. The most serious defect in the current statute is the inability of the Commission to inspect the books and records of registered investment advisers, to prescribe what books and records shall be maintained or to require the filing of reports. In light of market conditions existing today, it would appear contrary to the public interest to allow such a condition to continue. As part of its current legislative program, the Commission has proposed amendments to the law to include adequate regulatory provisions with respect to investment advisers. Prior to the Commission's investigation of investment trusts, it undertook a study of protective and reorganization committees. This study resulted in two additional Congressional enactments, the Trust Indenture Act of 1939 and chapter X of the National Bank- ruptcy Act (1938 revision). This study concerned itself ;vith the events which led to the insolvency of debtor companies, and in particular with the activities of protective and reorganization committees organized to protect the interests of the various classes of creditors and security holders and to participate in the reorganization of the debtor corporation. Nu- merous instances came to light where the indenture trustee, whose primary responsibility was to protect the interests of the holders of indenture securities, had basic conflicts of interest, including divided loyalties as between the debtor and its management officials on the one hand and the interests of public investors on the other. Such conflicts precluded any effective action by the trustee to safeguard the interests of investors prior to default or to see that their rights were asserted in a timely and proper fashion in the event of default. The Trust Indenture Act seeks to protect the purchasers of bonds, debentures, notes and similar debt securities when sold in amounts exceeding $1 million, by prescribing certain minimum standards governing the provisions of indentures. It requires the indenture to spell out the rights of the holders of the securities and to provide reasona- FOREWORD ble standards of diligence and loyalty applicable to the indenture trustee, and to facilitate its actions to protect the investor. The emphasis of this law is upon an effective and "independent" trustee whose interests do not conflict with those of investors and upon eliminating indenture provisions which might exculpate the trustee against dereliction in carrying out duties and responsibilities prescribed by the indenture. The provisions of this act and the Securities Act are so integrated that registration under the latter act of securities to be issued under a trust indenture is not permitted to become effective unless the indenture conforms to the standards of the Trust Indenture Act. Like registration statements, trust indentures are examined by the Com- mission for compliance with the law. The Commission may issue an order refusing qualification if the indenture does not conform to the prescribed standards or if the trustee has any conflicting interests. Once an indenture is qualified, enforcement of its terms is left to the trustee and the indenture security holders. The report of the Commission's investigation also had shown serious abuses in the functioning of protective committees and the manner in which insiders used such committees to control reorganization proceedings for their personal benefit and to the detriment of public security holders. The basic thrust of chapter X of the Bankruptcy Act (the Chandler Act) was to eliminate the practical control of reorganization proceedings by inside groups and self-constituted committees and to require, in all cases in which the debtor's indebtedness exceeds $250,000, the appointment by the court of a disinterested trustee, whose attorney must also be independent. It is the function of the trustee to assume charge of the debtor's operations and proceed with the preparation of a plan for its reorganization. He may investigate the acts of the prior management and institute recovery actions where the facts justify such action. Although protective committees and other representatives of security holders are permitted to participate, their activities are subject to strict court review and control. Fees for services in reorganization proceedings are also subject to court approval, which serves to prevent unwarranted and excessive fees to special groups while providing fair and reasonable compensation to those whose services can be shown to have benefited the estate. Furthermore, chapter X provides that the Commission may participate in corporate reorganization proceedings if requested or approved by the court, so as to aid the court and the independent trustee by rendering expert and independent advice and assistance on all import.ant phases of the proceeding. It operates in an "advisory" capacity, and has the right to be heard on all matters arising in the XXXVI FOREWORD

proceeding, but no right to appeal. It usually undertakes intensive legal and financial studies related to the company, its operations, its indebtedness and other outstanding securities, possible claims against management officials or controlling persons, the prospects for the company's future operations and the possibility of a successful reorganization. If the indebtedness of the debtor exceeds $3 million the court must, and if less than that amount it may, submit to the Commission all plans of reorganization deemed worthy of consideration. The Com- mission may thereupon prepare and file with the court its "advisory report" which analyzes the plan or plans in detail and recommends for or against court approval, depending upon whether the Commis- sion considers that the plan provides fair and equitable treatment to all interests affected and is feasible. In some instances the Commis- sion's recommendations are presented orally to the court through its counsel. The Commission's report is in no way binding upon the court, which may either reject the plan or approve it and submit it to a vote of creditors and affected security holders. In the latter event, a copy or summary of the Commission's advisory report is transmitted to security holders along with the plan, so that they may be informed of the Commission's analysis of and views on the fairness and feasibility of the plan before casting their votes for or against the plan. Since September 1938 the Commission has participated in chapter X proceedings for the reorganization of 457 debtor companies (371 principal debtors and 86 subsidiaries thereof) with stated assets of more than $3.5 billion and indebtedness of nearly $2.5 billion. Over 60 of these proceedings are still pending. The proceedings have involved the reorganization and rehabilitation of companies engaged in a variety of industries and businesses, including agriculture, mining, manufacturing, financial and investment, merchandising, real estate, construction and allied industries, transportation and communication, service, and utilities. In these proceedings, the Commission has issued a total of 40 advisory reports and 37 supplemental reports. In most other cases, its views and recommendations on the fairness and feasibility of the reorganization plans were presented orally by Commission counsel. The assistance rendered by the Commission in corporate reorganization proceedings has been favorably noted almost without exception by Federal courts, although they do not always follow the Com- mission's recommendations. The Chief Judge of the Court of Appeals for the Second Circuit had the following to say about the Commis- sion's advisory services 4 years ago: "We regard the service being rendered by the Commission to the Courts in connection with the reorganization of corporations to be most valuable, if FOREWORD XXXVII

not indispensable, for the proper disposition of this vital segment of court business according to the Congressional intent. The Commisslon affords the necessary expert knowledge, the skill, and the uniform approach which individual judges cannot have; and to the district judges in particular, the assistance is unique in its usefulness, and not otherwise to be obtained." 21st Annual Report, p. 89. More recently, a district court judge made the following comment on the role of the Commission following a hearing on fee allowances in which the Commission had objected to allowances in the requested amounts exceeding $4 million and where the Court approved allowances of $2,068,000, some $250,000 above that recommended by the Commission: "Though I have been forced to differ from the recommendations of the SEC in many of the instances, I wish to pay tribute to the careful and helpful analysis that the Commission made of the claims. Indeed, I take this opportunity to express my gratitude for the active and intimate participation of the Commission and its counsel in the reorganization proceedings. If any proof were needed of the wisdom of Congress in providing for representation of the public by the SecuritIes and Exchange Commission in reorganization proceedings, it has been furnished in this case. I would have felt help- less without the aid given unstintingly by counsel for the Commission. Each has cheerfully rendered, at the usual modest salary of a public servant, services equal in value to those of any to whom awards are made by this decision." In the Matter of Third Avenue Transit Corporation, S.D.K.Y. Kos. 85851,86410,86412, 86413,86537, unreported, (1958). Upon appeal, the allowances were further reduced to a figure only $30,000 more than the Commission initially recommended, or an ultimate saving to the debtor estate and its security holders of nearly $2% million. This report began with a discussion of "investor confidence." As indicated herein, all available signs would seem to bear out the fact that investor confidence has been largely restored. In fact, it may be noted that recent estimates place the number of public investors today at 12,500,000, nearly double the 1952 total. The record volume of securities successfully offered for public sale, taken together with the recent rise in the volume of trading on the New York Stock Exchange to the highest level in the Commission's history, is adequate evidence of the restoration of investor confidence. But the impact of the Federal securities laws and their administration has been felt no less by financial institutions, corporate executives, professional people, and other elements in the financial COIn- munity than by investors. It can reasonably be said that these acts and their administration have generally fostered improved standards of business conduct among all groups in their relationship to stockholders and investors. 'While this no doubt has been dictated in part by enlightened self-interest, it nonetheless has contributed substantially to investor confidence. xxxvm FOREWORD This, as we have seen, has had its desired effect, for the capital formation processes have successfully served their purpose of being a conduit for the flow of investors' savings into industry in ever increas- ingvolume. While the Commission can view with pardonable pride the record of its contribution to the interests of the investing public, it cannot rest on the record of its past accomplishments. In a dynamic economy such as this nation is experiencing, new problems of investor protection are constantly arising. The very fact that securities are being offered for public sale in record volume and that exchange trading in securities has reached a high level, plus the fact that more and more people have surplus savings, some of which is being used for investment and speculation in securities, are in and of themselves adequate reasons for the Commission not to become complacent. A. boiling stock market not only attracts new investors, some of whom have neither the resources nor the knowledge 'and skill to speculate in the stock market, but also attracts a fringe element, ever ready to take unfair advantage of the innocent and unsuspecting investor. A substantially increased record of law enforcement actions by the Conunis- sion within the past year leaves no doubt of this latter fact. Nor would we suggest that the investing public might reasonably become complacent. It cannot be overemphasized that nothing in the securities laws or their administration can keep the market price of securities from fluctuating, down as well 'as up. No reasonable person would wish it otherwise. It is, therefore, incumbent upon individual investors and their advisers to exercise care and even restraint in their analysis, evaluation and purchase of securities. It is most essential that investors exercise extreme care in their dealings with unknown brokerage firms and their salesmen, particularly those who telephone long-distance with "pie-in-the-sky" promises that the investor can double or triple his money overnight, without risk of loss, through the purchase of stock of a particular company. Common sense would dictate that such a promise is utterly fantastic and ridiculous. Unfortunately, foresight is never quite so good as hindsight, particularly when the promise of quick and easy profits is dangled before one's eyes, as many investors have learned to their sorrow. The Commission would like to take this occasion to express its thanks and appreciation to a capable, industrious, and efficient staff, both past and present. In the 1949 Task Force Report on "Regulatory Commissions" by the first "Hoover Commission," the Commission was characterized as "an outstandt"ng eeamvple of the independent commleeion. at ite best." [Italics supplied.] FOREWORD XXXIX

The statement, of course, applied to the Commission and its work more than 10 years ago and was surely well-deserved. However, it is no less applicable, we submit, to the excellent 'York of a most competent staff during the past 10 years. The volume of Commission business in recent years, in nearly all phases of its activities, has been on the increase. An example of this is to be found in the record of Securities Act registration statements filed with and examined by the Commission. In the 26-year administration of that act, a total of 15,930registration statements were filed which proposed offerings of securities aggregating $167 billion in amount. The past 6 years alone accounted for 5,561of the filings and $81 billion of the total amount. That the staff has been able to carry on effectively under a tremendous increase in the volume of Commis- sion business is a tribute to its ability and conscientious devotion to duty. ORIGINAL COMMISSION (As of July 2, 1934)

JOSEPH P. KENNEDY, Chairman "JAMES M. LANDIS GEORGE C. MATHEWS*" ROBERT E. HEALY"" FERDINAND PECORA

Other former members of the Commission, in order of their appointment:

J. D. Ross"" "WILLIAM O. DOUGLAS "JEROME N. FRANK*" "EDWARD C. EWHER** LEON HENDERSON SUMNER T. PIKE "GANSON PURCELL EDMUND BURKE, Jr. ROBERT H. O'BRIEN ROBERTK.l\IcCONNAUGHEY "JAMES J. CAFFREY RICHARD B. :McENTIRE*" "EDMOND 1\1. HANRAHAN "HARRY A. McDONALD PAUL R. ROWEN *DONALD C. COOK EDWARD T. l\ICCORMICK ROBERT I. l\IILLONzI CLARENCE H. ADAMS J. HOWARD ROSSBACH "RALPH H. DEMMLER *J. SINCLAIR ARMSTRONG A. J. GOODWIN, Jr •

• Served as Chairman. * * Deceased. XL COMMISSIONERS AND STAFF OFFICERS

(As of October 15, 1959) Commissioners Terj,,~~p~riM EDWARDN. GADSBYof l\lassachusettl', ClIalllllall______1963 ANDREWDOWNEY ORRICKof California______1962 HAROLDC. PATTERSONof Virginia______1960 EARL F. HASTINGS of Arizona______1964 JAMES C. SARGENTof New york-______1961

Secretary: ORVALL. DuBOIS Staff Officers ALRERTK. SCHEIDENHELM,Executive Director. CHARLEST. KAPPLER,Associate Executive Director. BYROND. 'YOODSIDE,Director, Division of Corporation Finance. SHARONC. RISK, Associate Director. JOSEPH C. 'VOODLE,Director, Division of Corporate Regulation. W. ALLEN JOHNSON,' Associate Director. PHILIP A. Lomas, Jr., Director, Division of Trading and Exchangps. RALPH S. SAUL, Associate Director. THOMAS G. MEEKER,General Counsel. WALTERP. NORTH,' Associate General Counsel. ANDREWBARR, Chief Accountant. LEONARDHELFENSTEIN,Director, Office of Opinion Writing. W. VICTORRODIN, Associate Director. MANUELF. COHEN,' Adviser to the Connulssion.

1Designated: October 5, 1959. • Designated: August 31, 1959. FormerlJ- Chief Counsel, Division of Corporation Finance.

XLI REGIONAL AND BRANCH OFFICES

Regional Administrators Region 1. Xew York, New Jersey.-Paul Windels, Jr.; Edward Schoen, Jr., Associate Regional Administrator, 225 Broadway, New York 7, N.Y. Region 2. Massachusetts, Connecticut, Rhode Island, Vermont, New Hamp- shire, Maine.-Philip E. Kendrick, Federal Building, Post Office Square, Boston 9, Mass. Region 3. Tennessee, North Carolina, South Carolina, Georgia, Alabama, Mississippi, Florida, and that part of Louisiana lying east of the Atcha- falaya River.-William Green, Suite 138, 1371 Peachtree Street NE., Atlanta 9, Ga. Region 4. Illinois, Indiana, Iowa, Kansas City (Kans.), Kentucky, :\1ichi- gan, Minnesota, Missouri, Ohio, Wisconsin.-Thomas B. Hart, Bankers Building (Room 630), 105West Adams Street, Chicago 3, Ill. Regtou ti, Oklahoma, Arkansas, Texas, that part of Louisiana lying west of the Atcharalaya River, and Kansas (except Kansas City) .-Oran H. Allred, United States Courthouse (Room 301), 10th and Lamar Streets, Fort Worth 2, Tex. Region 6. Wyoming, Colorado, New Mexico, Nebraska, North Dakota, South Dakota, Utah.-l\filton J. Blake, 802 Midland Savings Building, 44417th Street, Denver 2, Colo. Region 7. California, Nevada, Arizona, Hawaii.-Arthur E. Pennekamp. 821Market Street, San Francisco 3, Calif. Region 8. Washington, Oregon, Idaho, Montana, Alaska.-James E. New- ton, 905 Second Avenue Building (Room 304), Seattle 4, Wash. Region 9. Pennsylvania, Maryland, Virginia, West Virginia, Delaware, Dis- trict of Columbia.-William J. Crow, Courts Building, 310 6th Street NW., Washington 25, D.C. Branch Offices Cleveland 13, Ohio. Standard Building (Room 1628), 1370 Ontario Street. Detroit 26, Mich. Federal Building (Room 1074). Houston 2, Tex. 424Bettes Building, 201 ~fain Street. Los Ang-eles 28, Calif. Guaranty Building (Room 309), 6331 Hollywood Boulevard. Miami 32, Fla. Plaza Building (Room 440), 245 South East First Street. St. Louis 1,Mo. Arcade Building (Room 1025), 812Olive Street. St. Paull, Minn. Main Post Office and Courthouse (Room 1027), 180 East Kellogg Boulevard, Salt Lake City, Utah. Xewhouse Building (Room 1119), 10 Exchange Place.

XLII COMMISSIONERS

Edward N. Gadsby, Chairman Chairman Gadsby was born in North Adams, Mass., on April 11, 1900. He received an .A..B.degree from Amherst College in 1923 and a J.D. degree from the New York University School of Law in 1928: From 1929 to 1937 he was associated with the law firm of Mudge, Stern, Williams & Tucker of New York City. From 1937 to 1947 he practiced law in North Adams, Mass. In 1947 he was appointed a Commissioner of the Massachusetts Department of Public Utilities and held that position until 1952,serving as Chairman from 1947 to 1949. From 1952 to 1956 he served as General Counsel of the Massachusetts Department of Public Utilities and thereafter was a member of the law firm of Sullivan & Worcester of Boston, Mass. On August 20, 1957,he took officeas a member of the Securities and Exchange Commission for a term expiring June 5, 1958 and was designated Chairman of the Commission. He was reappointed effective June 5, 1958 for a term expiring June 5, 1963 and was again designated as Chairman.

Andrew Downey Orrick Commissioner Orrick was born in San Francisco, Calif., on Octo- ber 18, 1917. He received his B.A. degree from Yale College in 1940 and an LL.B. degree from the University of California (Hast- ings College of Law) in 1947. From 1942 to 1946 he was on active duty with the United States Army and was separated from the service as a captain in the Transportation Corps. After being admitted to practice in California in 1947 he was associated with the law firm of Orrick, Dahlquist, Herrington & Sutcliffe, in San Fran- cisco, until February 1954,when he became Regional Administrator of the San Francisco Regional Office of the Securities and Ex- change Commission. He served in that capacity until May 25, 1955, when he was sworn in as -a member of the Commission for a term of officeexpiring June 5, 1957. On June 12, 1957, he was reappointed as a member of the Commission for a term of officeexpiring June 5, 1962. During the periods from May 27, 1957 to June 6, 1957 and from June 12, 1957 to August 20, 1957 he as designated as Acting Chairman of the Commission.

XLIn XLIV COMMISSIONERS

Harold C. Patterson Commissioner Patterson was born in Newport, R.I., on March 12, 1897, and attended public schools in Massachusetts and Maryland, He attended George 'Washington University after graduating from Randolph Macon Academy. In 1918 he enlisted in the United States Naval Reserve for service in 'Vorld 'Val' I, was commissioned ensign, United States Naval Reserve, in 1918; in June 1919 commissioned ensign United States Navy; and resigned in 1923. Prior to 1954, he had for many years been a partner of Auchincloss, Parker & Redpath, members of the New York Stock Exchange, in Washington, D.C. He resigned from the firm June 1, 1954. He served as a Board Mem- ber of the National Association of Securities Dealers, Inc., and was active over the years in its securities industry policing work. On June 15, 1954, he was appointed Director of the Division of Trading and Exchanges of the Securities and Exchange Commission and served in that capacity until August 5, 1955, when he took office as a member of the Commission for a term of office expiring June 5, l{160.

Earl F. Bastings

Commissioner Hastings was born in Los Angeles, Calif., on April 27, 1908, and resides in Glendale, Ariz. He attended Texas 'Vestern University and the University of Denver. He is a registered professional engineer. During the years 1932 to 1941 he served as a consulting engineer with mining and industrial firms. From 1941 to 1942 he worked with Hawaiian constructors on a military installation on Oahu, T.H. From 1942 to 1947 he served in various engineering and managerial capacities. At that time he became a general partner of the firm, Darlington, Hastings & Thorne, which served as industrial consultants and managers. In 1949 he was appointed Director of Securities, Arizona Corporation Commission, Phoenix, and he served in that capacity until March 1, 1956, when he was appointed a member of the Securities and Exchange Commission for a term of office expiring .Iune 5, 1959. He was reappointed, effective June 5, 1959, as a member of the Commission for a term expiring June 5, 1964.

James C. Sargent Commissioner Sargent was born in New Haven, Conn., on February 26, 1916, and holds degrees of B.A. and LL.B. from the University of Virginia. He was admitted to the New York Bar in 1940 and became associated with the firm of Clark & Baldwin, New York City. From J anuary 1941 to July 1951, except for military service, he was employed as a trial attorney by Consolidated Edison Company of New York. He enlisted in the United States Army Air Force in 1942 and served in this country as an Air Intelligence school instructor COMMISSIONERS XLV and as a combat and special intelligence officer in the Southwest Pacific. He was separated to inactive duty in January 1946 with the rank of captain. In the fall of 1948, he served as an Assistant Attorney General of the State of New York in the Election Frauds Bureau in New York City. From July 1D51 to August 1954 he was employed as law assistant to the Appellate Division, First Depart- ment, Supreme Court, State of New York. He was associated with the firm of Spence & Hotchkiss, New York City, from August 1954 until November 1955. In November 1955 he was appointed Admin- istrator of the Commission's New York Regional Office. He served in that capacity until June 29,1956, when he was sworn in as a member of the Commission for a term of officeexpiring Jnne 5, 1961. He is a Lecturer at Law at the University of Virginia.

PART I CURRENT PROBLEMS BEFORE THE COMMISSION The foreword to this report has described the nature of the laws administered by this Commission, the abuses in the securities markets which led to their enactment and some of the problems encountered in administering these laws during the past quarter century. During the 1959 fiscal year these laws were put to their severest test for during that year the nation witnessed the highest level of activity in the securities markets since the organization of the Commission in 1934. This increase in market activity created complex enforcement problems, required the adoption of new regulatory measures and techniques and imposed heavy administrative burdens upon the staff of the Com- mission. The effects of surging securities markets upon the activities of the Commission are described in detail later in this report. This section briefly sets forth some of the more important problems created by these conditions and the impact of these problems upon the work of the Commission. The following salient statistics reveal the remarkable increase in activity in the securities markets and the tremendous growth of public interest and participation in those markets: The total amount of new securities for which registration statements were filed with the Commission in fiscal 1959 totaled $16.6 billion, only $300 million less than the record amount filed in fiscal 195-8. During fiscal 1959 the Commission processed 1,119 registration statements, the largest number of registration statements ever to be processed in a single year in the history of the Commission. The number of broker-dealers registered with the Commission rose to 4,907, an increase of almost 1,000 registrants since 1951, and the number of representatives registered with the National Association of Securities Dealers, Inc., on .June 30, 1959 was '7'7,91'7,the largest number in its 20-year history. The aggregate market value of all stocks on all stock exchanges, which never exceeded $100 billion between 1933 and 1945, reached $337.'6billion on June 30, 1959, almost three times the market value of all stocks on exchanges during the first decade of the Commission's history. The reported volume of trading on the Kew York Stock Exchange increased from a daily average of 2 million shares in February 1958, to a peak of 4,100,000 shares in October and November 1958, the highest daily average for any month since June 1933. 1 2 SECURITIES AND EXCHANGE COMMISSION The number of holders of shares of publicly owned corporations, according to estimates by the New York Stock Exchange, increased from 6,490,000 in 1952 to 12,500,000 in 1959, the largest number of public shareholders in the nation's history. The number of registered investment companies increased from 367 in 1952to 512 in 1959,and"the total assets of investment companies increased from $6.8 billion in 1952 to $20 billion in 1959. A number of factors appear to be responsible for this increase in activity and interest in the securities markets. Among these are the attractiveness of these markets for financing new corporate enterprises and the expansion of old ones, the emphasis upon capital gains in selling equity securities, the fear of inflation, the growing participation in the market of the large institutional investor and an unfortunate tendency among some persons to use the stock market as a medium for gambling. However, the principal concern of the Commission is not with the cause of this activity but with insuring that the securities markets, however active, are fair, orderly and honest, that prices in these markets express the free interplay of supply and demand and that decisions by investors to buy or sell are made in the light of full disclosure of all material facts. The discharge of these statutory responsibilities by the Commission is complicated in present securities markets by the participation of a large number of inexperienced investors and by broker-dealers and promoters unfamiliar with, or contemptuous of, the ethical and legal obligations owed to investors.

Fraud in the Sale of Securities Active and rising markets have raised the expectations of a substantial segment of the public that it is possible for the unsophisticated investor to reap large and quick profits. In this atmosphere oppor- tunities for fraud and manipulation multiply. Investors become less concerned with the facts about the issuer and the investment charac- teristics of its securities than with the allure of a possible "killing" described to them by an unknown salesman over the telephone. They become more susceptible to baseless tips and rumors, thus facilitating a variety of deceptive and manipulative practices. This atmosphere has attracted into the business of selling securities not only the confidence man, the petty swindler and the corporate plunger, but also an outright criminal element. These persons have seized upon the technique of selling securities to unsuspecting customers through the use of boiler rooms. The term "boiler room" refers to a firm engaged in the sale of securities primarily over the long distance telephone, to persons with whom the firm has had no previous contact and by high pressure methods ordinarily accompanied by gross misrepresentation and other fraudulent devices. Boiler rooms may operate not only from the large financial cen- TWENTY-FIFTH ANNUAL REPORT 3 tel'S but also in other locations around the country. There has been a noticeable increase, for example, in migratory operators moving from state to state. In some promotions several boiler rooms may be used to sell the spurious issue in widely scattered areas around the country, each boiler room being assigned to saturate its particular region. Not infrequently the long distance telephone salesmen for the boiler room establish themselves in hotel rooms, apartments and alleged business offices. In many cases, the security sold by a boiler room is unknown and worthless. To create the appearance of an active over-the-counter market for the security, the promoter will place with numerous brokers and dealers, orders for the purchase and sale of small amounts of the security at prices set by him, or arrange to have others do this, with the result that such brokers and dealers will publish quotations for the security at the prices specified in the orders. The salesmen for the boiler room are now able to refer in their sales "pitch" to a market price for the security which the unsuspecting investor can independently verify. 'When the distribution of the promoter's holdings is completed, however, the orders are withdrawn and the "market" disappears. In his telephone sales pitch, the boiler room salesman usually promises rapid increases in the market price of the security and no risk of loss in its purchase; he may make numerous misrepresentations concerning the issuer and its future prospects; he may urge purchases notwithstanding statements on the part of the customer that he cannot afford to do so; and he may advise the customer, of whose financial situation he knows nothing, to sell valuable securities in order to purchase the spurious boiler room security being offered. The Commission has found that resort to the civil injunction and administrative proceeding, no matter how vigorously employed, is not completely effective in halting the operation of boiler rooms. Pro- moters easily find another worthless issue and either establish or use an existing boiler room as a vehicle for a new fraudulent promotion. The Commission believes that only criminal prosecution will effectively stop those who show such a contemptuous disregard for the law. The Commission has, therefore, placed increased emphasis in its work upon the prosecution of such offenders. In fiscal 1959 the Commission referred to the Department of Justice 45 cases for criminal prosecution, one of the highest number of referrals in the Commis- sion's history, and referrals are continuing at approximately the same rate in fiscal 1960. A large portion of the Commission's staff is now engaged in investi- gating, developing, and assisting in the prosecution of criminal actions. Such activity requires careful and painstaking work usually over a period of many months. Investors must be identified and inter- 529,5~9---4 4 SECURITIES AND EXCHANGE COMMISSION viewed. Books and records of brokers, dealers and others must be examined and analyzed. The information thus obtained then has to be developed in a form permitting its introduction into evidence in legal proceedings. Emphasis upon developing criminal cases means that the Commis- sion with its limited resources has had to utilize staff personnel who would otherwise devote their full attention to other urgent enforcement and regulatory problems. The Commission believes, however, that its policy of pressing for criminal prosecution of violators of the Federal securities laws is the most effective deterrent to fraud in the sale of securities and must be vigorously pursued. In addition to its enforcement program against boiler rooms, the Commission has sought through a broad publicity campaign to alert investors to the risks involved in the purchase of securities from unknown high-pressure salesmen. Posters warning investors of boiler room operators have been widely distributed, spot radio and television announcements carrying similar warnings have 'been prepared to be broadcast in cooperation with The Advertising Council, and brochures listing protective measures that an investor should take before making a purchase have been prepared for wide public distribution. Manipulation in the Securities Markets In April 1959 the Commission issued a statement warning investors to exercise extreme caution and self-restraint when considering the purchase of securities upon the basis of tips and rumors,' Price fluctuations were occurring in certain securities on the exchanges and in the over-the-counter markets without apparent economic reason. Also there appeared to be a considerable amount of speculation on the part of public investors. These conditions facilitated the manipulation of securities prices and boded eventual losses to investors. Officials of the leading exchanges also joined in warning investors, and brokerage houses urged their customers to exercise caution in purchasing unknown securities. In volatile markets where prices are susceptible to swift and wide changes on the basis of rumors, manipulation is facilitated and the task of enforcement becomes increasingly difficult. The Commission has therefore had to place greater emphasis upon the detection and prevention of manipulation and a substantial number of investigations are now in progress. Some of these investigations have resulted in indictments and it is anticipated that certain other cases now under investigation will also lead to criminal prosecution.

Exemptions From Registration and Prefiling Publicity One of the areas of evasion of the registration and prospectus requirements of the Securities Act of 1933 is the claiming of exemp-

'~ecllr1ties Exchange Act Rell'IlsP No. 5927 (Apr. 7,1959). TWENTY-FIFTH ANNUAL REPORT 5 tions which, in fact, are not available. The attempt to use these exemptions to- evade registration requirements usually occurs where the issue, or the sales procedure to be employed, would not stand the light of the full disclosure requirements of registration. In order to narrow this area of evasion, the Commission has consistently sought through its participation in litigation involving claimed exemptions, through its own decisions and through its rule-making power, to define and clarify the proper limits of certain of these exemptions. One of the significant developments in this area has been the recent amendment by the Commission of Rule 133. Under Rule 133, which embodies an interpretation of long standing, the issue of securities in connection with certain types of corporate mergers, consolidations, reclassifications of securities and acquisitions of corporate assets is not deemed to constitute a "sale" of securities to stockholders of corporate parties to the transactions. This rule has the effect of exempting these transactions from the registration requirements, but not from the anti-fraud provisions, of the Securities Act. The rule provides no exemption for subsequent distribution of such securities. Because of the substantial number of transactions ostensibly effected in reliance upon the rule but which involved violation of the registration requirements, the Commission amended Rule 133 to restate the purpose and effect of that rule and to clarify its application and limitations. In addition, the Commission adopted a new registration form to provide an expeditious registration procedure for securities issued in a transaction within Rule 133 where such registration is required and where the issuer has solicited proxies under the Commission's proxy rule with respect to such transaction." In three significant cases the courts have further delineated the boundaries of exemptions from the registration requirements of the Securities Act. A frequently used device for evasion has been the abuse of the intrastate exemption under section 3 (a) (11) of the act. The issuer may attempt to use a resident of the state as a nom- inee for non-resident beneficial owners or the alleged sales to residents may he merely a step in a planned interstate distribution. In S.E.O. v, Hillsborough Investment Corporation, et al.3 the Court upheld the limitation on the scope of that exemption, long viewed as applicable by the Commission, that a single sale to a non-resident, directly or indirectly, destroys the intrastate exemption for the entire issue, including the securities sold only to residents. Various devices have been used in an attempt to avoid registration on the claim that a distribution is within the "private offering" exemption under section 4(1) of the act. The Commission and the courts have consistently rejected a numerical test as a conclusive basis

• Securities Act Release No. 4115 (July 6, 1959). • D. New Hampshire No. 1965 (Dec. 11, 1958>. 6 SECURITIES AND EXCHANGE COMMISSION for determining the availability of that exemption. In GiUigan, Will & 00. et al. v, B.E.O.,' the Court of Appeals for the Second Circuit further held that even if a numerical test did exist, persons claiming the exemption would have the burden of establishing a reasonable and bona fide belief that the total number of individuals involved in the placement would remain within that limit. The Court also concluded that the private offering exemption was not available to a dealer who assertedly acquired securities for "investment" where the dealer spec- ulatively purchased unregistered securities in the hope that the financially weak issuer had "turned the corner" and then unloaded the securities on an unadvised public when he later determined that their purchase was an unsound investment. The third case dealt with the exemption under section 4(1) of the act for trading transactions-s-an exemption frequently claimed by boiler rooms. In B.E.O. v. Oulpepper et al.,5 the Court of Appeals for the Second Circuit held that a broker-dealer who engages in steps necessary to consummate a public distribution is an "underwriter" within the meaning of the act even though the broker-dealer has no privity with the issuer or a control group. Another area of evasion of the registration requirements is the use of publicity with respect to an issuer or its securities prior to the filing of a registration statement. In two cases coming before it last year, the Commission undertook to set forth the precise limitations on prefiling publicity under section 5 (c) of the Securities Act of 1933.6 In these opinions, the Commission pointed out that the statutory procedure for disseminating information about the issue prior to the time of sale is exclusive and that it "cannot be nullified by recourse to public relations techniques to set in motion or further the machinery of distribution before the statutory disclosures have been made and upon the basis of whatever information the distributor deems it expe- dient to supply." 1

Regulation of the Exchanges During the fiscal year 1959,the Commission took a more active regulatory role with respect to exchange activities. A Commission investigation found, for example, that on the American Stock Exchange floor trading activities were accentuating market swings particularly in issues susceptible to extreme price fluctuations because of a small floating supply. At the suggestion of the Commission that Exchange adopted a rule designed to prevent floor traders from making purchases of stock at successively higher prices and to restrict the impact

• C.A. 2 No. 25111 (;rune 3,1959). G C.A. 2 No. 25242 (Sept. 10.19119). • OarJ M. Loeb, Rhoades cE 00. and Dominick cE Dominick, Securities Exchange Act Release No. 5810 (Feb. 9, 1959) ; First Maine corporotton, Securities Exchange Act Release No. 5898 (Mar. 2, 1959). q OarJ M. Loeb, Rhoade. March 1959 reduced minimum commissions on small value transactions and instituted a broad study in consultation with the staff of the Com- mission into the costs of effecting exchange transactions,"

Regulation of the Over-the-Counter Markets The increase in new offerings traded over-the-counter and the phe- nomenal growth in the number of broker-dealers registered with the Commission and of representatives registered with the National As- sociation of Securities Dealers, Inc., evidence the growing interest in over-the-counter securities. The Commission is seeking to ascertain what changes, if any, may be occurring in the distribution and trading practices of the over-the-counter market as a result of this growth. In recent securities markets, there has been a strong underlying public demand for so-called "glamor" stocks. These securities often sell at a substantial premium on the first day of trading. Most of these issues are low-priced, have no public market prior to the offering and often involve companies in the electronics, missile and related defense fields. In some instances, promoters have changed the name of the company and its operating divisions to suggest some connection with these activities. The Commission, after the end of the fiscal year, instituted a broad inquiry into the genesis and distribution of some of these issues to determine, among other things, whether some of these issues have been generated primarily to enrich the promoters, underwriters and others ; whether artificial restraints have been imposed upon the floating supply of these issues in order to raise the market price; and whether certain practices have developed in connection with the distribution and marketing arrangements for these issues which violate provisions of the federal securities laws."

• Securities Exchange Act Release No. 5981 (June 5. 1959). U Securities Exchange Act Release No. 5889 (Feb. 20,1959). 10 During the course of the Inquiry the Commission. on October 23, 1959. Issued Securi- ties Act Release No. 4150 eallmg to the attentron of the financial conununrty certain practices disclosed by the Inquiry which. in view of its staff, may involve violations of federal securities laws. 8 SECURITIES AND EXCHANGE COMMISSION

Inspection of Investment Companies The rise in the number of new investment companies and the tremendous growth of the industry led the Commission several years ago to develop a program for the routine inspection of investment companies. Since there has been no additional staff available for this purpose and in view of the increased workload of regular administrative business, the Commission has been able to conduct inspections only on a pilot basis for the past few years. It is hoped, however, that additional personnel will be made available so that the inspection program will move forward more rapidly in the future and that a realistic cycle of inspections can be instituted and maintained. The inspections made by the Commission to date, limited in number though they have been, have shown the urgent need for this method of assuring compliance with the Investment Company Act. In some cases failures to comply with the act or improper practices were discovered and corrective action requested and taken. In one case, the violations were serious in nature and resulted in a stop-order proceeding under the Securities Act and the issuance of an opinion and stop-order. Apart from bringing to light improprieties or fraudulent conduct, the institution of routine inspections should prove to be particularly beneficial to the newly organized or smaller investment company in complying with the requirements of the Investment Com- pany Act.

Other Factors in the Securities Markets Under the statutes which it administers, the Commission has the duty to conduct inquiries into the securities markets not only for the purpose of enforcement but also to ascertain facts to aid in the adoption of rules and regulations and for making appropriate legislative recommendations. I In dynamic and changing markets, the Commission must continually reassess the statutes and the rules and regulations which it administers in light of new knowledge. For example, the Commission has instituted an inquiry into the problems created by the growth in the size of investment companies for the purpose of determining whether the increased size of investment companies has created problems requiring remedial Iegislation,"' An- other inquiry of somewhat less importance but of interest to the public is one into the "put" and "call" market. This little known and little explored area of the securities market is now being studied by the Commission to ascertain, among other things, who writes these options, how they are marketed and who purchases them.

H See 23d Annual Report, p. 159. PART II LEGISLATIVE ACTIVITIES

Statutory An1enchnents Proposed by the Commission Proposals to amend 87 provisions of the Federal securities laws were submitted by the Commission to the 85th Congress in July and August 1957. These proposals were introduced in both the Senate and the House of Representatives, and the bills were referred to committee, but no action was taken on the bills during the 85th Congress.' During the latter part of 1958 the Commission reexamined these recommendations for legislation and made some modifications, deleting certain proposals and adding others. The modified proposals, which would amend the Securities Act of 1933,The Securities Exchange Act of 1934, the Trust Indenture Act of 1939, the Investment Company Act of 1940 and the Investment Advisers Act of 1940, were then submitted in the 86th Congress to the Committee on Banking and Cur- rency, United States Senate, and the Committee on Interstate and Foreign Commerce, House of Representatives. These Committees have the duty of exercising watchfulness over the execution of the securities laws under section 136 of the Legislative Reorganization Act of 1946. The Commission's proposals were introduced in the Senate by Senator A. Willis Robertson, Chairman of the Committee on Bank- ing and Currency, for himself and for Senator Homer E. Capehart, as S. 1178, S. 1179, S. 1180, S. 1181, and S. 1182. In the House of Representatives, Representative Oren Harris, Chairman of the Com- mittee on Interstate and Foreign Commerce, introduced companion bills, H.R. 5001, H.R. 2480, H.R. 5002, H.R. 2481, and H.R. 2482.2 Basically the Commission's proposals, the more significant of which are briefly described below, are intended to strengthen the safeguards and protections afforded the public by tightening jurisdictional provisions, correcting certain inadequacies revealed through administrative experience and facilitating criminal prosecutions and other enforcement activities. .The proposed amendments to the Securities Act of 1933 would clarify the jurisdictional basis of the civil liability provisions of the

1For a detailed discussion of the Commission's legislative program durIng the 85th Congress, see pages 10--12 of the Commission's 23d Annual Report and page 9 of the Com- mission's 24th Annual Report. • H.R. 5001 and H.R. 5002, proposing amendments to the Securities Act of 1933 and the Trnst Indenture Act of 1939, respectively, are substitutes for H.R. 2488 and H.R. 2483, respectively, which included earlier recommendations that the Commission decided to with. draw on further consideration. 9 10 SECURITIES AND EXCHANGE COMMISSION statute; extend existing civil liabilities and provide criminal liability with respect to documents filed with the Commission pursuant to Commission rules in connection with exempt offerings; increase from $300,000 to $500,000 the size of offerings which may be exempted from registration under section 3 (b) of the statute; and make it clear that a showing of past violations is a sufficient basis for injunctive relief and that aiders and abettors may be responsible in civil and administrative proceedings," The proposed amendments to the Securities Exchange Act of 1934 would make comparable changes with respect to injunctive relief and liability of aiders and abettors. In addition, changes proposed in that statute would make it a violation or the act to embezzle monies or securities entrusted to the care of an exchange member or a registered broker or dealer; clarify and strengthen the statutory provisions relating to manipulation and to the financial responsibility of brokers and dealers; authorize the Commission by rule to regulate the borrow- ing, holding or lending of customers' securities by a broker or dealer; make it clear that attempts to purchase or sen securities are covered by the antifraud provisions of the statute; revise the provisions relating to broker and dealer registration with respect to (a) the basis on which action for denial or revocation may be taken, (b) the sanctions which may be imposed by the Commission, (c) the conditions under which an application for registration may be withdrawn, and (d) the postponement of the effectiveness of an application for registration; authorize the Commission to suspend or withdraw the registration of a securities exchange when the exchange has ceased to meet the requirements of its original registration; clarify the Commission's authority to suspend a security from exchange trading where there has been a failure to comply with the act and where otherwise necessary in the public interest; prohibit trading in the over-the-counter market for limited periods where the public interest and the protection of investors so requires; provide that an insolvent broker or dealer may be adjudicated a bankrupt in an injunctive proceeding instituted by the Commission; and provide for a monetary :forfeiture for each day that certain reports required under the act are delinquent. The changes proposed in the Trust Indenture act of 1939 are designed primarily to conform this statute to recommendations made under the Securities Act. The proposed amendments to the Investment Company Act of 1940 would require an investment company to state as matters o:f fundamental policy, which generally could not be changed without the consent of its stockholders, the extent to which it intends to invest in particular types of securities and such other basic investment objectives as it represents it will emphasize; strengthen the provi-

• See p. 13, infra. TWENTY-FIFTH ANNUAL REPORT 11 sions requiring It minimum number of independent or nonmanagement directors; limit the extent to which a face-amount investment company can include preferred and common stock in its "qualified investments" ; make clear the application of the statute to an "advisory board"; and modify the exception for companies subject to regulation by the Interstate Commerce Commission and clarify the exceptions applicable to companies engaged in banking, insurance, small loan, factoring, discount or real estate businesses. The proposed changes in the Investment Advisers Act of 1940would expand the basis for disqualification of a registrant because of prior misconduct; authorize the Commission by rule to require the keeping of books and records and the filing of reports; permit periodic examinations of a registrant's books and records; empower the Commission by rule to define and prescribe means reasonably designed to prevent fraudulent practices; extend criminal liability for willful violation of a rule or order of the Commission; and revise the provisions relating to the postponement of effectiveness and the withdrawal of applications for registration. Many minor amendments of these statutes are also proposed. Hearings on the bills were held before the Subcommittee on Se- curities of the Banking and Currency Committee of the Senate, on June 15, 16, 17, 18, 23, 24, and 25, 1959, and before the Subcommittee on Commerce and Finance of the Committee on Interstate and For- eign Commerce of the House of Representatives on June 3, July 8 and 9 and August 4, 1959. The Commission and staff members presented testimony at the beginning of the hearings before each committee, and again after interested industry representatives and others had been heard. As a result of conferences with industry representatives, similar to those held in connection with the formulation of the legislative recommendations in the 85th Congress, and as a consequence of comments and suggestions made during the course of the hearings by members of Congress and witnesses, the Commission made certain modifications in its proposals. These modifications did not represent abandonment of the original proposals, but essentially constituted clarification and statutory specification of matters in conformity with the original intention of the Commission. The Commission also advised the Committees that it had no objection to three amendments to the Investment Advisers Act proposed during the hearings by certain investment advisers and their representatives. One would modify the definition of the term "control" in the statute, the second would grant the Commission authority to provide exemptions from the statute, and the third would modify the conditions under which an investment adviser may call himself an "investment counsel." 12 SECURITIES AND EXCHAlTGE COMMISSION

Other Legislative Proposals Various other bills to amend the securities laws were introduced, and the Commission submitted comments to the committees of Con- gress. These bills, except for H.R. 4025 and H.R. 5543, renewed proposals made in previous sessions of the Congress. No hearings were held on the bills, which are discussed briefly below. I. Proposal to Increase Registration Fees.-On January 28, 1959, Senator Homer E. Capehart for himself and for Senator Frank J. Lausche introduced S. 737, and on April 13, .1959, Representative John B. Bennett introduced an identical bill, H.R. 6294. Both bills would amend section 31 of the Securities Exchange Act of 1934,which now provides an annual fee for registration of exchanges of one five- hundredths of 1 percent of the aggregate dollar amount of stock exchange transactions, equal to 2 cents per $1,000. Under the bills this exchange registration fee would be increased to a rate of 5 cents per $1,000 and there would be a similar registration fee for brokers and dealers of 5 cents per $1,000 on transactions effected otherwise than on a national securities exchange," 2. Disclosure of Beneficial Ownership of Registered Securities in Election Contests.-On January 9, 1958, Senator Homer E. Capehart introduced S. 132, a bill directed to identifying beneficial owners of securities in proxy contests. The bill would add to section 14 of the Securities Exchange Act of 1934 a provision making it unlawful for any person to give or to attempt to give a proxy to vote a registered security at any annual or special meeting for the election or removal of directors, with respect to which proxies are solicited by opposing nominees, unless (1) such person is the beneficial owner of the security, or (2) the name and last known address of the beneficial owner appears on the proxy. In addition, the bill would make it unlawful for any person knowingly to exercise or attempt to exercise any proxy in violation of this provision," 3. Reporting Requirement of Beneficial Owners of Registered Securities and Officers and Directors of Issuers Thereofv-c-On Jan- uary 28, 1959, Senator Homer E. Capehart introduced S. 736, which would amend section 16 of the Securities Exchange Act of 1934 to require every beneficial owner of more than 5 percent (instead of 10 percent as now provided) of any class of any equity security which is registered on a national securities exchange to file reports of his securities holdings and transactions with the Commission,"

• See the Commission's 23d Annual Report, pp. 12-13, for a discussion of similar proposals in the 85th Congress, • See the Commlsalorr's 2;),. Annual RPJlort. JI, 16, for dis.cussion of a ~imiJar proposal in the 85th Congress. • See the Commis-ion'" 23d Annual Report, pp. 15-16, for a discussion of a similar proposal in the 85th ('ongTP". TWENTY -FIFTH ANNUAL REPORT 13

H.R. 1028 was introduced by Representative Abraham Multer on January 7,1959. This bill would amend section 16(a) of the Securi- ties Exchange Act of 1934to require officersand directors of any issuer of registered securities to report periodically the extent to which, and the purposes for which, their holdings of such securities are pledged. 4. Proposals Relating to Exempt Offerings and Civil Liabilities in Connection Therewith.- Two bills designed to impose additional civil liabilities in connection with exempt offerings under section 3(b) of the Securities Act of 1933 were introduced in the first session of the 86th Congress. On January 7, 1959, Representative Leonard Farb- stein introduced H.R. 93, a bill which would augment existing provisions for civil liabilities by providing for specific liability on the part of those responsible for untrue statements of material facts or omissions to state material facts in any statements or document filed with the Commission in connection with an exempt offering under section 3 (b) . This bill is identical with the proposal embodied in the Commission's legislative program/ except that the Commission proposal also encompasses false filings pursuant to section 3(c) of the statute. On February 17, 1959, Representative .Iohn R. Bennett introduced H.R. 4568, a bill which would raise the exemptive ceiling under section 3(b) from $300,000 to $500,000 and would make applicable to such exempt offerings the strict civil liabilities now pertaining solely to registered offerings. 8 5. Repeal of Exemption for Intrastate Offering.-H.R. 884, introduced by Representative Abraham Multer of New York, would remove the exemption provided by section 3(a) (11) of the Securities Act for a security offering confined to the residents of the state within which the issuer is both incorporated and doing business. The Com- mission has not submitted its views on this proposal. 6. Reduced Sales Load for Certain Purchases of Investment Company Shares.-As a consequence of the Commission's promulgation on December 2,1958, of rule 22d-1 under the Investment Com- pany Act,9 Representative Edward W. Hiestand introduced H.R. 4025 and H.R. 5543, both of which would amend section 22( d) of the statute to authorize quantity purchases of investment company shares by certain retirement associations at reduced sales loads. Prior to the adoption of rule 22d-1 several associations of individuals, which would not be exempted under the provisions of the rule, had received the benefit of a smaller sales load in connection with certain quantity

; See p, 10, RlIp'-U 8 H.R. 93 and H.R. 4568, Insofar as they relate to civil lIablilties, are Identical with H.R. 173 and H.R. 4744, 85th Congress. respectively, and H.R. 11308 and H.R. 9319, 84th Congress, respectively. The background of the latter bllls is discussed In the 22d Annual Report of the Commission, pp. 11-12. • See p. 23, infra. 14 SECURITIES AND EXCHANGE COMMISSION purchases and had been advised by the Commission's staff that it would not recommend that any action be taken in respect of such purchases. Both H.R. 4025 and H.R. 5543 are designed to restore the earlier interpretation. A substantial amount of time was directed to matters pertaining to other legislative proposals referred to the Commission for comment and to congressional inquiries. During the fiscal year 1959 a total of 76 legislative proposals were analyzed. In comparison, 58 proposals were analyzed during fiscal 1958 and 33 during fiscal 1957. In addition, numerous congressional inquiries relating to matters other than specific legislative proposals were received and answered. Congressional Hearings In addition to the hearings in connection with the Commission's legislative program discussed above, the Commission presented to the House Committee on Interstate and Foreign Commerce a general discussion of the Commission's activities and the particular problems currently facing the Commission. The Commission appeared before the Subcommittee on Legislative Oversight of the House Committee on Interstate and Foreign Com- merce in September and November 1958 and again in June 1959.10 The Commission also appeared on May 13, 1959, before the House Select Committee on Small Business to testify concerning the Com- mission's role in administering the laws governing the operation of small business investment companies.

'0 See the Commission's 24th Annual Report, pp. 12-13. PART III REVISION OF RULES, REGULATIONS AND FORMS

The Commission made a number of changes during the 1959 fiscal year in its rules, regulations and forms under the various statutes administered by it. Other changes which the Commission published in preliminary form for the purpose of obtaining public comments thereon were pending at the end of the fiscal year. The changes made during the fiscal year and those pending at the end of the year are described below.' Changing conditions, methods and procedures in business and in the financial practices of business make it necessary for the Com- mission to maintain a continuing review of its rules, regulations and forms. Certain members of its staff are assigned to this task. Changes are also suggested, from time to time, by other members of the staff engaged in the examination of material filed with the Com- mission, and by persons outside of the Commission who are subject to the Commission's requirements or who have occasion to work with those requirements in a professional capacity such as underwriters, attorneys, accountants, and other representatives. With relatively few exceptions, provided for by the Administrative Procedure Act, proposed changes in rules, regulations and forms are announced to the public and interested persons are invited to submit their views and comments thereon. These views and comments are carefully reviewed by the staff and by the Commission and are very helpful in connection with the Commission's consideration of proposed changes. THE SECURITIES ACT OF 1933

Amendment of Rule 133 Shortly after the end of the fiscal year the Commission adopted certain amendments to rule 133.2 The modification of this rule has been under consideration for some time and has been mentioned in

1The rules and regulations of the Commission are published in the Code of Federal RegUlations, the rules adopted under the varrous Acts adnnnfsterad by the Commtsston appearing in the following parts of title 17 of that Code: Securities Act of 1933, part 230. Securities Exchange Act of 1934, part 240. Public UtilIty Holding Company Act of 1935, part 250. Trust Indenture Act of 1939, part 260. Investment Company Act of 1940, part 270. Investment Advisers Act of 1940, part 275. • Securities Act Release No. 4115 (July 16, 1959). 15 16 SECUtUT1ES ANt> EXC:ElANGE COMMISSION previous annual reports of the Commission," Rule 133 provides in general that for the purpose of determining the application of the registration and prospectus provisions of the Securities Act, no "offer" or "sale" shall be deemed to be involved so far as stockholders of a corporation are concerned where, pursuant to the provisions of a statute or the certificate of incorporation, there is submitted to a vote of such stockholders a plan involving a statutory merger, consolidation, reclassification of securities or transfer of assets of the corporation in consideration of the issuance of securities of another corporation. The general purpose of the amendments to the rule is to make it clear that under certain circumstances securities distributed by persons receiving them in connection with such transactions may be required to be registered under the act. For example, the amended rule provides that where one company is merged into another company, a stockholder in control of the merged company who receives securities of the surviving company with a view to making a distribution of such securities to the public shall be deemed to be an underwriter and registration of the securities is required before the distribution can be made. However, registration is not required with respect to securities sold in certain brokers' transactions as defined in the rule. In connection with the amendment of rule 133, a new Form S-14 was adopted :for the registration of certain securities issued in a rule 133 transaction. TIllS form is discussed below at p. 20. Amendment of Rule 135 This rule, as originally adopted, provided that a notice or other communication sent by an issuer to its security holders to inform them of the proposed issuance of rights to subscribe to additional securities would not be deemed to offer any security issue for sale if such notice was sent in conformity with the rule. The principal requirements were that the notice be sent within 60 days prior to the record date, state that the offering will be made only by the prospectus and in addition contain only certain specified information necessary to inform the security holders of the forthcoming offering. The purpose of the rule was to enable an issuer to furnish certain factual information to its security holders in advance of making the actual offering. The rule was amended during the fiscal year to permit the sending of similar notices where an issuer proposes to offer securities to its own security holders, or to the security holders of another issuer in exchange for securities presently held by them, and also where the issuer proposes to make an offering of securities to its employees or to the employees of an affiliate."

3 23d Annual Report, p. 20; 24th Annual Report, p. 14. • Securities Act Release No. 4099 (June 16, 1959). TWENTY-FIFTH A...~AL REPORT 17

Proposed Rule Changes Relating to Assessable Stock During the 1958 fiscal year the Commission invited public coni- ments on a proposed new rule 136 and certain proposed amendments to rule 140 with respect to assessable stock and the levying of assessments thereon. 5 The general purpose of these proposals was to make it clear that the Securities Act of 1933 applies to the levying of assessments on assessable stock to the same extent that it applies to other securities. Action on these proposals was deferred pending further study of the matter. During the 1959 fiscal year the Commission published revised proposals with respect to the rules referred to and also a proposed exemption Regulation F,6 which were adopted shortly after the close ofthe fiscal year," The new Regulation F, which provides an exemption from registration under the act for assessments and delinquent assessment sales in amounts not exceeding $300,000in anyone year, requires the filing of a simple notification giving brief information with respect to the issuer, its management, principal security holders, recent and proposed assessments and other security issues. This notification could be prepared in a relatively short time by any officer of the company who is familiar with the company's affairs and there is no fee or charge for its filing. The filing may be made by mailing the notification to the appropriate regional officeof the Commission. The only information which a company is required to send to its stockholders, or otherwise publish, is a statement of the purposes for which the proceeds from the assessment are proposed to be used. This information may be included in the notice of assessment given by mail or otherwise published as required by State law. If the issuer should employ any other sales literature in connection with the assessment, copies of such literature must be filed with the Commission. Proposed Rule 144 During the fiscal year the Commission invited public comments on a proposed rule relating to certain transactions by the International Bank for Reconstruction and Development. The proposed rule, to be designated rule 144, would have defined the term "transactions by an issuer not involving any public offering," in section 4(1) of the act, to include certain activities of the Bank. After the close of the fiscal year, the Commission announced that it had discontinued consideration of the proposed rule since there appeared to be no present need for it.s

• See 24th Annual Report, p. 16. • Securities Act Release No. 4040 (Mar. 4,19(9). • Secnritles Act Release No. 4121 (Jnly 30, 19(9). 8 Securities Act Release No. 4028 (Feb. 10, 19(9) and 41t31 (Nov. 30. 19(9). 18 SECURITIES AND EXCHANGE COMMISSION The proposed rule would also define the term "distribution" in section 2(11) of the act as not applying to such transactions by the bank or by any dealer who is acting on an agency basis pursuant to a written contract with the bank. The matter was still under consideration at the end of the fiscal year. Adoption of Rule 151 TIlls rule defines the term "public offering" to exclude under certain conditions the offering of stock of small business investment companies to small business concerns pursuant to the requirements of the Small Business Investment Act of 1958.9 Under section 304(d) of the Small Business Investment Act, whenever a small business investment company provides capital to a small business concern through the purchase of the latter's convertible debenture bonds, the small business concern is required to purchase stock of the small business investment company in an amount equal to not less than 2 percent nor more than 5 percent of the capital so provided, in accordance with regulations of the Small Business Administration. Those regulations specify certain minimum amounts of such stock which a small business concern is required to purchase depending upon the amount of capital which it obtains from a small business investment company through the issuance of convertible debenture bonds. The new rule provides that a public offering of capital stock of a small business investment company is not deemed to be involved where the offer or sale is made in connection with the purchase of debenture bonds from a small business concern pursuant to the requirements of the Small Business Investment Act, the amount of stock involved is the minimum required by that act and the regulations thereunder in connection with the particular transaction, and the stock is acquired by the small business concern for investment and not with a view to its distribution. Amendment of Rule 434A This rule permits the use of summary prospectuses which omit in part or summarize information set forth in the more complete prospectus required to be used in connection with the offering and sale of securities. Summary prospectuses may be used in the form of newspaper advertisements, circulars, etc. as a screening device to lo- cate persons interested in receiving a copy of the complete prospectus. The rule was amended during the fiscal year to permit the use of summary prospectuses by a larger group of issuers." The rule as previously in effect permitted the use of summary prospectuses only by

• See Securities Act Release No. 4033 (Feb. 13. 1959). 10 Securities Act Release No. 4094, (Juae. 11,1959,),. TWENTY-FIFTH ANNUAL REPORT 19 registrants which file reports under sections 13 and 15(d) of the Se- curities Exchange Act of 1934. The amended rule permits the use of summary prospectuses by certain other registrants which do not file such -reports but which meet certain standards as to size, earnings, and the publication of reports. Adoption of Regulation E The Commission during the fiscal year adopted a new regulation, designated Regulation E, which provides a conditional exemption from registration under the Securities Act of 1933 for securities of small business investment companies which are licensed under the Small Business Investment Act of 1958 or which have received the preliminary approval of the Small Business Administration and have been notified by the Administration that they may submit an application for such a license." The new regulation, which exempts issues not in excess of $300,000 from registration under the act, was adopted pursuant to the new section 3(c) which was added to the Securities Act by section 307(a) of the Small Business Investment Act. Regulation E is similar in many respects to the general exemption for certain securities, other than those of investment companies, provided by Regulation A. It requires the filing of a notification with the Commission and, except in the case of offerings not in excess of $50,000, the filing and use of an offering circular containing certain specified information. In general, information is required in the offering circular as to the business and investment policies of the issuer, its management and its financial condition. The financial statements required must be prepared in accordance with generally accepted accounting principles and practices but need not be certified by independent public accountants. Provision is made for the suspension of an exemption in a particular case if the Commission finds that any of the terms and conditions of the regulation have not been met or complied with. Adoption of Form N-S During the fiscal year the Commission adopted a new form, designated Form N-5, for the registration under the Securities Act of 1933 of securities to be issued by small business investment companies which are licensed under the Small Business Investment Act of 1958 01' which have received the preliminary approval of the Small Business Administration and have been notified by the Administration that they may submit an application for such a license." This form is also to be used for the registration statements of such companies filed pursuant to section 8(b) of the Investment Company Act of 1940 ..

U Securities Act Release No. 4005 (Dec. 17, 1958). ~ Securities Act Release No. 4,004 (Dec. 17, 1l,l58). 5~~5:l3-5~ 20 SECURITIES AND EXCHANGE COMMISSION

The new form is a combination form which enables It small business investment company to register under the Investment Company Act of 1940 and at the same time to register securities for a public offering under the Securities Act of 1933 by means of a single registration statement. If a company has already registered under the Investment Company Act, the form may be used for subsequent registration under the Securities Act. If a company desires to register under the Invest- ment Company Act prior to registering securities under the Securities Act, the form may be used for this purpose also. Adoption of Form S-14 In connection with the adoption of amendments to rule 133/3 the Commission also adopted a new Form S-14.H This form is designed to provide a simplified registration procedure for securities issued in a rule 133 transaction where such registration is required and where the issuer has solicited proxies under the Commission's proxy rules with respect to such transaction. The form provides that the prospectus may consist chiefly of the information set forth in the proxy statement supplemented by the necessary underwriting and distribution data and pertinent information regarding developments .in the registrant's business subsequent to the rule 133 transaction.

THE SECURITIES EXCHANGE ACF OF 1934

Adoption of Rule 16b-8 The Commission during the fiscal year adopted a new rule under section 16(b) of the Securities Exchange Act of 1934.15 This section of the act provides that profits obtained by certain holders of the stock of a listed company from purchases and sales, or sales and purchases, of any equity securities of such company (other than exempt securities) within any 6-month period may be recovered by the company or by any security holder on its behalf. The new rule, designated rule 16b-8, exempts from section 16(b) under certain conditions the receipt from an issuer of shares of stock having general voting power and registered on a national securities exchange upon the surrender of an equal number of shares of stock of the same issuer which do not have such voting power and are not so registered, where the transaction is effected pursuant to the provisions of the issuer's certificate of incorporation for the purpose of making an immediate sale of the shares so received. The conditions of the rule, briefly summarized, are that the person so receiving such shares is not an officer or director of the issuer or a person who was a beneficial owner immediately prior to the transaction of more than 10 percent of a registered equity security of the

13 Supra, p. 15. U SecuritIes Act Release No. 4115 (July 16, 1959). ;u;,Serurlties Exchange Act Release No. 5921 (Mar. 30, 1959).

(" TWENTY-FIFTH ANNUAL REPORT 21 issuer; that the shares surrendered and the shares received are freely transferable and, entitle the holders thereof to participate equally per share in all distributions of earnings and assets; that the shares received must be registered upon issuance in the name of a person or persons other than the holder of the shares surrendered and may be required to be issued as of right only in connection with the public offering, sale, and distribution or gift of such shares; and that no shares of the class surrendered or any other shares of the class received are acquired by the person effecting the transaction within six months before or after the date of the transaction. Amendment of Form 8-K The Commission during the fiscal year adopted certain amendments to Form 8-K, which is the form prescribed for current reports filed pursuant to sections 13 and 15 (d) of the Securities Exchange Act of 1934.16 The amendments relate to the item of the form which requires information in regard to matters submitted to a vote of security holders, either at a meeting of such security holders or otherwise. The purpose of the amendments was to clarify the item with respect to the circumstances under which the information specified in the item is required to be furnished. The Commission also invited public comments on certain other proposed amendments to Form 8-K designed to bring to the attention of investors promptly information regarding material changes affecting the company or its affairs where it appears that the changes are of such importance that they should be reported promptly and not deferred, to the end of the fiscal year," The amendments relate to matters such as the pledging of securities of the issuer or its affiliates, changes in the board of directors otherwise than by stockholder action, the acquisition or disposition of significant amounts of assets and transactions with insiders. Shortly after the end of the fiscal year the time for submitting comments on these proposed changes was extended to August 15, 1959.1s

THE INVESTMENT COMPANY ACT OF 1940

Adoption of Rule 3e-l In connection with the adoption of rule 151 under the Securities Act,19the Commission also adopted a new rule 3e-1 under the Invest- ment Company Act of 1940 defining the term "public offering", for the purposes of section 3(c) (1) of that act, to exclude under certain conditions, the offering of stock of small business investment companies to small business concerns pursuant to the requirements of the

! ,. Securities Exchange Act Release No, 5734 (July 16, 1958). 17 Securities Exchange Act Release No. 6979 (June 9, 1959). 18 Securities Exchange Act Release No. 6018 (July 14,1959). " Supra, p. 18. 22 SECURITIES AND EXCHANGE COMMISSION

Small Business Investment Act of 1958.20 Section 3(c) (1) of the Investment Company Act provides that any issuer whose outstanding securities (other than short term paper) are beneficially owned by not more than 100 persons and which is not making and does not presently propose to make a public offering of its securities is not an investment company within the meaning of the act. Since the requirements of the Small Business Investment Act and the rules and regulations thereunder require that a small business investment company in its role as a provider of capital continually stand ready to sell its stock to small business concerns, a continuous disposition of stock by such investment companies may possibly be interpreted to be a "public offering." The Commission, therefore, adopted rule 3c-1 to effectuate the purposes and objectives of the Small Business Invest- ment Act without adversely affecting the public investor interest. The terms and conditions of the rule 3c-1 definition are substantially the same as those contained in rule 151. Adoption of Rule IOf-3-Permitting Acquisition of Securities of Underwriting Syndicates To alleviate the problems and administrative burdens involved in processing individual applications for relief pursuant to section 10(f} of the act, the Commission, in December 1958, adopted rule 10£-3 exempting certain limited acquisitions of securities by registered investment companies during the existence of an underwriting syndicate where such acquisitions are not made from affiliated underwriters," Notice of the proposed rule was issued in July 195822 and the comments received were unanimously in favor of the adoption of the rule, although a number of suggestions for its modification were included. Section 10(f) of the act provides that an investment company, unless exempted by rule, regulation or order, is prohibited from purchasing a security during the existence of an underwriting syndicate, if any of the principal underwriters are affiliated persons of the investment company. Before the adoption of rule 10f-3, investment companies were required in all such cases to obtain an exemptive ruling by the Commission prior to the purchase of such securities or to purchase them conditioned on obtaining an exemptive order within such periods of time as a particular underwriter might be willing to ~rant even though extending beyond the date of the public offering. The new rule permits the investment company to make such purchases under certain conditions without the necessity of obtaining an order of exemption. Through its experience in considering the many applications for

eoInvestment Company>Act Release No, 2828 (Feb. 13,1959). "Investment Compn ny Act Release No. 2797 (Dec. 2, 1958). "' Investment Company Act Release No. 2744. TWENTY-FIFTH ANNUAL REPORT 23 relief filed pursuant to section 10(f) over the years, the Commission was in a position to determine what conditions and safeguards should be imposed in such situations to insure the protection of investors. These include limitations with respect to the consideration paid, as related both to the amount of the offering and the assets of the investment company. In addition, underwriters' commissions may not exceed stated amounts, no purchase may be made from an affiliated underwriter, and the offering must be effectively registered under the Securities Act of 1933. These conditions are designed to permit purchases where the circumstances are such as to make it likely that the purchases would be consistent with the protection of investors. Pur- chases that do not meet the strict conditions of the rule may, nevertheless, be exempted by order upon application where the statutory standards are satisfied. Adoption of Rule 22d-I-Relating to Variations in Sales Load of Redeemable Securities Section 22(d) prohibits a registered investment company, its principal underwriter, or a dealer from selling redeemable securities of the company to any person except at a current public offering price described in the prospectus. Rule 22d-l was adopted by the Com- mission in order to settle and codify administrative interpretations of the provisions of section 22(d) and to provide by rule exemptions from its provisions which would obviate the necessity for numerous individual applications." Thus, the burden is removed from the industry of preparing applications under section 6(c), and the Com- mission need not process such exemptions, in cases identical to those where such relief had previously been granted. The result of the rule is to ensure uniform compliance with the provisions of section 22(d) . The rule was the product of a comprehensive review of the legislative history of section 22(d) of the act, and all past administrative interpretations and exemptive orders issued under that section. One of the most important objectives of the rule was to determine the question of the availability of a quantity discount (i.e., a reduced sales charge for sales exceeding an established amount) for persons who were banded together for the purpose of making purchases as a group. The rule permits the granting of quantity discounts and does not insist that the amount of securities must be determined as of a single point of time. In this respect the rule follows previous Commis- sion decisions which had permitted a sales load discount to be based upon shares previously acquired and then owned plus the shares being purchased. Purchases made within a period of not more than 13 months pursuant to a "letter of intent" may also be aggregated for ascertaining the quantity entitled to a discount but the agreement

,. Investment Company Act Release No. 2798 (Dec. 2, 19(8). 24 SECURITIES AND EXCHANGE COMMISSION under which such purchases are made must assure that the lower price is justified by the quantity actually purchased and that adjustments will be made if required. In each of these instances, the inclusion of shares of other mutual funds is permitted if the same principal under- vvriterisinvolved. The rule, however, requires uniform prices to individual investors and prohibits quantity discounts to groups of individuals, except in the case of a family unit. A trustee or other fiduciary may obtain a quantity discount for a single trust estate of which there are more than one beneficiary, but quantity discounts may not be allowed on the aggregate of sales to a trustee or representative acting for more than one account or more than one trust. The rule specifically provides that the term "any person" shall not include a group of individuals whose funds are combined directly or indirectly for the purchase of shares, whether jointly or through a representative or agent of the gT.QUp.The rule in this respect reflects a stricter interpretation than prior Com- mission views under which quantity discounts had been extended to trustees, custodians, or agents acting on behalf of members of an organization. The rule permits sales at reduced prices to tax exempt organizations, following Commission decisions in the past granting such exemptive treatment. Sales at net asset value or with a lower load are also permitted to be made to officers, directors, and employees of the investment company, its underwriter and investment adviser, but written assurance must be given that the purchases are for investment purposes and that the securities will not be resold except through the usual redemption or repurchase procedure. Sales to employee pension or benefit plans are included within the exemption afforded by the rule. With respect to the reinvestment of distributions the rule permits the limitation of reinvestment privileges to participants in a systematic investment or dividend reinvestment plan provided all shareholders are offered the opportunity to participate in the dividend reinvestment plan at any time. All stockholders must be notified of the availability of the dividend reinvestment privilege once each year by a statement in the annual report or other document. The rule has been helpful in stabilizing the pricing methods of the mutual funds. The need for individual exemptive orders has been substantially eliminated, thus lightening the burdens on the companies and the Commission to that extent. The provisions of the rule are, of course, subject to review by the Commission, and specific applications for relief may still be submitted. TWENTY-FIFTH ANNUAL REPORT 25

Adoption of Form N-5-Registration Form for Small Business Investment Companies As previously indicated," the new Form K-5 is a combination form which enables a small business investment company to register under the Investment Company Act pursuant to section 8 (b) and at the same time to register securities for a public offering under the Securities Act of 1933 by means of a single registration statement. If a company has already registered under the Investment Company Act the form may be used for subsequent registration under the Securities Act. If a company desires to register under the Investment Company Act prior to registering securities under the Securities Act, the form may also be used for that purpose.

24 Supra, p. 19. PART IV AD:MINISTRATION OF THE SECURITIES ACT OF 1933

The Securities Act of 1933 is designed to provide disclosure to investors of material facts concerning securities publicly offered for sale by use of the mails or instrumentalities of interstate commerce, and to prevent misrepresentation, deceit, or other fraudulent practices in the sale of securities. Disclosure is obtained by requiring the issuer of such securities to file with the Commission a registration statement and related prospectus containing significant information about the issuer and the offering. These documents are available for public inspection as soon as they are filed. The registration statement must become "effective," however, before the securities may be sold to the public. In addition the prospectus must be furnished to the purchaser at or before the sale or delivery of the security. The registrant and the underwriter are responsible for the contents of the registration statement. The Commission has no authority to control the nature or quality of a security to be offered for public sale or to pass upon its merits or the terms of its distribution. Its action in permitting a registration statement to become effective does not constitute approval of the securities, and any representation to a prospective purchaser of securities to the contrary is made unlawful by section 23 of the.act.

DESCRIPTION OF mE REGISTRATION PROCESS

Registration Statement and Prospectus Registration of any security proposed to be publicly offered may be effected by filing with the Commission a registration statement on the applicable form containing the prescribed disclosure. 'When a registration statement relates, generally speaking, to a security issued by a corporation or other private issuer, it must contain the information, and be accompanied by the documents, specified in schedule A of the act; when it relates to a security issued by a foreign government, the material specified in schedule B must be supplied. Both schedules specify in considerable detail the disclosure which should be made available to an investor in order that he may make an informed decision whether to buy the security. In addition, the act provides flexibility in its administration by empowering the Com- mission to classify issues, issuers and prospectuses, to prescribe appropriate forms, and to increase, or in certain instances vary or diminish, the information required to be disclosed in the registration statement, 26 TVVENTY-FIFTH A~AL REPORT 27 as the Commission deems appropriate in the public interest or for the protection of investors. In general the registration statement of an issuer other than a foreign government must set forth such matters 3S the names of persons who participate in the direction, management, Orcontrol of the issuer's business; their security holdings and remuneration and the options or bonus and profit-sharing privileges allotted to them; the character and size of the business enterprise, its capital structure, past history and earnings and financial statements certified by independent accountants; underwriters' commissions; payments to promoters made within 2 years or intended to be made; acquisitions of property not in the ordinary course of business, and the interest of directors, officers and principal stockholdlers therein; pending or threatened legal proceedings; and the purpose to which the proceeds of the offering are to be applied. The registration statement of a foreign government must contain comparable information in regard to the underwriting and distribution of the securities being registered, the natural and industrial resources of the country, its revenues, obligations and expenses, a description of the securities being registered, and similar matters. The prospectus constitutes a part of the registration statement and presents the more important of the required disclosures. Examination Procedure The staff of the Division of Corporation Finance examines each registration statement for compliance with the standards of accurate and adequate disclosure and usually notifies the registrant by an informal letter of comment of any material respects in which the statement appears to fail to conform to those requirements. The regis- rant is thus afforded an opportunity to file a curative amendment. In addition, the Commission has power, after notice and opportunity for hearing, to issue a "stop order" suspending the effectiveness of a registration statement. In certain cases, such as where a registration statement is so deficient as to indicate a willful or irresponsible failure to make adequate disclosure, no letter of comment is sent and the Commission either institutes an investigation to determine whether stop-order proceedings should be instituted or immediately institutes stop-order proceedings. Information about the use of this stop-order power during 1959 appears below under "Stop Order Proceedings." Time Required to Complete Registration Because prompt examination of a registration statement is important to industry, the Commission completes its analysis as promptly as possible. Congress provided for 20 days in the ordinary case between the filing date of a registration statement or of an amendment thereto and the time it may become effective. This waiting period is designed to provide investors with an opportunity to become familiar with the proposed offering. Information disclosed in 28 SECURITIES AND EXCHANGE COMMISSION the registration statement is disseminated during the waiting period by means of the preliminary form of prospectus. The Commission is empowered to accelerate the effective date so as to shorten the 20-day waiting period where the facts justify such action. In exercising this power, the Commission is required to take into account the adequacy of the information respecting the issuer theretofore available to the public, the facility with which investors can under- stand the nature of and the rights conferred by the securities to be registered, and their relationship to the capital structure of the issuer, and the public interest and the protection of investors. The note to rule 460 under the act indicates, for the information of interested persons, some of the more common situations in which the Com- mission believes that the statute generally requires it to deny accelera- tion of the effective date of a registration statement. The number of calendar days which elapsed from the date of .filing to the effective date of the median registration statement with respect to the 925 1 registration statements that became effective during the fiscal year ended June 30, 1959, was 28. The number of such calendar days in the 1958 and 1957 fiscal years was 24 and 23, respectively. These 28 calendar days for the median registration statement in the 1959 fiscal year were divided among the three principal stages of the registration process as follows: (a) from the date of filing the registration statement to the date of the staff's letter of comment, 17days; (b) from the date of the staff's letter of comment to the date of filing the first material amendment after such letter, 6 days; and (c) from the date of filing the first material amendment after the staff's letter of comment to the effective date of registration, 5 days. Holidays as well as Saturdays and Sundays are included in these numbers of days. The increase in elapsed time is a reflection of the substantial increase in the number of registration statements filed, as indicated below, and of the fact that a large number of these statements related to new or unseasoned ventures which required relatively more time and effort in making an appropriate review. .

VOLUME OF SECURmES REGISTERED , Securities effectively registered under the Securities Act of 1933 during fiscal 1959totalled $15.7billion, 5 percent less than the record

1Does not include 149 regltsratton statements of investment companies filed and effective as amendments to previously effective registration statements pursuant to section 24(e) of the Investment Company Act of 1940. The number of calendar days elapsed from the date of filing to the effective date of registration of the median (average) of these 149 registration statements was 22. TWENTY-FIFTH ANNUAL REPORT 29 $16.5 billion registered the previous year. The number of registration statements filed was 1,226, 34% greater than in 1958. During the 25-year history of the Commission, approximately $160 billion of registrations have become effective, $71 billion in the last 5 fiscal years. The lowest annual volume of registrations was $659 million in the wartime year 1943. The chart below shows the dollar amount of effective registrations by fiscal years from 1935 to 1959.

VOLUME OF SECURITIES REGISTERED WITH THE S. E. C. 1935 - 1959 20 (00110 .. Billions)

o 1935 1940 1945 1950 1955 \ 1960

(Fiscol Yeo .. )

05.3972 These figures cover all securities effectively registered, including new issues sold for cash by the issuer, secondary distributions, and securities registered for other than cash sale, such as exchange transactions, issues reserved for conversion and issues reserved for long- term options. Of the dollar amount of securities registered in 1959, 77.3 percent was for the account of issuers for cash sale, 17.5 percent for account of issuers for other than cash sale and 5.2 percent was for the account of others, as shown below.

Account for which securities wereJregistered under the~Securities Act of 1933 during the fiscal year 1959 compared with the fiscal years 1958 and 1957

1959 in Percent 1958 III Percent 1957 in Percent mlllions of total millions of total millions of total ------Registeredsale______for •account______. ___of•Issuers___••______for cash $12,095 773 $13,281 805 $12,019 82 2

Rif~e~f~~l~~:_~~!~~~_f~~_~~~~~. 2, 746 17.5 3, 00ll 183 2,225 152 Registered for account of others than the Issuers; •• ___•••• ______•__•______815 5.2 201 1.2 380 2.6 Total ______•____. ______------15,657 100 0 16,490 100.0 14,624 100 0 30 SECt1RITIES AN"l> ~XCHANG~ COMMISSION Securities to be sold for cash for account of the issuer amounted to $12.1 billion in 1959, a decrease of $1.2 billion over the previous year. This reflects a 23 percent decrease, about $1.6 billion, in the volume of debt securities, partially offset by a small incre-ase in the volume of common stock. Debt securities made up $5.3 billion of the 1959 volume, preferred stock $400 million and common stock $6.4 billion. Investment company securities showed a sharp increase in 1959 and accounted for 60 percent of the total for common stock compared with less than one-half in fiscal 1958. The number of statements, total amounts registered, and a classification by type of security for issues to be sold for cash for account of the issuing company is shown for each of the fiscal years 1935 through 1959 in appendix table 1. ~fore detailed information for 1959is given in appendix table 2, while 5-year summaries of such information for the 25-year period appear in part II of appendix table 1. The amount of securities registered by investment companies increased almost 50 percent in 1959 over the previous year while that registered by communication companies decreased 80 percent. Among the smaller groups, the trade group aggregate showed an outstanding increase. Securities classified by industry, registered for cash sale for account of issuers in each of the last 3 fiscal years are shown below:

1959 In Percent 1958 in Percent 1957 In Percent millions of total milhons of total milhons of total ------Manulacturmg ______$1,974 163 $2,239 169 $2,674 22.2 Exrraotrve ______-____-__ 128 I I 110 .8 283 24 Electnc, gas and water ______2,726 225 3,373 254 2,951 245 Transportation, other than railroads ______41 3 52 .4 112 .9 Oommunteation ______591 49 2,978 224 2,030 16.9 Investment compames ______4,329 358 2,919 220 2,614 21.8 Other flnaneial and real estate ______Trade ______880 73 1,109 8.4 952 79 543 45 34 .2 .7 Service ______84 76 .6 29 .2 33 .3 Construction ______75 .6 25 2 ------._------Total corporate ______11,31)3 93.9 12,868 969 11,733 97.6 Foreign governments ______732 6.1 412 3 I 286 24 ------TotaL ______--- 12,095 100.0 13,281 100.0 12,019 100.0

Investment company issues were classified as follows:

1959 In 1958 in 1957 In millions nnlhons milhons

Open-end compames I _ $3,760 $2, 784 $2,361 Closed-end compames -- -_ 140 I~ Face amount certificate companies _ 429 ------253 Total - _- __- -_ 4,329 2,919 2,614

I Periodic payment plans or their underlying secunnes are Included. Of the net proceeds of the corporate securities registered for cash sale for the account of issuers in fiscal 1959, 53 percent was desig- TWENTY-FIFTH ANNUAL REPORT 31 nated for new money purposes, including plant, equipment, and working capital, 1 percent for retirement of securities, 43 percent for purchase of securities, principally by investment companies and 3 percent for all other purposes.

REGISTRATION STATEMENTS FILED

During the 1959 fiscal year, 1,226 registration statements were filed for offerings of securities aggregating $16,622,890,371, an increase of 34% over the 913 registration statements filed during the 1958 fiscal year for offerings amounting to $16,913,744,964. Of the 1,226 registration statements .filed in the 1959 fiscal year, 472, or 39 percent, were .filed by companies that had not previously filed any registration statement under the Securities Act of 1933. Com- parable figures for the 1958 and 1957 fiscal years were 254, or 28 percent, and 305, or 32 percent, respectively. A cumulative total of 15,930 registration statements has been .filed under the act by 7,397 different issuers covering proposed offerings of securities aggregating over $167 billion from the enactment of the Securities Act of 1933 to June 30, 1959. Particulars regarding the disposition of all registration statements filed under the act to June 30, 1959, are summarized in the following table. Number and disposition of reqistration statements filed

Prior to July 1, Total July 1, 1958,to June 30, 1958 June 30, 1959 1959

Registration statements: Filed. ___•______14,704 • 1,226 15,930 DISposition: Effective (net) ______b 12,823 0 1,064 d 13,871 Under stop or refusal order ______196 6 202 Withdrawn ______1,540 65 1,605 Pending at June 30,1958______145 Pending at Junc 30,1959______------252 Total. ______14,704 ------15,930 Aggregate dollar amount: As filed \in billions) ______$150 7 $16 6 $167.3 As effect ve (in bilhons) ______147 2 15 7 162.9

• Includes 153registration statements eovermg proposed offerings totalling $3,774,427,154filed by mvest- ment eompames under seenon 24(e) of the Investment Company Act of 1940whrch permits registration by amendment to a previously effective regtstration statement. b The grw, number of registration statements that became effeetrve, including such statements that were subsequently WIthdrawn or placed under stop order, was 13,273as ofJune 30, 1958. e EXCludes10 registration statements that became effeetive durmg the year but were subsequently WIth- drawn; these 10statements are counted in the 65statements WIthdrawn durmg the year. d Excludes 2 registration statements that became effectIve prior to July 1, 1958,which were placed under stop order durmg tbe 1959fiscal year! and also excludes 14registration statements effectIve prior to July 1, 1958,that were withdrawn during tne 1959fleal year; these 2 and 14 statements are couuted under stop orders and withdrawn, respectively. 32 SECURITIES AND EXCHANGE COMMISSION The reasons given by registrants for requesting withdrawal of the 65 registration statements that were withdrawn during the 1959 fiscalyear are shown in the following table:

Number of Percent Reason for registrant's wrthdrawal request statements of total withdrawn WIthdrawn

I. WIthdrawal requested after receipt of the staff's letter of comment, ______12 18 2. Registrant was advised that statement should be WIthdrawn or stop order pro- oeedlngs would be necessary ______5 8 3 Change m financing plans ______. ___.. __ . ______. ___ . ______36 55 4. Change 10 market conditions ____ . ______. ______7 10 5. Ftnancmg obtaioed elsewhere ______1 2 fl. Regulation A could be used ______1 2 7. Insuttierent funds raised under escrow agreement ______2 3 8 Registrant was unable to negotiate acceptable agreement WIth underwriter ____ 1 2 TotaL ______65 100

RESULTS OBTAINED BY THE REGISTRATION PROCESS The staff's examination of registration statements often results in significant changes being effected in order that adequate disclosure will be made to the investing public. These changes cover a wide range of subject matters. Examples of disclosures made as a result of the staff's examination are set forth below. Disclosure of Speculative Features A registrant organized to produce electronic equipment filed a registration statement for 175,000shares of common stock (par value of 75~per share) to be offered at $5 a share, the underwriting commission to be $1 per share. Examination of the registration statement revealed that certain speculative features of the proposed offering had not been adequately disclosed. The prospectus, as filed, stated that the book value of the company's shares prior to the offering was approximately 96 cents but that after the offering it would be approximately $1.86per share. The registrant was required to include a further statement that such increase would be contributed by the public investors. The registrant was further required to disclose that the underwriters at a total cost of $75 had acquired 75,000 shares of the company's stock representing 15 percent of the total amount of such stock to be outstanding, whereas if all of the shares offered were sold, public investors would pay $875,000 for 35 percent of the stock to be outstanding. The company was also required to point out in the prospectus that: (1) it proposes to operate in fields where large expenditures for research and development are considered normal and necessary; (2) competition is intense, there being many companies, some with substantially greater resources than the registrant, conducting research and development work in the same general areas; (3) because of research and development work being done, it is possible that one or more of the registrant's proposed products may became obsolete before TWENTY-FIFTH ANNUAL REPORT 33 production is started or at any time thereafter; and (4) only actual production can determine the cost at which any of registrant's proposed products can be produced and only marketing can determine the prices at which they can be sold and the extent of the demand for them. Disclosure as to Use of Proceeds .A company engaged in the business of acquiring and developing oil and gas properties filed a registration statement covering $1,500,000 of 6 percent convertible debentures due 1969, to be offered initially to its stockholders by means of subscription rights. The underwriter agreed that within 6 business days after the termination of the rights offering it would purchase or find purchasers for debentures not taken down by stockholders so that the company would receive the proceeds from at least $400,000 principal amount of debentures. The underwriter also agreed to use its best efforts for 60 days after the termination of the rights offering to find purchasers for debentures not taken down by stockholders . .As originally filed, the prospectus indicated that the great bulk of the net proceeds was to be used for acquisition of new properties and development of properties then held. However, an analysis made by our staff of the financial position of the company and its future cash needs disclosed that the company was in a precarious cash position, that on the basis of the prior year's operations cash requirements during the next 18 months would be substantially in excess of the amount of cash that would be generated during that period and that therefore the purpose of the offering was not to acquire and develop properties, but to remedy the company's serious financial situation . .As a result of numerous comments made by the staff, the prospectus was extensively revised and there was set forth in the forepart thereof, a one and one-half page statement regarding the proposed offering and the company's financial problems, including the following cate- gorical statements : 1. The purpose of the offering was to alleviate the company's shortage of working capital; 2. The company had a working capital deficit of $488,635; 3. Current liabilities included $87,835 of notes payable given for past due accounts payable; 4. Past due accounts payable and past due notes payable amounted to $256,572 and $86,335 respectively; 5. The total amount of funds required to remedy the working capital deficit and retire long term debt maturing within the next 18 months was $1,195,204; 6. Since, on the basis of the previous year's financial report, the company's operations would generate only $335,000 of cash during 34 SECURITIES AND EXCHANGE COMMISSION the next 18 months, cash requirements would exceed cash generated by $860,000; 7. The minimum principal amount of debentures required to be sold to meet the company's present and anticipated cash needs was $1,050,000; 8. Past due accounts and notes payable which might not be paid if sufficient funds were not realized through sale of the debentures might be enforced through legal proceedings; 9. No priority would be accorded the debenture holders as to principal or interest vis-a-vis other general creditors in the event the company's cash needs were not met through the sale of debentures or otherwise. 'While a skilled financial analyst, after study and analysis, might have been able to deduce some of the information set forth above, none of the statements recited was contained in the prospectus as originally filed. It is fair to assume that the average investor would have been materially misled by the prospectus as originally filed. Revision of Summary of Earnings A corporation which had both domestic and foreign subsidiaries filed a registration statement containing financial statements which failed to reflect significant losses from the operations of one of the foreign subsidiaries. After our staff determined this fact during the course of the examination procedures and discussed it with the corporation's representatives, the financial statements were appropriately amended to include provisions for the foreign subsidiary's losses. The effect of such revision was to reduce net income for 1956, 1957, and 1958by approximately $164,000,$88,000,and $10,000respectively. After this revision net income per share for the 3 years was $0.06, $0.04 and $0.09 per share, or reductions of approximately 76, 70, and 10 percent, respectively. Disclosure as to Operations A company engaged in the development and production of certain electronic equipment filed a registration statement covering 240,000 shares of common stock at the par value of 75 cents a share. The offering price was $6 per share and the underwriting commission was $1 a share. In reviewing the registration statement it was noted that the proposed offering was to be made on an extremely high price- earnings ratio and price-book-value ratio. Accordingly the registrant was required to amend the prospectus to state that the price of the shares being offered had been arbitrarily determined by the board of directors and did not bear any relationship to assets or earnings of the company. It was further required to be pointed out that the offering price was 312 times the unaudited earnings per share for the last fiscal year and 13.2 times the net tangible book value on the basis of the company's balance sheet. TWENTY-FIFTH ANNUAL REPORT 35 With respect to the company's operations, the company was required to state in regard to one of its lines of business that it had at all times operated substantially below production capacity and that during a recent month, for example, it operated at about 7.5 percent of such capacity, leaving 92.5 percent of its capacity idle. The company was further required to point out that it had not yet engaged regularly in the production of certain machinery for commercial use and had no assurance as to the size of the market for such machinery or the acceptability of the company's products in such market.

STOP ORDER PROCEEDINGS

Section 8(d) provides that if it appears to the Commission at any time that a registration statement contains an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading, the Commission may institute proceedings looking to the issuance of a stop order suspending the effectiveness of the registration statement. Where such an order is issued, the offering cannot lawfully be made, or continued if it has already begun, until the registration statement has been amended to cure the deficiencies and the Commission has lifted the stop order. The following table indicates the number of proceedings under section 8(d) of the act pending at the beginning of the 1959fiscal year, the number initiated during the year, the number terminated and the number pending at the end of the year: Proceedings pending at beginning of fiscal year______7 Proceedings initiated during fiscal year 13 20

Proceedings terminated during fiscal year: By issuance of stop orders 1______6 By withdrawal of registration statemenL______1 7

Proceedings pending at the end of the 1959 fiscal year______13 Shortly after the end of the fiscal year stop orders were issued in two of the proceedings which were pending at the end of the fiscal year and a third proceeding was dismissed. The two proceedings in which stop orders were issued are included in the proceedings described below. Comico Corporation.-Comico Corporation is a Delaware corporation organized in 1957 for the purpose of exploiting a deposit of silica material located in Arkansas and held under a leasehold assigned to the company by its promoters. The company filed a registration statement covering a proposed public offering of 750,000 shares of common stock at $2 per share. The Commission instituted

lOne of these proceedings, Woodland Oil & Gas Co. Ine., was described in the Com- mission's 24th Annual Report, p. 40. 1i29i5~ 36 SECURITIES AND EXCHANGE COMMISSION investigative hearings to determine whether a stop order should issue. Following these hearings and prior to the effective date of the registration statement the Commission instituted stop order proceedings. Prior to the institution of the stop order proceedings, the registrant filed an application for withdrawal of the registration statement which was denied by the Commission. The registration statement contained a lengthy and optimistic discussion of the uses and markets for the minerals in the registrant's leasehold. The Commission found this statement materially misleading, among other things, because it was not based upon any factual engineering or market survey. The Commission found that the registration statement was also misleading for failure to disclose prior unsuccessful attempts to develop the property leased by the registrant and for failure to fully and adequately disclose the proposed use of the proceeds of the offering, the compensation to underwriters and the interests of management in transactions with the registrant. More- over, the registration statement failed to indicate clearly that the management would receive 660,000 shares of the registrant's stock for $25,000, whereas the public would be asked to pay $1,500,000 for 750,000 shares. Other deficiencies included the failure to disclose the provisions of the lease and the obligation to pay unusually high royalties, and the failure to set forth clearly in one place the speculative feature of the registrant's business and securities. The Com- mission issued a stop order suspending the effectiveness of the registration statement," Diversified Oil and Mining Corporation.- This company was organized as a spin-off from Shawano Development Corporation and engaged principally in the acquisition of interests in and the operation of oil and gas properties. It filed a registration statement covering a proposed public offering of 2,500,000 shares of $1 par 6 percent convertible, noncumulative, preferred stock, and warrants to purchase at $2 per share 500,000 shares of the company's 10 cent par common stock. The securities were to be offered in units of 25 shares of preferred stock and 5 warrants at a price of $25.50 per unit. The statement of matters to be considered at the hearing in a stop order proceedings challenged the adequacy and accuracy of the information disclosed in the registration statement in numerous respects, including information given with respect to the proposed plan of distribution, the use of the proceeds, the description of the business and securities of the registrant, transactions with the promoters and possible liabilities for the previous sale of unregistered securities. Prior to the commencement of the hearing, the registrant submitted a stipulation in which it waived a hearing and the post-hearing procedures provided for in the Commission's rules of practice and con-

• Securities Act Release No. 4050 (Apr. 27, 1959). TWENTY-FIFTH ANNUAL REPORT 37 sented to the entry of an order suspending the effectiveness of the registration statement. Thereafter, the Commission issued an order suspending the effectiveness of the registration statement," Fort Pierce Port & Terminal Company.-This company was organized in 1956 primarily for the purpose of acquiring harbor front property at Fort Pierce, Fla., to be developed and operated as a deep- water port facility. The company filed a registration statement covering a proposed public offering of 2,138,500 shares of its $1 par common stock at $1.25 per share. The company's properties, consisting of 3,000 feet of harbor front and certain other properties on nearby Causeway Island and on the mainland, were acquired by promoters of the company (including Joseph C. Mackey, board chairman, and H. A. Ramsey, president) with the intention of selling them to the company. The promoters' cost was $155,000 in cash and the assumption of mortgages aggregating $608,750. The properties were transferred to the company at an appraised value of $1,838,500, the company assuming the $608,750 of mortgages and issuing $1,229,500 par value of stock to the promoters. Subsequently, the company acquired 64.4 acres of submerged lands from the State of Florida for $3,220. Various references in the prospectus to the appraised value of the company's properties were questioned by the Commission's staff including the $430,000 appraised value of the property acquired from the State of Florida for $3,220. According to the staff there appeared to be a lack of adequate basis for the values determined by the appraisal. The properties acquired from the promoters were carried in the company's balance sheet at the appraised valuation ($1,838,250) contrary to generally accepted accounting principles, and the prospectus failed to contain proper disclosures with respect, among other things, to (1) the competitive traffic situation in relation to the port development project, including the results of a study of the facilities made in 195'7 by the U.S. Army Engineers; and (2) the speculative feature of the proposed offering. The Commission instituted stop order proceedings with respect to the registration statement.' Prior to completion of the proceedings, the company filed an application for withdrawal of the registration statement. In its application the company conceded "certain inaccurate statements of material facts and certain omissions of material facts" and agreed that correction would be made in any new registration statement which might be filed by the registrant, although the company stated that it did not intend to proceed with its stock offering at that time. The Commission concluded that withdrawal would not be inconsistent

• Securities Act Release No. 3971 (Oct. 2, 1958). • Securities Act Release No. 3951 (Aug. 6, 1958). 38 SECURITIES AND EXCHANGE COMMISSION with the public interest and the protection of investors and consented to the withdrawal of the registration statement," Funeral Directors Manufacturing and Supply Company.-This registrant was organized in Kentucky in 1954 for the purpose of manufacturing plastic grave vaults and plastic and aluminum caskets. It filed a registration statement covering a proposed offering of 199,- 907 shares of the registrant's common stock at $100 per share. The registration statement represented that registrant owned no property but that, depending on the success of the offering, it intended to purchase or construct warehouses and plants and factories. The Commission found that the registration statement contained material misstatements and omissions of material facts with respect to the state of the development work necessary to effect volume production of the registrant's products and failed to disclose the length of time it would take to effect full production. The registration statement also failed to list two officers employed by the registrant and stated that the remuneration to be paid registrant's officers had not been determined or authorized when, as a matter of fact, such remuneration had been authorized and the registrant had incurred a substantial contingent indebtedness to its officers. The registration statement also stated that there were no agreements to recom- pense any promoter for past or future services when, in fact, registrant was indirectly indebted to a promoter, who was the president of the registrant, for accrued rents, utilities, and services. A post-effective amendment to the registration statement not only failed to correct the previously existing deficiencies but was itself deficient in additional material respects. At the close of the case presented by the Commission's staff, the registrant admitted that the disclosures made in the registration statement and in the post-effective amendment were inadequate and that material events and changes which had occurred since the statement became effective were not disclosed in the post-effective amendment. The registrant consented to the issuance of a stop order by the Commission," Industro Transistor Corporation.- The registrant was organized in New York in December 1953 and engaged in the manufacture and sale of transistors. It filed a registration statement in 1958cover- ing a proposed public offering of 135,000 shares of lO-cent par value common stock and, in addition, 36,000 transferable 5-year warrants for the purchase of 1 share of common stock per warrant and the 36,000 shares of common stock subject to such warrants. Proceedings were instituted to determine whether a stop order should issue sus-

• Secnrlt1es Act Release No. 3960 (Aug. 27. 1958). • Secnrlt1es Act Release No. 4071 (Apr. 23. 1959). TWENTY-FIFTH ANNUAL REPORT 39 pending the effectiveness of the registration statement. .Among the deficiencies found to exist are those described below. The prospectus failed to contain an adequate and accurate statement with respect to the volume of the registrant's production, the amount of sales to the customers listed in the prospectus, the registrant's competitive position in the industry and the nature of its sales and distribution arrangements. The financial statements included in the prospectus were not prepared in accordance with the Commis- sion's requirements and good accounting practice. For example, sales returns were not shown as a deduction from sales but were treated as purchases of raw material. The income statement showed a net profit from operations for a 4-month period of over $17,000 whereas, if it had been properly prepared, it would have shown a substantial loss. The prospectus failed to disclose that the compensation of the underwriter included the difference between the exercise price of the 36,000 warrants which the underwriter was to receive and the market price of the stock. The prospectus was also misleading in stating that the underwriter was to pay 1 cent for each warrant, whereas it does not appear that any arrangement was made for such payment, in addition, the prospectus failed to state the possible adverse effect upon the registrant and its security holders of the granting of warrants to the underwriter and to certain other persons, and to state adequately and accurately the purposes for which proceeds from the sale of the securities were to be used. The Commission issued a stop order suspending the registration statement shortly after the end of the fiscal year." Subsequently, the registrant amended the registration statement to make appropriate disclosure in accordance with the Commission's decision and the Com- mission lifted its stop order, thus permitting the registration statement to become effective," Managed Funds Incorporated.-The registrant, an open-end management type investment company registered under the Investment Company Act of 1940, was organized under the laws of Delaware in 1946. The promoters were Hilton H. Slayton, Hovey E. Slayton, and Thomas W. Ruth. Hilton Slayton was president and a director, and Hovey Slayton was a vice president and a director, of the registrant. The registrant filed a registration statement under the Securities Act of 1933 in 1954 and subsequently registered additional securities by amendment as permitted by section 24( e) of the Investment Company Act. The Commission instituted proceedings under the Securities Act to determine whether a stop order should issue suspending the effectiveness of the registration statement.

1 Securities Act Release No. 4116 (July 17,1959). • Securities Act Release No. 4120 (July 24,1959). 40 SECURITIES AND EXCHANGE COMMISSION The proceedings developed the fact that although Slayton Associ- ates, Inc., all of the voting stock of which was owned by Hilton and Hovey Slayton, was under contract with the registrant to act as its investment advisor and had been paid for such services, it had entered into a contract with Stephen :M:. Jaquith, a registered representative of a brokerage firm, under which Jaquith was to perform the services of investment advisor for the registrant. For his services, Jaquith and his firm received substantial compensation in the form of commissions on securities transactions. A portion of these commissions were, at the direction of Hilton Slayton, credited to two other individual's, one his brother-in-law and the other a director of the registrant and the Slayton's former attorney. This contract with J a- quith was not disclosed in the registration statement nor had it been approved by the stockholders of the registrant as required by the Investment Company Act. The record showed that the board of directors gave scant attention to the management of the registrant; made no effort to be informed concerning registrant's policies and whether such policies were being followed; made no decisions concerning purchases and sales of portfolio securities and generally permitted the registrant to be managed by the Slay tons without consultation with or approval by the board as a whole. None of this was disclosed in the registration statement. The prospectus represented that the operations of the registrant were under the supervision and direction of its board of directors and failed to point out that the Slay tons were assuming the functions of the board of directors in directing the operations of the registrant. The prospectus represented that the principal objective of the registrant was capital growth, that such investment policy would result in normal turnover of portfolio securities and that dividends would be paid quarterly based on the receipt of income or profits on securities held. These representations were materially misleading since the registrant did not follow the stated policies but instead followed the policy of investment for the purpose of providing a flow of cash to its stockholders at a high uniform rate and engaged in a policy of excessiveportfolio turnover. The prospectus was also misleading in failing to disclose that the registrant's policy of realizing capital gains for the purpose of making quarterly distributions to shareholders was deleterious to the position of the shareholders in several respects. First, it required a high rate of portfolio turnover which resulted in the payment of large amounts of brokerage commissions and the payment of higher prices on the repurchase of identical securities immediately after their sale. Second, it further reduced the invested capital of shareholders who reinvested their distributions, since a sales load was charged on such reinvestment. Third, it did not take into consideration whether proper TWENTY-FIFTH ANNUAL REPORT 41 management would require the sale of securities in which net unreal- ized depreciation existed and thus avoid making distributions which were taxable to shareholders. Fourth, as noted above, the policy of distributing capital gains quarterly was not consistent with the objective of capital growth of the portfolio. Itwas registrant's policy to place a portion of the orders for transactions in portfolio securities with broker-dealers who sold its shares. Reciprocal business in the volume of eight or nine million dollars was directed to approximately 36 dealers for the fiscal year ended Novem- ber 30,1958. The Commission held that the prospectus should have disclosed that brokerage transactions were directed to broker-dealers who had sold shares of the registrant. In addition, the prospectus should have disclosed that obligations for merchandise and services rendered to the registrant's underwriters and investment advisors were being satisfied by directing to the suppliers brokerage commissions on transactions in the portfolio securities of the registrant. These disclosures should have accompanied the statements in the prospectus of the amount of sales load reallowed to dealers to make these statements not misleading. On the basis of the Commission's findings, a stop order was entered shortly after the end of the fiscal year suspending the effectiveness of the registration statement." Mon-O-Co Oil Corporation.-Registrant, a Montana corporation, was organized in 1940 and engaged in the acquisition of oil and gas leases and exploration for oil and gas. Itfiled a notification and offering circular under regulation A in March 1957 for the purpose of obtaining an exemption from registration with respect to an offering to its stockholders, pursuant to preemptive rights, of 4,000stock units, each unit consisting of one share of class A stock and 24 shares of class B stock at $75per unit and an offering of 14,474stock units in exchange for certain working interests held by public investors. The Com- mission thereafter temporarily suspended the exemption. In July 1957, the registrant filed a registration statement covering the same offering plus an additional offering of 4,000 stock units to the stockholders. Prior to the effective date of the registration statement, the Commission instituted stop order proceedings which were consolidated with proceedings to determine whether the order suspending the regulation A exemption should be vacated or made permanent. The Commission determined that the regulation A exemption should be permanently suspended, on the grounds, among other things, that the offering circular contained false and misleading statements of material facts and that the amount of the offering exceeded the maximum amount of $300,000permitted for offerings under regulation A. With respect to the stop order proceedings, the Commission found

• Securities Act Release No. 4122 (July 30,1959). 42 SECURITIES AND EXCHANGE COMMISSION that the geologist's report included in the prospectus contained an excessive estimate of recoverable reserves of oil, and that the registration statement was also materially deficient in the description of the registrant's other properties, in stating the total estimated expenses of the offering and in stating the purposes for which the proceeds were to be used. It also found that the material in the prospectus was poorly organized and that much of the information contained in it was not presented in clear and understandable fashion. Material relating to the same subject matter was scattered throughout various sections of the prospectus, with the result that the ordinary investor would have great difficulty in ascertaining the essential elements of the registrant's business and the merits of the proposed offering without referring to numerous portions of the prospectus and making independent calculations and conclusions as to the facts. The speculative features of the offering were not accurately and adequately disclosed, and there were a number of other deficiencies in the registration statement. The Commission refused to permit the registration statement to be withdrawn and issued a stop order suspending its effectiveness." Texas Glass Manufacturing Corporation.- The registrant, a Texas corporation, was organized in 1952 to engage in the manufacture of window and heavy sheet crystal glass. The company's only property consisted of a plant site in Bryan, Tex., donated by that city and the deed for which was held in escrow contingent upon the execution of a contract to construct a plant. The registrant filed a registration statement in 1957 covering a proposed public offering of 2,700,000 shares of its $1 par value common stock at $2 per share, plus 300,000shares subject to certain options at $1 per share. Amend- ments were subsequently filed which, among other things, changed the number of shares being registered. The Commission instituted stop order proceedings with respect to the registration statement in July 1957. The Commission found that the registration statement contained many deficiencies, some of which were highly material and some of which, while relatively less important, were indicative of a genera] lack of care in the preparation of the registration statement. Thus, the registration statement contained materially misleading statements with respect to the company's stage of development, the kind of glass which it proposed to manufacture, the processes to be used in manufacturing glass, the source of raw materials and the nature of the market for the registrant's products. For example, it was stated that the company would produce its glass on machines and by methods that are unique and less time consuming, whereas it appeared that the

10 Securities Act Release No. 4024 (Feb. 4,1959). TWENTY-FIFTH ANNUAL REPORT 43 machines and methods proposed to be used are those commonly known and employed by the glass industry. The registration statement indicated that certain previous sales of the company's stock were exempt from registration under section 3(a) (11) of the act, whereas it appeared that no exemption was available and that there was a contingent liability on the part of the company for such sales which liability was not reflected in the company's financial statements. The prospectus also indicated that 80 percent of the proceeds from the sale of the stock would be placed in an escrow fund to be returned to investors should the company fail to raise enough funds to carry out its plans, but no further information was given with respect to the nature of any escrow agreement or the circumstances under which such fund would be returned to investors. The prospectus also set forth statements with respect to costs applicable to plant construction contracts without indicating that such contracts had not yet been executed. The registration statement also included hypothetical figures purporting to show production costs and revenues for the proposed plant and setting forth a substantial figure as the annual net profit, even though the company had not yet engaged in any business. There were also other deficiencies in the disclosures provided in the registration statement. In view of the numerous and serious deficiencies in the registration statement the Commission issued a stop order suspending the effectiveness of the registration statement.P

EXAMINATIONS AND INVESTIGATIONS The Commission is authorized by section 8(e) of the act to make an examination in order to determine whether a stop order proceeding should be instituted under section 8 (d). For this purpose the Commission is empowered to subpoena witnesses and require the production of pertinent documents. Six such examinations were initiated during the 1959 fiscal year. None were pending from the previous fiscal year. In two cases the examinations led to stop order proceedings under section 8(d) . Four examinations were pending at the close of the fiscal year. The Commission is also authorized by section 20 (a) of the act to make an investigation to determine whether any provisions of the act or of any rule or regulation prescribed thereunder have been or are about to be violated. Investigations are instituted under this section as an expeditious means of determining whether a registration statement is false or misleading or omits to state any material fact. The following table indicates the number of such investigations with which the Commission was concerned during the fiscal year.

11 Securities Act Release No. 8984 (Oct. 81, 1958). 44 SECURITIES AND EXCHANGE COMMISSION

Investigations pending at the beginning of the fiscal year 13 Investigations initiated during the fiscal year______8 21 Investigations in which stop order proceedings were authorized during the fiscal year -- 3 Other investigations closed during the fiscal year______3 6

Investigations pending at the end of the fiscal year______15

EXEMPTION FROM REGISTRATION OF SMALL ISSUES Under section 3(b) of the Securities Act, the Commission is empowered to exempt, by rules and regulations and subject to such terms and conditions as it may prescribe therein, any class of securities from registration under the act, if it finds that the enforcement of the registration provisions of the act with respect to such securities is not necessary in the public interest and for the protection of investors by reason of the small amount involved or the limited character of the public offering. The statute imposes a maximum limitation of $300,000upon the size of the issues which may be exempted by the Commission in the exercise of this power. Acting under this authority the Commission has adopted the following exemptive regulations: Regulation A: General exemption for United States and Canadian issues up to $300,000. Regulation A-M : Special exemption for assessable shares of stock of mining companies up to $100,000. Regulation A-R: Special exemption for first lien notes up to $100,000. Regulation B: Exemption for fractional undivided interests in oil or gas rights up to $100,000. Regulation B-T: Exemption for interests in oil royalty trusts or similar types of trusts or unincorporated association up to $100,000. Regulation F : Exemption for assessments on assessable stock and for assessable stock offered or sold to realize amount of assessment thereon, up to $300,000.'" Under section 3(c) of the Securities Act, which was added by section 307(a) of the Small Business Investment Act of 1958, the Com- mission is authorized to adopt rules and regulations exempting securities issued by a company which is operating or proposes to operate as a small business investment company under the Small Business Investment Act. During the fiscal year the Commission, acting- pursuant to this authority, adopted a new regulation E, which

12 Adopted July 30. 1959. Securities Act Release No. 4121. TWENTY-FIFTH ANNUAL REPORT 45 exempts upon certain terms and conditions limited amounts of securities, not in excess of $300,000, issued by any small business investment company which has received a license or a notice to proceed from the Small Business Administration. This regulation is substantially similar to the one provided by regulation A under section 3 (b) of the act. Exemption from registration under section 3 (b) or 3 (c) of the act does not carry any exemption from the civil liabilities for false and misleading statements imposed by section 12(2) or from the criminal liabilities for fraud imposed by section 17 of the act. Exempt Offerings Under Regulation A The Commission's regulation A permits a company to obtain not exceeding $300,000 (including underwriting commissions) of needed capital in any 1 year from a public offering of its securities without registration if the company complies with the regulation. Regula- tion A requires the filing of a notification with the appropriate regional office of the Commission, supplying basic information about the company, certain exhibits, and except in the case of a company with an earnings history which is making an offering not in excess of $50,000, an offering circular which is required to be used in offering the securities. During the 1959 fiscal year, 854 notifications were filed under regulation A, covering proposed offerings of $170,241,400, compared with 732 notifications covering proposed offerings of $133,889,109 in the 1958 fiscal year. Included in the 1959 total were 42 notifications covering stock offerings of $9,460,253 with respect to companies engaged in the exploratory oil and gas business and 59 notifications covering offerings of $11,314,184 by mining companies. The following table sets forth various features of the regulation A offerings during the past 3 fiscal years :

OjJenngs under Regulation A

Fiscal year

1959 1958 1957

Size:$100,000 or less ______222 231 307 Over $100,000 but not over $200,000 ______162 165 163 Over $200, 000 but not over $300, 000______470 336 449

854 732 919

Underwriters:Used ______318 243 328 Not used ______-___- --_ --- ___ 536 489 591

854 732 919 01Jerors: Issuing eompanles ______- ___-- - _- - -_____- - - _-- -_ -- Stockholders ______797 704 865 31 28 52 Issuers and stockholders jointly ______26 0 2 854 732 919 46 SECURITIES AND EXCHANGE COMMISSION Most of the offerings which were underwritten were made by commercial underwriters, who participated in 251 offerings in 1959, 185 offerings in 1958, and 252 offerings in 1957. The remaining cases where commissions were paid were handled by officers, directors, or other persons not regularly engaged in the securities business. Suspension of Exemption Regulation A provides for the suspension of an exemption thereunder where, in general, the exemption is sought for securities for which the regulation provides no exemption or where the offering is not made in accordance with the terms and conditions of the regulation or in accordance with prescribed disclosure standards. Follow- ing the issuance of a temporary suspension order by the Commission, the respondents may request a hearing to determine whether the temporary suspension should be vacated or made permanent. U no hearing is requested within 30 days after the entry of the temporary suspension order, and none is ordered by the Commission on its own motion, the temporary suspension order becomes permanent. During the 1959 fiscal year, temporary suspension orders were issued in 87 cases as compared with 88 in the 1958 fiscal year. Of the 87 orders, 2 were later vacated. Requests for hearing were made in 26 cases. In 11 of such cases the requests were later withdrawn, and as of June 30, 1959, the proceedings in the remaining 15 cases were still pendingY The names of the companies involved in the orders issued during the 1959 fiscal year 'are set forth in table 7 of the appendix. As indicated in the 24th annual report, 11 cases were pending as of June '30, 1958, in which a hearing was requested after a temporary suspension order had been issued. In four of such cases the issuers withdrew their hearing requests and consented to the entry of permanent suspension orders and in three cases permanent suspension orders were entered by the Commission after hearings. The remaining four cases were pending on June 30, 1959. Certain of the above cases are summarized below to illustrate the misrepresentations and other noncompliance with the regulation which led to the issuance of suspension orders. Brookridge Development Corporation.-The temporary suspension order alleged that the terms and conditions of regulation A were not complied with in that the notification failed to disclose all sales of unregistered securities by the issuer or any principal security holder within one year prior to filing. Itwas asserted, moreover, that the amount of securities proposed to be offered and the amount sold during the past year in violation of section 5 of the act would exceed the regulation A $300,000 limitation. It was also alleged that the offering circular was materially misleading in failing to disclose:

.. Shortly after the end of the fiscal year, the suspension orders in three of these cases were made permanent. TWENTY-FIFTH ANNUAL REPORT 47 (1) Options to which officersof the issuer were entitled; (2) security holdings of the officers and directors; and (3) the effect of the underwriter's participation in the market on the price of the issuer's securities. In addition, the offering circular was alleged to be materially misleading in its inclusion of $176,478.86described as "Invest- ment in Subsidiaries" in the December 31, 1958, consolidated balance sheet, and by the inclusion in the consolidated income statement of dividends received from subsidiaries. The Commission's order further averred that the use of the offering circular without appropriate disclosure would be in violation of section 17 of the Securities Act of 1933. The issuer requested a hearing, but this request was subsequently withdrawn and the suspension order became permanent with the lapse of time. Empire Oil Corporation.- The order temporarily suspending the regulation A exemption alleged that the terms and conditions of regulation A had not been complied with in that escrow arrangements for certain shares had not been made with an independent escrow agent and information was not supplied as to the issuer's predecessors and affiliates. Moreover, it was asserted, the offering circular was materially misleading in failing to disclose information with respect to the offering of securities for additional properties, the net production of crude oil and natural gas, estimated oil reserves, and existing or threatened litigation against the issuer. Also, the offering circular was alleged to be materially misleading in its use of appraisal valuations. Violation of section 17 of the Securities Act, in addition, was asserted. No hearing was requested, and the suspension order became permanent with the lapse of time. Florida National Development Corporation.- The temporary suspension order alleged that the regulation A terms and conditions had not been complied with in that, among other things, the $300,000 ceiling was exceeded and the issuer failed to disclose that one Mac- Elrod was a promoter or predecessor, or both, of the issuer. The issuer's offering circular was averred to be false and misleading in its failure to disclose: (1) the exact amount paid for the issuer's properties and whether such properties were acquired by the issuer in arms-length transactions; (2) the facts surrounding certain brokerage commissions; (3) the circumstances concerning a $759,660 mortgage and note; and (4) the status of an option on 1,860 acres of land. Further, the financial statements included in the offering circular were materially misleading. The temporary suspension order also asserted violation of section 17of the Securities Act. No hearing was requested and the temporary suspension order became permanent with the lapse of time. Gob Shops of America.-The Commission temporarily suspended the regulation A exemption because it had reason to believe that the 48 SECURITIES AND EXCHANGE COMMISSION issuer's notification failed to comply with the terms and conditions of regulation A and that the offering circular contained false and misleading statements concerning the market and the market price of the stock and the underwriter's activities in the maintenance, domination and control of the market and market price of the stock. A hearing was held at the issuer's request. The issuer moved to dismiss the proceedings on the ground that its withdrawal had become effective and in the alternative requested that withdrawal be permitted, asserting that its failings involved "inadvertent and empty infrac- tions of technical rules or mistaken acts." The Commission held that there was no right under the circumstances to withdrawal of a noti- .ficationand denied the motion to dismiss. The Commission concluded that the omission to state that the price of the stock was artificially inflated and that the market was not free and open was a serious deficiency. Accordingly, the issuer's request for withdrawal was denied and a permanent suspension order was entered by the Commission.> Inspiration Lead Company, Inc.-The temporary suspension order alleged numerous deficiencies in the issuer's offering circular concerning, among other things, the issuer's past operations, are reserves, mining costs, and assets. A hearing was held pursuant to the issuer's request. At the hearing the issuer conceded that the offering circular was inadequate and incomplete in a number of respects, but asserted that the deficiencies were the result of inadvertence and mis- take and asked that it be permited to withdraw its filing for the purpose of revision and correction. The Commission, however, found the deficiencies and omissions to be serious and extensive. It stated, "We have previously indicated that an opportunity to amend a de- .ficient filing cannot be permitted to impair the required standards of careful and honest filings or to encourage a practice of irresponsible or deliberate submission of inadequate material to be followed by correction of deficiencies found by our staff in its examination." The Commission concluded that there was not such a showing of good faith or other mitigating circumstances in connection with the deficiencies as to justify a further opportunity to present an adequate tiling in lieu of a permanent suspension. The issuer's request for withdrawal was denied and an order was issued permanently sus. pending the exemption." Macinar, Inc.-The order of temporary suspension in this case alleged that the notification failed to disclose that Automatic Table Co. was an affiliate of the issuer; that it failed to disclose securities sold by Paul Gaston, an affiliate; and that the $300,000regulation A ceiling would have been exceeded by the offering. It was also averred that the offering circular contained untrue statements of material facts

"Securities .ActRelease No. 4075 (May 6,1959). Ui Securities .Act Release No. 4076 (May 7, 1959). TWENTY-FIFTH ANNUAL REPORT 49

and failed to disclose required information concerning a note payable in the sum of $17,400 held by the wife of the issuer's principal security holder. Moreover, there was a failure to set forth the issuer's assumption of an affiliate's $12,854.82 note and to disclose all material transactions of officers, directors, and controlling persons with the issuer, its predecessors, and affiliates. The issuer filed a request for hearing and a motion to vacate the temporary suspension order. Both the request for hearing and the motion to vacate were subsequently withdrawn and the temporary suspension order became permanent. Sports Arenas (Delaware ) Inc.-The temporary suspension order asserted that the issuer failed to disclose all promoters, controlling persons and affiliates and their backgrounds; that the aggregate public offering price of the securities and the aggregate gross proceeds actually received from the sale of securities to the public exceeded the $300,000 regulation A limitation; that an offering circular was not used in the offering of shares to the public; that certain sales material was used which was not filed with the Commission; and that the issuer failed to file a complete and accurate report of sales as required by regulation A. The issuer's offering circular, in addition, was alleged to be materially misleading in its failure to disclose the method of offering, whereby the issuer's securities would be sold to the public at a price higher than the $1.25 stated offering price, and to disclose the profits of those participating in the distribution. Violation of section 17 of the Securities Act was also alleged. No hearing was requested and the suspension order became permanent. Exempt Offerings Under Regulation B During the fiscal year ended June 30, 1959, 160 offering sheets were filed pursuant to regulation B and were examined by the Oil and Gas Section of the Commission's Division of Corporation Finance. Dur- ing the 1958 fiscal year, 109 offering sheets were filed and during the 1957 fiscal year, 133 were filed. The following table indicates the nature and number of Commission orders issued in connection with such filings during the fiscal years 1957-59. The balance of the offering sheets filed became effective without order.

Action taken 1m offering sheets filed under regulation B

FIllcaI years

1959 1958 1q57

Temporary suspension orders ______4 9 12 Orders terminating proceeding afti'r amendment ______1 1 7 Orders fixing effective date of amendment (no proceeding pending) __ 87 60 72 Orderspendlng)consenting______to WIthdrawal of offering sheet (no proceeding 2 3 3 Ordersproceedingconsenting______••to ______withdrawal of•______offering sheet and•• ______terminating•______2 2 --~_..._--- -- Total number of orders __• ______96 75 94 50 SECURITIES AND EXCHANGE COMMISSION Reports of sales.-The Commission requires persons who make offerinzs under regulation B to file reports of the actual sales made pursuant to that regulation. The purpose of these reports is to aid the Commission in determining whether violations of law have occurred in the marketing of such securities. The following table shows the number of sales reports filed under regulation B during the past 3 fiscal years and the aggregate dollar amount of sales during each of such fiscalyears. Reports of sales under regulation B

FIScal years

1959 1958 1957

Number of sales reports filed ______1,689 1,712 1,318 Aggregate dollar amount of sales reported ______------$1,204,751 $1,093,362 $1,154,792

LITIGATION UNDER THE SECURITIES ACT OF 1933 The Commission is authorized by the Securities Act to seek injunctions in cases where continued or threatened violations of the act are indicated. Many such actions were brought by the Commission during the past year. Generally these involved violations of both the registration and anti-fraud provisions of the act. Litigation Involving Violations of the Registration and Anti-Fraud Provisions Among the more important of such litigation was a complex of four cases involving the sale of common stock of General Oil and Industries, Inc. in violation of the registration and anti-fraud provisions. The company was originally organized in 1931 under the name of Pacific Gold Placers, Inc. All of its stock was issued prior to July 27, 1933, the effective date of the Securities Act. In 1958 the company was purchased by one Sidney B. Josephson, who changed its name, and increased the capitalization by 2 million shares. There- after, the complaints alleged, Josephson, a defendant in all of the cases, caused many of these unregistered shares to be sold in interstate commerce to the public by means of various misrepresentations. The Commission brought suits against A. G. Bellin Securities Corp.," Stratford Securities Co., Inc.,17 Phoenix Securities Corp.," Stanley Brown," registered broker-dealers, and numerous individual defendants, along with Josephson, to enjoin the sale of these securities. Orders of preliminary injunction have been entered in the first two cases for violation of the registration provisions, and the cases set for hearings."

'.8.E.C. v, Bellin, et al., U.S.D.C. S.D.N.Y. No. 139-30l. 11 H.E.C. v. Josephson, et al., U.S.D.C. S.D.N.Y. No. 140-193. 18 H.E.C. v. Phoenix See., U.S.D.C. S.D.N.Y. No. 141-36. aeH.E.C. v. Broten, U.S.D.C. S.D.N.Y. No. 141-35. '" Bellin and Josephson filed notice of appeal on April 8, 1959. TWENTY-FIFTH ANNUAL REPORT 51 Two cases involved the sale of Canadian Javelin Limited stock in violation of both the antifraud and registration provisions of the act. In the first case," the Commission brought suit against Canadian Javelin, European Fiduciary Corp., and various officers and employees of these corporations. The complaint charged the defendants with selling the securities by telephone and through the mails in the United States without filing a registration statement. It further charged that the securities were being sold by concealing the identity of the sellers, the consideration being paid to the brokers and dealers for recommending the securities, and also by misrepresenting their value. The corporations and three of the defendants consented to entry of final judgment enjoining further sales." In the second case," a U.S. investment adviser and an associate were charged with similar violations in the sale of Canadian Javelin. A permanent injunction was entered against them by consent. In another case involving the sale of Canadian securities in this country,24the Commission charged Philip Newman Associates, a registered broker-dealer, with selling securities of the Monarch Asbestos Co., Ltd., through the mails and by telephone to persons in the United States without filing a registration statement. The Newman firm and its officers were also charged with misrepresenting the securities with respect to the value of the stock and the business expectations of the company. A permanent injunction was entered against the Newman firm and its officers and employees by consent, and a preliminary injunction was granted as to Monarch Asbestos and others by default. In S.E.O. v. L08 Angeles T1'U8tDeed and Mortgage Exchange et al., 264 F. 2d 190 (C.A. 9, 1959), the district court granted the Commis- sion's motion for a preliminary injunction and the appointment of a receiver in an action brought by the Commission based on violations of the registration and fraud provisions of the Securities Act and the Securities Exchange Act in connection with the sale of trust deeds on individual parcels of property. See the 24th Annual Report at pages 51-52 for a discussion of the district court action. The judgment was reversed by the Court of Appeals for the Ninth Circuit, which did not reach the issue of whether the trust deeds constituted securities. It felt that this question, as well as others, including the matter of the appointment of a receiver, should await trial on the merits, particularly since the Court believed that certain procedural errors had occurred on the hearing. Accordingly, the Court remanded the case for trial, and trial was pending at the end of the fiscal year.

21 S.E.C. v. Canadian Javelin Ltd., U.S.D.C. S.D.N.Y. No. 138-85. 21 The matter is pending as to the other defendants . .. S.E.C. v. Loomt«, et al., U.S.D.C. D. Mass. No. 58-1210. '" S.E.C. v. Philip Newman A88ociate8,Inc., et al., N.Y. 3113, U.S.D.C. D. N.J., 1397-58. 529523-59--7 52 SECURITIES AND EXCHANGE COMMISSION As in past years, many cases involved fraud in the sale of securities of mining companies. In SE.O. v. Gotham Securities 25 the Commission's complaint charged the defendants with fraud in the sale of Saskalon Uranium and Oil, Ltd. common stock. The purchasers were told that they would "reap rich rewards," that the shares would be listed on a national exchange, and that the company was about to pay a dividend. A permanent injunction was entered against the defendants by consent. Permanent injunctions were also entered against the Lincoln Secu- rities COrp.26and its officers and salesmen, for fraud in the sale of shares of Shoreland Mines, Ltd., a Canadian mining company. Judg- ment was entered upon consent of defendants. In S.E.O. v. Del Marva Oil and Gas, et al.21 a final judgment was entered by consent against five oil and gas companies and their controlling stockholders. The judgment permanently enjoined defendants from making misleading statements of the value of mining properties, the ownership of leases, the probability of discovery of oil, etc. In S.E.O. v, Scott Taylor and 00., Inc.28 a temporary restraining order has been issued to restrain the sale of shares of Atomic Mining Corp., a Canadian corporation, pending a hearing of the case. A temporary restraining order has also been issued in S.E.O. v, Webster Securities 00rp.2'iI to restrain sales of stock of Goldfield Mines Co. of Nevada. In S.E.O. v, Gravity Science Foundation, et al.,so the complaint charged defendant with selling investment contracts and undivided interests in oil and gas leases without registering under the Securities Act. Vari- 0us misrepresentations concerning the operations of the company were also alleged to have been made. The Commission moved against the sale and offering of investment contracts without registration in S.E.O. v. The Donna-June 00.81 Inthis case the investment contracts were represented by limited partnership interests plus a profit-sharing agreement. In both cases, a permanent injunction was ordered with consent of defendants. Two important cases involved failure of defendants to meet the prospectus requirements of the 1933 act. In S.E.O. v, North Ameri- can Finance 00.,82 the complaint charged defendant with offering for sale 500,000 shares of common stock by transmitting through the mails a prospectus which did not meet the statutory requirements. The Commission alleged, among other things, that numerous misrepresentations were made as to the value of the shares, that the Commis-

.. U.S.D.C. S.D.N.Y. No. 886-58 • ... 8.E.C. v. Lincoln 8ecurities Corp., et at, U.S.D.C. N.Y. No. 18lS-79. 21 U.S.D.C. D. Utah C-56-59. lIS U.S.D.C. N.Y. No. 142-167 . .. U.S.D.C. S.D.N.Y. No. 141-887 • .. U.S.D.C. N.D. Ill. No. 594C484. 81 U.S.D.C. E.D. Okla. No. 4520 • .. U.S.D.C. D. Ariz. No. 2925. TWENTY-FIFTH ANNUAL REPORT 53 sion had approved the price at which the securities were being sold, and that the stock was insured. The case is particularly significant in that it is the first to hold that a prospectus does not meet the requirements of section 10(a) of the Securities Act if the financial statements therein represent that an accountant is independent when in fact he is not. A permanent injunction was entered upon consent of defendants. A permanent injunction was entered against Universal Drilling Co., Inc. and its president, Louis J. Roussel 33 restraining defendants from transmitting any prospectus relating to the sale of common stock in Universal until the prospectus met the requirements of the Securities Act. Counsel for these defendants informed the court of their intention to make an offer of rescission to customers who purchased the stock from the defendants J. H. Lederer Co., Inc. and Jean R. Veditz Co., Inc., registered broker-dealers. The court continued the restraining order previously entered against the latter, to prevent dissipation of funds until determination of the Commis- sion's application for appointment of a receiver. A permanent injunction was also entered by consent in S.E.C. v, Universal Service Corp.34for violation, inter alia, of the prospectus provisions. A permanent injunction by consent was entered against the Vari- Pao Corporation for numerous fraudulent representations in violation of the 1933 act.'5 In a companion case, the Commission later suc- ceeded in obtaining a permanent injunction against the defendant I. B. Morton & Co., InC.36 for violation of the antifraud provisions of the 1933 act and the registration provisions pertaining to broker-dealers in the Securities Exchange Act of 1934. Two other dealers in Vari-Pac stock were also enjoined from making further offers or sales. In S.E.C. v, O.T.C. Enterprises, Inc. the defendants were offering shares in a company purportedly developing a spaceship to fly through the universe utilizing "free energy." A public inaugural flight of the prototype at Oklahoma City, scheduled for April 19, 1959, failed to materialize. Otis T. Carr, president of the company, publicly announced that a space craft designed by him would be constructed in which a flight to the moon would ba made on December 7, 1959, re- turning to earth on December 15, 1959. In addition to selling shares to hundreds of investors, the promoters obtained additional income by selling plans for the spaceship and toy models at prices ranging from $5 to $10 a piece, and by organizing groups to study unidentified flying objects. They also attempted to promote a Space City, to be located near Washington, D.C., and to maintain direct contact with communities on other planets and stars. At least half a million dollars was obtained from hundreds of investors. Final judgment was

IS S.E.O. v. J. H. Lederer GO.,Inc., et aJ., U.S.D.C. S.D. N.Y. 140-328, NY 3103. .. U.S.D.C. S.D. Texas No. 11,608 . .. S.B.O.v. Albert '" 00., U.S.D.C. D.N.1. No. 1H~8 • .. S.B.O. v t. B. Morlon '" 00•• U.S.D.C. S.D. N.Y. No. 138-899. 54 SECURITIES AND EXCHANGE COMMISSION obtained by the Commission permanently enjoining defendants from further sales or offers of sales," Among other cases in which fraudulent misrepresentations were enjoined were: S.E.O. v. General Associates, Inc.,ss S.E.O. v, The Angelique 00.,89S.E.O. v. J.P. Lord, Inc.,40 S.E.O. v. Walker-Stevens, Ino.,41 S.E.O. v, Consolidated Enterprises, Inc.,42 SE.O. v, KimlJall Securities, Inc.48 and S.E.O. v. International Oorp., et al.44 In S.E.O. v, Aruida Oorporation 45 the Commission's complaint charged two broker-dealers with violation of section 5(c) of the Securities Act prohibiting public offerings of securities before the filing of a registration statement. In enjoining any further violation, the court held that the issuance of a press release giving a number of facts concerning the development of Arvida Corporation and the proposed stock offering, and the convening of a press conference at which additional facts were given, including the proposed price, constituted an offer to sell within the meaning of the act and was in violation of the act because a registration statement covering the securities offered had not been filed with the Commission. Judgment was entered upon consent of defendants. In related broker-dealer proceedings (see p. 103, infra) the Commission also concluded that defendants had violated the registration provisions of the 1933 act willfully, but held that no sanction was required in the public interest under the particular circumstances of the case. Securities Exchange Act Release No. 5870 (February 9, 1959). After the institution of these proceedings a registration statement was filed and became effective. In a case still pending," the Commission has brought suit to enjoin John Addison, Niles White, White, Green & Addison Associates, Inc., Trans-world Mining Corporation, Murchison Ventures, Inc., and numerous individual officers and employees, from further violating the registration provisions of the Securities Act of 1933, and to enjoin the defendants, their banks and depositories from dissipating or dis- bursing the assets or funds of these defendants, and particularly the sum of $146,625found in a suitcase left by Addison in a public carrier terminal. The Commission's complaint charges that since 1955 the defendants have been selling securities, namely, notes, evidences of indebtedness, participation in profit-sharing agreements, investment

31 u.s D.C. W.D. Okla. No. 8452. asU.S.D.C. N.D. Wash. No. 4708 . •• U.S.D.C. D. Conn. No. 7726 . .. U.S.D.C. S.D. Fla. No. 9231-M . ... U.S.D.C. S.D. N.Y. No. 135-313. e U.S.D.C. S.D. N.Y. No. 145-7 . .. U.S.D.C. S.D. N.Y. No. 142-153 . .. U.S.D.C. D.C. No. 1518-59. 45 U.S.D.C. S.D. N.Y. No. 136-67 .6 S.E.a. v. Addison et al., U.S.D.C. KD. Texas No. 8224. TWENTY-FIFTH ANNUAL REPORT 55 contracts, and fractional undivided interests in oil, gas, and other mineral rights, by use of the mails and in interstate commerce, without having first registered with the Commission. In a supporting affidavit filed with the complaint, it was alleged that Addison and his associates obtained loans from approximately 400 individuals in 23 States, the total of such loans amounting to nearly $1 million. A preliminary injunction has been entered and the sum of $146,625 ordered impounded in the registry of the Court pending a hearing on the merits of the case. Permanent injunctions restraining sales in violation of the registration provisions were decreed by consent in the following cases: S.E.O. v, Pettyjohn, et al./1 S.E.O. v, Justus, et al.,48S.E.O. v, Hillsborough Investment Oorp.,49S.E.O. v, Robbins,50 S.E.O. v, Bonanza Oil Oorp.; et al.,51S.E.O. v, Hinsdale Raceway, bW.,52 S.E.O. v, Vanco, Ino., et al.,53and S.E.O. v, Mono-Kearsarge Oonsol.54 Permanent injunctions were also entered in S.E.O. v, Southwest Securities Ino., et al.,55and S.E.O. v, Ben Franklin Oil and Gos Oorp., et al.,5Ilboth discussed in the 24th Annual Report," In the Hillsborough case, supra, the court granted a preliminary injunction against defendants Hillsborough Investment Corporation and Roger Mara, its manager. The defendant corporation, incorporated in New Hampshire, advertised in the newspapers, offering to sell its stock to New Hampshire residents. A few advertisements contained no such limitation. About a dozen sales were made to nonresidents, in some cases after being held in the name of a resident for 30 days. Defendants resisted the motion for a temporary injunction on the ground that a small number of interstate sales, where no future interstate sales were contemplated, should not take the issue out of the intrastate exemption contained in section 3(a) (11) of the 1933 act. The court held that even a single sale to a nonresident, whether directly or through the device of selling to a resident inter- mediary, destroyed the exemption as to the whole issue, and required registration in order to make future sales to residents.

'1 U.S.D.C. D. Alaska No. 10,470 • .. U.S.D.C. S.D. Fla. No. 8779-M . •• U.S.D.C. D. N.H. No. 1965. eo U.S.D.C. S.D. Texas No. 12,644. 61 U.S.D.C. D. Nev. No. 259. .. U.S.D.C. D. N.H. No. 1970 • .. U.S.D.C. D. N.J. No. 737-58. 54 U.S.D.C. D. Utah No. C-58-58 . .. U.S.D.C. N.D. Ark. No. 3566 . .. U.S.D.C. D. N.J. No. 601-57 61 At p, 46 et seq. 56 SECURITIES AND EXCHANGE COMMISSION The Mono-Kearsage Oonsolidated Mining Oompany case, supra, was an action by the Commission to enjoin sales of that company's stock without registration by broker-dealers and others who had received the stock from transferees of the company who were in control of the company. The defendants contended that they did not know of the control relationship. The Court, in granting an injunction, held that defendants were underwriters within the meaning of the Securities Act of 1933, that the term "underwriter" includes anyone who purchases from a person directly or indirectly controlling an issuer, or in common control with the issuer, with a view to public distribution of the securities of the issuer, that the defendants were to be held to have knowledge of those facts which they could obtain upon reasonable inquiry. The Court said further: Probably the facts directly known by them were sufficient to acquaint them with the true situation. If not, they were sufficient to impose upon them the duty of making further inquiry. Under the circumstances, they were not entitled to rely solely on the self-serving statements of Pennington and the other Cana- dians denyiug those facts which would have indicated that they were representing controlling persons, or were under common control with an issuer. With all these red flags warning the dealer to go slowly, he cannot with Impunity ignore them and rush blindly on to reap a quick proflt. He cannot close his eyes to obvious signals which if reasonably heeded would convince him of, or lead him to, the facts and thereafter succeed on the claim that no express notice of those facts was served upon him. 167 F. Supp. 248, 259 (D. Utah, 1958).

Litigation Relating to SlOP Order Proceedings

In Oolumbia General Investment 00. v. S.E.0.,58 the Court of Appeals for the Fifth Circuit affirmed a Commission stop order pursuant to section 8 (d) of the Securities Act suspending the effectiveness of Columbia's registration statement and denying Columbia's application for withdrawal prior to the effective date of the registration statement. Relying on Jones v. S.E.O., 298 U.S. 1 (1936), Columbia contended that the request for withdrawal divested the Commission of jurisdiction to issue the stop order. In upholding the Commission's order, the Court distinguished the Jones case on the fact that in the instant case 1,800 members of the public held 63,000 shares of the same class of securities covered by the registration statement. The Court noted that these stockholders and members of the investing public who might trade in these securities are proper subject of the official concern of the Commission. Moreover, the Court stated that since Jones a significant change in the law had taken place and it could no longer be said, as it was in Jones, that withdrawal was the concern of the registrant alone. Under the 1954 amendments to the act a registrant may now make offers to sell after filing but before registration. The

.. 260 F. 2d 559 (C.A. 11,1959). TWENTY-FIFTH ANNUAL REPORT 57 Court ruled that, if a registrant has an unfettered right to withdraw under these conditions, then the machinery of the Commission could easily be employed as an instrument of fraud. The Court rejected Columbia's contentions that the filing of a substantive amendment terminates, for the purposes of stop order proceedings, the legal significance of the original registration statement.

Participation as Amicus Curiae In Woodward v. Wright, 266 F. 2d 108 (C.A. 10, 1959), the Com- mission filed a brief amicus curiae in an appeal from a judgment for the defendant-sellers of an undivided interest in oil and gas rights. The action was based on the civil liability provisions of section 12 of the Securities Act, and while the lower court found that the sellers' prospectus contained a material false statement, it barred recovery since the purchasers had failed to show their reliance on the misrepresentation. After concluding that the contract of sale conveyed fractional undivided interests in oil and gas and hence securities, the Court of Appeals reversed and remanded the case to the district court on the ground that the evidence brought the appellants within the liability provisions of section 12(2). The court rejected the district court's ruling and agreed with the Commission's position that Con- gress did not impose upon a plaintiff the burden of proving reliance as a condition of recovery under section 12(2). The court refused to permit recovery under section 12(1) holding on the particular facts that a public offering had not been made. In 07'e8well-Keith, Ina. v. Willingham, 264 F. 2d 76 (C.A. 8, 1959), the Commission also filed a brief as amicus curiae. This was a private suit wherein the plaintiff involved section 12(2) of the act to rescind a commitment for securities claiming fraudulent misrepresentations were made. The defendants filed motions for dismissal for want of jurisdiction stating that neither the misrepresentations nor the delivery of the securities was made by use of the mails or interstate commerce. The trial court upheld this contention; however this holding was overruled on appeal where the court held, as urged by the Commission, that the section 12(2) "remedy is available if the mails or interstate commerce is used in any manner in consummating the sale" and that "payment of the consideration is part of the consummation of the sale." PART V ADMINISTRATION OF THE SECURITIES EXCHANGE ACT OF 1934 The Securities Exchange Act of 1934 provides for the registration and regulation of securities exchanges and the registration of securities listed on such exchanges, and it establishes, for issuers of securities so registered, financial and other reporting requirements, regulation of proxy solicitations and requirements with respect to trading by directors, officersand principal security holders. The act also provides for the registration and regulation of brokers and dealers doing business in the over-the-counter market, contains provisions designed to prevent fraudulent, deceptive and manipulative acts and practices on the exchanges and in the over-the-counter markets and authorizes the Federal Reserve Board to regulate the use of credit in securities transactions. The purpose of these statutory requirements is to ensure the maintenance of fair and honest markets in securities.

REGULATION OF EXCHANGES AND EXCHANGE TRADING

Registration and Exemption of Exchanges As of June 30, 1959, 14 stock exchanges were registered under the Exchange Act as national securities exchanges: American Stock Exchange New York Stock Exchange Boston Stock Exchange Pacific Coast Stock Exchange Chicago Board of Trade Philadelphia-Baltimore Stock Exchange Cincinnati Stock Exchange Pittsburgh Stock Exchange Detroit Stock Exchange Salt Lake Stock Exchange Midwest Stock Exchange San Francisco Mining Exchange New Orleans Stock Exchange Spokane Stock Exchange Four exchanges have been exempted from registration by the Com- mission pursuant to section 5 of the act: Colorado Springs Stock Exchange Richmond Stock Exchange Honolulu Stock Exchange Wheeling Stock Exchange Disciplinary Actions Each national securities exchange reports to the Commission disciplinary actions taken against its members for violation of the Se- curities Exchange Act of 1934 or of exchange rules. During the year 4 exchanges reported 23 cases of such disciplinary action, including imposition of fines aggregating $27,550 in 14 cases, the sus- 58 TWENTY -FIFTH ANNUAL REPORT 59 pension of two individuals from allied exchange membership, and censure of a number of individuals and firms. Commission Rate Study On February 20, 1959, the Commission announced the completion by its staff of a study of commission rates charged by members of the New York Stock Exchange undertaken as a result of an increase in commission rates adopted by the Exchange on May 1, 1958.1 The study was made in view of the responsibilities and duties imposed upon the Commission by section 19(b) of the Securities Exchange Act of 1934 with respect to the rules of national securities exchanges including rules relating to the fixing of reasonable commission rates," In line with suggestions of the Commission, the Exchange took steps falling into three general areas. First, the Exchange reduced commission rates on transactions ranging from $100 to $2,400 by approximately 5 percent. These modifications were suggested in view of the fact that the May 1958 percentage increases on transactions from $100 to $2,400 were relatively greater than the average percentage increase. The Exchange also eliminated the so-called "round turn" commission rate under which a reduced rate was granted to persons whose purchase and sale of the security was completed within 14 days. It was the view of the Commission that this type of transaction was not entitled to a special discount and the Exchange felt this rate had not achieved its desired objective. Following the action of the New York Stock Exchange other registered national securities exchanges, including the American Stock Exchange, adopted a schedule of commission rates identical with that of the New York Stock Exchange. Second, it was decided that an Exchange committee would study the use of a so-called volume or block discount for transactions involving multiple round lot units. The Exchange also agreed to study the possibility of further developing its income and expense survey of member firms as a source of data in connection with commission rates and to work with the staff of the Commission and consultants employed by the Exchange to prepare an outline for the basis of a cost study being made by the Exchange. Third, the Exchange amended its rules to provide that any proposed constitutional amendment to change commission rates or other charges would be announced 30 days in advance of action by the Board of Governors of the Exchange. Also, it was agreed that the Commission would be advised of any steps taken by the Exchange looking toward changes in commission rates or other charges.

1 Securities Exchange Act Release No. 5889. • Securities Exchange Act Release No. 5678. 60 SECURITms AND EXCHANGE COMMISSION

Activities of Floor Traders and Specialists As a result of a study made by the staff of the Commission of the activities of floor traders and specialists on the American Stock Ex- change, certain steps have been taken by that Exchange to impose further controls upon the activities of these members. The Commis- sion concluded from the study that further restrictions were necessary upon floor trading activities on that Exchange; that these restrictions should prevent floor traders from stimulating public interest in a stock by active and concerted buying; and that floor traders should be restricted from aggravating demand in present markets where many issues on the Exchange are peculiarly susceptible to extreme fluctuations because of a small floating supply. The Commission permitted the Exchange to put into effect on an experimental basis for six months a rule which the Exchange believes will minimize the undesirable features of floor trading, yet preserve certain asserted benefits," The effect of the rule is to impose restrictions upon floor trading purchases in a rising market. In line with suggestions of the Commission, the Exchange has also taken certain steps to regulate further the activities of specialists. Several new rules relating to specialists have been adopted, the most important of which makes subject to Exchange approval all off-floor transactions, with certain limited exceptions, by specialists in securities in which they are registered. The Exchange also has instituted a program for making periodic inspections of specialist dealer transactions in the securities in which they are registered. Under the program specialists will be required to report to the Exchange several times each year the details of their dealings for unannounced periods selected at random by the Exchange.

REGISTRATION OF SECURITIES ON EXCHANGES A member of a national securities exchange or a broker or dealer may not effect any transaction in a security on an exchange unless the security is registered on that exchange under the Securities Exchange Act or is exempt from such registration. In general, the act exempts from registration obligations issued or guaranteed by a State or the Federal Government or by certain subdivisions or agencies thereof and authorizes the Commission to adopt rules and regulations exempting such other securities as the Commission may find necessary or appropriate to exempt in the public interest or for the protection of investors. Under this authority the Commission has exempted securities of certain banks, certain securities secured by property or leasehold interests, certain warrants and, on a temporary basis, certain securities issued in substitution for or in addition to listed securities.

• Securities l!Jxcban~ 4ct Release No. 5981. TWENTY-FIF1'R ANNUAL REPORT 61 Section 12 of the Exchange Act provides that an issuer may register a class of securities on an exchange by filing with the Commission and the exchange an application which discloses pertinent information concerning the issuer and its affairs, including information in regard to the issuer's business, capital structure, the terms of its securities, the persons who manage or control its affairs, the remuneration paid to its officers and directors, the allotment of options, bonuses and profit- sharing plans, and financial statements certified by independent accountants. Form 10 is the form used for registration by most commercial and industrial companies. There are specialized forms for certain types of securities, such as voting trust certificates, certificates of deposit and securities of foreign governments. Section 13 requires issuers having securities registered on an exchange to file periodic reports keeping current the information furnished in the application for registration. These periodic reports include annual reports, semiannual reports, and current reports. The principal annual report form is Form 10-K which is designed to keep up to date the information furnished in Form 10. Semiannual reports required. to be furnished on Form 9-K are devoted chiefly to furnish- ing mid-year financial data. Current reports on Form 8-K are required to be filed for each month in which any of certain specified events have occurred such as changes in control of the registrant, important acquisitions or dispositions of assets, the institution or termination of important legal proceedings and important changes in the issuer's capital securities or in the amount thereof outstanding. Statisties Relating to Registration of Securities on Exchanges As of June 30,1959, a total of 2,236 issuers had 3,808 classes of securities listed and registered on national securities exchanges, of which 2,631 were classified as stocks and 1,177 as bonds. 1,294:issuers had 1,512 stock issues and 1,124:bond issues listed and registered on the New York Stock Exchange. Thus, 58 percent of the issuers, 57 percent of the stock issues and 95 percent of the bond issues were on the New York Stock Exchange. During the 1959 fiscal year, 73 issuers listed and registered securities for the first time on a national securities exchange, while registration of all securities of 73 issuers was terminated. The total number of applications for registration of classes of securities on national securities exchanges filed during the 1959 fiscal year was 203. The following table shows the number of annual, semiannual, and current reports filed during the fiscal year by issuers having securities listed and registered on national securities exchanges. The table also shows the number of reports filed under section 15(d) of the Securi- ties Exchange Act of 1934:by issuers obligated to file reports by reason 62 SECURITIES AND EXCHANGE COMMISSION of having publicly offered securities effectively registered under the Securities Act of 1933. The securities of such issuers are traded generally in the over-the-counter markets. As of June 30, 1959, there were 1,503 such issuers, including 247 also registered under the In- vestment Company Act of 1940.

Number of annual and other periodic reports filed by issuers under the Securities &change Act of 1934 during the fiscal year ended JUnt 30, 1959

Number of reports filed by-

Type of reports Over-the- Total Listed Issuers counterls- reports filed flIlng reports suers tiling under sec. 13 reports under sec. 15(d)

Annual reports on Form IO-K, etc ______2,223 1,480 3,703 Semi-annual reports on Form 9-K ______1,685 848 2,533 Ourrent reports on Form 8-K, etc__•______3,650 1,719 5,368 Total reports flIed___••______•______7,558 4,046 11,604

MARKET VALUE OF SECURITIES TRADED ON EXCHANGES The market value on December 31, 1958, of all stocks and bonds admitted to trading on one or more stock exchanges in the United States was approximately $419,585,963,000.

Number Market value oflssues Dec. 31.1958

Stocks: 1,507 $276,665,191,000 855 31,729,486,000 570 4, 266,569,000 i~jl~~~l~~i£~~======:::::::::::==:::::Total stocks ______2,932 312,661,246,000 Bonds: New York Stock Exchange 1______American Stock EXcha~e ______1,149 105,866,137,000 59 908,340,000 Exclusively on other ex anges______28 150,240,000 Total bonds ______1,236 106,924,717,000 Total stocks and bonds. ______4, 168 419,585,963,000

J Bonds on tbe New York Stock Exchange included 50 U.S. Government and New York State and Oity Issues with $77,600,873,000aggregate market value. The New York Stock Exchange and American Stock Exchange figures were reported by those exchanges. There is no duplication of issues between them. The figures for all other exchanges are for the net number of issues appearing only on such exchanges, excluding the many issues on them which were also traded on one or the other of the New York exchanges. The number of issues as shown excludes those suspended from trading and a few others for which quotations were not available. The number and market value as of December TWENTY-FIFTH ANNUAL REPORT 63 31, 1958, of preferred and common stocks separately was as follows:

Preferred stocks Common stocks

Number Market valne Number Market valne

Listed on registered exchanges ______586 $8, 400, 005, 000 2,028 $282,313,930,000 All other Issues 1•• ______59 493, 783,000 259 21,453,528,000

645 8, 893, 788, 000 2,287 303,767,458,000

1 Issues admitted to unlisted trading privileges only or listed on exempt exchanges.

The New York Stock Exchange has reported aggregate market values of all stocks thereon monthly since December 31, 1924, when the figure was $27.1 billion. The aggregate market value rose to $89.7 billion in 1929, declined to $15.6 billion in 1932, and was $298.8 billion in June 1959. The American Stock Exchange has reported December 31 totals annually since 1936. Aggregates for stocks exclusively on the remaining exchanges have been compiled as of December 31 annually by the Commission since 1948.

Share values on exchanges, in billions of dollars

New York American 'ExclUSively December 31 each year Stock Stock on other Total 1 Exchange Exchange exchanges

1936______• ___- _. _- - -. ------. -- ____ $ 59.9 $14.8 ~--_~------$ 74 7 1937______' _____• __•• _. _. ___- ___- _•• - -. -- -. ---.------38 9 10 2 ------49.1 1938.• ____• _____• ______' ___- ___- - -. - - - - - __- - _._ - _-'_ 47 5 10 8 ------58.3 1939_. __• ______• __•• ______•. ___- __- - _. -. _. __ 46 5 10 1 ----.-.----- 56.6 1940_. __. ______• ____ -. _' - _. - - _•. - _------., - - - - -. ------41.9 8.6 .------.---- 50.5 1941.. ___._. ____•• _____' ___• __.• ___- - __- _-. - __- - _•. -_._. 35 8 7.4 43.2 1942.• ______, __ . - __. -_. _' __- - __• -_. -_ ------38 8 7.8 ----.--.---- 46.6 1943_• ___• __• ___• ___ ._._ - -__- - _. ------__ . ------.-- 47.6 9 9 .------57.5 1944_. __• __• ____• _. ______• - -_ -_ -_ - __• - _-- - __- - _. - - 55 5 11.2 ----.------66 7 1945_. _._. ______• ____- __- ._._ ------._ -- - - -. - - 73.8 14.4 .------. 88.2 1946.• ___• ___' _____.• ___- ___• __•. - __ -'_ -- -. - - .• ------___ 68 6 13 2 .------81 8 1947_____• ____ . __' __• ____- _. _. _. - - _._ -_ - ••• - -. _------___ 68.3 12 1 .---.------80.4 1948______. ____• __• ___• _. ____•• __• - __- ___- _ -. - ___- ___• 67.0 11. 9 $3 0 81.9 1949_____•. ___• _____•• __• _•• ______• ___- ___- __• - __- - ____ 76 3 12 2 3 1 91 6 1950___• _•. _., _. ______._. --_. - - _. ___- - - _-- -. - - -- -. _-- 93 8 13 9 3.3 111 0 1951. _____• __ •. ___•• ____• ____• ___-_._ -_ -. - ____• - ______109 5 16 5 3.2 129 2 1952__ . __• ___•• __• ______• -. --. - - -. -.-----. -- - •• - •••• - --- 120 5 16 9 3. 1 140.5 1953___• _____• _' ______• - __-- _. --. - - -_ -- -. -- -. -- -. - - --- 117.3 16 3 2 8 135.4 1954______• ______• ___ -. __- - _. - - _- - - _- --._ - •• __• __ 169.1 22 1 3 6 194. 8 1955___.. _•• _. ______•• ____• _____._._._ - _- - -. - - _. -- _-- 207.7 27 1 4 0 238.8 1956. ______• ___• ___- __• ___• -_._ ------.- -. ------.- ---- 219 2 31.0 3.8 254.0 1957_____. ___• ___• ______- ___- __- - -. - - •• _ -. - - -. -. _._. ___ 195.6 25 5 3 1 224.2 1958._._. ____• ___• ______• ____- __ -. ___- _. - -_ - - ___. _. _____ 276.7 31 1959 , ___• ______• __•• ______• ______• ___• ___._ 7 4.3 312.7 June 30, 298.8 34 2 4 6 337.6

1 Total values 1936-47 inclusive are for the New York Stock Exchange and the American Stock Exchange only. 'As reported by the New York Stock Exchange and estimated for all others. At the time of passage of the Securities Exchange Act of 1934, stock prices were rising from their low point, reached in 1932, and a substantial recovery occurred through 1936. Indices turned down- ward with the stock market decline in 1937. Share volumes on the exchanges dropped from 962 million in 1936 to 221 million in 1942 and dollar volumes thereof from $23.6 billion in 1936 to $4.3 billion in 1942. Thereafter, recovery set in. For the calendar year 1958, the exchange turnover reached 1.4 billion shares with $38.4 billion dollar volume of sales, and for the first 6 months of 1959, the turnover 64 SECURITIES AND EXCHANGE COMMISSION reached nearly a billion shares with over $28 billion dollar volume. The number of stocks listed on the registered exchanges fell from 2,961 in 193'7to 2,584 in 1945, and recovered to 2,643 on June 30,1959. Growth of the issuers is reflected by the increase in their outstanding shares as reported below:

Shares on exchanger, in miUions

Listed on Unlisted Total on Percent June 30 registered and all listed on exchanges exempted exchanges registered exchanges

1936______2,438 (I) (I> (I) 1937______(1) (1) 1938______• ______- _._ 2,601 (I~ 1939______• ______2,312 (I> (I (1) 2,344 (I) (I) (II 1940______- ______-- _- -- ______-- -- (1) (1) 1941-. ______2,367 (I 1942______• ______2,279 (1) (1) (I) 1943______2,262 (1) (I) (I) 1944______2,284 393 2,677 85.3 1945______2,295 416 2,711 84.7 1946______2,320 420 2,740 84. 7 2,458 1947______408 2,866 85 8 1948______2,668 398 3,066 87.0 1949______2,841 390 3,231 87 9 1950______3,022 393 3,415 88 5 1951- ______3,156 366 3,522 89.6 1952______3,490 377 3,867 90.3 1953______• ______3,685 405 4,090 90.1 1955. ______• ______3,915 420 4,335 90.3 1956. ______5,009 467 5,476 91. 5 1957•• ______5,852 483 6,335 92.4 1958. ______• ______6,247 526 6,773 92.2 6,465 544 7,009 92_2

1Net totals of unlisted shares on all exchanges and of shares listed on the exempted exchanges have not been compiled prior to 1943• • December 31. Shares listed on the New York Stock Exchange reached half a billion in 1926, 1 billion in 1929, 2 billion in 1948, and 5 billion in 1958. A further increase to 5.46 billion shares listed on this Exchange during the first 6 months of 1959 brings the total shares available for trading on all exchanges to around '7.5billion as of June 30, 1959. Assets of Domestic Companies with Common Stocks on Exchanges The assets of all domestic companies having common stocks on the stock exchanges were roughly equal to the $291.4 billion market value of such common stocks on December 31, 1958. The equivalence owes to the preponderance of industrial stocks on the exchanges; it is not unusual for industrial stocks to sell for as much as or more than reported assets. The assets included about $280.8 billion for domestic companies with common stocks listed on registered exchanges and $11.4 billion for domestic companies with common stocks unlisted on the exchanges or listed on the exempted exchanges. The $280.8 billion listed aggregate included $266 billion on the New York Stock Exchange," $9.8 billion on the American Stock Exchange, and

• New York Stock Exchange "Fact Book, 1959" suppUes this figure tor 1957 Including BOmetlscal years ending In 1M8. Figures tor the other exchanges are tor the most part as reported around December 3J., 1Qli8. TWENTY-FIFTH ANNUAL REPORT 65 $5 billion exclusively on regional exchanges. The $11.4 billion unlisted and exempted aggregates included $8.2 billion on the American Stock Exchange and $3.2 billion exclusively on regional exchanges. The assets represent a conglomerate of individual and consolidated company reports and various treatments of such matters as reserves for depreciation. Foreign Stock on Exchanges The market value on December 31, 1958, of all shares and certificates representing foreign stocks on the stock exchanges was reported at about $12.5 billion, of which $11.1 billion represented Canadian and $1.4 billion represented other foreign stocks. The market values of the entire Canadian stock issues were included in these aggregates. Most of the other foreign stocks were represented by American depositary receipts or American shares, only the outstanding amounts of which were used in determining market values. Comparative Over-the-Counter Statistics Annual over-the-counter transactions of as much as $200 billion United States Government bonds, centered in the offices of 5 banks and 12 specializing dealers, are about 5 times the total bond and stock volumes on all the stock exchanges, and earn for the over-the-counter industry the distinction of being the world's largest securities market. Government bonds have in the past been actively traded on stock exchanges, reaching $2.9 billion per annum on the New York Stock Ex- change in the 1919-20 price recovery, but the last significant Ex- change volume was reported 20 years ago, in 1939, and current volumes on the Exchange are around $100,000 per annum. Securities representing upward of $50 billion State and local government debt are, with few exceptions," sold only over the counter. These bonds are usually issued in serial form, with a comparatively small amount for each maturity date, and have a specialized market owing to their tax-exemption features. Corporate bond sales on the stock exchanges are only about $1.5 billion per annum, much less than those over-the-counter. The over-the-counter potential for dealing in stocks is enormous, since there are perhaps a million corporations whose shares might come into the market. 6 However, less than 1 percent of these corporations appear to have the size and share distribution to command a continuing public market for their stocks. The following over-the-

• There 18 activity on the New York Stock Exchange in New York City Transit as or 1980, and on the American Stock Exchange in Chicago Transit Authority 3%,s of 1978. • U.s. Treasury Department "Statistics of Income" reported 924,961 corporation income tax returns for 1956-57, an Increase of 82,836 over 1955-ri6. About 8.500 of the returns accounted for 75 percent of the $949 biillon total reported assets. There have been well over 100,000 ne", Incorporations per annum over the past decade and th1s rate nearly doubled In the fiDlt 6 months of lQ59 upon passage of laws granting certa1n tax elections to l'orporations with not over 10 shareholders. 66 SECURITIES AND EXCHANGE COMMISSION counter data are derived from a continuing survey of the standard security manuals, the National Quotation Bureau Services, and reports to the Commission. Somewhat over 700 domestic banks have stocks with 300 or more reported holders which are not on any stock exchange. Practically all are common stocks. Their aggregate market value on December 31, 1958, was about $15 billion, which was close to 10 percent of the $155 billion assets on that date of the issuing banks. The corresponding market value of bank stocks on stock exchanges aggregated about $237 million for 24 issues," About 300 domestic insurance companies have stocks with 300 or more reported holders which are not on any stock exchange. Nearly all 'are common stocks. The aggregate market value of their quoted stocks on December 31, 1958, was about $11.5 billion, which was close to 40 percent of their $29 billion assets on that date. The corresponding value of insurance stocks on stock exchanges aggregated about $1.6 billion for 17 issues of 16 issuers. About 500 issuers are registered under the Investment Company Act of 1940, and their aggregate assets are about $20 billion. On De- cember 31, 1958, 39 of these issuers, with about $2.2 billion net asset value, had stocks on stock exchanges with about $1.9 billion aggregate market value," Over-the-counter market or redemption values of the remaining issuers' securities would bear a close correspondence to their approximate $17.8 billion net asset value. About 2,500 additional domestic industrial, utility, and miscellaneous issuers have stocks with 300 or more reported holders which are not on any stock exchange. The aggregate market value on Decem- ber 31, 1958, of their shares was about $32.5 billion. About $2.5 billion consisted of preferred stocks. The $30 billion common stocks were of companies with aggregate assets of about $39 billion on that date. Nearly all widely-held railroad stocks and a preponderance of widely-held utility and industrial stocks are on exchanges. In all, some 3,500 domestic corporate issuers (excluding registered investment companies) 9 have stocks with 300 or more reported hold-

• Of the 22 bank stocks remaining on stock exchanges on June 30, 1959, 1 was listed and registered, and 5 were listed and exempted from registration, on the Washington branch of the Philadelphia-Baltimore Stock Exchange, and 16 were listed on the exempted Richmond, Wheeling, and Honolulu Exchanges. 8 With 2 exceptions, all investment trust shares on the stock exchanges are ot closed-end issuers. Purchases and sales of closed-end investment trust shares are ordinarily made in the open market such as a stock exchange affords. Holders of open-end Investment trust shares ordinarily buy them from distributors and redeem them at their Ilquldatlng values. The 2 open-end issuers on stock exchanges are Coca Cola International Corporation and General Capital Corporation, whose shares are listed on the New York Stock Exchange and the Boston Stock Exchange respectively, with no exchange volume reported during 1958 In either Issue. • The use ot registered investment company totals in computing overall securities aggregates would be duplicative to a great extent in that their holdings consist of other securities, principally listed stocks. TWENTY-FIFTH ANNUAL REPORT 67 ers which are not on any stock exchange, and whose aggregate market value on December 31, 1958, was approximately $59 billion. The assets of the issuers having over-the-counter common stocks aggregated about $223 billion on that date, of which nearly 70 percent ($155 billion) was of banks. As in case of issuers having securities on stock exchanges/a the number of such issuers of over-the-counter stocks has not changed greatly in recent years. The constant additions are substantially offset by losses through new listings on stock exchanges, mergers, sales of assets, liquidations and reduction in number of shareholders in some instances." Share price changes have kept pace with those of stocks on stock exchanges. Aggregate share values of $238.8 billion on stock exchanges on December 31, 1955, were about 5.3 times the $45 billion over-the-counter values as computed for that date in our 22d Annual Report (1956), and the $312.7 billion stock exchange values on De- cember 31, 1958, were similarly about 5.3 times the $59 billion over- the-counter values as above computed. The domestic over-the-counter stock values of $59 billion, as computed above, included $15 billion of stocks of banks, which report to their own regulatory agencies. Of the $44 billion of other stock values, about $24 billion, or over 50 percent, were of issuers reporting to the Commission pursuant to requirements of the Securities Ex- change Act of 1934. The $24 billion included about $20.7 billion stocks of domestic issuers reporting under section 15(d) of the 1934 Act, by reason of registrations of securities for public sale," and about

:JJ) Issuers represented on stock exchanges numbered 2,594 on .Tune30, 1956, and 2,527 on .Tune30. 1959, including issuers of both bonds and stocks. 11 Purchases of stocks for control sometimes reduce holders below 300. Holders of preferred stocks, of real estate stocks issued in reorganizations, and of stocks distributed ("spun-olI") by large companies to their numerous stockholders tend to decrease over the years. U Issuers required to report under section 15(d) of the Securities Exchange Act ot 1934 had aggregate quoted values of shares 011 December 31, 1958, as follows: Value 01 Over the counter: 188uer8 quoted 8hare8 Utility, industrial, etc______948 $18, 115, 290, 000 Insurance______87 2,629,900,000 Foragn .______42 1,909,400,000

1,077 22,654,590,000 Unlisted on stock exchanges : UtU1ty. industrial, etc _ Insurance . _ 30 1,355.800,000 3 790,700,000 Foreign _ 2 1,465,300,000

35 3,611,800,000 1,112 26,266,890,000 Registered investment companles______225 Partnerships, voting trusts. stock purchase plans, ete______77

1,414 529523--59--8 68 SECURrrIES AND EXCHANGE COMMISSION $3.3 billion over-the-counter stocks of issuers reporting because they have other securities listed on registered exchanges. Taking into account the share values of registered investment companies which do report, and those of banks which do not report to the Commission, it is evident that the total values of shares of domestic issuers reporting to the Commission is more than half of the total domestic over-the-counter share values, as above computed.

DELISTING OF SECURITIES FROM EXCHANGES Pursuant to rule 12d2-1(b) under section 12(d) of the Securities Exchange Act, applications may be made to the Commission by issuers to withdraw their securities or by exchanges to strike any securities from listing and registration on exchanges. The Commission may not deny such 'applications if made in accordance with the appropriate exchange rules, but may impose such terms as it may deem necessary for the protection of investors. During the fiscal year ended June 30, 1959,the Commission granted applications by issuers and exchanges to remove 39 stock issues and 1 bond issue from listing and registration pursuant to rule 12d2-1 (b) . There were 41 removals, since 1 stock was delisted from 2 exchanges. The number of issuers involved was 37. The removals were as follows: Bond Applications filed by : ~:~~: 188Ue8 Ne~ York Stock Exchange 15 1 ~erican Stock Exchange______4 o Cincinnati Stock Exchange 1* o Mid~est Stock Exchange______3 o Pacific Coast Stock Exchange______5 o Philadelphia-Baltimore Stock Exchange______5 o Spokane Stock Exchange______1 o San Francisco Mining Exchange______1 o Issuers______5 o Total 40 1 .This stock was also dellsted from the American Stock Exchange. The applications by exchanges were based in general upon the ground that the issues were no longer suitable for exchange trading, by reason of reduced public holdings, small values, few holders, incon- sequential trading volumes on the exchanges, or a combination of these factors. Some of the issuers were not operating, or were in process of liquidation. Failure to file reports with the exchange was cited in three instances. In six of the applications made by exchanges it was stated that the issuers had requested the action. The five applications by issuers were for removal of stocks from various regional exchanges. The stocks remained listed on other exchanges where the principal trading volume therein occurred. TWENTY-FIFl'H ANNUAL REPORT 69 From July 1, 1936, through June 30, 1959,13there have been 533 delistings of securities on application of exchanges and 279 on application of issuers. Delistings from the New York Stock Exchange numbered 282 pursuant to its applications and 6 pursuant to applications by issuers. Delistings from the American Stock Exchange numbered 58 pursuant to its applications and 25 pursuant to applications by issuers. Delistings from the regional exchanges numbered 193 pursuant to their applications and 248 pursuant to applications by issuers. Thus, about 2 percent of the New York Stock Exchange delistings, 30 percent of the American Stock Exchange delistings, and 56 percent of the regional exchange delistings were pursuant to applications by issuers. As indicated above, delisting applications filed by exchanges are ordinarily based on lack of adequate public interest in the security issues concerned. The usual exchange application cites diminution in number of holders and publicly held shares or the moribund condition of the issue or issuer. The reduction in the number of holders and publicly held shares frequently results from acquisitions involving an offer of exchange into other listed shares of the same or another issuer. In some cases, a company will have sold its assets for cash and distributed all but small final payments in liquidation. The specific reason given in an application in case of a moribund condition may be that the issuer has failed to file reports required by the listing agreement and registration, or has discontinued transfer and reg- istrar facilities, or faces insolvency proceedings. Some exchanges, upon learning that an issuer has determined to delist an inactively traded issue, will make the application as a matter of good public relations, stating that it is made at the request of the issuer by reason of its inactivity on the Exchange. The New York Stock Exchange, as the leading exchange in number of listings and number of removals, has developed and published criteria on the basis of which it will consider initiation of a delisting application. (See 24th Annual Report, p. 63.) Some of the stocks delisted upon its application have remained or become listed on other exehanges.> One of the stocks delisted upon its application has since become prominent," In general, however, there are very few instances of substantial public interest in securities after their delisting upon application by exchanges. Delistings upon application by issuers fall into three classes: those which have little value, those which remain listed on other exchanges,

18 Comparable data are not ava.lIable for the period prior to July I, 1936. "Examples inclnde Kalamazoo Stove and Furnaee Company and DTM Corporation stocks remaining on Midwest Stock Exchange, and Spear I< Company, Clopay Corporation, and Davega Stores Corporation stocks which became llsted on the American Stock Exchange. :Ja The number of holders of American ExPress Company stock, dellBted in 1939 when it was nearly all owned by Amerex Holding Corporation, increased from nnder 100 to over 25,000 in Its sPin-olf bY' the latter 11 years later. 70 SECURITIES AND EXCHANGE COMMISSION and those which are good over-the-counter material. Upon the market break in 1937 and the subsequent drying up of exchange activity, from 962 million shares in 1936 to 221 million in 1942, and from $23.6 billion to $4.3 dollar volume respectively, there was a plethora of issuer applications. In this period, the Commission frequently required issuers to notify their stockholders of the pending application and to advise them of their right to be heard. Response of the holders was inconclusive," but the contents of the notifications were made the cause of denials or dismissals in some instances. For some time after the low point of the decline in share volumes was reached in 1942, the flow of delisting applications by issuers continued, and the Com- mission in three cases during the period 1944-46 required important issuers to put their decisions to a vote of stockholders." However, volumes on the exchanges were recovering. New delisting applications by issuers dropped to an average of about 7 per annum in the 15 years to June 30,1959, compared to over 21 per annum in the 8 years to June 30, 1943. Notifications to stockholders were required in only a few instances after 1943, the last being in 1954; no voting requirement has been ordered by the Commission since 1946. On occasion, either voluntarily or in compliance with a rule of an exchange, issuers have put the matter of delisting to vote of their stockholders before submitting applications. Since 1947, the Commission has held hearings on delisting applications only if requested by an interested party, and only three such hearings have been held since that date, all on delisting applications of the New York Stock Exchange. Most of the delistings pursuant to applications by issuers during the period have been with respect to issues having little value or issues remaining listed on other exchanges," Excluding a number of open- end investment company stocks, originally listed to qualify for sale under blue sky laws and not suitable for exchange trading, issues having a current market value of around $500 million have been removed to over-the-counter trading by delistings pursuant to applications by issuers during the period." The reporting requirements of the Commission pursuant to section 13 of the Securities Exchange Act seem not to have been much of a factor in the deliberations of the issuers with respect to delisting, since about $400 million of the market

.. The letters received were about equally divided tor and against delfstlng, and personal appearances at the hearings were few in number. 17 In none of these cases did the Issuer pursue Its dellstlng application further after imposition of the voting requirement. 18 Dellstlngs on application of issuers during the period originally comprised about 117 with no substanttaf trading value, DIS remaining listed on other exchanges, and 67 which became good over.the-counter trading material. Since dellstlng, about halt of the 67 last- mentioned Issues have been exchanged into listed stocks of other companies or passed out of existence In other ways. 18 This amount Is less than 0.2 percent of the market value of stocks on the exchanges. TWENTY-FIFTH ANNUAL REPORT 71 value is of issuers continuing to file similar reports under section 15(d) of the act. Delisting Proceedings under Section 19(a) Under section 19(a) (2) the Commission may suspend for a period not exceeding 12 months, or withdraw, the registration of a security on a national securities exchange if, in its opinion, such action is necessary or appropriate for the protection of investors and, after notice and opportunity for hearing, the Commission finds that the issuer of the security has failed to comply with any provision of the act or the rules and regulations thereunder. Shown below is the number of such proceedings during the 1959 fiscal year. Proceedings pending at the beginning of the fiscal year _ 8 Proceedings initiated during the fiscal year _ 5 13

Proceedings terminated during the fiscal year: By order withdrawing security from regtstratlon _ 5 By order suspending registration of security _ 1 6

Proceedings pending at the end of the fiscal year______7 The six proceedings which were terminated during the fiscal year were terminated during the early part of the year and were described in the Commission's 24th Annual Report.20 Section 19 (a) (4) authorizes the Commission summarily to suspend trading in any registered security on a national securities exchange for a period not exceeding 10 days if, in its opinion, such action is necessary or appropriate for the protection of investors and the public interest so requires. The Commission has used this power infrequently in the past. However, during the 1959 fiscal year the Commission found it necessary and appropriate in connection with three pending proceedings under section 1'9(a) (2) to use its authority summarily to suspend trading in securities registered on a national securities exchange. Only one of these suspensions remained in effect at the end of the fiscal year.

UNUSTED TRADING PRIVILEGES ON EXCHANGES The classical method by which stock exchanges evolved was for a group of local brokers to commence trading in any available securities. For more than half a century after the historic 1792 meeting under the buttonwood tree, any security could be called up for trading on the New York Stock Exchange at the pleasure of any member. By 1856, vote of a majority of members present came to be required for the placing of a security on the list to be called, but upon payment of

., Pp. 64-71. 72 S1!JCtJ1UTIES AND 1!JXcmNG1!J COMMISSION a 25-cent "fine" any member could have any other security temporarily inserted. Unlisted trading on the New York Stock Exchange was finally abolished in 1910, upon the recommendation of the New York Governor's Committee on Speculation in Securities and Com- modities (the "Hughes Committee") and because most of the stocks in the unlisted department were in any event becoming listed. The leading regional stock exchanges began trading in much the same way. For example, the rule on the Philadelphia Stock Ex- change as late as 1876 was that "members may call up the various stocks of any chartered company, whether on the regular list or not." As their growth in trading volumes and prestige enabled them to impose formal listing agreements and listing fees upon issuers, many of these exchanges came to abolish unlisted trading entirely, as the New York Stock Exchange has done, or to restrict it to issues listed upon other leading exchanges," A resolution adopted by the Bos- ton Stock Exchange in 1869 provided that "securities dealt in at the New York or Philadelphia Stock Exchanges may be called once, after the regular list, without charge ... " The rule on the Philadel- phia Stock Exchange by 1932 was that no securities could be admitted to unlisted trading which were not listed on the New York Stock Exchange, New York Curb Exchange, as it was then styled, Boston Stock Exchange, Pittsburgh Stock Exchange, or Chicago Stock Exchange. The American Stock Exchange (known as the New York Curb Exchange until 1953) is the principal center of exchange trading on an unlisted basis. In 1931-32 it had over 1,800 stock and 850 bond issues on its unlisted roster. As a result of the New York State At- torney General's examination of unlisted trading practices, the number was substantially reduced during 1933-34 by removal of issues inactively traded on the Exchange. The New York Produce Exchange provided facilities for security trading from 1928 to 1935, and had about 750stock and 150 bond issues available for unlisted trading. The New York Real Estate Securities Exchange operated from 1929 to 1941, and had about 100 stock and 200 bond issues available for trading on an unlisted basis. A number of other- exchanges on which unlisted trading occurred ceased to operate in the early days of the

%1 The listing process has had a long evolntlon. As early as 1847, the New York Stock Exchange called for transfer books to be located in New York City. Its Committee on Stock List, created in 1869, promulgated rules protecting against forgery and over-issuance of securities, and sought to obtain statements of condition and Iists of officers of issuers. The regular files of printed I1sting statements date from 1884. By 1900, the Exchange had commenced to can upon applicants for agreements to publish detailed statements and annual reports. The issuers' agreements with the Exchange became more comprehensive over the years, providing for periodic earnings statements, independent auditing, prompt notifications of issuer actions a1I'ecting their security holders, etc. With the advent of the Commission, the requtrements of the listing agreements were supplemented by the requirements for registration along with I1sting. TWENTY-FIFTH ANNUAL REPORT 73

Commission. The net number of securities admitted to unlisted trading on the exchanges prior to 1934is not available, but clearly ran into thousands.

Under section 12(f) of the Securities Exchange Act of 1934 22 the Commission may approve applications by national securities exchanges to admit securities to unlisted trading privileges without action on the part of the issuers, if it finds such admissions are necessary or appropriate in the public interest or for the protection of investors. Such admissions impose no duties on issuers beyond any they may already have under the act. Section 12(f) provides for three categories of unlisted trading privileges. Clause (1) provides for continuation of unlisted trading privileges existing on the exchanges prior to March 1, 1934. Clause (2) provides for granting by the Commission of applications by exchanges for unlisted trading privileges in securities listed on other exchanges. Clause (3) provides for granting by the Commission of applications for unlisted trading privileges conditioned, among other things, upon the availability of information substantially equivalent to that required to be filed by listed issuers. Included under clause (1) of section 12(f) are securities which had unlisted trading privileges on some exchanges prior to March 1, 1934, and (a) were also listed and registered on some other exchange or exchanges, or (b) were admitted only to unlisted exchange trading. Issuers of securities in group (a) are subject to the statutory reporting requirements by reason of the listing and registration of their securities. Issuers of securities in group (b) mayor may not be issuing public reports. Of the issues in group (b), only 246 stock and 20 bond issues remained in that status as of June 30, 1959. The attri- tion has been due to many factors. Bond and preferred stock issues have been retired. Companies have merged or liquidated. Marginal exchanges opening around the 1929 peak of market activity ceased operations thereafter. Many leading common stocks traded on an unlisted basis have subsequently been listed or exchanged for listed stocks of merging companies. The stocks with only unlisted trading privileges on the exchanges had an aggregate market value of $21.4 billion as of December 31, 1958. Standard Oil (New Jersey) held 52.5 percent of this total in stocks of Creole Petroleum Corporation, Humble Oil & Refining Com- pany, Imperial Oil Limited, and International Petroleum Company, Limited. An additional 1'7.5percent of the total was of 58 issues of

.. The original bills proposed abolition ot unlisted trading on stock exchanges. The proposals were opposed by the American Stock Exchange and other smaller exchanges as presenting too sharp a transition. Congress directed the Commission to study the problem and submit its recommendations, which was done In a "Report on Trading In UnllBted Securities upon Exchanges," dated January 3, 1936. The recommendations were adopted and the present section 12(t) was enacted In May 1936. 74 SECURITIES AND EXCHANGE COMMISSION 55 issuers reporting as fully as though they were listed, by reason of registrations under the Securities Act, the Public Utility Holding Company Act, the Investment Company Act, or because the issuers in some cases had other securities listed on registered exchanges. The residue in public hands of such unlisted stocks accordingly amounted to only about $6.5 billion, and of this amount, about $4.2 billion was of '1'0Canadian and other foreign stocks and American depositary receipts for foreign shares. The reported volume of trading on the exchanges in stock admitted to unlisted trading only, for the calendar year 1958, was about 32.3 million shares or about 2.5 percent of the total share volume on all the exchanges. Over 90 percent of this 32.3 million share volume was on the American Stock Exchange. Unlisted trading privileges on exchanges in issues listed and registered on other exchanges, granted under clause (1), are for the life of the issue, while those granted under clause (2) are only for the duration of the issue's listing and registration on another exchange." The number of unlisted trading privileges 24 granted under clause (1), in issues listed on other exchanges, were 991 in stocks and '1'5 in bonds on December 31, 1935. Similar privileges were thereafter granted under clause (2) for 1,410 stock issues and 8 bond issues. Mergers of exchanges, mergers of issuers, etc., have reduced the number of such privileges, which as of June 30, 1959, comprised 1,492 in stocks and 1 in bonds. The reported volume of trading on the exchanges pursuant to these unlisted trading privileges for the calendar year 1958was about 38.7million shares or about 3 percent of the total share volume on all the exchanges. About 15 percent of this 38.7 million share volume was on the American Stock Exchange and 85 percent was on the regional exchanges. On June 30, 1959, unlisted trading privileges existed pursuant to clause (3) of section 12(f) in only 12 bond and 4 stock issues, and 2 of the stock issues have also become listed on other exchanges. There have been no applications under clause (3) since 1949. Applications for Unlisted Trading Privileges Applications by exchanges for unlisted trading privileges in stocks listed on other exchanges, made pursuant to clause (2) of section 12(f) of the Securities Exchange Act, were granted by the Commission during the fiscal year ended June 30, 1959as follows:

.. Ordinarily, delisting occurs npon termination of the existence of an issue, and so the unlisted trading privileltCS therein, whether under clause (1) or clause (2), also end, Occasionally, however, an unlisted trading privilege on one exchange granted under clause (1) has continued after the issue has been dellsted from another exchange upon application by the issuer or by the exchange or because a listing was dropped upon merger of exchanges. Corrently, 4 such unlisted trading privileges continue in stocks which were formerly listed on other exchanges . .. The number of trading privileges is greater than the number of Issues because there may be trading privileges in an issue on more than one exchange. TWENTY-FIFTH ANNUAL REPORT 75

Stock exchange: Number 01 stocks ~erican______2 Boston______20 Cincinnati______1 I>etroit______10 Alidvvest______1 PacificCoast______7 Philadelphia- Baltimore______27 Pittsburgh______1

69 Rule 12f-2 under section 12(f) of the Securities Exchange Act provides that when a security admitted to unlisted trading on an exchange is changed in more than certain stipulated minor respects, the exchange may apply for Commission determination that the unlisted trading privileges may continue on the ground that the changed security is substantially equivalent to the security theretofore admitted to unlisted trading privileges. During the fiscal year the Commission granted applications by the American Stock Exchange for continuance of unlisted trading under this rule in three stock issues and two bond issues.

BLOCK DISTRIBUTIONS REPORTED BY EXCHANGES Rule 10b-2 under the Securities Exchange Act of 1934 in substance prohibits any person participating or otherwise financially interested in the primary or secondary distribution of a security from paying any other person for soliciting a third person to buy any security of the same issuer on a national securities exchange. This rule is an antimanipulative rule adopted under section 10(b) of the act which makes it unlawful for any person to use any manipulative or deceptive device or contrivance in contravention of Commission rules prescribed in the public interest or for the protection of investors. Para- graph (d) of rule 10b---2exempts transactions where compensation is paid pursuant to the terms of a plan, filed by a national securities exchange and declared effective by the Commission, authorizing the payment of such compensation in connection with the distribution. The Commission in its declaration may impose such terms and conditions upon such plan as it deems necessary or appropriate in the public interest or for the protection of investors. At the present time two types of plans are in effect to permit a block of securities to be distributed through the facilities of a national securities exchange when it has been determined by the exchange that the regular market on the floor of the exchange cannot absorb the particular block within a reasonable time and at a reasonable price or prices. These plans have been designated the "Special Offering Plan," essentially a fixed price offering based on the market price, 76 SECURITIES AND EXCHANGE COMMISSION and the "Exchange Distribution Plan," which is a distribution "at the market." Both plans contemplate that orders will be solicited off the floor but executed on the floor. Each plan contains certain antimanipulative controls and requires specified disclosures concerning the distribution to be made to prospective purchasers. In addition to these two methods of distributing large blocks of securities on national securities exchanges, blocks of listed securities may be distributed to the public by a "Secondary Distribution" on the over-the-counter market, after the close of exchange trading. The exchanges generally require members to obtain the approval of the exchange before participating in such secondary distributions. The following table shows the number and volume of special offerings and exchange distributions reported by the exchanges having such plans in effect, as well as similar figures for secondary distributions which exchanges have approved for member participation and reported to the Commission:

Total sales-12 months ended December 31, 195826

Shares In Value (thou- Number offer Shares sold sands of dollars)

Special offerings. ______5 93,445 88,152 3,286 Exchange distributions ______38 620,806 619,876 29,454 Secondary distrlbutrons ______122 9,321,712 9,508,505 361,886

6 months ended June 30, 1959 It

Special offerings ______1,650 Exchange dlstributlons ______334, 006 296,28,~II9 I 14, 683 Secondary distnbutlons ______89III 10,214,61728'~1 10,503,726 455,764

MANIPULATION AND STABll..IZATION Manipulation The Exchange Act describes and prohibits certain forms of mauip- ulative activity in any security registered on a national securities exchange. The prohibited activities include wash sales and matched orders effected for the purpose of creating a false or misleading appearance of trading activity in, or with respect to the market for, any such security; a series of transactions in which the price of such security is raised or depressed, or in which actual or apparent active trading is created for the purpose of inducing purchases or sales of such security by others; circulation by a broker, dealer, seller, or buyer, or by a person who receives consideration from a broker, dealer, seller or buyer, of information concerning market operations conducted for a rise or a decline in the price of such security; and the making of any false and misleading statement of material information by a broker, dealer, seller, or buyer regarding such security for the purpose of inducing purchases or sales. The act also empowers the

IS Details of these distributions appear in the Commtsslon's monthly ststlstl<'lll bulletin. For data for prior years 500 appendix table. TWENTY-FIFTH ANNUAL REPORT 77

Commission to adopt rules and regulations to define and prohibit the use of these and other forms of manipulative activity in any security registered on an exchange or traded over the counter. The Commission's market surveillance staff in its Division of Trad- ing and Exchanges in Washington and in its New York Regional Office and other field officesstudies the tickertape quotations of securities listed on the New York Stock Exchange and on the .American Stock Exchange, the sales and quotation sheets of the various regional exchanges, and the bid and asked prices published by the National Daily Quotation Service for about 6,000 unlisted securities for any unusual or unexplained price variations or market activity. The financial news ticker, leading newspapers, and various financial publications and statistical services are also closely followed. When unusual or unexplained market activity in a security is observed, all known information regarding the security is examined and a decision made as to the necessity for an investigation. Most investigations are not made public so that no unfair reflection will be cast on any persons or securities and the trading markets will not be upset. These investigations, which are conducted by the Commis- sion's regional offices,take two forms. A preliminary investigation or "quiz" is designed to discover rapidly evidence of unlawful activity. If no violations are found, the preliminary investigation is closed. If it appears that more intensive investigation is necessary, a forma] order of investigation, which carries with it the right to issue subpoenas and to take testimony under oath, is issued by the Commission. If violations by a broker-dealer are discovered, the Commission may institute administrative proceedings to determine whether or not to revoke his registration or to suspend or expel him from membership in the National Association of Securities Dealers, Inc., or from a. national securities exchange. The Commission may also seek an injunction against any person violating the act and it may refer information obtained in its investigation to the Department of Justice recommending that persons violating the act be criminally prosecuted. In some cases, where State action seems likely to bring quick results in preventing fraud or where Federal jurisdiction may be doubtful, the information obtained may be referred to State agencies for State injunction or criminal prosecution. The Commission is much concerned with indications of increased manipulative activity in present securities markets. Accordingly, the Commission has placed greater emphasis in its enforcement work upon the detection and prevention of manipulation and a substantial number of investigations are now in progress in this area.26 Active securities markets are particularly susceptible to manipulation because of the ease with which public interest can be generated.

><, • Securities ExchaDge Act Release No. 11927. .. 78 SECURITIES AND EXCHANGE COMMISSION Devious schemes may be employed to take advantage of this public interest. These include schemes to increase the quoted over-the- counter prices for relatively obscure issues being distributed without registration in asserted reliance upon some exemption, or the creation of fictitious markets for such issues. Such schemes are not uncommon in connection with distributions effected by "boiler rooms." These activities when conducted with ingenuity through numerous inter- mediaries are difficult to detect. Persons engaged in, or proposing distribution of a security not outstanding in the hands of the public may place orders for the purchase 'and sale of small amounts of a security with numerous brokers and dealers, or arrange to have others do this, with the result that such brokers and dealers will publish quotations for the security at prices specified in the orders, thus creating the appearance of an active over-the-counter market for the security, when in fact no such market exists except as generated by the distributors. When the distribution is completed, the orders are withdrawn and the "market" disappears. The investigation and prosecution of a manipulation case requires careful and painstaking work usually over a period of many months. Investors must be identified and interviewed, books and records of brokers, dealers and others must be examined and analyzed, and the information thus obtained then has to be developed in a form which would permit its introduction in evidence in legal proceedings. The following table shows the number of quizzes and formal investigations pending at the beginning of fiscal 1959, the number initiated in fiscal 1959, the number closed or completed during the same period, and the number pending at the end of the fiscal year:

Trading investigations

Quizzes Formal in- vestfgattons

1958•••••.• ______•• ______• ______• __• ______• ______Pending June 30, 46 8 InItiated during fiscal year ______•______••__•______._. ______89 Total .•_____•______. __. ______•____•______• _.______•______•• ______135 8 55 gl::~e~ :;:'~~~=~~~~~~=:::=~::::::~:~::=:::::::::::::::::::::::3 3 Total.. __• _._•• ______. ______•. ______• _.______•______._ 58 3

Pending at end of fiscal year __•__•______. ____•______•____•_•. _.___. ____ 77 11

When securities are to be offered to the public, their markets are watched very closely to make sure that the price is not unlawfully raised prior to or during the distribution. One thousand and fifty-five registered offerings having a value of $15,657 million and 854 offerings exempt under section 3(b) of the Securities Act, having a value of about $170 million were so observed during the fiscal year. Two hundred and seventy-four other offerings, SUCh.as secondary distri- TWENTY-FIFI'H ANNUAL REPORT 79 butions and distributions of securities under special plans filed by the exchanges, having a total value of $715 million, were also kept under surveillance. Stabilization When, in 1934, the provisions of the Securities Exchange Act were being drafted, Congress concluded that at times it would be necessary to stabilize offerings of securities in order to raise funds for industry and to protect existing investors while doing so. But rather than set stabilizing standards as a matter of law, Congress delegated to the Commission the authority to adopt rules to govern this little-under- stood function. When the Commission was organized, one of its first tasks was to study the subject of stabilizing, decide what was improper and consider the adoption of rules. The principal difficulty has been that stabilizing is a form of market manipulation. The problem was to retain the benefits while removing those antisocial practices which might cause loss to investors. The Commission proceeded slowly, as many new facets of the problem were revealed, and it was difficult to devise a simple formula which had the particularity required in a rule binding on all who dealt in securities, without literally stran- gling the business. Until it gained more expertise in the field, the Commission encour- aged issuers, underwriters and their counsel to consult with it and the staff concerning problems which might arise in this area. Each such problem was judged on its own merits in the light of whether or not the interests of investors might be adversely affected. As the Com- mission gained experience, general principles were laid down. It was held, among other things, that stabilizing was not improper if it did no more than prevent or retard a price decline during an offering; that stabilizing purchases should be confined to the fewest transactions necessary to accomplish such a purpose; that stabilizing levels must be based on an existing independent market and not some level believed desirable by the person stabilizing; and that it was improper for a stabilizer to follow a rise in price too closely. Releases were issued from time to time to publicize the Commission's viewpoint with regard to stabilizing. In addition, the Commission expressed its viewpoint in its decisions and opinions. From time to time it was suggested that what had now become a rather extensive list of settled practices be codified in specific rules, but in various conferences, the industry claimed that any code must necessarily be too rigid to allow for changing conditions. However, on December 30, 1952, the Committee on Interstate and Foreign Commerce of the House of Representatives recommended that the "Commission should earnestly and expeditiously grapple with the problem of stabilization with the view of either the early 80 SECURITIES ~ EXCHANGE COMMISSION promulgation of rules publicly covering these operations, or of recommending to the Congress such changes in legislation as its experience and study show now to be desirable." The Commission therefore undertook to codify the stabilizing practices which had been developed over the years. The Commission requested and obtained the assistance of the securities industry in formulating its stabilizing rules. .An ad hoc committee of the public was formed. This committee conferred with and submitted proposals to the staff, which were considered by the Com- mission together with the recommendations of the staff and views obtained in a public hearing held prior to the adoption of the rules. The rules as finally adopted are extremely technical. They have, however, served well their purpose of facilitating distributions and preventing unlawful manipulations. Rule 10b-6 restricts the trading activities of those who issue or participate in the distribution of securities. Rule 10b-7 governs the times, methods and prices at which stabilizing transactions are permissible. Rule 10b-8 deals with the peculiar problems arising in an offering of securities through rights. The Commission is continuously reexamining the effect of these rules and if it appears necessary, it will amend them to conform to any developing practice of the industry which appears to be in the public interest. During 1959 stabilizing was effected in connection with stock offerings aggregating 32,097,212 shares having an aggregate public offering price of $770,503,662 and bond offerings having a total offering price of $129,038,300. In these offerings, stabilizing transactions resulted in the purchase of 710,015 shares of stock at a cost of $18,146,077 and bonds at a cost of $2,938,340, and 4,461 stabilizing reports showing purchases and sales of securities effected by persons conducting the distribution were received and examined during the fiscal year.

INSIDERS' SECURITY HOLDINGS AND TRANSACTIONS Section 16 of the act is designed to prevent the unfair use of confi- dential information by directors, officers and principal stockholders by giving publicity to their security holdings and transactions and by removing the profit incentive in short term trading by them in equity securities of their company. Such persons by virtue of their position may have knowledge of the company's condition and prospects which is unavailable to the general public and may be able to use such information to their personal advantage in transactions in the company's securities. 'Provisions similar to those contained in section 16 of the act are also contained in section 17 of the Public Utility Holding Company Act of 1935 and section 30 of the Investment Company Act of 1940. TWENTY-FIFTH ANNUAL REPORT 81

Ownership Reports Section 16(a) of the Securities Exchange Act requires every person who is a direct or indirect beneficial owner of more than 10 percent of any class of equity securities (other than exempted securities) which is registered on a national securities exchange, or who is a director or officer of the issuer of such securities, to file reports with the Commis- sion and the exchange disclosing his ownership of the issuer's equity securities. This information must be kept current by filing subsequent reports for any month in which a change in his ownership occurs. Similar reports are required by section 17(a) of the Public Utility Holding Company Act of officers and directors of public utility holding companies and by section 30(f) of the Investment Company Act of officers, directors, principal security holders, members of advisory boards and investment advisers or affiliated persons of investment advisers of registered closed-end investment companies. All ownership reports are available for public inspection as soon as they are filed at the Commission's office in Washington and reports filed pursuant to section 16(a) of the Securities Exchange Act may also be inspected at the exchanges where copies of such reports are filed. In addition, for the purpose of making the reported information available to interested persons who may not be able to inspect the reports in person, the Commission summarizes and publishes such information in a monthly "Official Summary of Security Transactions and Holdings," which is distributed by the Government Printing Office on a subscription basis. Increasing interest in this publication is evidenced by the increase in the total circulation from a rate of about 6,000 at the end of the 1958 fiscal year to more than 8,000 at the end of the 1959 fiscal year. During the fiscal year, 39,275 ownership reports were filed. This represents a considerable increase over the 33,126 reports filed during the 1958 fiscal year. The following table shows details concerning reports filed during the fiscal year ended June 30, 1959.

Number of reports filed during fiscal year 1959

Securities Exchange Act of 1934 : er Form 4 33,848 Form 5______660 Form 6 3,550

Total 38,058

...Form 4 Is used to report changes In ownership; Form II to report ownership at the time an equity security of an Insurer Is tlrst registered on a national securities exchange; and Form 6 to report ownership of persons who subsequently become officers, directors or principal stockholders of the Issuer. 82 SECURITIES AND EXCHANGE COMMISSION

Public UtilityHolding Company Act of 1935: 2. Form U-17-1 --_ 23 Form U-17-2 --_ 343

Total______366

Investment Company Act of 1940 :211 Form N-30F-1______488 Form N-30F-2 -- 363

Total______851 Grand total- 39,275

Recovery of Short-Swing Trading Profits by Issuer In order to prevent insiders from making unfair use of information which may have been obtained by reason of their relationship with a company, section 16(b) of the Securities Exchange Act, section 17(b) of the Public Utility Holding Company Act, and section 30(f) of the Investment Company Act provide for the recovery by or on behalf of the issuer of any profit realized by insiders from certain purchases and sales, or sales and purchases, of securities of the company within any period of less than 6 months. The Commission has certain exemptive powers with respect to transactions not comprehended within the purpose of these provisions, but is not charged with the enforcement of the civil remedies created thereby.

REGULATION OF PROXIES

Scope of Proxy Regulation Under section 14(a) of the Securities Exchange Act, 12(e) of the Public Utility Holding Company Act of 1935, and 20(a) of the In- vestment Company Act of 1940the Commission has adopted regulation 14 requiring the disclosure in a proxy statement of pertinent information in connection with the solicitation of proxies, consents and authorizations in respect of securities of companies subject to those statutes. The regulation also provides means whereby any security holders so desiring may communicate with other security holders when management is soliciting proxies, either by distributing their own proxy statements or by including their proposals in the proxy statements sent out by management. Copies of proposed proxy material must be filed with the Commis- sion in preliminary form prior to the date of the proposed solicitation. Where preliminary material fails to meet the prescribed disclosure standards, the management or other group responsible for its prepa-

28 Form U-17-1 is used for initial reports and Form U-17-2 for reports of changes of ownership. 28 Form N-30F-l is used for initial reports and Form N-30F-2 for reports of changes of ownership. TWENTY-FIFTH ANNUAL REPORT 83 ration is notified informally and given an opportunity to avoid such defects in the preparation of the proxy material in the definitive form in which it is furnished to stockholders. Statistics Relating to Proxy Statements During the 1959 fiscal year 1,975 proxy statements in definitive form were filed under the Commission's regulation 14 for the solicitation of proxies of security holders; 1,959 of these were filed by management and 16 by nonmanagement groups or individual stockholders. These 1,975 solicitations related to 1,814 companies, some 150 of which had more than one solicitation during the year, generally for a special meeting not involving the election of directors. There were 1,790 solicitations of proxies for the election of directors, 152 for special meetings not involving the election of directors and 33 for assents and authorizations for actions not involving a meeting of security holders or the election of directors. In addition to the election of directors, the decisions of security holders were sought through the solicitation in the 1959 fiscal year of their proxies, consents and authorizations with respect to the following types of matters: Mergers, consolidations, acquisitions of businesses, purchases and sales of property, and dissolutions of companies 103 Authorizations of new or additional securities, modifications of existing securities, and recapitalization plans (other than mergers, consolidations, etc.) 270 Employee pension and retirement plans (including amendments to existing plans)______71 Bonus, profit-sharing plans and deferred compensation arrangements (including amendments to existing plans and arrangements) 21 Stock option plans (including amendment to existing plans) 178 Stockholder approval of the selection of management of independent audi- tors______608 Miscellaneous amendments to charter and by-laws, and miscellaneous other matters (excluding those Involved in the preceding matters) 410 Stockholder Proposals During the 1959 fiscal year, 48 stockholders submitted a total of 156 proposals which were included in the 99 proxy statements of 99 companies under rule 14a-8 of regulation 14. Typical of such stockholder proposals submitted to a vote of security holders were resolutions relating to amendments to charters or by-laws to provide for cumulative voting for the election of directors, limitations on the granting of stock options and their exercise by key employees and management groups, the sending of a post-meeting report to all stockholders, changing the place of the annual meeting of stockholders and the approval by stockholders of management's selection of independent auditors. The management of 20 companies omitted from their proxy statements under the Commission's rule 14a-8 It total of 65 additional pro- 5291123-59---9 84 SECURITIES ANV- EXCHANGE COMMISSION posals submitted by 25 individual stockholders. The principal reasons for such omissions and the numbers of times each such reason was involved (counting only one reason for omission for each proposal even though it may have been omitted under more than one provision of rule 14a-&) were as follows: (a) 1&proposals related to the ordinary conduct of the company's business; (b) 17proposals involved the election of directors'; (c) 13 proposals concerned a personal grievance against the company; (d) 11 proposals were not a proper subject matter under State law; (e) 5 proposals were resubmitted after not having received sufficient affirmative votes at a previous meeting; and (f) 1proposal was not submitted timely. Ratio of Soliciting to Non-Soliciting Companies Of the 2,236 issuers that had securities listed and registered on national securities exchanges as of June 30, 1959, 1,985 had voting securities so listed and registered. Of these 1,985 issuers, 1,544 or 78.7 percent, solicited proxies under the Commission's proxy rules during the 1959 fiscal year for the election of directors. Proxy Contests During the 1959 fiscal year, 19 companies were involved in proxy contests when nonmanagement persons filed detailed statements as participants, or proposed participants, under the requirements of rule 14a-11 when proxies are to be solicited from stockholders for the election of directors. A total of 259 persons, including both management and nonmanagement, filed such statements in 11 cases for control of the board of directors and in 8 cases for representation on the board. Management retained control in 8 of the 11 contests, opposition nominees won in 2, and 1 was settled by negotiation. Of the 8 cases where representation on the board was involved, management retained all places on the board in 5 and in the other 3 cases nonmanagement persons were elected to the board.

REGULATION OF BROKER-DEALERS AND OVER-THE-COUNTER MARKETS Registration The Securities Exchange Act requires under section 15(a) that brokers and dealers, with certain exceptions, using the mails or instrumentalities of interstate commerce to engage in securities transactions on the over-the-counter market must register with the Com- mission. Brokers and dealers whose business is exclusively intrastate or exclusively in exempt securities are not required to register. TWENTY-FIFTH ANNUAL REPORT 85 'The chart below sets forth statistics regarding the registration of brokers and dealers and applications for such registration during the fiscal year 1959. Effective registrations at close of preceding fiscal year 4,752 Applications pending at close of preceding fiscal year______60 Applications filed during fiscal year______944

Total ~------5, 756

Applications denied______4 Applications withdra wn______21 Applications cancelled______1 Registrations withdra wn______632 Registrations caneeljed.i.L; __ 59 Registra tions revoked______41 Registrations suspended______5 Registrations effective at end of year 4,907 Applications pending at end of yeaL______87

Less: 5,757 Suspended registrations revoked during year______*1 Total 5,756

*23 registrations were in suspension at close of the fiscal year.

Administrative Proceedings Section 15(b) of the Securities Exchange Act provides that the Commission shall revoke a firm's broker-dealer registration or deny broker-dealer registration to an applicant if, after appropriate notice and opportunity for hearing, it finds such action is in the public interest and that the registrant or applicant or any partner, offic-er,director or other person directly or indirectly controlling or controlled by such broker-dealer or applicant is subject to one or more of the disqualifications set forth in the act. In addition, pending final determination whether any registration shall be revoked, the Commission shall by order suspend such registration if after appropriat-e notice and opportunity for hearing, suspension shall appear to the Commis- sion to be necessary or appropriate in the public interest or for the protection of investors. The disqualifications referred to above, are briefly: (1) conviction in the past 10 years of a felony or misdemeanor involving the purchase or sale of securities or any conduct arising out of business as a broker-dealer; (2) willful false or misleading statements in the application or documents supplementing the application; (3) injunction by a court of competent jurisdiction from engaging in any conduct or practice in connection with the purchase or sale of securities; and 86 SECURITIES AND EXCHANGE COMMISSION (4) willful violation of any of the provisions of the Securities Act of 1933 or the Securities Exchange Act or any of the Commission's rules and regulations thereunder. Under section 15A of the Securities Exchange Act brokers and dealers may be suspended or expelled by the Commission from membership in a national securities association, and under section 19(a) (3) from national securities exchanges, for violations of the federal securities laws or the regulations thereunder. Registration may not be denied to an applicant absent evidence of misconduct specified in the act. Other factors, such as bad reputation or character, lack of experience in the securities business or even conviction of the applicant of a felony unrelated to securities transactions, do not constitute statutory grounds for denial of registration as a broker-dealer. Section 15A(b) (4) of the Securities Exchange Act of 1934provides that in the absence of the Commission's approval or direction, no broker or dealer may be admitted to or continued in membership in a national securities association if the broker or dealer or any partner, officer, director or controlling or controlled person of such broker or dealer was a cause of any order of revocation or suspension or expulsion from membership which is in effect. An individual named as such a cause often is subject to one or more statutory disqualifications under section 15(b) and his employment by any other broker-dealer thus could also become a basis for broker-dealer revocation proceedings against the new employer. The following statistics deal, among other things, with administrative proceedings instituted to deny and revoke registration and to suspend and expel from membership in an exchange or a national securities association: Proceedings pending at start of fiscal year to : Revoke registration______20 Revoke registration and suspend or expel from NASD or exchanges.Lc., 25 Deny registration to applicants______5

Total proceedings pending______50

Proceedings instituted during fiscal year to: Revoke registration______60 Revoke registration and suspend or expel from NASD or exehanges.Lc., 43 Deny registration to applicants______8

Total proceedings instituted______111

Total proceedings current during fiscal year______161 TWENTY-FIFl'H ANNUAL REPORT 87

Disposition of Proceedings

Proceedings to revoke registration: Dismissed on withdrawal of registration______5 Registration revoked______21 Total______26

Proceedings to revoke registration and suspend or expel from NASD or exchanges: Registration revokedL______6 Registration revoked and firm expelled from NASD______14 Dismissed on withdrawal of registration______3 Dismissed-registration and membership permitted to continue in effect______5 Suspended for a period of time from NASD______1

Total______29

Proceedings to deny registration to applicant: Registration denied______4 Dismissed on withdrawal of application______1 Dismissed-application permitted to become effectlve______2

Total______7

Total proceedings disposed of______62

Proceedings pending at end of fiscal year to: Revoke registration______54 Revoke registration and suspend or expel from NASD or exehangea.c.,., 89 Deny registration to applicants______6

Total proceedings pending at end of fiscal year______99

Total proceedings accounted for 161

Administrative proceedings in which action was taken during the year included the following:

SU8pension Proceeding8 During the past year the Commission suspended the registration of several broker-dealers pending final determination as to whether their registrations should be revoked. Since suspension has the effect of stopping all securities business by the registrant, this sanction is imposed only in the most serious type of cases where the Commission finds, on the evidence adduced at a hearing, that such action is required, in the public interest and for the protection of investors. A. G. Bellin Securities Corp.-The registrant was found, in connection with the sale of unregistered stock in General Oils & Industries, to have made false and misleading statements regarding, among other 88 SECURITIES AND EXCHANGE COMMISSION things, prospects of profits, payment of dividends, increase in market price, listing on exchange, merger, interest of officials of prominent oil companies in General, and the issuers' ownership of and production from oil and gas properties. In addition, registrant was preliminarily enjoined from selling stock of General. The Commission, on the basis of these findings, held that a sufficient showing had been made to require suspension of registration in the public interest and for the protection of investors. In determining this the Commission stated, "... we are required ... to suspend registration where the record before us on the suspension issue contains a sufficient showing of misconduct to indicate the likelihood that after hearings on the revocation issue registrant will be found to have committed willful violations or any of the other grounds prescribed with respect to the revocation in section 15(b) will be established, and that revocation will be required in the public interest.": "The Com- mission also stated that under the suspension. provision, "... we are only directed to inquire into the question of whether the public interest or the protection of investors warrants suspension, and there is no requirement that suspension be based upon findings of willful violation or the other grounds specified with respect to revocation." 30 At the close of the fiscal year revocation proceedings were pending against registrant. Herman Bud Rothbard, doing business as Jonathan & Com- pany.-Rothbard admitted that he filed a false and misleading financial statement with his application for registration, violated the net capital rule, failed to amend his registration "to disclose transfer of control of his business, failed to file a required financial report, and maintained materially deficient books and records and he consented to suspension of his broker-dealer registration. The Commission concluded that suspension was appropriate in the public interest and for the protection of investors." In addition, on June 30,1959, the Com- mission revoked Rothbard's registration. This is discussed in more detail later in this report. Jean R. Veditz Co., Inc.-Registrant consented to suspension of its broker-dealer registration. The Commission found suspension to be appropriate in the public interest and for the protection of investors. The order instituting proceedings charged registrant, Jean R. Veditz, its president and sole stockholder, and Ben Goldstein, its sales manager, with violation of the antifraud provisions of the federal securities laws in the offer and sale of stock of Universal Drilling Company. Registrant and Veditz were stated in the order to have been enjoined by the Supreme Court of New York, County of New York, from en- !l'aging in certain activities in connection with the purchase and sale

.. Sl\curltlC\l Exchange Act Release No. 5966 (May 18.1959). 31 Securities Exchange Act Release No, 5797 (Oct. 11, 1958). TWENTY-FIFTH ANNUAL REPORT 89 of securities. Revocation proceedings against registrant were pending at the end of the fiscal year." Philip Newman Associates, Inc.-In the latter part of 1958 registrant's books showed sales through the use of the mails of 124,520 unregistered shares of the common stock of Monarch Asbestos Co., Limited. Evidence at the suspension hearing established that, to induce purchase of this stock, registrant made numerous false representations, including among other things, that Monarch was an operating company with highly profitable production, and that Monarch's asbestos mine was adjacent to that of Johns-Manville Corporation and contained asbestos superior to that produced by the latter. It was also falsely represented that Johns-Manville Corporation had determined to acquire or to merge with Monarch and that the market price of Monarch stock had risen and would increase from $5 to $16 per share in from 1 to 6 months. The Commission held that there had been a sufficient showing of willful violations by registrant, including a course of conduct replete with fraud, to make it necessary and appropriate in the public interest and for the protection of investors that registrant's registration be suspended until final determination on the question of revocation. Proceedings on the question of revocation of registrant's broker-dealer registration were pending at the end of the fiscal year. 33 Alexander Dvoretsky, doing business as Dennis & Company.- The Commission found on the basis of stipulations entered into by Dvoretsky that he employed individuals who were permanently enjoined from engaging in certain securities practices and that he willfully violated provisions of the Securities Exchange Act and rules thereunder in that his application for registration denied existence of such injunctions and that he failed to file any correcting amendment to the application to state their existence. He was also found to have willfully violated the Commission's net capital rule and books and records requirements. These violations, the consent and the record so far made, were held to be a sufficient showing to require suspension of registration in the public interest and for the protection of investors. At the end of the fiscal year proceedings to revoke Dvoretsky's registration were still pending." Denial Proceedings Kelly Rubenstein, Inc.-William Rubenstein, president and a director of applicant, was found by the Commission to have willfully made. a false and misleading statement in the broker-dealer application of Washington Securities Corporation. Both Rubenstein and Washington were found to have willfully violated section 15(b) of the Securities Exchange Act of 1934 and rule 15b-2 thereunder in not

.. Securities Exchange Act Release :No.5843 (Dec. 23, 1958) • .. Securltles Exchange Act Release No 5856 (Jan. 15, 19(9) . .. Securities Exchange Act Release No. 59052 (lIIay 12. 1959). 90 SECURITIES AND EXCHANGE COMMISSION promptly filing an amendment correcting the inaccuracy of this information. In addition, the Commission found that Rubenstein, while president, treasurer and a director of Keith Richard Securities Corp. caused that firm to willfully violate Commission rules concerning keeping of books and records. Under all the circumstances, the Com- mission found it in the public interest to deny the application of applicant and found Rubenstein to be a cause of the denial. How- ever, the order stated that the above findings did not necessarily mean that Rubenstein was permanently barred from registration or from employment by a registered broker-dealer in a supervised capacity upon a proper showing." Alan Russell Securities, Inc.-The Commission denied broker- dealer registration to applicant and named Nathan L. Batterman and amos Maiers as causes of the denial. The action was based on a permanent injunction issued by the United States District Court for the Southern District of New York against applicant, Batterman and Maiers. The decree, entered by consent, enjoined applicant, Batter- man and Maiers from making untrue and misleading statements in connection with the sale of International Ceramic Mining Limited stock in violation of the antifraud provisions of the Securities Act.36 Leonard Burton Corporation.-Broker-dealer registration was denied applicant and Leonard Burton was named the cause of denial based on willful violations of the antifraud provisions of the Securi- ties Act of 1933 and the Securities Exchange Act. The Commission found that Leonard Burton while employed as a securities salesman by Steven Randall & Co., Inc. made misleading representations in connection with the offer or sale of Texas Union Oil Company stock. Burton represented that there would be no commissions on the sale of the stock and failed to state that Steven Ran- dall & Co., Inc. was selling the stock as principal. Burton also presented an optimistic picture of large and quick increases in the market value of the stock based on actual production without ap- prising investors of the speculative and contingent factors known by him. The statement that a stock is likely to go up was deemed to imply, "... that there is an adequate foundation for such prediction and there are no known facts which make such a prediction dangerous or unreliable." The Commission rejected registrant's allegation that the practicalities of merchandising the stock excused the registrant from the requirements of disclosure necessary to render the statements made not misleading."

.. Securities Exchange Act Release No, 5770 (Sept. 8. 19(8) • .. Securltles Exchange Act Release No. 5779 (Sept. 25. 19(8). '" Securities Exchange Act Release No 5978 (June 4. 19(9). TWENTY-FIFTH ANNUAL REPORT 91 Washington Securities Corporation.- The Commission denied broker-dealer registration to applicant and named Joseph Freundel as a cause of denial. Freundel, president, director and sole stockholder of applicant, was permanently enjoined, with others, on August 19, 1958, by the United States District Court for the District of New Jersey from making untrue or misleading statements in connection with the sale of common stock of Saskalon Uranium and Oils Limited. On the basis of the injunction against Freundel and his control of applicant, it was found in the public interest to deny applicant's registration. 88 Revocation Proceedings Pilgrim Securities, Inc.-This broker-dealer registration was revoked by the Commission on findings of fraud in the sale of securities, sales of unregistered securities, making of false records, failure to keep required records, failure to file promptly an amendment to the registration application, filing of an amendment containing a false statement and failure to file a report of financial condition for 1957 as required. The Commission found that registrant and Joseph Leo Gruber, Jr.s president of registrant, sold over 23,000 unregistered shares of Eagle Oil and Supply Company to at least 32 investors. Inconnection with some of these sales Gruber and registrant made false representations regarding a stock split, dividends, sales quotas and expected profits. The Commission found Gruber to be a cause of the revocation." John D. Ferris, doing business as Ferris & Co.-The Commission found that Ferris engaged in the securities business without disclosing that he was insolvent, issued bad checks, failed to pay for securities sold and delivered, and failed to meet his obligations arising from the purchase and sale of securities. In addition, registrant failed to furnish a customer a confirmation of sale, failed to comply with the net capital rule, failed to maintain accurate and current books and records and failed to file a report of financial condition for 1956. Ac- cordingly, the broker-dealer reg-istration of Ferris was revoked. The Commission held, "The conduct of a securities business involves implied representations of solvency and a readiness and ability to meet all attendant obligations as they arise and to consumate transactions in the usual manner in accordance with trade custom." By failure to disclose his insolvency and repeated failure to meet his responsibilities in connection with his securities transactions, Ferris was heIc1to have engaged in a course of conduct which operated as a fraud and deceit

II Securities Exchange Act Release No. 5899 (Mar. 16. 1959) . .. Securities Exchange Act Release No. 5958 (May 15. 19511). 92 SECURITIES AND EXCHANGE COMMISSION upon persons with whom he conducted business in violation of the antifraud provisions of the Securities Act of 1933 and the Securities Exchange Act.40 Sills and Company.-In this case also revocation was in part based on e:ffecting securities transactions without disclosing insolvency. In addition, the Commission found that registrant converted to its own use customer's funds in connection with the purchases and sales of securities, filed a false financial report, failed to comply with the net capital rule, failed to keep accurate books and records, and failed to correct information in its registration application. It was determined that registrant and Robert Bernard Sills, president and a director of registrant, converted to their own use funds of 19 customers, totaling $28,240, which had been obtained upon the false representation that registrant would use funds for the purpose of purchasing securities for the customers. The Commission named Sills as a cause of the order of revocation." William Rex Cromwell, doing business as Cromwell & Co.- Revocation of Cromwell's registration was based in part on his retain- ing funds received from the sale of securities for customers, amounting to $15,700, for periods of from 2 to 5 years. Also, Cromwell misappropriated funds received from customers for the purchase of securities amounting to almost $9,000 and failed to return the money or deliver the securities for periods of about llh to 4 years. In addition, Cromwell was found to have failed to comply with the net capital

.. Securities Exchange Act Release No. 5947 (May 8, 19,59) • .. Securities Exchange Act Release No. 5919 (Mar. 27, 1959). On February 5, 1959, Sills and Arthur P. Green, sales manager for S111sand Company, were indicted by the United States District Court for the Southern District of Florida. Both were charged with violating the Securities Exchange Act by filing false information with the Commis- sion and with violations of the antifraud provisions of the Securities Act and the Mall Fraud Statute. TWENTY-:FIFTH ANNUAL REPORT 93 rule, to make and keep current required books and records and to make his books and records available for reasonable inspection. He failed to file a report of financial condition for the year 1957 and failed to correct information in his registration application." William Harrison Keller, Jr., doing business as W. H. Keller, Stoc'kbroker.-The Commission revoked the broker-dealer registration of Keller based in part on the sale of securities to customers at prices not reasonably related to and substantially in excess of prevail- ing market prices as evidenced by registrant's contemporaneous cost. In 54 transactions with customers while acting as principal, Keller sold securities at markups over cost ranging from 6.25 to 40 percent with profits to Keller of over $20,000, representing an average markup of over 16 percent. Thirty-seven of these sales took place on the same day that Keller purchased the securities, and in 13 of the transactions involved the purchases were effected from other customers. In connection 'Withall of these sales, Keller failed to disclose to the customers the prices paid for the securities or the current market price established by other broker-dealers. In addition, Keller failed to comply with the net capital rule, to make and keep current required books and records, and to amend his application for registration to disclose employment of a person subject to a court injunction. Also, on April 29, 1958,he was permanently enjoined from effecting seeuri- ties transactions in violation of the net capital rule by the United States District Court for the Southern District of Indiana. Keller was also expelled from membership in the National Association of Securities Dealers, Inc.43 Allied Securities Corporation.- The Commission revoked this broker-dealer's registration and expelled it from membership in the National Association of Securities Dealers, Inc., naming Jack R. Parkman and William E. Powell causes of the order of revocation and expulsion. The Commission found that registrant sold unregistered securities of Life Insurance Company of South Carolina and Georgia Pacific Underwriters, Inc., and made false and misleading statements concerning the market prices and value of these securities and the financial condition of the issuer. Additional grounds for revocation were violation of the net capital rule, failure to keep accurate books and records and violation of regulation T.44 Richard A. Sebastian, doing business as Sebastian & Company.- Sebastian sold shares of Canada General Fund to a customer without revealing that the stock was pledged to secure a loan and would not promptly be released from such lien. In addition, Sebastian violated the net capital rule and failed to keep current required books and

.. Securities Exchange Act Release No. 5911 (Mar. 25, 1959) . .. Securities Exchange .Act Release No. 5909 (Mar. 18, 1959) . .. SecurIties Exchange .Act Release No. 5880 (Feb. 16, 1959). 94 SECURITIES AND EXCHANGE COMMISSION records. Consequently, the Commission revoked Sebastian's registration and expelled him from membership in the National Associa- tion of Securities Dealers, Inc.45 Graham & Company.-The broker-dealer registration of Graham & Company was revoked based on various false and misleading representations made to purchasers of stock of Hard Rock Mining Co. and Texas Adams Oil Company. These false representations included statements concerning the market for and the price of Hard Rock stock and statements that securities would be delivered to customers promptly; no disclosure was made of the fact that the registrant and Hard Rock were under common control. In addition, registrant offered, sold and delivered stock of Hard Rock in violation of the registration provisions of the Securities Act of 1933. Also, securities in both these companies were sold at prices not reasonably related to the current market prices. The Commission expelled registrant from membership in the National Association of Securities Dealers, Inc. and found E. W. Sterling Graham and Susan P. Graham causes of the order of revocation and expulsion.v' J. H. Lederer Co., Inc.-Registrant was found by the Commission to have sold over 1 million shares of stock of Continental Mining Exploration, Limited at prices ranging from $2.85 to $3.10 per share in violation of the registration requirements of the Securities Act of 1933. The shares were sold through long distance telephone solicitation in which false and misleading statements were made concerning, among other things, dividends to be paid, appreciation in the market price and registration of the securities. The Commission revoked the broker-dealer registration of J. H. Lederer Co., Inc., expelled registrant from membership in the National Association of Securities Dealers, Inc. and found Joseph Herbert Lederer a cause of the order of revocation and expulsion;" In addition, pursuant to a complaint filed by the Commission, the United States District Court for the Southern District of New York permanently enjoined J. H. Lederer Co., Inc., and Lederer from further violations of the registration provisions of the Securities Act of 1933 in the offer and sale of the common stock of Continental Mining Exploration Limited. Shelley, Roberts & Company of California.-The Commission found that Billy E. Boyle, president and controlling person of registrant, while an officer and a director of another broker-dealer, caused that broker-dealer to make various false and misleading statements in the sale of stock of United Mercury Corporation in violation of the antifraud provisions of the Securities Acts. These misrepresentations concerned, among other things, prospective increases in market prices, guarantees against loss, and listing on an exchange. Also,

.. Securities E:l.change Act Release No. 5876 (Feb. 12, 1959). 48 Securities Exchange Act Release No. 5864 (Jan. 27, 1959). 41 Securities Exchange Act Release No. 5848 (Dec. 29,1958). TWENTY-FIFTH .ANNUAL REPOR'!' 95 Boyle was found to have caused the other broker-dealer to extend credit in violation of regulation T. Registrant was found to have refused to make its books and records available for reasonable inspection. The Commission revoked the broker-dealer registration of Shelley, Roberts & Company of California and found Boyle a cause of the revocation." Gill.Harkness & Co.-This broker-dealer registration was revoked by the Commission on findings that registrant solicited and effected securities transactions without disclosing it was insolvent. Bruce A. Johnston, registrant's president and controlling stockholder, induced customers with whom he was in a relationship of trust and confidence to lend him funds and securities for purposes of supplying capital to registrant and sold to other customers shares of stock in registrant, and failed to inform any of these customers of the registrant's operating losses and insolvency. Alan D. Selditch, general manager of registrant's securities department, made false and misleading statements in the offer and sale of registrant's stock to two customers in violation of the antifraud provisions of the Securities Acts. He represented that registrant was in good shape, had a capitalization of $100,000,was expanding and would pay dividends, none of which was true. Registrant was found to have failed to keep accurate books and records, violated the net capital rule and failed to correct information in its registration application. The Commission's order of revocation also expelled registrant from membership in the Na- tional Association of Securities Dealers, Inc., and found Johnston and Selditch causes of the order of revocation and expulsion." Benjamin and Company, Ine., David Joel Benjamin, doing business as Benjamin and Company.-David Joel Benjamin was found by the Commission to have sold and delivered 243,000shares of stock of Hardy-Griffin Engineering Corporation in violation of the registration provisions of the Securities Act of 1933. Furthermore, a notification and offering circular used in selling the securities contained untrue statements concerning the sale of unregistered stock within the previous year, Benjamin's ownership of shares of the stock, payments made to Hardy-Griffin by its officers, directors, and pro- motors, and the number of shares that would be outstanding upon completion of the offering, all in violation of the antifraud provisions of the Securities Acts. David Joel Benjamin was also found to have violated the net capital rule and failed to make and keep current required books and records. Based on this record, the Com- mission revoked the broker-dealer registration of Benjamin, and Ben- jamin & Company, Inc. In addition, the latter was expelled from

.. Securities Exchange Act Release No. 11837 (Dec. 22, 19118). AI Secur1t1es Exchance Act Release No. 11822 (NOT. 24, 19118). 96 SECURITIES AND EXCHANGE COMMISSION the National Association of Securities Dealers, Inc. and Benjamin was found to be a cause of the order of revocation and expulsion." Whitney Phoenix Company, Inc.-The Commission revoked.the broker-dealer registration of registrant and found Strabo V. Claggett, president and director of registrant, a cause of the order of revocation. Registrant and Claggett offered and sold stock of Selevision weSt- ern, Inc. nVestern) and its parent, Selevision Corporation of Amer- ica (Selevision) by means of false and misleading information in wilful violation of the antifraud provisions of the Securities Acts. The Western offering circular and other sales literature falsely stated that registrant had increased its stock holdings in Selevision by purchase of an additional 65,000 shares and contained optimistic statements regarding Selevision's business prospects and future operations, but failed to disclose that Selevision had recently discontinued an important part of its business. Also, Claggett falsely stated to two purchasers of Selevision's stock that the stock would double or triple in price and, "that things were rolling along like a house afire." Registrant sold Western's securities pursuant to a filing with the Commission under regulation A. However, in the offer and sale of these securities, it used letters soliciting the purchase of the stock which were not filed with the Commission as required. In addition, registrant sold the stock in jurisdictions other than those indicated in the filing. Since it failed to comply with the provisions of regulation A, the exemption from registration was not available and the sale and delivery of Western stock by registrant and Claggett was in wilful violation of the registration requirements of the Securities Act of 1933. In addition, registrant violated the net capital rule, failed to comply with record requirements and refused to permit inspection of its records," Herman Bud Rothbard, doing business as Jonathan & Co.-The Commission revoked the broker-dealer registration of Rothbard 'and expelled him from membership in the National Association of 'securities Dealers, Inc. The Commission had previously suspended his broker-dealer registration." Rothbard, in the sale of about 40,000 shares of stock of U.S. Elec- tronics Development Corporation (EDCOR), used circulars which stated that ED COR was operating at a profit and that a dividend might be expected when in fact EDCOR had suffered losses and had an earned surplus deficit. Based on these findings the Commission held that Rothbard wilfully violated the antifraud provisions of the Securities Acts.

1Io Securities Exchange Act Release No. 5798 (Oct. 21,1'958) . ... Secnrltles Exchange Act Release No. 5995 (June 26,1959). • Secur1t1ell Exchange Act Release No. 5797 (Oct. 17,19(8). TWENTY-FIFTH ANNUAL REPORT 97

Rothbard also violated the registration requirements of the Se- curities Act of 1933 in that he sold 93,333 unregistered shares of EDCOR's stock. The sale of these shares was held not to be an exempt private offering for it was clear that the purchasers took for resale and not for investment and the ultimate offerees were members of the general public. In addition, Rothbard was in violation of the net capital rule on several occasions, filed a false financial statement with his registration application, failed to amend his registration application to reflect a change in control, failed to keep required books and records and failed to file a report of his financial condition for 1957.63 J. A. Latimer & Co., Inc.-The revocation of this broker-dealer registration was based in part on false and misleading statements in its application for registration concerning control of registrant. In addition, the Commission found that registrant effected wash sales in the stock of U.S. Hoffman Machinery Company and Artloom Com- pany on the New York Stock Exchange, while Hyman Marcus, the person who controlled registrant, was Chairman of the Board of each of these companies. Moreover, registrant was found to have made purchases of these securities while participating in the distribution of such securities in violation of section 10(b) of the Securities Ex- change Act and rule 10b-6 thereunder, and to have borrowed money on these securities from unqualified persons in wilful violation of section 8(a) of the Securities Exchange Act and regulation T thereunder. Besides revoking registrant's registration, the Commis- sion expelled registrant from the National Association of Securities Dealers, Inc. and found John Albert Latimer and Marcus to be causes of the order of revocation and expulsion. 54 Gotham Securities Corporation.- The Commission revoked this broker-dealer registration on the basis of a permanent injunction obtained in the United States District Court for the District of New Jer- sey barring registrant, Joseph Fruendel, a director and president of registrant, and Rico Tomasco, Jr., a director and secretary-treasurer of registrant, from making various untrue or misleading statements in connection with the sale of stock of Saskalon Uranium and Oils Ltd. Fruendel and Tomasco were named as causes of the revocation. 55 Steven Randall & Co. Inc.-The broker-dealer registration of reg- Istrant was revoked and it was expelled from membership in the

.. Securities Exchange Act Release No. 5998 (June 30,1959) . .. Securities Exchange Act Release No. 5849 (Dec. 29, 1958). On July 2, 1959, subsequent to the close of the fiscal year, Latimer was indicted by the United States District Court for the Southern D1strict of New York. The indictment contained 51 counts and charged violations of the anttmanlpulattve provisions of the Securities Exchange Act of 1934 in connection with a serles of transactions in the stock of the American Tractor Company listed on the American Stock Exchange . .. Securities Exchange .ActRelease No. 5899 (Mar. 16, 1959). 98 SECURITIES AND EXCHANGE COMMISSION National Association of Securities Dealers, Inc., with Frank M. Naft, its president, being named a cause of the order. Registrant and Naft were subject to a permanent injunction issued by the United States District Court for the Southern District of New York, pursuant to a complaint filed by the Commission, barring further sales of unregistered stock of Swan-Finch Oil Company. Another permanent injunction was issued by the Supreme Court of the State of New York, New York County, barring Steven Randall & Co., Inc. from conducting a securities business in the state of New York. The complaint filed by the Attorney General of the State of New York charged registrant with distributing fraudulent literature and engaging in other fraudulent practices in connection with the sale of securities of Texas Union Oil Corporation. In addition, registrant was found to have faBed to amend its registration statement to indicate existence of the injunctions." Frederick Securities Corporation-Fred Kaufman, doing business as Fred Kaufman Cu.-The broker-dealer registrations of these registrants were revoked based on findings by the Commission that registrants were permanently enjoined by the United States District Court for the District of New Jersey from offering and selling stock of Ben Franklin Oil & Gas Corporation in violation of the registration provisions of the Securities Act of 1933. In addition, both registrants failed to file a report of financial condition for 1957. Fred Kaufman, president and sole stockholder of Frederick Securities Corporation, was found to be a cause of the order of revocation issued against that corporation." William Harold HiIbert.-Hilbert was found to have sold stock of Great Fidelity Life Insurance Company (Great Fidelity) and Farm & Home Agency, Inc. (Agency) to customers in several states in violation of the registration requirements of the Securities Act of 1933 and while he was not registered as a broker-dealer. The United States District Court for the Southern District of Indiana in an action instituted by the Commission permanently enjoined Hilbert and others from selling unregistered shares of Great Fidelity. Later, the same court permanently enjoined Hilbert and others from selling unregistered stock of Agency. Hilbert failed to send customers confirmations of transactions, failed to maintain and preserve books and records and failed to correct his registration application to state his correct business address and the existence of the injunctions. Accordingly, the Commission revoked Hilbert's broker-dealer registration." James C. Graye, doing business as J. C. Graye Co.-The broker- dealer registration of Graye was revoked based on three injunctions

.. Securities Exchange Act Release No. 5872 (Feb. 11, 1959). M Securities Exchange Act Release No. 5861 (Jan. 20, 1959). 158 Securities Exchange Act Release No. 5860 (Jan. 21, 1959). TWENTY-FIFTH ANNUAL REPORT 99 entered against him. On April 3, 1958, the United States District Court for the Southern District of New York, pursuant to complaints filed by the Commission, issued two permanent injunctions against Graye barring him from further violations of the antifraud provisions of section 17 of the Securities Act of 1933in the sale of stock of Atlas Gypsum Corporation Limited (Atlas) and from further violations of the Commission's net capital rule. The decree enjoining the sale of Atlas stock barred the use of false statements and misleading omissions concerning the market price of Atlas stock, listing on a national securities exchange and plans to merge Atlas with other corporations, among other things. An injunction was also entered by the Supreme Court of New York on February 17, 1958, permanently enjoining Graye from engaging in securities transactions in the state of New York. In addition, Graye was found to have failed to amend his application for registration to indicate existence of the injunctions and failed to file a financial report for the year 1957as required." Tannen & Co., Inc.-Registrant and Philip Tannen, president, director and sole stockholder of registrant, were subject to two permanent injunctions issued by the United States District Court for the Southern District of New York pursuant to complaints filed by the Commission. On June 27,1957, registrant and Tannen were enjoined from the sale of unregistered shares of stock of Swan-Finch Oil Corp. and on October 11, 1957, from selling unregistered shares of stock of Cornucopia Gold Mines, in violation of the registration provisions of the Securities Act of 1933. The Commission revoked the broker- dealer registration of registrant and found Tannen to be a cause of such revocation. 60 Carl J. Bliedung.-Bliedung was subject to a permanent injunction entered in the United States District Court for the District of Colum- bia on March 16, 1955, barring him from effecting financial transactions unless promptly recorded in his books and records pursuant to Commission rules and requiring him to account for and record all financial transactions not recorded in his books and records. Bliedung also used customer funds for his own benefit, failed to deliver customers' securities promptly and sold securities at prices not bearing it reasonable relationship to the market prices. In addition, he sold securities to a customer and prior to delivery permitted securities of a like kind owned by him to remain subject to a lien for a loan made to him, in violation of the Commission's rule prohibiting hypotheca- tion of customer securities. The broker-dealer registration was revoked and Bliedung was expelled from membership in the National Association of Securities Dealers, Inc.61

fill Securities Exchange Act Release No. 5888 (Dec. 29, 1958). "" Securities Exchange Act Release No. 5761 (Aug. 21, 1958) • • , Securities Exchange Act Release No. 5745 (.JUly 30. 1958).

529023--59--10 100 SECURITIES AND EXCHANGE COMMISSION

McGrath Securities Corporation.- The Commission found that registrant and Robert C. Leonhardt, its president and sole stockholder, sold 447,614shares of stock of Micro-Moisture Controls, Inc. (Micro- Moisture) in violation of the registration provisions of the Securities Act of 1933. As a result of a complaint filed by the Commission, registrant and others had been enjoined from selling and delivering the stock of Micro-Moisture in violation of the registration provisions of the Securities Act of 1933. Registrant stipulated that the Court's findings and conclusions be considered as facts in the administrative proceeding. The Commission accordingly found that Micro-Moisture issued over 2 million shares of its unregistered common stock to a Canadian corporation in exchange for the latter's assets and the latter in turn distributed such stock to its shareholders. Shortly thereafter a group of these stockholders who were then in control of Micro- Moisture sold over 700,000shares to various broker-dealers, including the shares later sold by registrant and Leonhardt. The Commission concluded that registrant and Leonhardt were underwriters with respect to the unregistered shares sold by them. Accordingly, the Commission revoked the broker-dealer registration of McGrath Se- curities Corporation, expelled it from membership in the National Association of Securities Dealers, Inc., and found Leonhardt a cause of the order of revocation and expulsion." Keith Richard Securities Corp.-Registrant was found by the Commission to have sold stock of Arliss Plastics Corporation (Arliss) to purchasers in over 30 States principally through the use of local and long distance telephone calls. The Commission concluded that in connection with these sales, Julius Silver, president and sole shareholder of registrant, Samuel Goldberg, former sales manager, and G. Norman Waldman and Hyman Germanowitz, salesmen of registrant, made false and misleading representations concerning, among other things, prospects of a merger, payment of dividends, listing on a stock exchange, increase in market price of Arliss' stock and Govern- ment contracts held by Arliss. In addition, registrant, aided and abetted by Silver and William E. Rubenstein, former president of registrant, was found to have failed to keep current required books and records. Registrant, aided and abetted by Silver, was also found to have wilfully violated the net capital rule. In February 1959, based on a complaint filed by the Commission, the United States District Court for the Southern District of New York preliminarily enjoined registrant from engaging inthe securities business while not making and keeping current books and records required by Commission rules. The Commission revoked the broker-

... SecurItIes Exchange Act Release No. 5783 (Sept. 26. 1958). TWENTY-FIFTH ANNUAL REPORT 101 dealer registration and found Silver, Rubenstein, Goldberg, Waldman, and Germanowitz causes of the order of revocation." In separate actions, the Commission revoked the broker-dealer registration of Owens & CO.64(Owens) and Churchill Securities Corp.65 (Churchill), and denied requests for withdrawal of registration. Revocation in each instance was based on a permanent injunction and violation of the net capital rule. Owens was enjoined by the United States District Court for the District of Colorado on January 24, 1958, from further violations of the net capital rule. Churchill was enjoined on May 2, 1957, by the Supreme Court of the State of New York, County of New York, from engaging in the securities business in that State. In addition, the Commission expelled Churchill from membership in the National Association of Securities Dealers, Inc. and found Nat Girsky, Emanuel Bisgeier and Melvin Heiman, officers of Churchill, to be causes of the order of revocation and expulsion. John Cuthbert Owens, president, director and controlling stockholder of Owens, was found to be a cause of the order of revocation entered against Owens. The Commission determined that J. D. Creger & CO.66had violated the Commission's net capital rule, failed to make and keep current required books and records, and kept inaccurate records. Also, pursuant to a complaint :filedby the Commission, registrant was permanently enjoined from doing business with inadequate net capital by the United States District Court for the Southern District of California, Central Division, on September 16, 1957. The Commis- sion revoked the registration of J. D. Creger & Co. and found James D. Creger, president, director and controlling stockholder of registrant, a cause of the order of revocation. The Commission revoked the broker-dealer registration of William Whitehead 67 upon a determination that he had failed to comply with the net capital and record keeping requirements of the Securities Exchange Act of 1934 and was permanently enjoined by the United States District Court for the State of New Jersey from further violations of these provisions on the basis of a complaint :filed by the Commission.

The registration of Vickers Brothers 68 was revoked by the Com- mission based on findings that between December 31, 1957, and Octo- ber 30, 1958, registrant was in violation of the Commission's net capital rule on eight different occasions. In addition, Vickers Brothers was expelled from membership in the National Association

.. Securities Exchange Act Reles.se No. 5988 (June 17, 1959) . .. Securities Exchange Act Release No. 5916 (Mar. 25, 1959) . .. Securities Exchange Act Release No. 5871 (Feb. 10,1959) . .. Securities Evchange Act Release No. 5953 (May 15,1959). "''Securitles Exchange Act Release No. 5135 (July 11, 1958) . .. Securities Exchange Act Reles.se No. 5945 (Apr. 30, 1959). 102 SECURITIES AND EXCHANGE COMMISSION of Securities Dealers, Inc. and Henry G. Vickers and Norman L. Martin, general partners in registrant, were found to be causes of the order of revocation and expulsion. Lynne B. Fenner, president and principal stockholder and a director of The Fenner Corporation;" had been permanently enjoined by the Supreme Court of the State of New York on April 30, 1957, from engaging in securities transactions in that State. On January 24, 1958, the United States District Court for the Southern District of New York entered a decree of consent permanently enjoining Fenner and registrant from violations of the Commission's net capital rule based on a complaint filed by the Commission. Accordingly, the Commission revoked the broker-dealer registration of The Fenner Cor- poration and found Fenner to be a cause of revocation. The Commission revoked the broker-dealer registration of John T. Pollard & Co., Inc., now known as Webb Securities, Inc.70 Registrant had misstated its capital in a financial statement filed with its application for registration, engaged in transactions while in violation of the Commission's net capital requirements and made false entries in its books and records. The Commission, in addition, found John T. Pollard, president and a director of registrant, and Louis H. Green- berg, vice president, treasurer and a director of registrant, to be causes of the order of revocation. The broker-dealer registration of Arthur R. Gilman 71 was revoked for failure to file a report of his financial condition, to keep and preserve current books and records and to correct information regarding his business address in his application for registration.

Ross Natale Barengo 72 had his broker-dealer registration revoked based on findings that he made false and misleading statements in his application for registration regarding the name under which he would conduct business and the persons who controlled his business. In addition, he failed to file an amendment correcting such statements and failed to file required annual financial reports for the years 1956 and 1957. The following broker-dealer registrations were revoked by the Com- mission for failure to file financial reports as required by section 17(a) of the Securities Exchange Act of 1934 and rule 1'7a-5 thereunder: George D. Clarke, Ltd.,73Walter O'Donnell,74James A. Heaney, Jr.,75

69 Securities Exchange Act Release No. 5757 (Ang. 21,1958). 70 Securities Exchange Act Release No. 5777 (Sept. 24, 19(8). n Securities Exchange Act Release No. 5859 (Jan. 21,1959). 72 Securities Exchange Act Release No. 5866 (Feb. 2, 19(9). 7' Securities Exchange Act Release No. 5939 (Apr. 22,19(9). 7< Securities Exchange Act Release No. 594() (Apr. 22,19(9). 70 Securities Exchange Act Release No. 5941 (Apr. 22. 19(9). TWENTY-FIFl'H ANNUAL REPORT 103

Staey, Bell & Co., Inc.,76David Handel," and John B. Sullivan doing business as John B. Sullivan Company,"

Other Sanctions Carl M. Loeb, Rhoades & Co.-Dominick & Dominick.- The Commission instituted broker-dealer revocation proceedings against registrants, based upon offers to sell or solicitation of offers to buy securities of the Arvida Corporation (Arvida) in violation of section 5(c) of the Securities Act of 1933. Registrants were the prime underwriters of the offering. Prior to the filing of a registration statement with the Commission, a partner of one of the registrants, with the consent of the other and of the issuer, composed a release for use in the New York papers. The release stated, among other things, that Arthur Vining Davis, holder of considerable real estate in Florida, was going to convey some 100,000 acres of properties, described in the release as in an area of the Gold Coast in three named Florida counties, to Arvida, that Arvida would have assets of over 100 million dollars, and that within 60 days there was going to be a public offering of Arvida's securities through an investment banking group headed by registrants. In addition, newspaper reporters were called to the officeof one of the registrants, were told that the offering price would be in the vicinity of $10 or $11 per share and were given further information about Davis and his career. The information contained in the release, together with the additional information furnished orally, appeared in three New York newspapers on September 19, 1958, and in numerous other news media throughout the country. A limited survey indicated that for the two business days of Sep- tember 19 and 22, Loeb, Rhoades received indications of buying interest amounting to $500,000with a total of 101 securities firms expressing an underwriting interest in the offering. Loeb, Rhoades made notations of seIling group interest on the part of about 25 securities dealers. In addition, registrants received, prior to September 30, at least 58 expressions of interest from members of the public, including at least 17 specific orders to buy. Arvida did not file a registration statement under the Securities Act until October 27, 1958. The Commission concluded that publicity, prior to the :filing of a registration statement, by means of public media of communication, with respect to an issuer or its securities, emanating from broker- dealer firms who as underwriters or prospective underwriters have negotiated or are negotiating for a public offering of the securities of such issuer, must be presumed to set in motion or to be a part of the distribution process and therefore to involve an offer to sell or a solicitation of an offer to buy such securities prohibited by section

.. Securities Excbange .Act Release No. 5886 (Feb. 17. 1959). ff Securities Excbange .Act Release No. 5887 (Feb. 17. 1959) . .. Securities Excharu:e Act Release No. 5815 (Nov. 5. 1958l. 104 SECURITIES AND EXCHANGE COMMISSION

5(c) of the Securities Act of 1933. Therefore, the Commission held the press release and meeting and resultant publicity wilfully violated section 5(c) of the Securities Act. However, under all the circumstances, including registrant's excellent reputation, and the fact that they acted on reliance of counsel and that no investors appeared to have been injured, the Commission found that no sanction was necessary in the public interest or for the protection of investors." A related action brought by the Commission in the United States District Court for the Southern District of New York, in which a consent decree was entered permanently enjoining violation of section 5(c) by Arvida, registrants, and others, is discussed at p. 54, supra. First Maine Corporation.-Registrant, in violation of section 5(c) of the Securities Act of 1933, was found to have offered to sell or to have solicited offers to buy unregistered securities of Life Insurance Securities Corporation (LISCO) for a period of over 3 months before a registration statement was filed with the Commission. Burton M. Cross and Herbert L. Rackliff, president and beneficial owner of equity securities of registrant, respectively, were found to have caused registrant to distribute by mail, notices, circulars and other publicity which constituted the illegal offers to sell or solicitations of offers to buy LISCO's stock. In addition, registrant, Cross and Rackliff were found to have violated section 5(b) (1) of the Securities Act by transmitting improper prospectuses after LISCO's registration statement was filed. Also registrant, Cross and Rackliff were held to have made false and misleading statements of material facts in offering the securities of LISCO, thereby violating the antifraud provisions of the Securi- ties Act. The Commission found that the material distributed by registrant contained two general themes, (1) the attractiveness of stock of life insurance companies in which it was stated LISCO would invest, and (2) the knowledge, experience, ability and com- petency of LISCO's officers and directors, particularly Cross. This literature was materially misleading in stressing the investment op- portunities of life insurance companies without disclosing that the funds of investors would be invested in a casualty insurance company organized by Cross and Rackliff and not yet in operation. The information in regard to the experience of LISCO's management was misleading for failure to state that the active officers have had only very limited experience with an operating insurance company. The Commission, in view of the nature of the violations, ordered that registrant be suspended from the National Association of Secu- rities Dealers, Inc., for 20 days and that Cross and Rackliff be named causes of the suspension. 80 i' • 'II 'Securities Exchange Act Release No. 5870 (Feb. 9, 1959). 80 Securities Exchange Act Release No. 5898 (March 2,1959).

I , ~ tl TWENTY-FIliTH ANNUAL REPORT 105

Net Capital Rule The Commission has adopted under section 15(c) (3) of the Secu- rities Exchange Act rule 15c3-1, commonly known as the net capital rule, which is intended to provide safeguards for securities and funds of customers dealing with broker-dealers by limiting the amount of indebtedness which may be incurred by a broker-dealer in relationship to net capital. A broker-dealer subject to the rule may not allow his "aggregate indebtedness" to be more than twenty times his "net capital," as those terms are defined in the rule. When it appears, from an examination of reports filed with the Commission or through inspection of books and records, that a broker- dealer is in violation of the net capital rule, an opportunity is generally afforded the registrant to correct such capital deficiencies. Failure promptly to bring the capital position into compliance with the rule may result in injunctive action to restrain further violations or the institution of proceedings to determine whether or not the registrant's broker-dealer registration should be revoked. Violations of the net capital rule were alleged in 13 injunctive actions filed by the Commission in the last fiscal year and in 22 revocation proceedings. Broker-dealers participating in "firm commitment" underwritings must have sufficient net capital to permit participation in the underwriting for the amount they have agreed upon. The staff, in order adequately to protect issuers and customers of broker-dealers participating in such underwritings, carefully analyzes the latest information concerning the capital position of such a broker-dealer in order to determine if assumption of the new obligations involved in the underwriting is possible without violating the net capital rule. The Commission will refuse to accelerate the effectiveness of registration statements filed under the Securities Act when it appears that any of the underwriters would, by virtue of commitments in the underwriting, be in violation of the net capital rule. Broker-dealers named as underwriters in offerings of securities registered with the Commission who appeared to be inadequately capitalized to fulfill their commitments and, at the same time, remain in compliance with the net capital rule, were informed of the potential violation of the rule and the effect this would have upon the pending registration statement. Such broker-dealers either obtained sufficient additional capital, comply fully with the rule, reduced their commitments in the underwriting to such an extent as to participate in the underwriting without viola- ing the rule, withdrew as underwriters, or participated in the underwriting on a "best efforts" basis only. Financial Statements Under section 17(a) of the Securities Exchange Act, the Commis- sion has promulgated rule 17a-5 requiring the filing of periodic financial statements by registered brokers and dealers. Under this rule, 106 SECURITIES AND EXCHANGE COMMISSION every financial report filed must be certified by a certified public accountant or a public accountant who is in fact independent, with certain limited exemptions applicable to situations where certification does not appear necessary for customer protection. Thus, under certain conditions, a member of a national securities exchange need not file such a certified report. Also, if since his previous report a broker has limited his securities business to soliciting subscriptions as an agent for issuers, transmitted funds and securities promptly, and has not otherwise held funds or securities for or owed monies or securities to customers, he is exempt from the certification requirement. An exemption from the certification requirements is also given a broker- dealer who, from the date of his last report, has only bought and sold evidences of indebtedness secured by liens on real estate and has not carried margin accounts, credit balances, or securities for securities customers. The requirements for filing financial reports enable the Commission and the public to determine the financial responsibility of broker- dealers and enable the staff to analyze the reports in order to determine whether the registrant is in compliance with the Commission's net capital rule. Revocation proceedings are instituted against registrants who :fail to make the necessary filing. However, it is the practice of the Commission to first inform a registrant of his obligations under rule 17a-5 prior to taking such action against him. During the past fiscal year, 4,560 reports of financial condition were filed, an increase of 87 over fiscal 1958. Broker-Dealer Inspections Section 17(a) of the Securities Exchange Act provides for regular and periodic inspections o:f registered broker-dealers. The Commis- sion has continued to place emphasis on this program to insure a more adequate protection of investors. Inspection serves to assure compliance by broker-dealers with the securities acts and the rules and regulations promulgated by the Commission. The inspection device is one of the most useful instruments at the Commission's disposal in protecting investors and preventing and detecting violations of the Fed- eral securities laws. Generally, inspections involve, among other things: (1) review of a broker-dealer's pricing practices; (2) a determination of financial condition; (3) a review of the safeguards used in handling customers' funds and securities; and (4) a determination of whether adequate disclosures relating to transactions are made to customers. In addition, the inspectors also determine whether brokers and dealers keep their books and records in compliance with the Federal securities laws and conform to the margin and other requirements of Regulation T as prescribed by the Federal Reserve Board. Further- more, a check is made to see if excessive trading in customers' accounts TWENTY-FIFTH ANNUAL REPORT 107 involving "churning" or "switching" has occurred. Inspections often turn up evidence of sale of unregistered securities or the use of fraudulent practices, including the use of improper sales literature or sales methods. Frequently, the inspections enable the Commission to nip in the bud situations which if not corrected, could result in loss to customers. In 1956, the Commission inaugurated a policy of increasing the number of inspections over that of previous years. The same policy has been followed in the past fiscal year. Inspections completed during the year numbered 1,47l. In determining whether to institute action against a broker-dealer found to be in violation of the statutes or rules as a result of an inspection, consideration is given to the nature of the violations and to the effect such violations may have upon members of the public. It is not the Commission's policy to take formal action against broker- dealers for every violation. For example, inspections frequently reveal various inadvertent violations which are discovered before becoming serious and before customers' funds or securities are en- dangered. Where no harm has come to the public in such situations, the matter is usually brought to the attention of the registrant and suggestions made to correct the improper practices. If the violation appears to be willful and the public interest or the protection of investors is best served by formal action, the Commission promptly institutes the appropriate proceedings. The following table shows the various types of violation disclosed as a result of the inspection program during the fiscal year 1959:

7'lIpe Number Financial ditficulties______180 I!ypothecation rules______53 Unreasonable prices for securities purcbases______255 Regulation T of the Federal Reserve Board______170 "Secret profits"______7 Confirmations and bookkeeping rules 1,081 l1iscellaneous______824

Total indicated violatiollB 2,070

Total number of inspections______1,471 The principal stock exchanges, the National Association of Secu- rities Dealers, Inc. and some of the States each have somewhat similar but not identical inspection programs to that of the Commission. Each agency conducts its inspections, examinations or audits in accordance with its own procedures and with particular reference to its own regulations and jurisdiction. Inspections by other agencies cannot be adequate substitutes for Commission inspections since they are not primarily concerned with the detection and prevention of violations of the Federal securities laws and the Commission's regula- 108 SECURITIES AND EXCHANGE COMMISSION tions thereunder. However, the inspection programs of these other organizations do afford added protection to the public. For this reason, the Commission and certain other inspecting agencies maintain a program of coordinating inspection activities to obtain the widest possible coverage of brokers and dealers and to avoid unnecessary duplications of inspection. By this program, each inspecting agency makes available to all such agencies advice that it has started a particular inspection but the reports or findings of such an inspection are not exchanged between the parties. Information discovered in the course of such inspections or examinations indicating serious violations of regulations administered by another agency may, however, be called to the attention of such other agency. The program does not prevent the Commission from inspecting any firm recently inspected by another agency and such inspections are made whenever there exists good cause. Agencies now participating in this coordination program include the American Stock Exchange, the Boston Stock Exchange, the Mid- west Stock Exchange, the National Association of Securities Dealers, Inc., the New York Stock Exchange, the Pacific Coast Stock Ex- change, the Philadelphia-Baltimore Stock Exchange, and the Pitts- burgh Stock Exchange.

SUPERVISION OF ACTIVITIES OF NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. Section 15A of the Securities Exchange Act of 1934 ("the Maloney Act") provides for the registration with the Commission of national securities associations and establishes standards for such associations. The rules of such associations must be designed to promote just and equitable principles of trade, to prevent fraudulent and manipulative acts and practices and to meet other statutory requirements. Such associations serve as a medium for the cooperative self-regulation of over-the-counter brokers and dealers. They operate under the general supervision of this Commission which is authorized to review disciplinary actions and decisions which affect the membership of members, or of applicants for membership, and to consider all changes in the rules of associations. The National Association of Securities Dealers, Inc. ("NASD") is the only Association registered under the act. In adopting legislation permitting the formation and registration of such associations, Congress provided an incentive to membership by permitting such associations to adopt rules which preclude a member from dealing with a nonmember, except on the same terms and conditions as the member affords the investing public. The NASD has adopted such rules. Accordingly, membership is necessary to the profitable participation in underwritings and over-the-counter TWENTY-FIFTH ANNUAL REPORT 109 trading since members may properly grant price concessions, discounts and similar allowances only to other members. Loss or denial of membership due to expulsion or suspension or other ineligibility due to a statutory disqualification, or to failure to meet standards of qualification established in N.ASD rules, thus imposes a severe economic sanction . .At June 30, 1959, there were 4,018 N.ASD members, an increase of 198 during the year, as a result of 542 admissions to and 344 terminations of membership. .At the same time, there were registered with the N.ASD as registered representatives 77,917 individuals, including generally all partners, officers, traders, salesmen and other persons employed by or affiliated with member firms in capacities which involved their doing business directly with the public. The number of registered representatives increased by 12,603 during the year as a result of 19,071initial registrations, 11,043 re-registrations and 17,511 terminations of registrations. The membership and registered representative figures as of June 30, 1959, both represent all-time high marks. NASD Disciplinary Actions The N.ASD furnishes the Commission summaries of decisions on all disciplinary actions against members and registered representatives of members. Each such decision is considered by the Commission's staff to determine whether the underlying facts indicate conduct in violation of the statutes administered by the Commission or the rules thereunder and whether the Commission should, on its own motion, call up a particular case for review. This staff consideration often includes an examination of the .Association's complete file on a particular case. Where such action appears warranted by the available facts, independent Commission inquiry or action is initiated through the appropriate regional office. During the fiscal year the N.ASD forwarded to the Commission 248 disciplinary decisions on 209 formal complaint cases. It is not unusual for there to be more than one decision on a particular case for all decisions of District Business Conduct Committees are appealable to or reviewable by the Board of Governors which may affirm, modify, or reverse such decisions or remand them for reconsideration. Final .Association decisions were reported to the Commission during the year in 175formal complaint cases. Each formal complaint must rest on allegations that a member firm had violated specified provisions of the N.ASD Rules of Fair Practice, although registered representatives of members and other persons controlling or controlled by members may also be cited for violations or for having been the cause of violations. Of the 175 decided cases, 103 were based on complaints solely against members. Eight such complaints were dismissed on findings that the allegations had not 110 SECURITIES AND EXCHANGE COMMISSION been sustained, whereas in 95 cases it was found that the alleged violations had occurred, and a penalty was imposed on the member. The remaining 72 cases involved allegations of violations against the member firms concerned and 108 of their registered representatives or associates. Two such complaints were dismissed as to the two members and three individuals concerned and 21 others were dismissed as to the members involved, while 11 other individuals were found not to have been guilty of the alleged violations. Violations were found and a penalty was imposed on 49 members and 94 individual associates of members involved in this category of complaints. In all, there were disciplinary decisions adverse to 144 members and to 94 registered representatives. The penalties imposed included censure, fine, suspension or expulsion of the member or suspension Or revocation of the registration of a registered representative and in some cases a finding that an individual had been a cause of an expulsion, suspension or revocation. In many instances more than a single penalty was imposed and in a substantial majority of the cases some or all of the costs of the proceedings were assessed against those found to have acted improperly. Thus 31 members were expelled; 4 were suspended for periods ranging from 1 week to 18 months; the registrations of 28 registered representatives were revoked and 9 were suspended, also from 1 week to 18 months; and 16 individuals were held to have been the cause of an expulsion, suspension, or revocation. Moreover, 88 members were assessed fines as were 10 registered representatives, in amounts varying in each category from $25 to $5,000. The minimum penalty of censure was imposed on 18 members and 18 registered representatives. In the fiscal year the Association collected a total of $77,658.66 as a result of fines and costs imposed in disciplinary actions. In some cases, of course, fines or costs imposed on an expelled member or a revoked representative are never paid. In addition to disciplinary action by formal complaint procedure, as described above, action was also taken against members pursuant to the Minor Violation Procedure, provided in the Association's Code of Procedure for Handling Trade Practice Complaints, for the disposition of disciplinary cases where the facts are not in dispute and where the matter involves minor or technical violations of the rules with no significant damage to customers or other parties. Under this procedure a member charged with violation of the rules may waive a hearing, admit the violations as alleged and accept a penalty not in excess of censure and a fine of $100. A member's rights of appeal are preserved as is the right of the Board of Governors to review action by a District Business Conduct Committee. A member, however, is not required to follow the Minor Violation Procedure and may elect to face formal charges and to require a hearing. TWENTY-FIFTH ANNUAL REPORT 111 The Association reported to the Commission during the year the disposition of 31 complaints pursuant to Minor Violation Procedure. In 20 cases fines were imposed in amounts ranging from $25 to $100 and aggregating $1,325 and in 8 other cases the only penalty imposed was censure. In another case after the member admitted alleged violations and paid a fine of $100 under Minor Violation Procedure, the Board of Governors remanded the case to the appropriate committee for formal complaint treatment on the grounds that minor violation treatment was inappropriate where a member was charged with the repetition of acts for which it had previously been dis- ciplined. The remand resulted in the filing of a formal complaint and a finding of violations for which a fine of $200 was imposed. In two other cases members rejected Minor Violation Procedure and required the filing of formal complaints. In one such case, the member demonstrated to the committee's satisfaction at a hearing that it had not acted improperly and the committee dismissed the complaint. In the remaining case, the member rejected an offer to admit alleged violations and to pay a fine of $25. A formal complaint was then filed and the district committee found violations and imposed a $25 fine. The member appealed this decision to the Board of Gov- ernors which affirmed the findings of violations and increased the penalty to a fine of $300 plus costs. Commission Review of NASD Disciplinary Action Section 15A(g) of the act provides that disciplinary actions by the NASD are subject to review by the Commission on its own motion or on the timely application of any aggrieved person. The effectiveness of any penalty imposed by the NASD is automatically stayed pending determination in any matter which comes before the Commission for review. At the beginning of the fiscal year, two such review cases had been pending before the Commission. During the year eight other such petitions were filed and three cases were disposed of, leaving seven petitions pending at the year end.81 The Commission dismissed an application filed by Samuel B. Frank- lin & Company seeking review of disciplinary action by the Asso- ciation which had found that the firm had violated the Association's Rules of Fair Practice by selling securities to, and purchasing securities from, customers at prices which were not fair in view of all the relevant circumstances." An NASD District Committee had censured the firm, fined it $1,000 and assessed costs amounting to $773.80. The

81 Tbe pending cases concerned applications filed by Sterling Securities Co., Marc Ster- ling, et al, (File 16--1A77); Raymond G. Challklan (File 16-1A79) ; A. J. Grayson & Co .• Ine, and Albert J. Grayson (File 16-1A80) ; Gerald M. Greenburg and Robert Leopold (File 16-1A81) ; L. C. Flsber Co. (File 16-1A82) ; Whitney & Co., Inc. (File 16-1A83) ; and Franz Bachmann (File 16-1A85).. After the close of the fiscal year, the L. C. Fisher appltcatlon was remanded to the NASD for reconsideration on the joint request of the NASD and Fisher . .. Securities Exchange Act Release No. 5916 (Mar. 24, 1M9) and File 16-1A72. 112 SECURITIES AND EXCHANGE COMMISSION

NASD Board of Governors on appeal affirmed this action and assessed an additional $153.29 in connection with the costs of the appeal. According to the Commission's decision, the basic facts were not in dispute. Out of 731 transactions in which Franklin & Co. as principal sold securities to customers during the period between January and May 1956, not including sales of investment company shares and other securities sold in a public offering pursuant to a prospectus, 642 transactions involved markups in excess of 5 percent. The company, as principal, purchased securities from customers in 428 transactions and in 159 of these transactions its markdown exceeded 5 percent. In the 642 sales transactions the markups were more than 10 percent in 549 instances, more than 15 percent in 402 cases, more than 20 percent in 260 transactions, and ranged from 30 to 62 percent in 99 cases. On its 159 purchases from customers, the markdown in 68 transactions exceeded 10 percent, in 32 it exceeded 15 percent, in 20 it exceeded 20 percent, and in 6 cases it ranged from 30 to 37 percent. In dis- cussing the gross dollar amount of transactions, the Commission pointed out that of the 731 sales, 498 were in the $100-$500 category, and 108 each involved more than $500, and that of these 606 transactions, the markups were 30 percent or more in 55 cases and in excess of 20 percent in 184 cases. The price range of the securities sold was less than 10 cents per share in 127 transactions, less than 50 cents in 477 transactions, and less than $1 in 499 transactions. These markups were computed on the basis of the firm's own cost on same day or contemporaneous purchases of shares of the same securities except that, in a relatively small number of instances where such information was not available, the computations were made on the basis of quotations obtained from the National Daily Quotation Service. The markdowns on the firm's purchases from customers were computed on the basis of same day or contemporaneous sales by the firm of shares of the same securities for its own account. The applicant urged, among other things, that most of the transactions involved purchases or sales of so-called "penny" stocks selling for less than $1 per share; that in most cases the dollar value of a transaction was small; that the NASD 5 percent markup policy should not be applied to low priced securities sold in small dollar transactions; that it was justified in charging an amount over cost sufficient to cover expenses; and that its markups over cost were not greater than the differences between the published bid and asked quotations on typical penny stocks. In its findings and opinion the Commission concluded that Franklin & Co.'s pricing practices clearly were unreasonable, at least in those transactions where the markups or markdowns were greater than 20 percent, as there was no showing of special circumstances such as unusual expenses, extraordinary services to customers or acquisition of TWENTY-FIFTH ANNUAL REPORT 113 inventory at special concessions. The Commission sustained the NASD finding that the firm had purchased and sold securities at prices which were not fair under all the relevant circumstances and which were not reasonably related to current market prices, that such conduct was inconsistent with just and equitable principles of trade and that the penalties imposed were not excessive, having due regard to the public interest." Two other applications for review of Association disciplinary action were dismissed by the Commission, consideration having been stayed pending determination of administrative proceedings against the parties concerned. These petitions had been filed by Batkin & CO.54and Churchill Securities Corp.55 Dismissal of the petitions as moot followed action by the Commission revoking the broker-dealer registration of Batkin & Co. and expelling it from the Association S6 and similar action as to Churchill Securities Corp." Commission Review of NASD Action on Membership Section 15A(b) of the act and the by-laws of the NASD provide that, except where the Commission finds it appropriate in the public interest to approve or direct to the contrary, no broker or dealer may be admitted to or continued in membership if he, or any controlling or controlled person, is under any of the several disabilities specified in the statute or the by-laws. By these provisions Commission approval is a condition to the continuance in Association membership of any broker-dealer who, among other things, controls a person whose registration as a broker-dealer has been revoked or who was found to have been a cause of a Commission order of revocation. A Commission order approving or directing admission to or continuance in Association membership, notwithstanding a disqualification under section 15A (b) (4) of the 'act or under an effective Associa- tion rule adopted under that section Orsection 15A(b) (3), is generally entered only after the matter has been submitted to the Association by the member or applicant for membership. Where, after consideration, the Association is favorably inclined, it ordinarily files with the Commission an 'application on behalf of the petitioner. A broker- dealer whose application is refused Association sponsorship, however, may file an application directly with the Commission. The Commis- sion reviews the record and documents filed in support of the application and, where appropriate, obtains additional evidence. At the beginning of the fiscal year one such petition was pending before the

.. After the close of the tlscal year the tlrm filed a petition for review of the Commis- sion's decision with the Court of Appeals for the Ninth Circuit . .. Securities Exchange Act Release No. 5763 (Aug. 22, 1958) and File 16-1A61 • .. Securities Exchange Act Release No. 5951 (May 11,1959) and File 16-1A11 . .. Securities Exchange Act Release No. 510!J.(June 9, 1958) . srSecurities Exchange Act Release No. 5811 (Feb. 10, 19,59). 114 SECURITIES AND EXCHANGE COMMISSION Commission; during the year six petitions were filed and three were disposed of; and four were pending at the year end. The three disqualified individuals whose employment was thus approved were: William A. Spanier," formerly president of Bennett, Spanier & Co., Inc., a firm revoked as a broker-dealer and expelled from the NASD by the Commission on May 28, 1952, on findings that, among other things, it had engaged in manipulative activities and had sold unregistered securities; S9 Kenneth E. Goodman," formerly sole stockholder of Kenneth E. Goodman & Co., a firm similarly revoked and expelled by the Commission on April 23, 1958, on :findings that it had falsely stated its bank balance on its books and had effected securities transactions in violation of the Commission's net capital rule; 91 and Leonard H. Whitaker,92 whose registration as a broker-dealer had been revoked by the Commission in 1952 because of certain securities violations, including, among other things, the sale of unregistered securities and conversion to his own use of a payment from a customer for securities." Whitaker's employment by another NASD member firm had earlier been approved by the Commission under specified conditions. 94 This second approval petition was necessary because Whitaker had changed employers. In each case the Commission found it appropriate in the public interest to approve the NASD applications in view of all the circumstances, including the lapse of time and supervision of the representatives.

LITIGATION UNDER TIlE SECURITIES EXCHANGE ACT OF 1934 In order to protect the public, the Commission is authorized to institute actions to enjoin broker-dealers and other persons from engaging in activities which violate the provisions of the Securities Exchange Act of 1934. Some of these activities also violated provisions of the Securities Act of 1933 and are discussed above. Anti-Fraud Litigation In discharging its obligation to prevent frauds upon the public, the Commission filed a number of complaints during the past year. Final judgment enjoining Louis E. Wolfson from further violating the antifraud and antimanipulative provisions of the Exchange Act was obtained." This case is discussed at length in the 24th Annual report.96 The complaint alleged that ",Volfson and others had attempted to

.. securities Exchange Act Release No. 5778 (Sept. 25, 1958) and File 16-1A46 . .. Adams &; Co., Bennett, Spanier & Co., Inc. and Ray T. Haas, 33 S.E.C. 444 (1952) . .. Securities Exchange Act Release No. 5828 (Dec. 5, 1958) and File 16-1A73 . .. Securities Exchange Act Release No. 5684 (Apr. 23, 1958). osSecurities Exchange Act Release No. 5989 (June 16, 1959) and Flle 16-1A78 . .. Leonard H. Whitaker, 33 S.E.C. 72 (1952). DC Securities Exchange Act Release No. 5581 (Sept. 3, 1957) and Flle 16-1A64 . .. USDC SD NY No. 135-30. "At p. 100. TWENTY-FIFTH ANNUAL REPORT 115

defraud the public and to manipulate the market of .American Motors stock; that he and his associates caused to be published in a financial newspaper an article stating that they owned 460,000 shares of that stock at a time when they had disposed of 200,000shares, and that they later caused an article to be published stating that Wolfson had disposed of one-quarter of his 400,000 shares and would sell the rest during the coming months. Wolfson, according to the complaint, omitted to disclose that he had disposed of all his holdings in American Motors, had in fact sold short, and was attempting to buy stock to cover his short position. Judgment against Wolfson was entered by consent. In E.E.O. v, Wilkes,91 the Commission's complaint charged violations of the short selling and antifraud provisions of the Exchange Act and the Commission's rules in that defendant caused four broker- dealers to sell for his account on the American Stock Exchange an aggregate of 29,100 shares of Hazel Bishop, Inc. common stock, by falsely representing to the brokers that he owned such stock. A final decree enjoining further violations of the act was entered on consent of defendant," Three cases involved violations of the Exchange Act with regard to over-the-counter sales. In E.E.O. v. McDonald 99 the complaint alleged that the corporate defendant broker-dealer accepted moneys and securities and represented that it would fulfill its obligation to deliver securities or moneys due when in fact it could not and did not intend to do so. Affidavits filed in support of a motion for a temporary restraining order alleged, among other things, that a broker-dealer firm had paid defendant $50,000 for the purchase of securities which were never delivered, that employees of defendant stated that members of the public had paid more than $250,000 for securities which were not delivered, and that the Dayton Aviation and Radio Equipment Corp., which had engaged defendant as underwriter for its offering of some 500,000 shares of common stock, had received proceeds from the sale of only 274,200 shares although in fact the whole issue had been sold. A permanent injunction was obtained by default against the firm and its president. In E.E.O. v. Oampbell1°O and in E.E.O. v. Rosen 101 the Commission charged defendant brokerage firms with accepting customers' orders and deposits of money and securities upon the representation that they were ready and able to meet all obligations, when in fact they were insolvent and unable to meet current liabilities. Permanent injunctions were entered in both cases,

8'1 USDC SD NY No. 145-163. os In a companion case. S E.a ..... Brtnrn; USDC SD NY. No. 140-236. thp dpfplHlant was permanently enjoined from further short-sales of Hazel Bishop, Inc. stock, 99 USDC SD NY. No. 139-190. 100 USDC SD Texas, No. 12.347. 101 USDC D Mass., No. 0S-S69-A.

029523--59----11 116 SECURITIES AND EXCHANGE COMMISSION

Cases under the Net Capital Rule The "net capital rule" provides an important protection to investors against loss of securities or monies, due to financial straits of broker- dealers, by requiring every broker-dealer to limit his aggregate indebtedness to all persons to 2,000 per centum of net capital. During the year injunctions were obtained to enjoin broker-dealers from further violations of the net capital rule in S.E.O. v. Trigg,102 S.E.O. v. Wagner,103 S.E.O. v. Sano?04 S.E.O. v. The Ohristopher Oorp.,105 8.E.O. v. Empire State Mutual Sales, !'lUJ./06 and 8.E.O. v. Green.107 In the Empire State and Green cases, and in S.E.O. v. Aronson 108 and S.E.O. v. Oa1'1'oll109the Commission charged defendants with violations of the fraud and record-keeping provisions of the Exchange Act, as well as the net capital rule. M. J. Shuck v. S.E.O., 264 F. 2d 358 (C.A. D.C., 1958), involved a petition for review of a Commission order denying withdrawal and revoking petitioner's registration as a broker-dealer. The Commis- sion's revocation was based on findings that petitioner had been enjoined by a district court from violating the Commission's net capital rule and that revocation would be in the public interest. The Court of Appeals for the District of Columbia, in affirming the Commission's order, held, first, that the Commission had observed the fundamental purposes of section 9(b) of the Administrative Procedure Act and, second, that under the circumstances of this case, the Commission properly found revocation was in the public interest. Service on the petitioner of the temporary restraining order and the Commission's complaint in the action for the preliminary injunction as well as the issuance of the injunction itself met the requirement in 9(b) that written notice of the facts warranting a revocation be sent to the li- censee prior to the agency proceeding. The Court stated that the record shows that even prior to the district court proceedings the Commission's staff had discussed with Shuck the matter of compliance. In addition, the court proceedings, the Court held, afforded petitioner a further opportunity to demonstrate compliance. Moving to the merits of the case, the Court concluded that it is not required that the injunction contain an express finding of wilfulness as petitioner had contended where revocation is based on the entry of an injunction. Evidence of wilfulness, however, might be considered by the Commission in applying the public interest criterion. The record of Shuck's action in the past supported the Commission's

102 USDC SD Texas, No. 12,236. 203 USDC SD NY, No. 138-41. UK USDC SD NY, No. 147-363. 10lI USDC SD Fla., No. 8982-M. 100 USDC SD NY, No. 142-291>. 207 USDC ND Texas, No. 8060. 208 USDC SD Calif., No. 988-1>8 HW. "» USDC D Mass., No. 59-194A. TWENTY-FIFTH ANNUAL REPORT 117 findings that the violation of the net capital rule was not unintentional or inadvertent. This past record coupled with the District Court's finding that Shuck would not maintain the required standards in the future could properly justify the Commission's revocation for the future protection of the investing public. Nor did the Court feel that Shuck's expressed wish to withdraw from the securities business or his alleged satisfaction of creditors precluded the Commission from taking this step. The Court stated that the Commission could hold its hearing which would reflect the facts shortly after they occurred and take prompt and appropriate action without waiting until Shuck re-entered into business. The Court of Appeals restated its ruling in Hughes v, B.E.Opo that wilfulness means "no more than that the person charged with the duty knows what he is doing."

Litigation Involving Broker-Dealer Registration and Reporting Requirements

Gilligan, Will &: 00., et alp V. B.E.O., 267 F. 2d, 461 (C.A. 2, 1959) involved a petition for review of the Commission's order suspending Gilligan, Will & Co. for 5 days from the National Association of Se- curities Dealers, Inc. for violations of section 5 of the Securities Act and finding James Gilligan and William Will causes of the order.v' Petitioners challenged the Commission's findings that they were underwriters with respect to 1955 and 1956 transactions in Crowell- Collier debentures and stock. The Court upheld the findings and conclusion of the Commission that the resale of securities contemplated and executed by petitioner was a distribution or public offering and hence petitioners were underwriters. The Court rejected petitioners' argument that they took for investment where they intended to retain the stock only if the issuer continued to operate profitably. Some of the cases brought by the Commission involved failure of the defendants to file the reports required by the Exchange Act. In B.E.O. V. Alexander L. Guterrna, and F. L. Jacobs 00.112 the complaint sought to enjoin the company and its then president and controlling stockholder, Guterma, from continuing to violate the antifraud and reporting requirements of the 1934 Act and the antifraud and registration requirements of the 1933 act. After Guterma resigned and disposed of his interest in the company, the new management consented to entry of a mandatory injunction ordering the company to prepare and file with the Commission all information, documents and reports required by the act.

110 174 F. 2d 969,977 (1949). 111 For a discussion of the Commission's Findings and Opinion see 24th Annual Report, pp.83-84. 112 USDC SD NY, No. 144-363. A criminal indictment is also pending against Guterma. See the discussion of erfmlnal Ilttgatton, infra, this report.

I l I . J' ~~".' 118 SECURITIES AND EXCHANGE COMMISSION

Upon application of the Commission the District Court at New York City appointed receivers for the assets of the company. Im- mediately thereafter a petition for reorganization under chapter X of the Bankruptcy Act was filed and is now pending in the District Court at Detroit, Mich. The Commission is participating in these proceedings. In B.E.O. v. Interworld T. V. Fiime, bW.,113 the court entered a mandatory injunction requiring the filing of reports on Forms 8-K, 9-K, and lo-K and restraining future violations of the reporting requirements. In a companion case, B.E.O. v. Guild Films 00.,114 the court ordered reports to be filed correcting a previously filed Form 10-K and enjoined future violations. A mandatory injunction was entered by consent in B.E.O. v, Peru- vian Oil Concessione 00., Inc.,l1s requiring the company to file annual reports for fiscal 1955,1956and 1957. In B.E.O. v. First Lewis Oorporationr" defendant was charged with failing to make available for examination by representatives of the Commission the books and records required to be kept by the Exchange Act. The Court enjoined the defendant from doing business in securities while failing to make such books and records available. A permanent injunction was also entered in B.E.O. v, Brad- ford,117for failure to make available books and records and for failure to file a report of the financial condition of a brokerage firm. Proxy Litigation The Commission appeared as plaintiff in one case of proxy litigation. In B.E.O. v. Central Founa1'Y 00., et al.,us the Commission obtained a court order delaying the effect of votes cast by stockholders of the company at the Annual Meeting, charging both management and the opposing Independent Stockholders Protective Committee with violations of the proxy rules. The management filed a notice of appeal from the order and the case was set for hearing on the Commis- sion's complaint. However, before any further action was taken, the next Annual Meeting was held from which the stockholders' faction emerged victorious by a substantial margin. Neither side was charged with illegal practices in connection with the second meeting. The management faction then stipulated to dismissal of its appeal. There- upon the Commission stipulated to dismissal of its complaint. Contempt Proceedings In B.E.O. v, East Boston Co., Bernard Goldfine, et al.,119 the Com-

113 USDC SD NY, No. 145--328. 114 USDC SD NY, No. 145--327. 110 USDC SD NY, No. 144-363- 11. USDC D Mass, No. 59-479-F. I1T USDC SD Calif, No. 179-58. Bradford has filed notice of appeal. 11' USDC SD NY, No. 138-110. 119 USDC D Mass, No. 54-438-W. TWENTY-FIFTH ANNUAL REPORT 119

mission found it necessary to bring a contempt action to enforce an injunction order previously obtained. The respondents were found in civil contempt for failure to file the semi-annual report of the company required under the Exchange Act. The respondents consented to payment of a $2,500 fine by the individuals. The company had earlier paid $3,000compensatory damages. Participation as Amicus Curiae As noted in the last annual report, the Commission filed briefs in two cases in which the validity of rule 16b-3, insofar as it exempts the exercise of stock options from section 16(b) of the Exchange Act, was brought into question. In the first of these cases, Perlman v. Timberlake, the judge of the United States District Court for the Southern District of New York declared in dictum that the rule is invalid, but held that the defendants were protected from liability because of their good faith reliance upon the rule. The other case, Van A.alten v, Hurley, now pending before another judge of the same court, has not yet been decided.v" In Taylor, et al. v, Janigan (USDC D. Mass, No. 85-1056), the case arose out of the purchase by the President of Boston Electro Steel Casting, Inc. of substantially all of the outstanding stock from the shareholders. The plaintiffs brought suit under section 10(b) of the Exchange Act and rule 10b-5 thereunder, charging that they were induced to sell by defendant's misrepresentation. The defendant moved to dismiss on the grounds of lack of jurisdiction and failure to state a cause of action. Defendant also argued that 28 U.S.C. ~ 1331, which requires a $10,000 amount to be in controversy, governs the implied right of action under the Exchange Act and the rules under it. The Commission filed a brief amicus curiae. The court supported the Commission's arguments, denying the motion to dismiss. The court stated that section 10(b) and rule 10b-5 gave rise to the cause of action and to Federal jurisdiction, and that interveners need not comply with the requirement as to amount in controversy, because section 27 of the Exchange Act grants jurisdiction without reference to amount.

1>0 After the close of the year the United States District Court for the Southern District of Texas held, In Oontinental Oil 00. v, Perute, that the rule Is within the Commission's exemptive authority. The opinion expressly declined to accept the rationale of the Timberlake case. In addition, the Van Aa/ten case was decided on JUly 30, 1959, but the trial judge held that It was unnecessary to decide the validity of the rule, and declined to express an opinion. PART VI ADMINISTRATION OF THE PUBLIC UTILITY HOWING COMPANY ACT OF 1935 The Public Utility Holding Company Act of 1935 provides for the regulation by the Commission of interstate public-utility holding company systems engaged in the electric utility business or in the retail distribution of gas. The matters dealt with embrace intricate and complex questions of law and fact, and generally involve one or more of three major areas of regulation. The first of such areas covers those provisions of the act, contained principally in section 11 (b) (1), which require the physical integration of public-utility companies and functionally related properties of holding company systems, and those provisions, contained principally in section 11(b) (2), which require the simplification of intercorporate relationships and financial structures of holding company systems. The second area of regulation covers the financing operations of registered holding companies and their subsidiaries, the acquisition and disposition of securities and properties, and certain accounting practices, servicing arrangements and intercompany transactions. The third area of regulation includes the exemptive provisions of the act, the provisions covering the status under the act of persons and companies, and those regulating the right of a person affiliated with a public-utility company to acquire securities resulting in a second such affiliation. The staff functions under the act are performed in the Branch of Public Utility Regulation of the Division of Corporate Regulation.

COMPOSITION OF REGISTERED HOLDING COMPANY SYSTEMS- SUMMARY OF CHANGES On June 30,1959, there were 21 registered holding company systems subject to regulation under the act. Of these, 3 systems, namely, (1) Cities Service Company, (2) Electric Bond and Share Co., and (3) Standard Gas and Electric Co., do not own as much as 10 percent of the voting securities of any public-utility company operating within the United States. The remaining 18 systems are referred to herein as "active registered systems." Included in the 18 active registered systems there were 19 registered holding companies of which 13 function solely as holding companies and 6 function as operating companies as well as holding companies,'

, In one of these systems there are two registered holding companies. 120 TWENTY-FIFTH ANNUAL REPORT 121 In addition, in these systems there are 99 electric and gas utility subsidiaries, 42 nonutility subsidiaries, and 16 inactive companies, totaling 176 system companies. The following tabulation shows the number of holding companies, electric and gas utility companies and nonutility companies in each of the 18 active registered systems as at June 30, 1959, and their aggregate assets, less valuation reserves, as of December 31, 1958:

Classification oj companies as oj June 30, 1959

Bolelyreg- Reg- Electric Aggregate Istl>red Istered and gas Non- In- Total system I System holding holding- utility utlllty active com. assets, less com- operating subsldl- subsldt- companles valuation panles COID- aries aries panles reserves at panles Dcc. 31, 1958 ------I. American Electric Power Co., Inc __. ______.. __ . 1 ---.- ...--- 12 10 1 24 $1,390,897,233 2. American Natural Gas Co .. 1 --._------2 5 0 8 693, 121, 304 3. Central and South West Corp •• ____•• ____..... ___ . 1 6 0 1 8 628, 684, 284 4 Columbia Oas System, -----.---- 1 9 8 2 20 I, 150,624,000 5. C~~u;g>:d-Natiii-8i'Gas. ------Co ______. __•• _.•... __.. 1 ------4 2 0 7 665,873, 042 6 Dclaware Power & Light COo. _ ._._ •..• __ ._ •. _ .. ___ ------_.- 1 2 0 0 3 193,602,682 7. Eastern Utilities Associates. 1 ------5 0 2 8 105,396,099 8. General Pubhc UtI1ltles Corp. ____ . __ ... __ ...... 1 ------.. 7 2 0 10 875, 438, 123 9. Granite City Oenerating Co. (VOtintt trust). __ ..... 1 ------1 0 0 2 '399,346 10. Middle Sou Utilities, Inc. 1 ------6 0 4 11 699, 861, 423 11. National Fuel Gas Co .... _. 1 -----_.--- 3 6 0 10 192,291,388 12. New England Electric SYS- tem •• ____ •.... _. ___•.. ___ 1 ----._---- 22 1 4 28 600, 134, 564 13. Ohio Edison Co •.. ____.. _._ ------1 3 0 0 4 587,375,000 14. PhlladelphlaElectrlcPower Co __• __ ...•.. __...•. _.•.. .------1 1 0 1 3 42,996, 922 15. Southern Co .. The. ___ . ____ 1 5 2 1 9 I, 130,862,818 16. Union Electric Co __..... __ . .------1 3 1 0 5 552, 235, 003 17. Utah Power & Light Co ... _ .------1 2 0 0 3 227,445, 100 18 West Penn Electric Co., The_. __.• __ ._ .•...•. _ .... 1 1 12 6 1 21 531,419,781 ------Subtotals. ____ ._ ..•... _ .. 13 6 105 43 17 184 10,268,659,012 Less' Adjustment to eluninate duplication In count result In" from 4 companies being su sldlarles In 2 systems and 2 companies being subsldl- aries In 3 systems.' __ ..•.... __ ~------~-- -6 -1 -1 -8 #_------Add: Adjustment to Include the assets of these 6 jointly owned subsidiaries and to remove the parent companies Investments therein which are Included In the system assets above ...• __... ______.• _ ------.------• 526, 280, 320 Total companies and as------sets In active systems, ______13 6 99 42 16 176 10, 794, 939, 332

I Represents thc consolidated assets,less valuation reserves, of each system as reported to the Oomrntsstcn on Form USS for the year 1956, except as otherwise noted.. S Represents the corporate assets of Granite City Generating Co. at March 31,1959. Assets of the voting trustees of Granite City Generating Oo., the holding company parent of the Gencrating Co ,have not been reported. I These 6 companIes are Beech Bottom Power Oo., Inc. and Windsor Power House Coal Co. which are indirect subsidiaries of American Electric Power Co. and The West Penn Electric Co.; Ohio Valley Electrlc Corp. and its subsidiary, Indiana-Kentucky Electric Oorp., which are owned 37.8 percent by American Electric Power Oo., 16.5 pereent by Ohio Edison Oo., 12.5 percent by The West Penn Electric Co , and 33 2 percent by otbercoropanles; Mississippi Valley Generating Co which Is owned 79 percent by Middle South Utilities, Inc .. and 21 percent by The Southern Co.; and Arklaboroa Corp. which Is owned 32 percent by Central and South West Corp. system, 34 percent by Middle South UtI1lties, Inc. system and 34 percent by a third company. , In addition to the adjustment to Include the assets of the 6 jointly owned subsidiaries rather than theIr Investments therein, the total adjustment Includes the assets of Electric Energy, Inc., since Union Electric Co., which owns 40 percent of tbe common stock of EEl, Is a holding company with respect to EEl. 122 SECURITIES AND EXCHANGE COMMISSION

During the fiscal year the Commission granted an exemption to Central Public Utility Corporation, a registered holding company. The exemption was granted pursuant to section 3(a) (5), which affords exemption to companies having no domestic public-utility companies. Further discussion of this matter is at page 132 of this report. Also during the fiscal year American Electric Power Company, Inc., a registered holding company, sold the assets of a subsidiary, The Seneca Light & Power Company, to Ohio Power Company, another subsidiary of American Electric Power. New England Electric System disposed of one subsidiary, Pequot Gas Company, by sale to a nonaffiliate. While most of the section 11 problems existing at the time of the passage of the act have been resolved, there still remain a substantial number of issues which have not as yet been determined. Examples are: In its order under section 11(b) (2) with respect to Cities Service Company the Commission required that company to eliminate the minority interest in its subsidiary, Arkansas Fuel Oil Corporation, or to dispose of its holdings therein. A proceeding which is pending before the Commission with respect to this matter is discussed at page 132 of this report. In its order under section 11(b) (1) with respect to The Columbia Gas System, Inc., the Commission reserved jurisdiction concerning the retainability in the system of the properties of ten companies (subsequently reduced to six) and in this connection there is a proceeding pending before the Commission which is discussed at page 126 of this report. There is a problem under section 11(b) (1) of the act with respect to Consolidated Natural Gas Co. relating principally to the retainability of nonutility pipe-line properties. With respect to Delaware Power & Light Co. there exists the question of whether the gas and electric facilities are retainable under common control. The Commission, by order dated April 14, 1950, directed the disposition of the gas properties of Blackstone Valley Gas & Electric Co., a subsidiary of Eastern Utilities Associates. This system has pending before the Commission a plan designed to accomplish the disposition of the gas properties required to be divested. That matter is discussed at pages 126-127 of this report. There is pending before the Commission an application filed by Electric Bond and Share Company for an exemption pursuant to section 3(a) (5) and this matter is discussed on page 133 of this report. In the Middle South Utilities, Inc., system there exist problems with respect to the retainability of certain gas and transportation properties and the elimination of a minority interest in a subsidiary. National Fuel Gas Co. system has oil, real estate, and gas transmission businesses, the retention of which has not been determined. There is also a problem relating to a minority interest in one of its subsidiaries. TWENTY-FIFTH ANNUAL REPORT 123 There is pending before the Commission a proceeding under section l1(b) (1) of the act with respect to New England Electric System to determine whether the system's gas properties are retain able together with its electric properties," In addition there exists a problem in respect of the minority interests in the common stock of five subsidiaries. There is a problem under section 11(b) (1) of the act which has not been resolved whether Utah Power & Light Co. may retain its subsidiary, The Western Colorado Power Co. The maximum number of companies subject to the act as components of registered holding company systems at anyone point of time was 1,620 in 1938. Since that time additional systems have registered and certain systems have organized or acquired additional subsidiaries, with the result that 2,387 companies have been subject to the act as registered holding companies or subsidiaries thereof during the period from June 15, 1938, to June 30, 1959. Included in this total were 216 holding companies (holding companies and operating-holding companies), 1,023 electric and gas utility companies and 1,148 nonutility enterprises. From June 15, 1938, to June 30, 1959, 2,064 of these companies have been released from the regulatory jurisdiction of the act or have ceased to exist as separate corporate entities. Of the remaining 323 companies, 176 are members of the 18 active systems listed in the table on page 121 and 147 are members of the additional 3 systems named above at page 120, which are also subject to regulation under the act. Of the above-mentioned 2,064 companies 924 with assets aggregating approximately $13 billion at their respective dates of divestment have been divested by their respective parents and are no longer subject to the act as components of registered systems. The balance of 1,140 companies includes 777 which were released from the regulatory jurisdiction of the act as a result of dissolutions, mergers and consolidations and 363 companies ceased to be subject to the act as components of registered systems as a result of exemptions granted under sections 2 and 3 of the act or the grant of orders pursuant to section 5(d) of the act finding such companies had ceased to be holding companies.

DEVELOPMENTS IN INDIVIDUAL REGISTERED SYSTEMS There is discussed below each of the active registered systems and the other systems in which there occurred during the fiscal year 1958 significant developments other than financing transactions. The financing activities of registered holding companies and their subsidiaries are treated below in a separate section of this report.

arI'he Commission has previously determined that the electric properties of New England Electric System constitute an Integrated publlc-utUity system (Holding Company Act Release No. 13688, Feb. 20. 1958). 124 SECURITIES AND EXCHANGE COMMISSION

A. DEVELOPMENTS IN ACTIVE REGISTERED SYSTEMS

American Electric Power Company, Inc. At December 31, 1958, this system had consolidated assets, less valuation reserves, of some $1,391 million. The system had consolidated operating revenues of about $296,547,000 for the calendar year 1958. Although no significant corporate changes took place in the system during the fiscal year, there was substantial activity with respect to its expansion program and the financing arrangements therefor. This system is the largest electric holding company system subject to the act having generating capability of 5,432,000 kw. During the fiscal year Ohio Power Company acquired the assets of The Seneca Light & Power Company, a wholly owned subsidiary of American Electric," The system carries on research along many avenues of technology and, during the fiscal year, continued to concentrate on nuclear research and development based upon a long-term, rather than a short-term, approach to the usefulness of atomic power. Three system companies are members of the East Central Nuclear Group which consists of 14 utility companies in the general Ohio Valley area. This group is in the process of developing a program involving research and development of a high-temperature, gas-cooled, heavy water-moderated, pressure-tube reactor of 50,000 kw. capacity .. The AEP system's contribution to this project's pre-operational research and development is expected to be approximately $1,650,000 over a 5-year period. If the reactor proves economically feasible and is built, an additional contribution for post-operational work is expected to amount to about $650,000, likewise spread over a subsequent period of 5 years. American Electric Power Co., Inc., is also a member of Nuclear Power Group, Inc., and, as such, continues to derive technological and practical experience from the research and design activities in Commonwealth Edison Company's 180,000-kw. boiling-water reactor being installed at Dresden, Ill. The plant is expected to be in operation in 1960. Nuclear Power Group is contributing $15 million of the research and development cost of this plant, of which the AEP system's share is approximately $3 million. The system's service corporation designed and engineer the power plants of Ohio Valley Electric Corp. American Electric owns 37.8 percent of the voting securities of OVEC, which, with its wholly owned subsidiary, Indiana-Kentucky Electric Corp., furnishes elec tric power to an installation of the Atomic Energy Commission near Portsmouth, Ohio. There was pending before the Commission at the close of the fiscal year the issue of whether the acquisition of OVEC's stock by American Electric and other sponsoring companies meets the standards of section 10 of the act. This issue and the organization

a Holding Company Act Release No. 13M2 (Oct. 27,1958). TWENTY-FIFTH ANNUAL REPORT 125 and financing of aVEC and Indiana-Kentucky Electric Corp. are discussed on pages 126-129 of the Commission's 23d Annual Report. American Natural Gas Co. This registered holding company and its subsidiary companies, as at December 31, 1958, had consolidated assets, less valuation reserves, of approximately $693,121,000. The system had consolidated operating revenues of about $204,543,000 for the calendar year 1958. On April 7, 1958, the Commission issued its findings and opinion and order directing American Natural to take appropriate steps to eliminate its outstanding $25 par value $6 nonredeemable preferred stock from the holding company system.' In November 1958. Ameri- can Natural filed a plan under section 11(e) of the act to eliminate such preferred stock by a payment of $32.50 per share to the holders thereof. Public hearings on the plan have been concluded. Briefs and replies thereto have been filed. Oral argument was heard on May 19,1959, and the matter was pending before the Commission for decision at the end of the fiscal year. Central and South West Corp. This registered holding {;ompany and its subsidiaries, as at Decem- ber 31, 1958, had consolidated assets, less valuation reserves, amounting to approximately $628,684,000. The system had total consolidated electric operating revenues of about $146,806,000 for the calendar year 1958. Three system subsidiaries are members of Texas Atomic Energy Re- search Foundation which consists of a group of 11 electric utility companies in Texas. The Foundation was organized in 1957 for the purpose of engaging in research in the atomic energy field as applied to the generation of electric power. These system subsidiaries are committed to contribute a total of about $1 million, of a combined total of $10 million, for the research program which has for its object studying heavy hydrogen or fusion reactions at high temperature under controlled conditions. Two system subsidiaries have joined with 13 other electric utility companies in the formation of Southwest Atomic Energy Associates which, for research and development purposes is financing the construction of an epithermal thorium power reactor. The Columbia Gas System, Inc. This registered holding company and its subsidiaries, at December 31, 1958, had consolidated assets, less valuation reserves, of about $1,150,600,000. The consolidated gross operating revenues for the calendar year 1958 were approximately $427,443,000. During the fiscal year Columbia's wholly-owned subsidiary, Colum- bia Gulf Transmission Company, acquired the assets of Gulf Inter-

4 RaIding Company A.ct Release No. 13726. 126 SECURITIES AND EXCHANGE COMMISSION state Gas Company, a nonaffiliated company, in exchange for 3,574,337 shares of common stock of Columbia and the assumption by Columbia Gulf Transmission Company of Gulf Interstate's liabilities, including $141,400,000 of its publicly-held first mortgage pipeline bonds," The assets acquired consist principally of 389 miles of pipeline which is used to gather gas purchased by the Columbia system in Louisiana, and 845 miles of transmission line, which is used to transport such gas to eastern Kentucky where it is delivered to other facilities of the Columbia system. The Columbia system follows the policy of having its publicly-held securities solely at the holding company level and the assumption of the Gulf Interstate Gas Company bonds by a subsidiary of Columbia was a departure from this policy, which, if allowed to continue, would have resulted in the system having substantial amounts of long-term debt at two separate levels, creating a pyramiding of system securities, which was one of the evils the Public Utility Holding Company Act of 1935 was designed to prevent. To correct this situation, Columbia has exchanged its debentures for the Columbia Gulf debentures," As indicated at page 132 of the 22d Annual Report there was pending before the Commission a motion filed by Columbia requesting the release of jurisdiction with respect to the retain ability of certain properties controlled by the system. Both the Division of Corporate Regulation and Columbia have filed proposed findings of fact and conclusions of law. The Division recommended that the Commission should not, on the basis of the record so far made in the proceeding, find the properties involved are retainable, Columbia submitted that the properties involved are properly a part of its integrated gas system or are reasonably incidental thereto and are retainable. The matter was pending at the close of the fiscal year. Eastern Utilities Associates TIllS registered holding company and its subsidiary companies, as at December 31, 1958, had consolidated assets, less valuation reserves, of about $105,396,000 and its consolidated operating revenues for that year were approximately $33,059,000. On April 4, 1950, the Commission issued an order directing EUA to sever its relationship with the gas properties of its subsidiary, Blackstone Valley Gas Company.' In 1956 Valley Gas Co. was incorporated for the purpose of acquiring and operating such gas properties. In February 1957, an application-declaration was filed covering several transactions designed to effectuate compliance with the Commission's order of April 4, 1950. Included in the transactions was a proposal that EUA issue 25-year debt securities. The

• Holding Company Act Release Nos. 13893 (Dec. 23. 1958) and 13903 (Dec. 29, 1008) • • Holding Company .Act Release No. 14030 (June 22, 1Q59). , 31 S.E.C. 329. TWENTY-FIFTH ANNUAL REPORT 127 Division of Corporate Regulation opposed the issuance of the long- term debt securities by EUA and on December 15,1958, the Commis- sion published its findings and opinion in which it concluded that the proposed bonds could not be approved," On February 6, 1959,EUA filed a plan, pursuant to section 11(e) of the act, designed to accomplish the disposition of the Blackstone Gas properties, but which did not include the issuance of long-term debt securities by EUA. Hear- ings on the plan were concluded and the matter was before the Com- mission for decision at the close of the fiscal year. Middle South Utilities, Inc. This registered holding company and its subsidiaries, as of Decem- ber 31, 1958, had consolidated assets, less valuation reserves, amounting to approximately $699,861,000. The system had total consolidated operating revenues for the year 1958 of above $182,927,000. Hearings were held in 1957 with respect to issues related to the acquisition by certain companies, including Middle South, of the capital stock of Electric Energy, Inc., an electric generating company which has a long-term contract for the sale of firm power to an installation of the Atomic Energy Commission. During the hearings, Middle South, as a result of negotiations with Kentucky Utilities Company, entered into a formal contract to sell its 10 percent stock interest in EEl. Middle South filed a declaration under section 12(d) of the act and rule 44 thereunder (file No. 70-3595), requesting Commission permission to sell its stock interest in EEl and Kentucky filed an application under section 10 of the act (file No. 70-3596) requesting Commission approval to acquire such interest. The Middle South- Kentucky proposed transactions were consolidated with the pending proceedings and a supplemental hearing was held. On November 28, 1958, the Commission issued its findings and opinion and order, pursuant to section 10, approving the acquisitions by Union Electric Company, Illinois Power Company, and Kentucky Utilities Company of their proposed respective interests in the EEl stock. In addition, the Commission permitted Middle South's declaration for the sale of its interest in EEl to become effective," New England Electric System This registered holding company and its subsidiaries, as at Decem- ber 31, 1958, had consolidated assets, less valuation reserves of about $600,135,000and, for that year the consolidated operating revenues amounted to approximately $166,959,000. On August 5, 1957, the Commission instituted a proceeding in respect of NEES and its subsidiaries for the purpose of determining the extent to which the electric, gas, and other business operations of the

8 Holding Company Act Release No. 13886. D Holding Company Act Release No. 13871. This matter Is discussed at pages 126-129 of the 23d Annual Report and also at pages 11~116 of the 24th Annnal Report. 128 SECURITIES AND EXCHANGE COMMISSION

NEES holding company system satisfied the integration standards of section l1(b) (1) of the act.10 The hearing was initially devoted exclusively to the issue of whether or not the electric operations of the NEES system constitute those of a single integrated public-utility system within the meaning of section l1(b) (1). On February 20, 1958, the Commission issued its findings and opinion and order in which it held that the electric properties of the NEES holding company system satisfied the standards delineating an integrated public- utility system." At the close of the fiscal year, there was pending for further hearing and determination the question of whether the NEES system may retain all or any of its gas properties. In July 1958, NEES filed a plan under section 11 (e) of the act to eliminate the minority interests in the common stocks of those of its subsidiaries engaged solely in the electric business. Proceedings were instituted by the Commission under section 11(b) (2) for the purpose of determining whether the existence of the public minority interests in these subsidiaries constituted an unfair and inequitable distribution of voting power and the two proceedings were consolidated for hearing and determination." On May 14, 1959, the Commission approved the plan 13 and on June 15, 1959, the plan was approved and ordered enforced by the United States District Court for the District of Massachusetts," The system holds a 30 percent stock interest in Yankee Atomic Electric Company, which is constructing an atomic electric plant. The organization of Yankee and its initial financing transactions are discussed at pages 162-164 of the 22d .Annual Report, and steps in the formulation of Yankee's overall financing program are discussed on pages 130-131 of the 23d .Annual Report. During the fiscal year the Commission approved the permanent financing of Yankee 15 and the plant is scheduled for completion in 1960. The total capital requirements of Yankee, including construction costs and working capital, are estimated by Yankee at $57 million, of which $20 million will consist of first mortgage bonds, $17 million of unsecured promissory notes and $20 million of common stock. Ohio Edison Company Ohio Edison is a registered holding company and an operating electric utility company. The system consists of Ohio Edison itself and three electric utility subsidiaries, Pennsylvania Power Company, Ohio Valley Electric Corp., and its wholly-owned subsidiary, Indiana- Kentucky Electric Corp. Ohio Edison and its subsidiary, Pennsyl-

'" Holding Company Act Release No. 184521t J1 Rohling Company Act Release No. 18688. UHolding Company A4:t Release No. 18199 (Ang. 1, 1958) • .. Holdlng Company Act Release No. 14002- ;If Merrimack-EIISe% ElectrIc Co. et al., Civ. No. 59-393 F. :Ill Holding Company Act Release Nos. 1398li (Apr. 15, 1959) and 14025 (.JUIIe 12, 1959). TWENTY-FIFTH ANNUAL REPORT 129 vania Power Co., had consolidated assets, less valuation reserves, of approximately $587,375,000 at December 31, 1958, and their consolidated operating revenues for the year 1958 amounted to $137,650,000. Ohio Edison and Pennsylvania Power are 2 of the 15 electric utility companies that sponsored the organization of Ohio Valley Electric Corp. (OVEC) and its subsidiary, Indiana-Kentucky Electric Corp., which supply the power requirements of a gaseous diffusion plant of the Atomic Energy Commission located near Portsmouth, Ohio. The interest of Ohio Edison in the common stock of OVEC is 16.5 percent. Further details with respect to OVEC are set forth at pages 126-129 of the 23d Annual Report. In the Commission's order authorizing the acquisition of OVEC's securities, jurisdiction was expressly reserved to determine at an appropriate future time whether the companies subject to the act could retain such securities." On November 19, 1956, the Commission reopened the proceeding and ordered a hearing in respect of the reserved issues." Hearings have been completed and at the close of the fiscal year, the matter was in process of preparation for submission to the Commission. Ohio Edison and Pennsylvania Power and 12 other electric utility companies are members of East Central Nuclear Group formed about 2 years ago to formulate plans for undertaking a program of nuclear research and development. In December 1957, this group and Flor- ida West Coast Nuclear Group presented a proposal to the Atomic Energy Commission for research and development on a partnership basis with that agency of a 50,OOO-kw.high-temperature gas-cooled, heavy-water-moderated reactor of the pressure-tube type. It will be designed as a prototype of a natural uranium 200,000 kw. reactor. Subject to necessary regulatory approvals, Ohio Edison and Penn- sylvania Power may be obligated to expend approximately $425,000 per year over the 1958-62 period in connection with preoperational research and development. The Southern Company This registered holding company and its subsidiaries had, at December 31, 1958, consolidated assets, less valuation reserves, of approximately $1,130,863,000 and for that year the consolidated operating revenues totaled about $272,134,000. Southern and its subsidiaries have continued their participation in research and development of nuclear power through Power Reactor Development Co., a nonprofit corporation in the process of constructing an experimental fast breeder atomic reactor in Michigan. The system's service company is one of the 21 member companies which formed PRDC. Further details with respect to PRDC are set forth

II Holding Company Act Release No. 11578 (Nov. 7. 19112). 11 Holding Company Act Release No. 13313. 130 SECURITIES AND EXCHANGE COMMISSION

at pages 164-166 of the 22d Annual Report and at pages 129-130 of the 23d Annual Report. The four direct subsidiaries of Southern have agreed to contribute $2.4million over a 6-year period toward the construction of this atomic reactor and Southern has guaranteed the payment of 8 percent of the principal and interest of the borrowings made from various banks by PRDC under a loan agreement providing for such borrowings of $15 million by the end of 1958.18 Alabama Power Company and Georgia Power Company, subsidiaries of The Southern Company, have undertaken the joint construction of a 1,000,OOO-kw.steam electric generating station to be owned and operated by Southern Electric Generating Company (SEGCO), which is to be owned equally by Alabama and Georgia. The estimated cost of the station, scheduled for completion in 1962, is $161 million and is to be financed by the issuance and sale of $105 million of first mortgage bonds to the public, the balance to be supplied as common equity by the owner companies. During the past fiscal year the Commission approved the first issuance and sale of first mortgage bonds of SEGCO in the principal amount of $25 million. The Com- mission noted in its findings and opinion that while SEGCO would not be consolidated with Alabama or Georgia for the purpose of financial reporting, nevertheless, for purposes of financial analysis, the Com- mission considered it appropriate to impute 50 percent of the outstanding publicly-held securities and of the surplus of SEGCO to Alabama and 50 percent to Georgia." On November 4, 1955, the Commission rescinded its previously issued order authorizing the issuance and acquisition of up to 55,000 shares of the common stock of Mississippi Valley Generating Com- pany, of which 11,000 shares had been issued to and acquired by Mid- dle South Utilities, Inc. and The Southern Company, leaving the balance of 44,000 shares authorized but not yet issued. In respect of the 11,000 shares already issued, the Commission reserved jurisdiction for future determination of the action to be taken thereon." Union Electric Co. Union Electric Co. is a registered holding company and an operating electric utility company. As at December 31, 1958, the consolidated assets, less valuations reserves, of Union and its subsidiaries amounted to approximately $552,236,000and their consolidated operating revenues for 1958totaled about $131,650,000. Heretofore the Commission reserved jurisdiction over the acquisition by certain companies, including Union Electric, of the capital stock of Electric Energy, Inc., an electric generating company which has a long-term contract for the sale of firm power to an installation

18 Holding Company Act Release No. 13883 (Feb. 12, 19(7). t. Holding Company Act Release No. 14008 (May 20, 19(9) . .. Holding Company Act Release No. 13029. TWENTY-FIFTH ANNUAL REPORT 131

of the Atomic Energy Commission. On November 28,1958, the Com- mission issued its findings and opinion and order granting approval of the applications of Union Electric Company to acquire 40 percent, of Illinois Power to acquire 20 percent, and of Kentucky to acquire 20 percent, of the common stock of Electric Energy, Inc., pursuant to section 10 of the act and released the jurisdiction previously reserved under that section. The Commission dismissed the application of Central Illinois Public Service Company to acquire 20 percent of the EEl stock on the ground that it was not, and would not become, as a result of the proposed acquisition, an affiliate of EEl and of any other public-utility company and that, absent such an affiliated relationship, no approval of the acquisition of the common stock of EEl need be obtained." On March 26, 1956, Union Electric filed an application for exemption from the provisions of the Holding Company Act pursuant to section 3 (a) (2) thereof. On January 13, 1959,Union Electric filed an amendment to bring the exemption application up to date. The matter was pending at the close of the fiscal year. In the fiscal year there were four cases before the courts arising out of objections by J. Raymond Dyer, a stockholder of Union to solicitation of proxies by the company's management and by solicitation by Dyer. For a discussion of the background of this litigation see the 24th Annual Report at pages 119-120. On April10, 19[;9,the Court of Appeals for the Eighth Circuit affirmed the Commission's orders entered in March 1958 allowing a declaration filed by management to become effective as a basis for proxy solicitation for the 1958stock- holder's meeting." The Court rejected all of Dyer's numerous contentions On the merits and held that within the scope of its review functions, there is nothing which the Commission did or failed to do which would entitle petitioners to have the orders reversed. More- over, the Court found that the questions presented had not become moot or inoperative because the stockholder's meeting had been held. As set forth in the 24th Annual Report, Dyer had filed a petition for certiorari in the Supreme Court of the United States to review the Eighth Circuit's dismissal as moot of his petition for review of the Commission's orders relating to Union's 1957 meeting." On May 18, 1959,the Supreme Court granted certiorari, vacated the judgment and remanded the case to the Eighth Circuit for further consideration in view of that Court's opinion in the 1958 proceeding." At the end of the fiscal year the case was pending before the Court for a decision on the merits. In addition, Dyer has filed a petition to review the Com-

:n 32 S.E.C. 202 (1951). ". Dyer v. S.E.C., 266 F. 20 33 Dyer filed a petition for certiorari In the Supreme Court III thlA case on Aug. 3, 1959. :a Duer v, S.B C., 251 F. 20 512 (e.A. 8, 19(8). 0' Dyer v. S.B C., 359 U.S. 499. 529523--59----12 132 SECURITIES AND EXCHANGE COMMISSION

mission's orders in connection with the 1959 solicitation of proxies for Union's meeting. The related injunction action in the district court referred to on page 120 of the 24th Annual Report was decided adversely to Dyer subsequent to the end of the fiscal year.

B. DEVELOPMENTS IN OTHER SYSTEMS

Central Public Utility Corporation This company registered under the act as a holding company in 1938, at which time the system consisted of 47 operating companies located in 19 States and in areas outside of the United States. In order to effectuate compliance with section 11(b) of the act, the system consummated a number of section l1(e) plans and on June 1, 1955, filed an application for exemption under section 3(a) (5) of the act, stating that it had disposed of all its domestic public-utility subsidiaries and had substantially simplified its capital structure. On April 3, 1959, following several amendments to and a hearing OIl the application, the Commission issued an order granting Cenpuc an exemption from the act,25subject to a number of terms and conditions, which included consummation of a proposed consolidation of Cenpuc with one or more companies within 6 months of the date of the order (subsequently extended for 1 month) and the right of Cenpuc shareholders objecting to the consolidation to receive $28 per share in lieu of shares of the consolidated corporation. Cenpuc agreed that the consolidation, in and of itself, would constitute a change of circumstances within the meaning of section 3 (c) of the act; thus, the Com- mission may revoke the exemption if the circumstances existing after the consolidation prove to be detrimental to the public interest or the interest of investors. Subsequent to the exemption order, Cenpuc publicly announced and filed proxy material with the Commission relating to a proposed consolidation of itself, Consolidate Electronics Industries Corp., and Philips Industries, Inc. into a new corporation to be named Consolidated Electronics Industries Corp. and into whose shares Cenpuc's capital stock would be converted on a share for share basis. The Commission, after examining the proxy material, released the jurisdiction which it had reserved thereover. On Octo- ber 16, 1959, following the requisite stockholder approval, the proposed consolidation was consummated. Cities Service Co. On September 20, 1957, the Commission issued an order pursuant to section 11(b) (2) of the act requiring Cities to eliminate the 48.5 percent minority interest in Arkansas Fuel Oil Corporation or to dispose of its holdings of 51.5 percent," Cities, Ark Fuel and a stockholder of Ark Fuel petitioned the United States Court of Appeals

.. Holding Company Act Release No. 13970. :II Holding Company Act Release No. 13549. TWENTY-FIFTH ANNUAL REPORT 133 for the Third Circuit for review of the order. On July 22, 1958, the Court affirmed the order of the Commission." On September 18, 1958, Cities filed a plan pursuant to section 11(e) for the purpose of eliminating the minority interest in Ark Fuel. The plan provided for division of the assets of Ark Fuel into two new campanies, one to be owned by Cities and the other by the minority interest. Subse- quently, the plan was withdrawn and a new plan filed providing for the exchange of one share of Cities common stock for each 2.4 shares of Ark Fuel common stock. Hearings on the latter plan were commenced on March 31, 1959, and were still in progress at the close of the fiscal year. Electric Bond and Share Company Electric Bond and Share Company, which no longer holds as much as 5 percent of the outstanding voting securities of any domestic public-utility company, has pending before the Commission an application, filed pursuant to section 3(a) (5) of the act, for exemption as a holding company from provisions of the act. In the event such exemption is granted, it is the intention of the company to convert its status to that of an investment company and register under the Investment Company Act of 1940. The proceeding on the exemption application involves a number of very difficult and complex issues, among which is the question as to whether Bond and Share, through its wholly-owned engineering and consulting service company subsidiary, Ebasco Services, Incorporated, exercises controlling influence over, or is affiliated with, certain public-utility and holding company clients of Ebasco which formerly were controlled by Bond and Share. Hearings were concluded on March 26, 1959, and the matter was under advisement for decision by the Commission at the close of the fiscal year. Standard Gas and Electric Company Standard Gas and Electric Company, a registered holding company, was formerly a subsidiary of Standard Shares, Inc. On September 23, 1958, the Commission granted an application of Standard Shares under section 5(d) of the act for an order declaring it not to be a holding company and its registration as such thereupon ceased to be in effect.28 Standard Shares, formerly known as Standard Power and Light Corp., upon the issuance of such order, completed its registration as an investment company under the Investment Company Act of 1940 and is subject to the requirements of that act and to the Com- mission's jurisdiction thereunder. Standard Gas and Electric owns 45.6 percent of Philadelphia Com- pany, also a registered holding company. Neither owns directly or indirectly 10 percent or more of the voting securities of a public-

.. Arkansas Fuel OU Corporation, 257 F. 2d 926. .. Holding Company Act Release No. 18824. 134 SECURITIES AND EXCHANGE COMMISSION utility company and both are required by orders issued under section 11(b) (2) of the act to liquidate and dissolve. Each of these registered holding companies is in a position to effectuate dissolution except that there exist undetermined questions relating to Federal income taxes for the years 1942 through 1950. Other Matters As previously reported at pages 114-115 of the 23d Annual Report, International Hydro-Electric System ("IHES") was reorganized pursuant to section 11(d) of the act and IHES is now registered as an investment company under the Investment Company Act of 1940 and subject to the Commission's jurisdiction thereunder. The only remaining matters under the Holding Company Act are fees and expenses to be awarded in connection with the reorganization. After hearings, oral argument was heard by the Commission and the matter was pending for decision at the end of the fiscal year. There are also pending before the Commission applications for the allowance of fees and expenses in connection with a plan filed and consummated by The United Corporation pursuant to section 11(e) of the act for its conversion into an investment company. Hearings on such applications have been held, oral argument heard, and the matter was under advisement for decision by the Commission at the close of the fiscal year.

FINANCING OF ACTIVE REGISTERED PUBLIC UTILITY HOLDING COMPANIES AND THEIR SUBSIDIARIES During the fiscal year 1959active registered holding companies and their subsidiaries sold to the public and to financial institutions, pursuant to authorizations granted by the Commission under sections 6 and 7 of the act, 25 issues of long-term debt and of stocks aggregating $477 million." This is in contrast to fiscal year 1958when there were 36 such issues with aggregate gross sales value of $583 million." All but five 31 of the active registered holding company systems sold long- term debt or stock to the public in varying amounts and of various types in fiscal 1959. The following table presents by systems the financing by active registered holding companies and each of their subsidiaries classified by amounts and types of securities .

.. Debt securities are computed at their principal amount and stocks are taken at gross proceeds to the company. 30 In fiscal 1959, all of the securities wei e sold to provide new capital. In fiscal 1958, two issues of debt securities, aggregating $36 million, were sold to refund other debt securities carrying a higher Interest rate. 31These are Delaware Power & Light Company, Granite City Generating Company, Philadelphia Electric Power Company, Union Electric Company, and Utah Power & Light Company. Because of the nature of their business Granite City and Philadelphia required no new capital, and Delaware, Union and Utah met their financial requirements through the issuance of short-term notes. TWENTY-FIFTH ANNUAL REPORT 135

TABLE I.-Securities issued and sold for cash to the public and financial institutions by active reqistered holding conipames and their subsidiaries, fiscal year 1959. [In millions 1

Holding Company System Bonds Debent ures Preferred Common

Amencan Electric Power Co, Inc _ Indiana & Mrehtgan Elect. Co______$20 _ OhIO Power Co 25 _ Amencan Natural Gas Co $28 Central and South West Corp _ Central Power & LIght Co______1! _ southwestern Eleetrrc Power Co______Ib _ The Columbia Gas System. Ine______$25 39 Consolidated Natural Gas Co______45 39 Eastern Utilities Ao;1;oe"'tes______4 Brockton Edison Co______5 ~l _ General Public Utrhties Corp______20 Middle South Utrlrties, Inc • _ Arkansas Power & Light Co______S _ Louissana Power & LIght Co__ 8 __ National Fuel Gas Co__ 10 _ New England Electric System _ Yankee Atomic Electric Co______9 OhIO Edison Co______30 _ _ The Southern Co __ 4l> Alabama Power Co______20 __ Gulf Power Co______7 .. -- .. _ __ Mississippi Power Co .. ,'; _

The \~~:s~ePe:;{rEf~~i.?cec';;'_~t_I:'.~_~~-~-~~:::::::::::::: ~~_ ::::::-::~:: :::::::::::: :::::::::::: Monongahela Power Co______16 _ West Penn Co______14 __ Total .. __ $194 80 18 18-5

In addition to common stock issued for cash listed in the above table, The Columbia Gas System, Inc., through a subsidiary, exchanged with the public 3,574,373shares of its stock in connection with the acquisition by the subsidiary of the assets of Gulf Interstate Gas Company, a nonaffiliated natural gas pipeline company. The market value of the stock at the time of issuance was approximately $78 million. This issuance was excepted from the competitive bidding requirements of rule 50, the Commission concluding that compliance with competitive bidding was not necessary or appropriate in the public interest or for the protection of investors or consumers to assure the receipt of adequate consideration or the reasonableness of the fees or commission to be paid with respect to such issuance. De- tails of the transaction are more fully discussed at page 125 hereof. The table also does not reflect the issuance of short-term notes to banks by any of the system companies, nor does it include intrasys- tem financing represented by the issuance of securities by subsidiaries to their holding companies. These issuances also required authorization by the Commission except in the case of the issuance to banks of short-term notes having a maturity of less than 9 months where the aggregate amount did not exceed 5 percent of the total capitalization of the company as defined in section 6(b) of the act. The issuance of such securities is exempted by that section 6(b). It may be noted from the table that the total of $477 million is made up of $194 million bonds, $80 million debentures, $18 million 136 SECURITIES AND EXCHANGE COMMISSION preferred stock, and $185million common stock. No bonds were sold during the first half of the fiscal year; the three debenture issues aggregating $80 million were sold during that period. Competitive Bidding All but 3 of the 25 issues sold for cash and listed in table I were offered at competitive bidding pursuant to the requirements of rule 50.32 An order granting exception from competitive bidding was entered in only one of the three instances, the other two being automatically excepted by paragraph (a) (1) rule 50.33 General Public Utilities Corp., a registered holding company, issued and sold 530,000 shares of its $5 par value common stock for $20 million. This was a nonunderwritten rights offering in connection with which it was proposed that the unsubscribed shares would be sold through brokers on the New York Stock Exchange. Although it appeared that the sale of the unsubscribed shares would be exempt under paragraph (a) (4) ,34 the Commission granted the company an exception from the provisions of the rule to the extent it might become applicable to the transaction." Consolidated Natural Gas Company, also a registered holding company, sold 821,256shares of its $10 par value common stock for $39 million. This was also a nonunderwritten rights offering to its stockholders and was automatically excepted from the competitive bidding requirements by the provisions of paragraph (a) (1) of the rule. It was not proposed that the unsubscribed shares be sold. The remaining issue not sold through competitive bidding was the issuance of $15 million of common stock by Yankee Atomic Electric Company, a subsidiary of New England Power Company, which in turn is a subsidiary of New England Electric System, a registered holding company. New England Power Company purchased $4,- 800,000 of the issue and Montaup Electric Company, a subsidiary of Eastern Utilities Associates, a registered holding company, purchased $720,000thereof. The remainder of $9,480,000was purchased by the other nine owner companies of Yankee Atomic Electric Company. Since this stock was offered to existing stockholders, which had agreed to subscribe for their pro rata share the transaction was excepted from the rule pursuant to paragraph (a) (1) thereof. During the period from May 7, 1941, the effective date of rule 50, to June 30, 1959, a total of 767 issues with a sales value of $10,957 million were sold at competitive bidding under the rule. Those totals

II As noted above, the table does not Include the issuance of Columbia Gas common stock In connection with an exehnuge offer which was excepted from the competitive bidding requirements of rule 50. "'That paragraph excepts the Issuance and sale of securities pro rata to existing holders of the company pursuant to preempttve rights . .. That paragraph excepts the issuance and sale of securities the total proceeds whereof do not exceed $1 million. II Holding Company Act Release No. 13853. TWENTY-FIFTH ANNUAL REPORT 137

compare with 224 issues of securities with an aggregate sales value of $2,311million which have been sold pursuant to orders of the Com- mission granting exception from the competitive bidding requirements of the rule under paragraph (a) (5) 36 thereof. The numbers of issues and the amounts of various classes of securities which have been sold pursuant to exception granted under paragraph (a) (5) are set forth in the following table: Sales by registered holding companies and their subsidiaries of securities excepted from competitive bidd~ng requirements pursuant to the provisions of paragraph (a) (5) of rule 50 by orders of the Commission entered from ~May 7, 1941, to June 3D, 195937 [Dollar amounts in mlllions]

Underwntten N on-underwritten Total

Number of Amount Number of Amount Number of Amount Issues Issues Issues

Bonds ______Debentures ______4 $27 65 $1,171 °09 °$1,198 N otes ______3 83 0 42 9 125 Preferred stock ______------21 83 21 83 13 III 25 272 38 383 Common stock ______33 279 53 243 87 522 Total 53 500 170 1,811 °224 °2,311

° Tbls is exclusive of Y wee Atomic bonds of $20,000,000 for WhICh exception was granted III June 1959 but the sale of these securities did not occur until July. Of the total amount of securities sold pursuant to orders of exception granted under paragraph (a) (5) of rule 50, 122 issues with a dollar value of $1,841million were sold by the issuer and the balance of 102 issues with a dollar value of $470 million were portfolio sales. Of the 122 issues sold by the issuers, 68 were in amount of $1 million to $5 million and 2 bond issues were in excess of $100 million." Protective Provisions of First Mortgage Bonds and Preferred Stocks of Public Utility Companies In passing upon issuances of first mortgage bonds and preferred stocks of public-utility companies, the Commission examines the mortgage indenture and charter provisions to determine whether or not there is substantial conformity with the applicable Statements of Policy which were adopted by it in 1956.39 These Statements of Policy represent substantially a codification of certain principles or

.. Paragraph (a) (5) of rule 50 provides for exception from the competitIve bidding requirement of the rule where the Commission finds such bidding Is not necessary or appropriate under t.he particular circumstances of the Individual case. n The total number of issues in the table is 224 as compared with a total of 241 issues reported in the 23d An- nual Report (page 137) for the penod ending June 30, 1957. In preparing the earlier report an exception was counted as to each issue of securities. Insome cases one order of exception was issued although the securities were sold from time to time in seperate issues. To eliminate such duplication, the above table is prepared on the basis of the number of exceptions granted from competitive bidding. In addition, In the table in the 23d Annual Report there was a duplication in the number of exceptions granted for issues of preferred stock. As a result, the total figure of 38 in the above table Is the same as in the earlier table although there was one exception granted for preferred stock (Brockton Edison Co ) during the fiscal year 1958 described at pages 127-128 of the 24th Annual Report. • Ohio Valley Electric Corporation, $360 mUlion; and United Gas Corporation $116 million • .. Holding Company Act Release No. 13105 (Feb. 16, 1956) as to first mortgage bonds and Holding Company Act Release No. 13106 (Feb. 16, 1956) as to preferred stock. 138 SECURITIES AND EXCHANGE COMMISSION policies prescribed for the protection of investors in these securities developed on a case-by-case basis over a period of years, as modified in the light of experience and comments received from interested persons who had been invited to submit their views. Conformity with the Statements of Policy is required except where deviations are clearly warranted by the circumstances of a particular case." During fiscal year 1959 applications or declarations with respect to 17 first mortgage bond issues aggregating $248,950,000principal amount, and three preferred stock issues with a total par value of $10 million, were filed by public-utility companies under the act." The Statement of Policy with respect to first mortgage bond issues requires a restriction, under certain circumstances, on the distribution of earned surplus to common stockholders. In the case of 6 of the 17 bond issues with respect to which applications were filed during the fiscal year, existing indenture provisions adequately conformed with this requirement of the Statement of Policy. In the case of nine issues, an additional restriction was required and was either proposed by the issuer or evolved in informal discussions between the Commis- sion's staff and representatives of the issuer. The two remaining bond issues were proposed by two newly-organized companies having no previous records of earnings or dividends. In both cases, the indenture contained certain restrictions against future distributions of earned surplus to holders of the common stock, all of which, in each instance, was jointly held by groups of other utility companies. To avoid unnecessary rigidity, the restrictive dividend provisions generally included the further provision that the restrictions could be modified upon application of the issuer to, and approval by, the Com- mISSIOn. A further provision contained in the Statement of Policy regarding first mortgage bonds relates to the renewal and replacement of depreciable utility property which is subject to the lien of the mortgage. It requires, in essence, that the issuer construct additions to its property, or else deposit cash or bonds with the indenture trustee, in an amount which on a cumulative basis will provide for the replacement in cash or property of the dollar equivalent of the cost of the depreciable mortgaged property during its estimated useful life. The State- ment of Policy provides that the requirement be expressed as a percentage of the book cost of depreciable property, except that if the existing indenture provision expresses the requirement on a different

.. .Application of the Statements of Polley to filings from the effective date thereof to June 30, 1958, are discussed In the 23d .Annual Report (pages 141-43) and the 24th .Annual Report (pages 128-31).

41 Of the 17 bond Issues as to which applications or declarations were filed during the fiscal year, 12 were Issued and sold to the public or financial Institutions during the fiscal year as indicated in the table on p, 135, above: 3 were Issued and sold after the close of the fiscal year; 1 Issue was withdrawn after approval by the Commission; and 1 issue was sold to the issuer's holding companies and not to the public. TWENTY-FIFTH ANNUAL REPORT 139 basis, as, for example, in terms of operating revenues, no change will be required if the company can demonstrate that the existing provision provides an amount at least equal to a requirement based on the book cost of depreciable property. As in the case of earned surplus restrictions, the Commission, in the interest of flexibility, has permited the issuer to insert a provision under which the issuer, upon application to, and approval by, the Commission may modify the percent of depreciable property requirement. Of the 17 bond issues, the indentures of 12 expressed the renewal and replacement fund requirement as a percent of depreciable prop- eity which was deemed to be appropriate; the indentures of 4 expressed the requirement as a percent of revenues and were found acceptable by the Commission since they appeared to afford at least as much protection to the bondholders as would be afforded by an appropriate percent-of-property formula; and the indenture of the remaining 1 bond issue contained no renewal and replacement fund requirement in view of another requirement of the indenture-unusual for an electric utility company-for a 100 percent cash sinking fund repayment of the bonds by the maturity date thereof." During the fiscal year 1959, the Commission has continued to adhere to the principle, set forth in the Statements of Policy for both bonds and preferred stocks, that the securities be freely refundable at the option of the issuer upon reasonable notice and payment of a reasonable redemption premium, if any.43 An exception was made by the Commission in the case of Yankee Atomic Electric Company, a new company organized for the purpose of building and operating an experimental nuclear power plant in New England. In light of the unusual circumstances of the construction and financing of the plant, the Commission approved an indenture covenant providing that none of the company's proposed $20 million principal amount of first mortgage bonds could be redeemed for refunding purposes during the period of plant construction; that during a 5-year period thereafter the bonds could be refunded only upon payment of redemption premiums higher than customary under the Commission's usual standards; but that following such 5-year period the bonds would be freely refundable by the company upon payment of the normal lower scale of redemption premiums." Continuing studies made by the Commission's staff of electric and gas utility bond issues sold at competitive bidding indicate that restrictions on free refundability of bonds have had no significant bear-

.. The usual sinking fund provision for electric utlllty bonds, wblch generally have a 30.year maturity, provides for annual sinking fund payments aggregating, over the life of the Issue, approximately 30 percent of the principal amount of the bonds. •• The significance of the refunding privilege, both as a matter of conformity with the standards of the act and as a matter of practical finance, was discussed at Rome length In the 24til Annual Report, at page 130. .. Holding Company Act Release No. 14025 (June 12,1959), 140 SECURITIES AND EXCHANGE COMMISSION ing upon the interest cost to the issuer." The staff's studies also indicate that the presence or absence of a restriction on free refundability has not affected the number of bids received by an issuer at competitive bidding or the ability of the winning bidder to market the bonds. These findings were based on an examination of all electric and gas utility bond issues (including debentures) sold at competitive bidding between May 14, 1957, and June 30, 1959, by companies subject to the Holding Company Act as well as those not so subject. It was on the former date that a public-utility company not subject to the Holding Company Act instituted a practice, which has been followed in competitive bidding by various other public-utility companies not subject to the Holding Company Act, of including a provision prohibiting the issuer, during a period of years, generally five, from refunding its outstanding bonds at lower interest rates. During the above period, there was a total of 178 electric and gas utility bond issues offered at competitive bidding, aggregating $3,763 million principal amount. The refundable issues numbered 137 and accounted for a total of $2,507million, while the nonrefundable issues-all except 1 being nonrefundable for a period of 5 years, and the one being nonrefundable for a period of 7 years-numbered 41 and totaled $1,256 million principal amount. The number of refundable issues thus represented 77 percent of the total number of issues, while, in terms of principal amount, the refundable issues accounted for 66.6percent. The weighted average number of bids received on the refundable issues was 4.56, while on the nonrefundables it was 4.27. The median number of bids on both groups was the same-i.e., 4. With respect to the successof the marketing of the bond issues, an issue was considered to be successfully marketed if at least 95 percent of the issue was sold at the syndicate price up to the date of termination of the syndicate. On this basis, 75.2 percent of the refundable issues were successful, while 73. 2 percent of the nonrefundables were successful. In terms of principal amount, 73.0 percent of the refund ables were successful, while 74.7 percent of the nonrefundables were successful. Extension of the comparison to include the aggregate principal amounts of all issues which were sold at the applicable syndicate prices up to the termination of the respective syndicates, regardless of whether a particular issue met the definition of a successful marketing, indicates that 89.2percent of the combined principal amount of all the refund- ables were so sold, as compared with 89.1 percent for the nonre:fund- ables. The substantially similar statistics developed in respect of the two groups of bond issues support the Commission's policy of requir-

"This finding has also been made by others who have made Intensive studies of the problem. See W. J. Wlnn and A. Hess, Jr., "The Yalue of the Call Privilege," The JOllrnal oj Finance, May 1959, page 189. TWENTY-FIFTH ANNUAL REPORT 141 ing free refundability of utility bond issues subject to the Holding Company Act. In the 24th Annual Report, mention was made (at page 131) of a comprehensive study of redemption provisions of corporate bonds being conducted at the Wharton School of Finance and Commerce of the University of Pennsylvania, and that a member of the staff of the Commission was serving on an advisory committee with respect to such study. A preliminary draft report on the study was completed shortly after the close of fiscal year 1959. Of the three preferred stock issues with an aggregate par value of $19 million with respect to which applications or declarations were filed during the fiscal year, two issues had charter provisions in substantial conformity with the Statement of Policy. The other issue failed to conform in certain respects relating to, among other things, restrictions against (a) amending the charter in a manner adverse to the preferred stockholders, (b) mergers or consolidations, (c) re- acquisitions by the issuer of any of its outstanding preferred stock, and (d) issuance or assumption of short-term unsecured debt. Accordingly, the Commission, in approving the proposed issue of preferred stock, conditioned its order so as to require the necessary investor protection."

.. Holding Company Act Release No. 18992 (Apr. 27, 1959). PART vn PARTICIPATION OF THE COMMISSION IN CORPORATE RE- ORGANIZATIONS UNDER CHAPTER X OF THE BANK- RUPTCY ACT, AS AMENDED

The role of the Commission under chapter X of the Bankruptcy Act, which provides a procedure for reorganizing corporations in the United States district courts, differs from that under the various statutes which it administers in that the Commission does not initiate chapter X proceedings or hold its own hearings. It has no authority to determine any of the issues in these proceedings. However, at the request of the judge or on the Commission's own motion, if approved by the judge, the Commission may participate in such proceedings in order to provide independent, expert assistance to the court and investors on matters arising in such proceedings and, where the Com- mission considers it appropriate, it may file advisory reports on reorganization plans. Thus, the facilities of the Commission's technical staff and its disinterested recommendations are simply placed at the service of the judge and the parties, affording them the views of disinterested experts in a highly complex area of corporate law and finance. The Commission pays special attention to the interests of public security holders, who may not otherwise be effectively represented. In any case where the scheduled indebtedness of a debtor corporation does not exceed $3 million, the judge under section 172 of chapter X may, before approving any plan of reorganization, submit such plan to the Commission for its examination and report. If the indebtedness exceeds $3 million, the judge must submit the plan to the Commission before he may approve it. "Wherethe Commission files a report, copies of it, or a summary thereof, must be sent to all security holders and creditors when they are asked to vote on the plan. The Commission has no authority to veto or require the adoption of a plan of reorganization and is not obligated to file a formal advisory report on a plan. The Commission's advisory reports on plans of reorganizations are usually widely distributed and serve an important function. How- ever, they represent only one aspect of the Commission's activities in cases in which it participates. The Commission, as a party to a chapter X proceeding, is actively interested in the solution of every major issue arising therein and the adequate performance of its duties re- 142 'l'WENTY-FIFTH ANNUAL REPORT 143 quires that it undertake in most cases intensive legal and financial studies. Even in cases where the plans are not submitted to the Com- mission and no report is filed, the Commission must consider various reorganization proposals of interested parties while plans are being formulated, and be prepared to comment fully upon all plans that are the subject of hearings for approval or confirmation. In the exercise of its functions under chapter X the Commission has endeavored to assist the courts in achieving equitable, financially sound, expeditious and economical readjustments of the affairs of corporations in financial distress. To aid in attaining these objectives the Commission has lawyers, accountants and financial analysts in its New York, Chicago and San Francisco regional officeswho keep in close touch with all chapter X hearings and issues. Supervision and review of the regional officers'chapter X work is the responsibility of the Division of Corporate Regulation of the Commission, which also handles the actual trial work in cases arising in the Atlanta and Washington, D.C., regional areas.

SUMMARY OF ACTIVITIES The Commission actively participated in 49 reorganization proceedings involving 69 companies (48 principal debtor corporations and 21 subsidiaries of those debtors) during the past fiscal year.' The stated assets of these 69 companies totaled approximately $583,626,000 and their indebtedness totaled approximately $540,501,000. The proceedings were scattered among district courts in 18 states, as follows: 11 proceedings in New York, 6 in Illinois, 5 in Kentucky, 4 in Nevada, 3 in Pennsylvania, 2 each in Florida, Texas and Oklahoma, and 1 each in Washington, Iowa, Virginia, Maryland, North Dakota, New Jersey, Louisiana, Connecticut, Colorado, and Utah, During the year, the Commission entered its appearance in 14 new proceedings under chapter X involving companies with aggregate stated assets of approximately $62,037,000and aggregate indebtedness of approximately $39,165,000. They involved the rehabilitation of companies engaged in such varied businesses as uranium mining, motion picture production, hotel and country club operations, and the manufacturing of precision instruments, building materials and miscellaneous product s. Proceedings involving 4 principal debtor corporations were closed during the year. At the end of the year, the Commission was actively participating in 45 reorganization proceedings involving 67companies.

THE COMMISSION AS A PARTY TO PROCEEDINGS The Commission has not considered it necessary or appropriate that it participate in every chapter X case. Apart from the fact that the

1 The appendix contains a complete list of reorganization proceedings in wbieb the Com- mission participated as a party during the fiscal year ended June 30, 1959. 144 SECURITIES AND EXCHANGE CO,MMISSION administrative burden of participating in every one of the approximately 90 cases instituted during the fiscal year would be unsurmount- able with its present staff, many of the cases involve only trade or bank creditors and a few stockholders. The Commission has sought to participate principally in those proceedings in which a substantial public investor interest is involved. This is not the only criterion, however, and in some cases involving only limited public investor interest, the Commission has participated because an unfair plan had been or was about to be proposed, the public security holders were not adequately represented, the reorganization proceedings were being conducted in violation of important provisions of the act, other facts indicated that the Commission could perform a useful service or the judge requested the Commission to participate.

PROCEDURAL MATrERS The Commission, when a party in chapter X proceedings, has been diligent to urge upon the court the procedural safeguards to which all parties are entitled. The Commission also attempts in its interpretation of the statutory requirements to encourage uniformity in the construction of chapter X and the procedures thereunder. Prior to the filing of an involuntary petition for the reorganization of the F. L. Jacobs Oompany in the United States District Court for the Eastern District of Michigan," the United States District Court for the Southern District of New York appointed receivers for the d~btor company to preserve its assets and to protect the interests of the stockholders, creditors, employees and the general public. This receivership grew out of an extensive investigation by the Commission's New York regional officewith regard to possible violations of the Securities Act of 1933 and the Securities Exchange Act of 1934. An injunction to restrain the receivers was issued by the United States District Court in Michigan on March 23, 1959. The receivers petitioned that court to dismiss the chapter X petition on the grounds that it was collusively filed and that the debtor's principal place of business was New York, or in the alternative, to transfer the proceeding to New York. The Commission participated in the hearing to develop the facts regarding the debtor's place of business. ' The court held that the petition was properly filed and denied the relief requested. An appeal by the receivers was pending in' the United States Court of Appeals for the Sixth Circuit at tile close of the fiscal year. There was also a venue problem in the proceeding involving Verdi Development Oompany, whose common stock was withdrawn in 1958 from listing and trading on the San Francisco Mining Exchange by Commission order.

• In the Matter oj F. L. Jacob« Company (No. 42235). TWENTY-FIFTH ANNUAL REPORT 145 The debtor filed a petition for reorganization in the United States District Court of Nevada and the Commission filed a motion to transfer the case, on the ground that the company's principal place of business was not, as alleged, in Nevada. This motion became moot because the Court dismissed the petition. A new petition, filed in the Central District of Utah, was approved," The appeal in the Selected Investments case 4 involved the questions whether public investors in a trust fund were creditors, despite provisions in their "certificate bonds" consistent with those of an equity security, and whether the separate entities of the trust fund and the corporation controlling it could be disregarded where the corporation's only business was the management of the fund and where, in the sale of the certificate bonds to public investors, the corporation had led the investors to believe that they were lending their money to it. The Commission supported the trustee in successfully urging the Court of Appeals to affirm the District Court's order approving the petition for reorganization." In the Shanoano Development Oorporation case," the Commission sought the removal of the president of the debtor as additional trustee on the ground that he was a substantial stockholder and creditor of the debtor, and so was not a disinterested person as required by sections 156 and 158 of chapter X. In addition, it was urged that no operations were being conducted by the debtor and hence there was no need for an operating trustee. The additional trustee resigned after the Commission's motion was filed. Under the act, the trustee's counsel, like the trustee himself, must be disinterested, since each plays a key role in the reorganization. In the previously mentioned JMobs case the Commission took the position that the attorney for the trustees was not disinterested. The Commission stated that the trustees' attorney had actively collaborated with the attorney for the debtor who had referred to him two of the three petitioning creditors, that he had first appeared as attorney for the petitioning creditors, and that these facts indicated the existence of a materially adverse interest. The attorney resigned while a decision on an application for his removal was pending.

PROBLEMS IN CONNECTION WITH THE ADMINISTRATION OF ESTATES During the course of the reorganization proceedings involving Selected Investments Corporation,' the court sua sponte ordered a

• In the Matter oj Verdi Development Co. (C.D. Utah. No. B. 89-59) . • In the Matter of Selected Investments Trust Fund and Selected Investments Oorpora- tion, (W.D. Okla., No. 16080). • Selected Investments Oorporation v, Duncan, et al., 260 F. 2d 918 (C.A. 10, 1958). eert, den. Hart, et al. v. Selected Investments Oorporation, 359 U.S. 901 (1958). The Commission also supported the trustee In opposing an earI1er attempt to secure a writ ot prohibition trom the Court ot Appeals against the assumption ot jurisdiction by the District Court. • In the Matter oJ Shawano Development Oorp., (D. Wyoming. No. 3168). 7 See tn. 5, IlUpra. 146 SECURITIES AND EXCHANGE CO:MMISSION distribution of one-third of the assets of the debtor to the creditors. The Commission, joined by certain creditors, objected on the ground that a liquidation of such a substantial portion of an estate under- going a reorganization could be accomplished only pursuant to a plan of reorganization, but the judge overruled these objections. The Commission joined a creditor on a motion for a stay to the United States Court of Appeals for the Tenth Circuit. The appellant's request that no supersedeas bond be required was supported by the Commission on the ground that to require a bond in a matter such as this would in effect defeat the right of creditors and stockholders to take appeals under chapter X." On January 30, 1959,the Court of Appeals stayed the distribution, but the matter became moot with the confirmation of a plan of reorganization in July 1959. In the Swan Fi1Wh Oil Oorporation case," the court had enjoined Doeskin Products, Inc., a former subsidiary of the debtor, from trans- ferring any of the stock or assets of Keta Gas & Oil Company, which had been a wholly-owned subsidiary of the debtor. There had been a purported transfer of 1,140,390shares of Keta to Doeskin in exchange for 800,000shares of Doeskin stock. The trustees secured an order requiring Doeskin to show cause why it should not be required summarily to turn over the Keta stock and its assets to the trustees. Doeskin and Keta moved the court to vacate this order on the grounds (1) that the court lacked jurisdiction over Keta-; and (2) that since Doeskin had a substantial adverse claim to the Keta stock and assets, summary jurisdiction did not lie. Evidence at the hearings indicated the Keta stock and assets were turned over to Doeskin in an unauthorized manner and that consequently Doeskin had no valid claim to the stock and assets. The Commission contended that Doeskin knew or should have known of the unauthorized nature of the transaction, and that under these circumstances, the reorganization court had summary jurisdiction to determine the question of title. The court denied the trustees' motion for a summary order and an appeal was taken. The Commission filed a brief expressing the view that the trustees' position was correct." In the Ludman. Corporation. case," certain creditors petitioned the court to adjudicate the debtor a bankrupt. As a result of the Com- mission's representation that there was a good possibility the company could be successfully reorganized, the reorganization proceeding was

8 See also In the Matter of Equitable Plan Company (S.D. Cal., Cen. Div. No. 86096-BH), where the trustee petitioned the court for authority to pay a dividend of 20% on unsecured pre-chapter X debts of $9,725,083 which would have amounted to 83% of the debtor's cash and 33% of Its current assets. The Commission took the position that this proposed dividend would be a payment out of funds provided by liquidation of loans and not from the earnings of the company and was in effect a liquidation without a plan. A dividend of 10% was approved by the court. • In the Matter of Swan-FinCh Oil Corp., (S.D.N.Y. No. 93046). 10 On Aug. 24, 1959, the Court of Appeals reversed the District Court. Pettit and Crawford, Trustees ~. Doeskin Products 11£0.et al.-F. 2d-(C.A. 2). 11 In the Matter Of Ludman Corp. (S.D. Fla., Miami Dlv. No. 4018-M-BK). TWENTY-FIFTH ANNUAL REPORT 147 continued. A plan was subsequently filed with the court and referred to the Commission for an advisory report, which was under consideration at the end of the year.

TRUSTEE'S INVESTIGATIONS A complete accounting for the stewardship of corporate affairs by the old management is a requisite under the Bankruptcy Act and chapter X. One of the primary duties of the trustee is to make a thorough study of the debtor to assure the discovery and collection of all assets of the estate, including claims against directors, officers,or controlling persons who may have mismanaged the company's affairs, diverted its funds to their own use or benefit, or been guilty of other misconduct. The staff of the Commission participates in the trustee's investigation so that it may be fully informed as to all details of the financial history and business practice of the debtor. The Commis- sion views its duty under chapter X as requiring it to call the attention of the trusteee, or the court if necessary, to any matters which should be acted upon. In the Texas Portland Oement Oompany case," the Commission participated in an extensive investigation under section 167 by the trustees into the tangled financing of the debtor and related questions. The debtor had initially sold 500,000shares of unregistered stock to residents of Texas. It issued approximately 400,000 additional shares in bonuses, commissions for assistance in procuring loans, and special transactions with promoters and creditors. At the suggestion of counsel for the Commission the trustees secured injunctions against the transfer of most of the additional shares by the holders thereof, pending determination of the validity of their issuance and other questions involved." The trustee's investigations in the reorganization proceedings involving Selected Investments Corporation and Selected Investments Trust Fwrul,14 disclosed that the debtor had been subjected to fraudulent mismanagement by its officersand directors. The trustee obtained a judgment against these corporate insiders for approximately $12 million in damages, on which some recovery has been had, and suits are pending against the bonding companies for the balance."

ACTIVITIES REGARDING PROTECTIVE COMMITTEES The Commission has constantly been alert to insist upon the honesty of fiduciaries in their relationship to the estate and to investors, and

UIn the Matter Of Teilla8 Portland Oement 00., (E.n. Texas, Beaumont Dlv., No. 1606h u Approximately 35 witnesses were examined. Two of the witnesses, a former director and his business assoctate, were Indicted In the Southern District of Texas for perjury allegedly committed In the course of their respective examinations under section 167. t< See fn, 5, 8upra. '" On Oct. 22, 1958, an indictment was returned (U.S.D.C. W.D. Oklahoma) charging certain of the debtors, officers and directors and others with violations of the antifraud provisions of the Securities Act of 1933 and the mail fraud statute. On March 27, 1959, each of the defendants was found guilty on some or all of the counts of the Indictment. 529523--59----1J 148 SECURITIES AND EXCHANGE COMMISSION

has always sought to disqualify security holder committees subject to a conflict of interest from acting in chapter X proceedings. In the above mentioned Selected Investments T1'U8tFund and Se- lected Investments Uorporation case, a committee formed to represent certificate holders of the trust fund, had solicited from public investors $1 for each $1,000 of thrift certificates. Commission counsel objected to this solicitation and the court required the committee to return all funds received." After the committee qualified as a duly constituted committee, representing approximately 3,000 certificate holders whose claims exceed $16 million, it applied to the court for permission to solicit contributions from certificate holders to finance its activities. The Commission contended that the committee should be denied the right to make mass solicitations, recommending that the committee make appropriate arrangements for the financing of its activities by contributions from its members or individual security holders. The Commission's contention was upheld. In the Texas Portland Oement Oompany case," a common stockholders' committee, composed of a New York attorney and four of his relatives, attempted to solicit powers of attorney from stockholders generally. The Committee members had acquired their stock in one of the transactions being investigated by the trustees, in settlement of a relatively small cash advance to the debtor, and the committee chairman was asserting a large unliquidated claim against the debtor for services and expenses allegedly rendered in procuring a mortgage commitment which the debtor had rejected. The Commission joined with the trustees in opposition to recognition of this committee, on the ground of the conflict between the interests of its members and those of common stockholders generally. The District Court ruled that the committee was disqualified to act as a representative of stockholders. There has since appeared in the proceedings another common stockholders' committee, composed of local stockholders who acquired their shares in the original public offering. Some of the members of a creditors' committee in this proceeding owned stock of the debtor either directly or indirectly. The Com- mission joined the trustees in opposition to the recognition of this committee because of the conflict of interests involved in the dual status of committee members. This committee also was disqualified.

ACTIVITIES WITH REGARD TO ALLOWANCES Every reorganization case ultimately presents the difficult problem of determining the allowance of compensation to be paid out of the debtor's estate to the various parties for services rendered and ex-

.. 24th Annual Report or the SecurIties and Exchange Commission, page 188. 17 See fn, 12 ,"pro. TWENTY-Fll'TH ANNUAL REPORT 149 penses incurred in the proceeding. The Commission, which under section 242 of the Bankruptcy Act may not receive any allowance from the estate for the services it renders, has sought to assist the courts in protecting debtors' estates from excessive charges and at the same time equitably allocating compensation on the basis of a claim- ant's contribution to the administration of an estate and the formulation of a plan. In the Third Avenue Transit Corporation case the District Court granted fees and expenses totaling $2,068,505. The Commission had recommended awarding fees and expenses of $1,818,476, and upon appeal to the Court of Appeals for the Second Circuit, that Court set the amount at $1,849,005.18 In so doing, the Court listed the factors which bear on the granting of allowances in reorganization cases: (a) economy of administration, (b) the burden the estate can safely bear, (c) value of the services, (d) duplication of service by counsel representing the same interests, and (e) the reasonableness and fairness of the compensation to each applicant. It noted that the recommendations of the Commission "are entitled to great weight." The District Court had found that an oral agreement between an attorney and a firm to share equally in the compensation they received :from the reorganization contemplated as well as an equal division of work. The Court of Appeals upheld in principle the award by the district judge of separate compensation to each. The Court of Ap- peals also upheld the Commission's contention that section 249 of the Bankruptcy Act prevented the awarding of a fee where the fee applicant had pledged securities of the debtor after assuming to act in a representative or fiduciary capacity in a reorganization and the securities were subsequently sold. In this case, further, the wife of an attorney in the reorganization had sold securities of the debtor. The District Court found that the wife's decision to sell was based on the advice of her investment broker and not on any inside information possessed by the husband and held that section 249 did not bar a fee to the attorney although he had knowledge of the sale of the securities by his wife. The Com- mission took the position that a fee should be denied the attorney since he had knowledge of his wife's transaction and derived an indirect benefit from it. The Court of Appeals sustained the Commissions position and held that the facts warranted the statutory disqualification. IS In the Stardust, Inc. case," the court confirmed a plan of reorganization which provided for a sale to reorganized Stardust, Inc. of a group of five hotel units, in various stages of completion, for $1,500,000

11 nurtace 'I'ransnt ; Inc. v, Baee, Bacon oE O'Shea, 266 F 2d. 862 (C.A. 2, 19,c)9). ,. For a discussion of the case in the District Court, see the Commission's 24th Annual Report at pages 138-14l. "" In the Matter 0/ Stardust, Inc. (D. Nev.• No. 955). 150 SECURITIES AND EXCHANGE COMMISSION cash and a $2,800,000note secured by a deed of trust on the properties. Subsequently it appeared that the costs for completion had been un- derestimated and, as a result, the reorganized Stardust was unable to meet the first payment on the note. A petition for modification was approved by the court under section 222 of chapter X. Applications for fees and expenses in connection with the modification of the plan aggregated $58,460. The Commission took the position that the creditors, preferred stockholders, and the trustee and his counsel were primarily interested in preserving the terms previously determined and fixed under the plan, and that the modifications, as amended, were essentially a compromise and reflected, in greater or lesser degree, the efforts of all participants. Under a commitment pursuant to order of the Court, the proponent of the modification, who was in control of the reorganized debtor, was obligated to pay the fees and expenses in connection with the modification. The Commission urged that nevertheless chapter X standards should be followed, in accordance with the provisions in section 221(4) which make "all payments ... promised by the debtor or by a corporation ... acquiring property under the plan or by any other person" subject to the governing standards of chapter X. The Commission recommended fees totalling $2'3,860, and the judge awarded the applicants $29,881P In the Adolf Gobel, Inc. case," applications were filed for fees in the aggregate amount of $374,370. The Commission submitted its recommendations aggregating $170,000 and the court awarded $1'1'8,000. The Commission recommended denial of compensation to the debtor's attorneys who also acted as attorneys for the principal stockholder and plan proponent, and to an attorney for an individual creditor whose claim was the subject of litigation, asserting that the activities of these attorneys were principally for the benefit of their clients and only collaterally of benefit to creditors generally, and therefore each should look to his client for his compensation. The court denied these requests for allowances.

ADVISORY REPORTS ON PLANS OF REORGANIZATION During the fiscal year, the Commission issued two advisory reports and one supplemental advisory report. Such reports represent the principal means by which the Commission records its views publicly. Generally speaking, an advisory report is prepared only in a case involving a substantial public investor interest and in which significant problems exist. On occasion, because of the exigencies of time or for other reasons, no written report is filed but instead Commission

.. The order included a commendation relating to the Commission's partlelpat!on-"The S.lll.C., in a workmanlike document, which is thorough and complete, •.• strikes a respon- sive chord with the court's thinking." .. In the Malte r of Adolj Gobel, tno., (D. New Jersey, No. B-316-58). TWENTY-FIFTH ANNUAL REPORT 151 counsel makes a detailed oral presentation of the Commission's views and the reasons therefor. Usually advisory reports are prepared at the close of the hearings after the completed record contains sufficient material upon which to formulate an opinion as to a plan's fairness and feasibility. However, in the reorganization proceeding involving Alaska Telephone Oorpo- ration/a the judge requested the Commission to prepare written comments on three proposed plans of reorganization and to submit them to the court prior to hearings on the plans. In his decision, the judge followed rather closely the lines of analysis and comments in the memorandum submitted to the Court by the Commission. In proceedings in Nevada for reorganization of the San Souci resort hotel 24 the Commission advised the court on four plans of reorganization. Only two plans were considered worthy of consideration and the Judge requested that additional views be presented orally by Commission counsel on these plans. The trustee's plan contemplated an arrangement providing an extension of maturi- ties on the senior debt, and conversion of junior debt to stock. The second plan also contemplated amortization of the existing debt, but on different terms. A feasible plan under chapter X requires a debt structure reasonably geared to prospective earnings. The Commission felt that the plans were not feasible on an earnings valuation, and that under the proposed plans the debtor would be insolvent or on the brink of insolvency at the very beginning of its new life. However, the court approved the trustee's plan and submitted it to the creditors for acceptance. On February 25, 1959, the Commission filed objections to a plan of reorganization proposed in the Selected Investments Oorporation and Selected Investments Trust Fund case." Under the plan, the debtor would have transferred some $10 million of assets to a new corporation which would engage in the general loan and finance business. Creditors of the debtor were to receive $5 million of preferred stock of the new corporation and $5 million in cash which was to be borrowed by the new corporation. Additional capital was to be provided to the new corporation through the private sale of $500,000of common stock. The Commission pointed out, among other things, that creditors would only be entitled to elect a minority of the board of directors for their $5 million investment, whereas purchasers of the $500,000 of new common stock would elect a majority of the board. The Commission also questioned the feasibility of the plan. The plan was approved by the court and accepted by the requisite majority of

23 (W.D. Wash., No. 41633). :u. San Soum Hotel Ino., (D. Nev. No. 259) . .. See tn. 4 8upra. 152 SECURITIES AND EXCHANGE COMMISSION

creditors but it was not confirmed by the court due to the filing of a new plan of reorganization. On April 23, 1959,the Commission filed an advisory report on the second plan of reorganization. The new plan proposed that the reorganized debtor issue to the certificate holders $11 million in 20-year debentures and 16,500,000shares of common stock, $1 par value per share, out of a total of 18,150,000shares to be authorized. The remainder of the 1,650,000shares was reserved for options to proposed management. The stock options contemplated by the plan provided that the stock would be available to certain specified persons at $1 per share for 5 years. The plan also provided that there would be a restrictive stock option to employees at the same price as the options to proposed management. The Commission stated that the amended plan was not fair in a number of respects, particularly in that it would permit creditors desiring to withdraw and receive cash to receive the same amount as those who stayed in and took securities. The Commission also expressed doubts as to the propriety of including stock options in a plan of reorganization and urged that they be eliminated completely or substantially modified. In a supplemental report following amendments to meet the Com- mission's recommendations, the Commission concluded that the amended plan was fair and equitable and feasible. This plan was approved by the court, accepted by the requisite majority of creditors, and confirmed by the court. The plan is in the process of being consummated. In the Inland Ga8 Corporation case 26 a petition was filed by three debenture holders of Kentucky Fuel Gas Corporation for the alter- ation and modification of the plan of reorganization confirmed by the court on April 28, 1958, and affirmed on appeal, 260 F. 2d 510 (C.A. 6), oert. den. April 27, 1959. The modification was based upon a proposed underwriting whereby the estate would receive cash in an amount greater than the valuation of the enterprise upon which the plan was based. The Commission submitted a memorandum. stating that the court had jurisdiction to consider proposed alterations and modifications and that the alterations and modifications proposed in the petition appeared to have sufficient merit on their face to warrant a hearing upon due notice to security holders. The District Court denied the petition and on appeal by the creditors, which the Commission supported, the Court of Appeals for the Sixth Circuit granted a stay of the order of consummation of the plan."

... (E.D. Ky. Nos. 98~B. 991-B and 111;). ::r C.A. 6 Nos. 13.911 and 13.955. TWENTY-FIFTH ANNUAL REPORT 153 The Hudson & Manhattan Railroad Company owns and operates office buildings in New York City and an interurban rapid transit electric railway between New York City and points in New Jersey. In the reorganization proceeding of this company," the trustee filed with the court an amended plan designed to permit only the senior bondholders to share in the value of the mortgaged assets, but recognizing the claims of junior bondholders against certain assets allegedly not subject to the mortgage liens (free assets). It also provided for a contingent interest for junior bondholders in the proceeds of the sale of the railroad, if such a sale realized more than was required to meet the claims of the senior bondholders. Under the plan, the debtor would continue only as a real estate company, and a new company would be organized as a subsidiary of the real estate. The real estate company would issue to the senior creditors $10,- 038,100 principal amount of 20-year 6 percent first mortgage bonds and 590,476shares of a new class A common stock, which would constitute 91 percent of the common stock equity. The junior creditors would receive 58,849 shares of a new class B common stock, which would represent the remaining 9 percent of the equity. The class B stock was intended to recognize the interest of junior bondholders in the free assets of the debtor and generally to provide for their right to receive the remaining proceeds of any sale of the railroad company property after satisfaction of the claims of senior bondholders. No participation was provided for the present preferred and common stock since the debtor was insolvent. The new class A and B stocks would be alike except in respect of the election of directors and adjustments in relative participation of proceeds of the sale of the railroad properties in excessof $17million. The Commission's advisory report found the amended plan fair and equitable and feasible except in one minor respect. The amended plan proposed that the initial boards of directors of the real estate company and the railroad company would be appointed by the court after consideration of nominations by the bondholders or their representatives, but the court was not required to accept any of the nominees. Representatives of senior bondholders proposed that the initial boards of directors be designated by the court from among nominees of bondholders, with the seven class A directors of the real estate company and the five class A directors of the railroad company to be chosen from among nominees of senior bondholders, and the two class B directors of each of the reorganized companies to be chosen from among nominees by junior bondholders. The Commission believed that this proposal was appropriate and the court agreed and incorporated the proposal into the plan. A notice of appeal has been filed by common stockholders .

.. In the Matter of Hudson & Manhattan RR Co., (S.D.N.Y. 1'\0.90460). 154 SECURITIES AND EXCHANGE COMMISSION

Frank Fehr Brewing Company," a relatively small, long-established brewery in Louisville, Ky., filed a voluntary petition for reorganization under chapter X on August 16, 1957, following several years of losses. Its preferred stock was widely held by public investors. A plan of reorganization was filed on December 26, 1958, based on an offer by a group of local business men to supply a substantial amount of cash for all the common stock of a reorganized company. Creditors were to be paid in cash and 5-year mortgage bonds and the rights of the preferred stockholders altered. The old common stock was excluded. The Commission initially opposed the plan, primarily on the ground that the preferred stockholders were not being fairly treated. The Commission counsel participated in a series of negotiations culminating in amendments satisfactory to a preferred stockholders committee and upon Commission recommendation the court confirmed the amended plan. The president of the debtor, who was also the majority common stockholder, appealed from the order of confirmation. The trustee moved to dismiss the appeal on the grounds, among others, that the appellant had failed to object formally to the order of confirmation and had failed to appeal from the order of approval. The appellant had participated actively in the proceedings and had made his opposition to the plan known at several stages, but had remained mute at the hearing on confirmation. The appellant's counsel had withdrawn prior to that hearing. The Court of Appeals for the Sixth Circuit denied the motion to dismiss on May 26, 1959, saying-"The preliminary approval of the plan by the court is but one step in a continuous process leading to confirmation." It held that appellant's statements at the prior approval hearing "adequately presented to the district judge, and presents to this court also, applicant's contentions and objections to the plan." This decision was in accordance with the position taken by the Commission on this issue in its brief. Thereafter, on the merits, the Court of Appeals affirmed on June 16, 1959,80the order of confirmation, and the plan is now being consummated. The Commission had advocated affirmance of the order in its brief, with ?ne reservation, The trustee, apparently by inadvertance, had supplied the preferred stockholders group, which was then soliciting rejection of the plan,. with an old stockholders list , and had subsequently made available a current list to a group soliciting acceptances. It was contended that enough acceptances had been received to make the discrepancy between the two lists immaterial and the objecting

: In the Matter of Frank Fehr BI"cwing Co. (W.D. Ky No. 19515). In re Frallk Fehr Breloing Oo., 268 F. 2£1. 170; petition for certiorari pending. TWENTY-FIFTH ANNUAL REPORT 155 preferred group later withdrew its opposition to the plan as the result of further amendments. The Commission considered that these circumstances would require reversal of the order of confirmation, on the ground that the plan had not been properly accepted, in the absence of a showing that the error was not prejudicial. The Court of Appeals concluded "Although that might be the proper remedy under some circumstances, we do not think the particular circumstances of this case warrant taking that procedure." It stressed the fact that the old list was delivered in good faith and clearly dated, that no request was made for a later list and there was no indication that it would have not been supplied if requested, and that the parties directly involved had withdrawn their objections and were not supporting the plan. The Court said: "Under the circumstances, we find no such unfairness which would cause us to invalidate the entire vote of the preferred stockholders at the request of one who appeals as a common stockholder only ... " In the Magnolia Park case 31 the Court approved a plan of reorganization which included a provision for the trustee to enter into an agreement with outsiders to operate the track. Sportservice Corporation, which held a concession agreement with Magnolia and was a creditor and stockholder, had objected to the plan unless it could continue as operator of the concession. As a result of Sportservice's vote against the plan, there was not the requisite majority voting acceptance of the plan. Sportservice by the actions and statements of its representatives appeared to be primarily interested in upsetting the plan because it was not given the concession, and Commission counsel urged that the vote of Sportservice had not been in good faith and should be disregarded pursuant to section 203of chapter X. All other creditors voted in favor of the plan. The vote of Sportservice was disqualified by the Court. Sportservice has filed notices of appeal," and applied to the Court of Appeals for a stay. An agreement was reached whereby the motion for stay was withdrawn. Subsequently, a compromise was effected with the aid of Commission counsel and the plan was confirmed after the closeof the fiscal year .

• , In the MatteI' of Magnolia Park, Ino., (E.D. La., New Orleans Dlv., No. 9010). "Ill the Matter Of Magnolia Park, Inc., (e.A. 5, No. 17734). PART VIII ADMINISTRATION OF TIlE TRUST INDENTURE ACT OF 1939 Bonds, notes, debentures, and similar securities publicly offered for sale, except as specifically exempted by the Trust Indenture Act of 1939,must be issued under an indenture which meets the requirements of the act and has been duly qualified with the Commission. In- dentures to be qualified are required to include specified provisions which provide means by which the rights of holders of securities issued under such indentures may be protected and enforced. These provisions relate to designated standards of eligibility and qualification of the corporate trustee to provide reasonable financial responsibility and to minimize conflicting interests. The act imposes on the trustee, after default, the duty to use the same degree of care and skill "in the exercise of the rights and powers invested in it by the indenture" as a prudent man would use in the conduct of his own affairs. Exculpatory provisions formerly used to eliminate all liability of the indenture trustee are outlawed. The provisions of the Trust Indenture Act are closely integrated with the requirements of the Securities Act. Registration pursuant to the Securities Act of securities to be issued under a trust indenture subject to the Trust Indenture Act is not permitted to become effective unless the indenture conforms to the requirements of the latter act, and necessary information as to the trustee and the indenture must be contained in the registration statement. In the case of securities issued in exchange for other securities of the same issuer and secunities issued under a plan approved by a court or other proper authority which, although exempted from the registration requirements of the Securi- ties Act, are not exempted from the requirements of the Trust Inden- ture Act, the obligor must file an application for the qualification of the indenture, including a statement of the required information concerning the eligibility and qualification of the trustee.

Indentures .filedunder the Trust Indenture Act oj 1939 during the fiscal yeor ended June 30. 1959

Number of Aggregate indentures dollar amount

Indentures gr:dlng June 30, 1958______Indentures ed during tIsca1 year. ______30 $1, 002, 264, 600 202 3, 686, 135, 830 Tots1s ______• ______232 4, 686, 400, 430 Disposition during tIsca1 year: Indentures quallfied ______192 4, 229, 058, 550 Indentures deleted by amendment or wlthdrawn ______Indentures pending June 30,1959 ______13 184, 617, 900 27 274,723,980 Tots1s ______232 4, 686, 400, 430

156 PART IX ADMINISTRATION OF THE INVESTMENT COMPANY ACT OF 1940 Companies engaged primarily in the business of investing, reinvesting, holding and trading in securities are subject to registration and regulation under the Investment Company Act of 1940. This act, among other things, prohibits such companies from changing the nature of their business or their investment policies without the approval of their stockholders, requires disclosure of the finances and investment policies of these companies, regulates the means of custody of the companies' assets, requires management contracts to be submitted to security holders for their approval, prohibits underwriters, investment bankers and brokers from constituting more than a minority of the directors of such companies, and prohibits transactions between such companies and their officers, directors and affiliates except with the approval of the Commission. The act also regulates the issuance of senior securities and requires face-amount certificate companies to maintain reserves adequate to meet maturity payments upon their certificates. Investment companies which offer securities to the public must file appropriate registration statements under the Securities Act. Regis- tered investment companies must also file periodic reports and are subject to the Commission's proxy and insider trading rules. Both the Division of Corporation Finance and the Division of Corporate Regulation assist the Commission in the administration of this statute, the former being concerned with the disclosure provisions and the latter with the regulatory provisions.

COMPANmS REGISTERED UNDER THE ACT During the fiscal year ending June 30, 1959, 70 new companies registered under the act while the registrations of 11 companies were terminated. The following classes of companies were involved:

Registered Regrstration during the terminated fiscal year during the fiscal year

25 6 ~i=:~:~~Unit Investment~~-e.:d::::::::::trust ______:::::::::::::::::::::::::::::::::::::::::::::•______28 2 Face-amount certificate compames ______• ______• ______17 3 0 0 TotaL ______• ______• ___• ____• _____._ 70 11

157 158 SECURITIES AND EXCHANGE COMMISSION None of the 70 new registered companies were deregistered during the year. Eight of the new registrations were filed by small business investment companies which had received from the Small Business Administration notice to proceed to qualify for a license under the Small Business Investment Act of 1958. As of June 30, 1959,there were 512 investment companies registered under the act, and the estimated aggregate market value of their assets on that date was $20billion. These figures represent an overall increase of 59 registered companies and an increase of roughly $3 billion in the market value of assets over the corresponding totals as of June 30, 1958. The total registered companies by classification are a.sfollows: Management open-end; _ 261 Managenlent closed-end 132 Unit investment trust 107 Face-amount certtfleate______12

Total 512

GROWTH OF INVESTMENT COMPANY ASSETS The following table illustrates the striking growth of registered investment company assets during the past 18 years, and particularly in recent years :

Number of investment companies registered under the Investment Company Act and the estimated aggregate assets at the end of each fiscal year, 1941 through 1959

Number of companies Estlmated aggregate market FIscal year ended June 30 Registered Registration value of at begin. Registerod terminated Registered assets at nwgof during during at end of end of year year year year year (In millions)"

1941______1942__• ______0 450 14 436 $2,500 1943______436 17 46 407 2,400 1944__• ______407 14 31 300 2.300 1945______300 8 Tl 371 2,200 1946______371 14 19 366 3,250 1947____• ______366 13 18 361 3,750 1948______361 12 21 352 3,600 1949______• ______• ______352 18 11 359 3,825 1950______359 12 13 358 3,700 1951______• ______358 26 18 366 4,700 366 1952______12 10 368 5,600 1953_. ______368 13 14 367 6,800 1954. ______367 17 15 369 7,000 1955. _. ______369 20 5 384 8,700 1956______384 37 34 387 12,000 1957______• ______387 46 34 399 14,000 1958______399 49 16 432 15,000 1959______•• ______432 42 21 453 17,000 453 70 11 512 20,000 TotaL ______• ______••• ___ ------890 378 ------

"'rile Increase In aggregate assets reflects the sale of new securities as well as capital appreciation By way on Ilustratton, the National Associatron of Investment Companies reported that during the callmdnl year 1958 its open-end Inves~ment company members, numbering 151 and representing the bulk of tlu- industrv, had net sales of their secuntles amounting to $1.1 lulhon TWENTY-FIFTH ANNUAL REPORT 159

PROGRAM FOR INSPECTION OF INVESTMENT COMPANIES The Commission, as indicated in its 23d and 24th Annual Reports, has initiated a program for the periodic inspection of investment companies pursuant to the statutory authority under section 31 of the Investment Company Act. Up to the fiscal year 1958, 16 companies had been inspected. Fourteen companies were inspected in fiscal 1959, the third year of the inspection program. These inspections were undertaken by staff teams usually consisting of one attorney or analyst from the Division of Corporate Regulation and one securities investigator from the appropriate field office in order to combine the specialized training and knowledge of the staff concerning the regulatory requirements of the Investment Company Act with the field experience and investigative expertness of field office personnel. Inspections made in the past 3 years indicated, in some instances, noncompliance with regulatory provisions of the Investment Com- pany Act. For example: (1) improper selling practices by salesmen who promoted the sale of mutual fund shares just prior to dividend payment dates without explaining that the amount of dividend to be paid was included in the purchase price of the shares on which a sales- load was paid and that receipt of the dividend would represent a return of capital on which the shareholder would be liable for income taxes; (2) deviations from fundamental policy without approval of stockholders; (3) improper composition of boards of directors because of the affiliation of directors; (4) acquisition of securities during an underwriting where an affiliated relationship existed between underwriter and company; (5) sale of securities to a company by an affiliated person acting as a principal; (6) failure to file appropriate fidelity bond; (7) noncompliance with the requirements for the custody of the portfolio securities of a company under section 17 of the act; and (8) failure to obtain approval of stockholders or the Board of Directors for an investment advisory contract, In addition to noncompliance with various regulations and standards required under the act, there were instances where books and records of the companies were inadequate or lacking. For example: (1) failure to record the date and time of requests for redemption, thus making it impossible to determine whether the investors received their correct net asset value; (2) failure to maintain purchase and sales journals; failure to maintain ledger accounts for broker-dealers used by the company for its portfolio security transactions; and (3) failure to keep proper vouchers for out-of-pocket expenses. In addition, the staff noted instances where the custodian did not adhere to the terms of the custodianship agreement, or the Commission's regulations on the safekeeping of portfolio securities of the company. In some instances, there was a considerable delay in the transmission 160 SECURITIES AND EXCHANGE COMMISSION

to the investment companies of funds received by dealers selling mutual fund shares. In cases where deficiencies are noted, unless other action is indicated, they are brought to the attention of the investment companies involved so that corrective steps may be taken. The Commission's experience to date shows that this aspect of the inspection program will prove to be particularly helpful to the newly organized or the smaller investment company, and of benefit to the investing public.

STUDY OF SIZE OF INVESTMENT COMPANIES On behalf of the Commission, the Securities Research Unit of the Wharton School of Finance and Commerce of the University of Pennsylvania is now conducting a fact-finding survey in connection with a study of the problems created by the growth in size of investment companies (see 24th Annual Report, p. 148). This inquiry, made pursuant to the direction contained in section 14(b) of the Investment Company Act, is being conducted, at present, through the use of a questionnaire directed to the various investment companies. The questionnaire was prepared by the staff of the Wharton School after discussion with the Commission and representatives of the investment company industry and was distributed by the Com- mission early this year. Shortly before the close of the past fiscal year the Wharton School submitted to the Commission a progress report on its size and study activities. The report indicates that substantial data in reply to the early phases of the questionnaire have been obtained and are being processed. In the initial stage of the work, detailed processing is being concentrated on the replies of open-end companies. A preliminary report on certain phases of the size study is planned early in the next fiscal year. It is anticipated that later other preliminary reports covering other aspects of the study will be available. When it receives the full report :from the Wharton School on the size study survey, it is expected that the Commission will be in a position to determine whether the increased size of investment companies has created any problems which require specific remedial ]f>gis]ativerecommendations by the Commission to the Congress.

CURRENT INFORMATION The Commission's rules promulgated under the act require that the basic information contained in notifications of registration and in registration statements of investment companies be kept up-to- date,. .through. periodic and other reports , except in cases of certain inactive unit trusts and face-amount companies. The following current reports and documents were filed during the 1958 fiscal year: TWENTY-FIFTH ANNUAL REPORT 161 ~ual reports______349 Quarterly reports______179 Periodic reports to stockholders (containing financial statements) 1,003 Oopies of sales literature 2, 722 The foregoing statistics do not reflect the numerous filings of revised. prospectuses by open-end mutual funds making a continuous offering of their securities. These prospectuses, which must be checked for compliance with the act, are required to show material changes which have occurred in the operations of the companies since the effective date of the prospectuses on file. In this respect the registration of the securities of such companies is essentially different from the registration of the usual corporate securities. In addition to these recurring activities, the Commission in the past year has performed other duties in connection with the Small Business Investment Act of 1958. Pursuant to an arrangement with the Small Business Administration, the staff of the Commission examines a copy of each Proposal to Operate as a small business investment company, filed on SBA Form 414, to determine the status of the Proposed Operator under the Investment Company Act and the other statutes administered by this Commission. Both the Pro- posed Operator and the SBA are notified as to the staff's conclusion in each case.

APPUCATIONS AND PROCEEDINGS The Investment Company Act prohibits certain types of transactions, in the absence of an exemptive order by the Commission issued upon a determination that specified statutory standards have been met. For this reason one of the principal activities of the Commis- sion in its regulation of investment companies is the processing of applications for such exemptive orders. Under section 6(c) the Commission, by rules and regulations, upon its own motion or by order upon application, may exempt any person, security or transaction from any provision of the act if and to the extent that such exemption is necessary or appropriate in the public interest and consistent with the protection of investors and the purposes fairly intended by the policy and provisions of the act. Other sections, such as 6(d), 9(b), 10(f), H(a), 17(b), and 23(c), contain specific provisions and standards pursuant to which the Commission may grant exemptions from particular sections of the act or may approve certain types of transactions. Also, under certain provisions of sections B, 3, and 8 the Commission may determine the status of persons and companies under the act. There were 145 applications under various sections of the Invest- ment Company Act pending before the Commission during the fiscal year 1959. The various sections of the act with which these applica- 162 SECURITIES AND EXCHANGE COMMISSION tions were concerned and their disposition during the fiscal year are shown in the following table:

Ap plicaiions filed with and acted upon by the Commission under the Investment Company Act of 1940 during the fiscal year ended June 30, 1959

Pending Pendmg Se~tlons Subject Involved July I, Flied Closed June 30, 1958 1959 ------3 and/or 6. _____ Status and exemption" ______4 8 6 6 7(d) ___- ______Registratron of foreign Investment companies, 2 4 3 3 8(0- ______'I'errnmation of registration. ______20 11 11 20 9,10, 10______Regulation of affihation of directors, officers, 3 19 21 1 employees, Investment advisers, underwriters, and others. 12,13,14(a),I5-- Regulation of Iunctions and activltres of 1 16 14 3 li______investment companies Regulation of transactions with affihated 8 20 20 H persons 18, 19,21,22, 2:L Requirements as to capital structures, loam. 5 17 13 9 distnbutions and redemptions, and related matters 20, 30 ______PrOXIes, reports and other documents re- O 2 1 1 VIewed for cornphanee. 28. ___ . ___• __•• Regulation of face amount certificate com- 1 1 1 1 32______pames Accountmg superYl~'"lOn______• ______0 3 3 0 ------Totals ___ ------.-.------. 44 101 93 52

'Includes only those section 6(c) cases in WhICh exempuon is requested from all provisions of the act. Although, as a rule, the applications for exemptions under the act are processed without holding formal hearings, there are occasions when the applicant will request a hearing, or the Commis- sion feels that the relief sought is such that a hearing should be held. Two hearings resulted from applications pursuant to section 17(b) of the act, requesting exemptions from the statutory prohibition against dealings between investment companies and their affiliates or between persons controlled by an investment company. In Atlas (lorporation, the applicant, a closed-end investment company, requested an exemption for certain transactions incident to a merger of five companies engaged in uranium mining.' Four of the five companies involved are affiliates of, and presumed to be controlled by, the investment company under the act. Consequently, they are prohibited by section 17(a) from dealing with each other in connection with the merger in the absence of an exemptive order. The Commis- sion before granting an exemptive order in such a case must determine whether the terms of the proposed transactions, including the considerations to be paid or received, are reasonable and fair and do not involve overreaching on the part of any person concerned. In addition, it must decide whether the proposed transactions are consistent with the policies of the investment company, Atlas Corpora- tion, as recited in its registration statement and reports filed pursuant

1 Investment Company Act Release No. 2778 (Oct. 21, 1958). The notice of and order for hearing on the application contains a summary of the proposed transactions and other pertinent details of the case. TWENTY-FIFTH ANNUAL REPORT 163

to the act, and are consistent with the general purposes of the act. Hearings were held and the Commission is considering the record to determine whether there has been compliance with the above-listed statutory requirements. Another hearing, involving an application under section 17(b), in which the Commission determined that the terms of a merger of an investment company with its affiliate were in compliance with the statutory standards was held in New York Dock Oompany.2 In that case New York Dock Company, a closed-end investment company, requested the order in connection with its merger into its affiliate, Dun- hill International, Inc. After considering the record the Commission granted the exemption. Another hearing held pursuant to an application filed during the past fiscal year involved Dunhill International, the surviving corporation of the above merger. After acquiring New York Dock Company's securities portfolio as a result of the merger, the surviving company conceded that it came within the statutory definition of an investment company in that it owned investment securities valued at more than 40 percent of its total assets. However, it filed an application pursuant to section 3 (b) (2) of the act for an order declaring it to be primarily engaged in a business other than that of an investment company. A public hearing was held, but before its completion, Dunhill International registered under the act and withdrew the application it had filed under section 3(b) (2).s Another hearing resulted from an application by Investors Diversi- fied Services, Inc. and others for an order of exemption permitting sale of their shares on the basis of a reduced sales load to certain associations for the account of the individual members of the associations.' A decision is pending. Other hearings held during the year which resulted from applications filed in prior years included cases involving National Depart- ment Stores Corporation and Civil and Military Investors Mutual Fund, Inc. In National Department Stores Corporation 5 the hearings were concluded and the Commission handed down its findings and opinion during the past year. The company, which previously had engaged directly and through wholly-owned subsidiaries in the retail department store business, had disposed of most of such interests and invested the proceeds so that directly and through a controlled subsidiary it engaged primarily in the mining and oil business. The Commission held that the company was primarily engaged directly or through a controlled company in business other than that of an investment company .

• Investment Company Act Release No. 2811 (Dec. 23, 1958). a Investment Company Act Release No. 2891 (June 18. 1959) • • Investment Company Act Release No. 2881 (June 11. 1959). • Investment Company Act Release No. 2812 (May 1.1959). 164 SECURITIES AND EXCHANGE COMMISSION

In Oivil and Military Investors Mutual Fund, Inc.6 a hearing was held pursuant to the application of the investment company for modification of the Commission's order 1 finding and declaring that the above name was deceptive and misleading in violation of section 35(d) of the act. Exceptions have been field to the decision of the hearing examiner and it is expected that the case will be argued before the Commission some time next year. In The Great American Life Underwriters, Ino., where the applicant is seeking an order pursuant to section 6 (c) or in the alternative an order under sections 8 (f) and 6(c) s, the hearing examiner filed his recommendations shortly before the end of the last fiscal year. Ex- ceptions have been filed to the recommended decision and the matter was pending before the Commission at the end of the fiscal year.

UTIGATION UNDER THE INVESTMENT COMPANY ACT

Variable Annuities In S.E.O. v. Variable Annuity Life Insurance Oompany of Amer- ica, et al., 359 U.S. 65 (1959), the Supreme Court reversed the Court of Appeals for the District of Columbia which had upheld the district court's dismissal of the Commission's complaint charging violation of the registration provisions of the Investment Company Act and the Securities Act of 1933. The district court had held that the McCarran-Ferguson Act placed exclusive regulatory jurisdiction Over the defendant's sale of variable annuity contracts in the insurance authorities of the State and the District of Columbia," The Court of Appeals had affirmed the district court's decision on the ground that the variable annuity contracts sold by the defendants are exempt from registration by section 3 (a) (8) of the Securities Act, which excludes the ordinary annuity contracts issued by insurance companies. In addition, the Court of Appeals had held that defendants were insurance companies within the provision of section 3(c) (3) of the Investment Company Act. The Supreme Court held that the defendants were not issuing contracts of insurance within the exemption provisions of the Securities Act, Investment Company Act and the McCarran-Ferguson Act. In so holding the court concluded that insurance involved some investment risk-taking on the part of the insurer and noted the absence here of such an assumption by the companies, since in these contracts they guarantee essentially only an interest in a portfolio of common stock which interest "may be a lot, a little or nothing" depending on the investment results of the company. In a concurring opinion, Justice Brennan added that

• Investment Company Act Release No. 2858 (Apr. 3, 1959). See pages 154-155 in 24th Annual Report for further details. • Investment Company Act Release No. 2723 (June 9, 1958). 8 The 24th Annual Report, page 154, contains a dtsensalon of the case. • See 23d Annual Report at page 164. TWENTY-FIFTH ANNUAL REPORT 165

he considered the contracts as containing elements of both insurance and investment contracts and since they raise regulatory problems of the sort contemplated by the Congress when it passed the Securities Act and the Investment Company Act, he concluded that Congress did not intend to exclude these contracts by reason of the insurance exemption. Four dissenting judges viewed the contracts as a bona fide experiment in the insurance field, and even though this particular development has securities aspects, felt that regulation should be left to the states as contemplated by the exemptions in the federal legislation. The effect of the Supreme Court decision is to make the defendants subject to registration as investment companies under the Investment Company Act. Prior to the close of the fiscal year extensive staff conferences were held with these entirely new kinds of investment companies to consider proposals for changing their methods of operation so as to bring them into compliance with the underlying purposes and provisions of the Investment Company Act. Administra- tive proceedings were instituted after the close of the year, and are pending, in connection with applications of these companies to exempt them from literal compliance with certain provisions of the act. Other Litigation During the year, the American-Hawaiian Steamship Company filed a notification of registration under the Investment Company Act, and thereby became a registered company under the terms of the act. Previously the Commission had filed suit to enjoin the company from engaging in any securities transactions until it had registered." Prior to 1953 the company either directly or through subsidiaries, was engaged in intercoastal shipping operations. Thereafter the company sold its vessels, suspended its intercoastal shipping services, closed its branch offices,and cancelled its intercoast tariffs on file with the Interstate Commerce Commission. It engaged in no shipping whatever in 1957 or 1958. In the years prior, it had incurred operating deficits from shipping, while its principal income was obtained from dividends and interest on its investments. As of December 31, 1957, the company and its two wholly-owned subsidiaries had consolidated assets of about $30 million, of which 95 percent was in cash and securities, the rest in officeand other equipment. The object of the Commission having been achieved, a stipulation was entered into, discontinuing the action. In S.E.O. v. McPhail (S.D.N.Y.) the Commission brought suit under section 36 of the Investment Company Act against the directors and officers of the McPhail Candy Corporation, a registered invest-

10 8.E.O. v. American-Hawaiian SteamBhip Company, S.D.N.Y., No. 139-3In. 166 SECURITIES AND EXCHANGE COMMISSION ment company." The Commission's complaint, which sought to enjoin the defendants from serving as directors or officers of the corporation, as well as an accounting and the appointment of a receiver, charged Russell McPhail, the president and controlling stockholder of the corporation with the fradulent diversion, waste and misuse of corporate assets, and charged the other defendants with failure to discharge their obligations to enforce the corporation's rights against McPhail. The complaint also stated that the corporation had been an investment company since 1953 but had failed to register under the act until 1957in violation of section 7. In October 1957, the defendants moved to dismiss the complaint on the ground that the acts complained of by the Commission had occurred prior to registration, but the motion was denied. Thereafter the defendants offered to settle the Commission's action on the basis of (1) the entry of a consent decree enjoining the defendants from acting as officers or directors of any investment company; (2) the payment by McPhail to the Corporation of $325,000; (3) the extension by McPhail of an offer to purchase publicly held common shares of the corporation at their net asset value, and publicly held preferred shares of the corporation at their redemption price, including all un- paid dividends. The settlement was accepted by the Commission and approved by the Court subject to the acceptance of the purchase offer by a sufficient number of stockholders to cause the corporation to fall outside the scope of the Investment Oompany Act 12 and the compromise of a stockholder's suit now pending in the Delaware Chancery Court.

11 S.D.N.Y. CIvil Action No. 13ti-203. Pages 157-158 of the 24th Annual Report also contain a discussIon of thls case. 11 Section 3(c) (1) of the act provides an exception to the statutory definitIon of an investment company If the outstanding securities of an issuer are beneficIally owned by not more than 100 persons and It Is not makIng and does not propose to make a public offerIng of Its securitIes. PART X ADMINISTRATION OF THE INVESTMENT ADVISERS ACT OF 1940 The Investment Advisers Act of 1940 requires persons engaging for compensation in the business of advising others concerning securities to register as investment advisers. The registration requirements, however, do not apply in certain limited situations. For example, an investment adviser is not required to register when he furnishes investment advice only to persons who are residents of the state in which he maintains his principal place of business and he does not provide advice or analysis concerning securities listed on a national securities exchange or admitted to unlisted trading privileges on such an exchange. The act also provides an exemption for any investment adviser whose only clients are investment companies and insurance companies. An investment adviser who in the last 12 months had fewer than 15 clients and does not hold himself out generally to the public as an investment adviser, is likewise exempt from registration. It is unlawful for registered investment advisers to engage in practices which constitute fraud or deceit upon clients or prospective clients. Registered investment advisers violating any of the various provisions of the act are subject to appropriate administrative, civil or criminal remedies. Investment advisers who also effect transactions as brokers or dealers, are required to disclose any interest they may have in transactions effected for clients, if acting as an investment adviser in regard to such transaction. In addition, the act prohibits a registered investment adviser from entering into an agreement with his clients, under which his compensation is based on a share of capital gains or appreciation, and also prevents him from assigning an investment advisory contract without the consent of the client involved. Likewise, a registered investment adviser partnership which changes its membership must notify clients of such an occurrence. The Investment Advisers Act does not empower the Commission to inspect the books and records of an investment adviser. Nor, under the act, may the Commission deny or revoke the registration of an investment adviser unless: (1) he has been enjoined by a court of competent jurisdiction from activities in connection with his conduct as an investment adviser or from action involving securities or certain 167 168 SECURITIES AND EXCHANGE COMMISSION

other activities; (2) he has been convicted in the past ten years of a crime involving securities, the securities business or certain related activities; or (3) has falsified his application for registration. During the past fiscal year, the number of registered investment advisers increased substantially, reaching a total of 1,671, an increase of 7 percent over the previous year. The following table contains statistics concerning registration of investment advisers and applications for such registration during the fiscal year:

Stati8tws of Investment Adviser Registrations-1959 Fiscal Year Effective registrations at close of preceding fiscal year 1,562 .Applications pending at close of preceding fiscal year______22 .Applications filed during fiscal year______278

Total 1,862 Registrations cancelled or withdrawn during year 156 Registrations denied or revoked during year______3 .Applications withdrawn during year______2 Registrations effective at end of year 1,671 .Applications pending at end of year______30

Total 1,862

ADMINISTRATIVE PROCEEDINGS Security Forecaster Co., Inc.-Registrant, publisher of a weekly investment letter known as Financial Forecaster, devoted an entire issue of the latter to an article on Anacon Lead Mines, Ltd. (Anacon). This article recommended the purchase of Anacon stock in extrava- gant and enthusiastic terms, stating that for several weeks registrant had been conducting an extensive research program on Anacon which showed beyond a shadow of a doubt that, among other things, Anacon was the "sleeper" of the year among Canadian mining stocks. It also projected a potential recovery of gold in Anacon properties of some $50 million or more, stated that Anacon had paid more than a million dollars in dividends, and that Anacon's investments had a value of more than $16 million as of December 31, 1957. The report failed to disclose that Anacon had no proven gold deposits on these properties, that no dividends had been paid since 1952,and also failed to disclose that in contrast with the reported $16 million estimated value of Anacon Investments in shares of a mining corporation, the same shares had a value as indicated by a then existing market price of only $2,212,000. Registrant was also found to have willfully filed an application for registration incorrectly listing an individual as a director. In an action brought by the Commission, a permanent injunction was issued by the United. States District Court for the Southern District of New York against registrant and Melvin A. Johnson, its TWENTY-FIFTH ANNUAL REPORT 169

president, director and sole stockholder. 1 The decree barred them from using false and misleading statements concerning the potential recovery from Anacon's investments, profits realized in stock of other companies managed by the president of Anacon, profits that could be realized from investing in Anacon, and the present financial condition of Anacon and its history of dividend payments. Registrant consented to entry of the decree without admitting any of the allegations of violations contained in the complaint. In the revocation proceeding, which followed the injunction, registrant urged that Jolmson was the subject of a continuing investigation and had properly, and on advice of counsel, refrained from testifying in the revocation proceeding in order to avoid the possibility of waiver of his constitutional privilege against self-incrimi- nation. Accordingly, it was contended registrant was deprived of the testimony of the person most qualified to present registrant's defense. The Commission rejected this argument, holding that registrant was given due notice of the hearing on the charges against it and at that hearing registrant had participated with counsel. Based on the injunction, finding of a willful violation and substantial departure from the standards of care and responsibility and fair and impartial analysis expected of a registered investment adviser, the Commission revoked the investment adviser registration of Security Forecaster Co., Inc. 2 William H. Keller, Jr., doing business as Insurance Stock Infor-- mation Service.-Keller's investment adviser registration was revoked based on an injunction issued by the United States District Court for the Southern District of Indiana, Indianapolis Division 3 permanently enjoining him from violations of the Commission's net capital rule in connection with his activities as a broker-dealer.' The Commission also revoked Keller's broker-dealer registration based on the injunction and violations of the antifraud, record keeping, and other provisions of the federal securities laws.5 That action is described in a prior portion of this report. Albert J. Gould, doing business as Gould Investment Service.- The Commission revoked the Investment Adviser registration of Gould based on a finding that he was permanently enjoined by the United States District Court for the Southern District of New York from effecting transactions in securities at a time when A. J. Gould & Co., Inc. was in violation of the Commission's net capital rule." In

1S.D.N.Y., No. 130-239 (Feb. 28, 1958). • Investment Advisers Act Release No. 103 (May 20, 1959); petition for review of Commission order filed May 26, 1959; ClvU No. 25, 693, United States Court of Appeals (2 Cir.) ; pending at close of fiscal year. • S.D. Ind., No. I P 58--c-46 (Mar. 20,1958). • Investment Advisers Act Release No. 101 (Mar. 18, 1959). • Securltles Exchange Act Release No. 5909 (Mar. 18,1959). • S.D.N.Y., No. 113-87 (Sept. 18, 1956). 170 SECURITIES AND EXCHANGE COMMISSION that injunctive action, the court found that A. J. Gould & Co., Inc., a registered broker-dealer firm of which Gould was president and a director, had wilfully violated the net capital rule,"

T Investment .Advisers .Act Release No. 95 (Sept. 2, 1958). PART XI OTHER ACTIVITIES OF THE COMMISSION

COURT PROCEEDINGS Civil Proceedings At the beginning of the fiscal year 1959 there were pending in the courts 54: injunctive and related enforcement proceedings instituted by the Commission to prevent fraudulent and other illegal practices in the sale or purchase of securities. During the year 60 additional proceedings were instituted and 58 cases were disposed of, leaving 56 such proceedings pending at the end of the year. In addition the Commission participated in a number of corporate reorganization cases under chapter X of the Bankruptcy Act, in 7 proceedings in United States District Courts under section 11(e) of the Public Utility Holding Company Act and in 18 miscellaneous actions. The Com- mission also participated in 59 civil appeals in the United States Courts of Appeals. Of these, 20 came before the courts on petition for review of an administrative order, 17 arose out of corporate reorganizations in which the Commission had taken an active part, 17 were appeals in actions brought by or against the Commission, 1 was an appeal from an order entered pursuant to section 11(e) of the Public Utility Holding Company Act, and 4 were appeals in cases in which the Commission appeared as amicus curiae. The Commis- sion also participated in 4 appeals or petitions for certiorari before the United States Supreme Court resulting from these or similar actions. Complete lists of all cases in which the Commission appeared before a Federal or State court, either as a party or as amicus curiae, during the fiscal year, and the status of such cases at the close of the year, are contained in the appendix tables. Certain significant aspects of the Commission's litigation during the year are discussed in the sections of this report relating to the statutes under which the litigation arose. Criminal Proceedings The statutes administered by the Commission provide for the transmission of evidence of violations to the Attorney General, who may institute criminal proceedings. The regional offices of the Commis- sion prepare detailed reports in cases where the facts appear to warrant criminal prosecution. After careful review by the General Counsel's Office, these reports are considered by the Commission, and 171 172 SECURITms AND EXCHANGE COMMISSION if it believes criminal prosecution is appropriate they are forwarded to the Attorney General. Commission employees familiar with the case often assist the United States attorneys in the presentation to the grand jury, the conduct of the trial, and the preparation of briefs on appeal. The Commission also submits parole reports prepared by its investigators relating to convicted offenders. During the past fiscal year, 45 new cases were referred to the De- partment of Justice for prosecution. This represents the highest number of criminal referrals in the past 17 years and the 5th highest in the Commission's history. Also during the fiscal year 27 indictments were returned against 111 defendants, the highest number since fiscal year 1943,and there were 24 convictions in 13 cases. There were six appeals in criminal cases during the fiscal year. In three instances the appeals were dismissed. The conviction was affirmed in the only appeal decided on the merits. The remaining two cases were still pending at the close of the period. Two criminal contempt proceedings were instituted during 1959, which were still pending at the end of the year.' From 1934to June 30, 1959,2,487 defendants have been indicted in the United States District Courts in 602 cases developed by the Com- mission and 1,319 convictions obtained in 555 cases. Thus, over the past 25 years, convictions have been obtained and upheld in over 85 percent of the cases completed," As in past years, the criminal cases developed and prosecuted during the year covered a wide variety of fraudulent practices. They included frauds in the sale of securities of established as well as new businesses, frauds on the part of securities broker-dealers and their representatives, frauds in the sale of securities relating to oil and gas promotions and mining ventures, and fraudulent securities promotions of alleged inventions. In addition, defendants in a number of cases also were charged with violating the registration provisions of the Securities Act. The filing of a false registration statement under the Securities Act and the failure to file reports required under the Securities Exchange Act also were charged in certain of the cases. The "Ponzi" technique whereby promoters pay back to investors out of the investors' own funds monies which are falsely represented to be profits or interest on their investments was a part of the fraud alleged in a number of the cases in which convictions were obtained during the year. In U.S. v. Selected Investment Oorporation et oi.; (W.D. Okla.), after 3 weeks of trial, Hugh A. Carroll was convicted and sentenced to

1See Criminal Contempt Proceedings, appendix table 30, Part II. 2 A condensed statistical summary of all criminal cases developed by the Commission from the fiscal year 1934 through the fiscal year 1959 Is set forth in appendix table 37. The status of criminal cases developed b~' the Commission which were pending at the end of the fiscal year is set forth in appendix table 88. TWENTY-FIFTH ANNUAL REPORT 173 a term of 7 years 8 on all counts of a 31-count indictment which charged violations of the antifraud provisions of the Securities Act of 1933, violations of the Mail Fraud Statute and conspiracy to violate both statutes. Three other defendants received sentences ranging from a suspended sentence with 5 years probation to 5 years imprisonment;' The two corporate defendants were each fined $1,500 and one defendant was acquitted. The indictment alleged that the defendants employed a scheme to defraud in connection with the sale of certificate bonds of Selected Investments Trust Fund by means of false and misleading representations and by concealment of material facts. It was charged that the defendants paid dividends out of capital while representing to investors and prospective investors that such dividends were paid from profits earned by the trust fund created and managed by defendant Selected Investments Corporation; that false financial statements of the trust fund were distributed to investors; that the defendants illegally converted to their own use properties of the trust fund; that the defendants falsely represented that there were adequate safeguards to protect investors from loss and that their funds were invested in sound income producing securities," Convictions also were obtained after trial against two defendants in V.S. v. Monarch Radio and Television Oorporation et al. (S.D. N. Y.) . Prior to trial one defendant pleaded guilty. Two defendants were acquitted and the case dismissed as to the four remaining defendants. This indictment charged the defendants with making various misrepresentations in the sale of Monarch stock and with issuing false financial statements and paying dividends out of stock sale proceeds while representing that such dividends came from company earnings when the company had no earnings. A sentence of 18 months imprisonment was imposed upon Roy W. Adams (N.D. Texas) following his conviction of charges arising out of the fraudulent sale of stock of Central Finance Service, Inc. A codefendant, Council Mayo Forsyth, had previously been sentenced to 2 years imprisonment for the fraudulent sale of the same stock. The indictment charged that the defendants falsely represented to investors that the Central stock being offered was unissued stock and that the money received from the sale of such stock would be used by Central in its business operations; that Central was realizing substantial profits from its business operations and would pay substantial dividends and that investors would receive a return of all money invested in Central stock upon request. The promotion of alleged inventions resulted in convictions in Ii.S, v. Arnold E. Vandersee et al. (D.N.J.) and V.S. v, Gailon A. Bell

• Sentence was later reduced to 5 years and notice of appeal was withdrawn . • Appeal ppndlng by one defpndan t. • The Commission Is participating In reorganization proceedings of Selected Investment Corporation under chapter X of the Bankruptcy Act 174 SECURITIES AND EXCHANGE COMMISSION

(S.D. Calif.). After 6 weeks of trial in the Vandersee case defendants Vandersee and the Vandersee Corporation were found guilty on 11 counts of a 15-count indictment charging fraud in the offer and sale of common stock of the Vandersee Corporation The indictment alleged that as part of a scheme and artifice to defraud purchasers the defendants falsely represented, among other things, that the Vander- see Corporation had contracts with General Motors, General Electric, Ford Motor Company and other large corporations; that the corporation was producing equipment used in the manufacture and production of atomic energy, radio tubes, aircraft engines, printed circuits, and other electrical equipment; that the corporation had an order for $1 million from Bell Telephone and General Electric; and that the corporation had obtained title to two patents issued to Arnold E. Vandersee. The indictment also charged that the defendants failed to advise the public investors that some of the shares being offered by Vandersee were his personally owned shares, or the personally owned shares of other defendants. Vandersee was sentenced to a total term of 8 years and fined $5,000. The defendant corporation was fined $5,500. Two remaining defendants were found not guilty. In the Bell case defendant was found guilty on three counts charging violations of the antifraud provisions of the Securities Act, and two counts charging violations of the registration requirements of that act in connection with the sale of stock of Nu-Form Batteries, Inc. A sentence of 5 years probation was imposed upon Bell who was also ordered to make restitution. The indictment charged that Bell falsely represented that funds invested in Nu-Form Batteries stock would be used to acquire additional production facilities when, in fact, the defendant intended to and did appropriate such funds to his own use and benefit; that Bell had invented the Nu-Form Battery; that the battery would soon be distributed nationwide; that an affiliate of Nu-Form Batteries was equipped to assemble 2,000 batteries per day; and that Nu-Form stock would be listed on a national securities exchange. The indictment further charged that defendant failed to disclose that earlier attempts to manufacture and market the Nu-Form Batteries on a commercial basis had been unsuccessful and that earlier experience had indicated that the company could not generate sufficient revenue to cover operating expenses. In U.S. v. Albert Hefferan (W.D. Mich.) the defendant was sentenced to a prison term of 3 years following his plea of guilty to various counts of an indictment charging violations of the antifraud provisions of the Securities Act in connection with the sale of promissory notes purportedly secured by shares of stock. The indictment alleged that as part of a scheme and artifice to defraud, the defendant placed a series of newspaper advertisements soliciting investors to advance him sums of money. It was represented in these advertise- TWENTY-FIFTH ANNUAL REPORT 175 ments that the defendant would furnish collateral variously described as "listed, highgrade securities" and "grade A negotiable listed securities," having values substantially in excess of the amounts of the investments solicited. The indictment charged that the defendant did not intend to and did not pledge genuine securities as collateral for his promissory notes issued to investors, but delivered to them forged certificates which he falsely represented to be genuine. In addition, the indictment alleged that Hefferan falsely represented to investors that investments in his notes collateralized by purported shares of stock would be absolutely safe and involve no risk of loss; and that he had ample income from his business and investments to pay the monthly instalments of principal and interest provided in his notes. In U.S. v. PUIUlH. Oollilns (S.D. Ill.) the defendant, who was the representative of a broker-dealer, pleaded guilty to ten counts of a twenty count indictment charging him with violations of the Securi- ties Act and the Mail Fraud Statute. Collins' sentence was suspended and he was placed on probation for 3 years. Hugh O. Van Valkenburgh (D. Neb.) entered a plea of nolo con- tendere to four counts of an indictment charging fraud in the sale of securities of Instant Beverages, Inc. The defendant was fined $11,500 and placed on probation for 3 years. The other defendant, Abraham Schapiro, had previously pleaded guilty to eight counts of the indictment and had been placed on probation for 30 months and fined $2,000. The indictment charged that the defendants employed a scheme to defraud purchasers of the securities of Instant Beverages, Inc. by misrepresenting that the proceeds from the sale of defendants' shares of stock would be used by Instant Beverage, Inc. to begin production, whereas the defendants converted the proceeds to their own use j and that formulae held by the company for an effervescent soft drink were perfected and that Instant Beverage, Inc. would soon cause to be produced a stable product in marketable quantities, whereas the defendants knew that the formulae and processes were incomplete and not perfected and that a stable product could not be produced therefrom. In addition, it was charged that the defendants sold stock to the public at $5 a share for which they had paid 1 cent per share, without disclosing to the investors the original cost of the shares. In U.S. v. Harold W. Danser r-; et al (D. Mass.) the defendants are charged with violations of the antifraud provisions of the Securi- ties Act in the sale of the common stock and warrants of Ultrasonic Corporation, and with conspiracy to file false registration statements under the Securities Act pursuant to which the stock offering was made and to defraud the United States by impeding and obstructing 176 SECURITIES AND EXCHANGE COMMISSION the Commission in its protection of public investors. The indictment charges, among other things, that the defendants, in the offer and sale of the Ultrasonic securities used .financial statements, included in the prospectuses furnished to investors, which represented that the Ultrasonic Corporation was operating at a profit and had substantial assets, when in fact the corporation had suffered substantial losses and the assets were substantially less than the amount stated. In U.S. v, Charles M. Berman, et al. (S.D.N.Y.) numerous defendants were indicted for violations and conspiracy to violate the Securi- ties Act. The indictment charges the defendants with employing a scheme to defraud investors in the offer and sale of shares of John Inglis, Ltd. and other securities. The indictment alleges that as a part of this scheme defendants caused Cornelis de Vroedt, Inc. to obtain a broker-dealer registration with the Commission and arranged to supply securities to be sold through Cornelis de Vroedt, Inc. Ac- cording to the indictment, defendants caused Cornelis de Vroedt, Inc. to contract to sell, as commission agent for certain foreign trusts, large quantities of the John Inglis, Ltd. shares and defendants inserted advertisements in financial journals, newspapers and periodicals, purchased mailing lists and distributed literature to the said mailing list to condition the public for the extensive telephone sales campaign that followed. It is further charged that the defendants, in effecting the sale of the Inglis shares, falsely represented to investors that the defendant Cornelis de Vroedt, Inc. was a long established securities firm; that the purchasers could place their trust and confidence in the firm; that the firm maintained an independent research department which issued impartial advice to its customers; that the firm was advising the purchasers to invest and reinvest in the Inglis shares as a result of an impartial analysis of that security by its research department, which analysis was based upon facts and information not generally available to the public at large; that the firm, the officersthereof and the salesmen had purchased large quantities of Inglis shares for their own accounts; that the firm was offering and selling Inglis shares to a special group of customers at bargain prices with no commission charge to said customers in order to add such customers to its existing regular clientele; that the purchasers would suffer no loss and were assured of immediate large specified profits because of imminently impending designated mergers, increased earnings, declarations of dividends and new listings on registered securities exchanges; and that in order to participate in these guaranteed profits, it was necessary for the customers to make immediate purchase of the Inglis shares since they were "blue chips" in short supply and soon would be unavailable at the then existing low prices. TWENTY-FIFl'H ANNUAL REPORT 177 The indictment charges further that the defendants would send confirmations to persons who had not ordered securities and thereafter threaten to make trouble for them with the Securities and Ex- change Commission if they did not buy the securities, and that the defendants destroyed or falsified records of the company for the purpose of impeding, impairing and obstructing the investigative functions of the Commission. The indictment in V.S. v. Alexander L. Guterma, et al (S.D.N.Y.) charged violations of, and conspiracy to violate, the reporting requirements of the Securities Exchange Act of 1934. The indictment charges that Guterma, Robert J. Eveleigh, and Comficor, Inc., unlawfully failed to file with the New York Stock Exchange and the Com- mission a statement indicating beneficial ownership and the changes in such ownership in the common stock of F. L. Jacobs Co. at the close of specified calendar months. The indictment further charges that Guterma and Eveleigh delayed and obstructed the filing of the annual report of F. L. Jacobs Co. for the fiscal year ended July 31, 1958, and that Guterma and Eveleigh, who were officers, directors and owners of securities of F. L. Jacobs Co., unlawfully delayed and obstructed the making and filing of monthly reports of F. L. Jacobs Co. which would have disclosed the disposition by F. L. Jacobs Co. of a significant amount of assets otherwise than in the ordinary course of business. Indictments in two cases charge fraud in connection with the transaction of business as a broker-dealer. Bryan H. Kyger was charged in an indictment returned in the Southern District of Texas with violations of the Securities Exchange Act, as well as the Securities Act and the Mail Fraud Statute. According to the indictment, Kyger solicited customers to purchase securities from his firm upon the representation that the firm was financially able to execute such orders and to deliver securities and money due customers when he did not intend to and did not execute such orders or deliver to customers the securities ordered by them, The indictment also charges that Kyger appropriated to his own use and benefit the monies received by him from his customers in payment of securities purchased by them, and that he sold securities belonging to his customers without their knowledge and similarly misappropriated the proceeds. In an indictment returned in V.S. v, Robert Bernard Sills et al (S.D.Fla.), the defendants were charged with similar violations. The indictment in this case charges, among other things, that the defendants, operating through Sills and Company, a registered broker- dealer of which Sills was president and controlling stockholder and for which defendant Green was sales manager and a salesman of securities, employed a scheme and artifice to defraud by soliciting and 178 SECURITIES AND EXCHANGE COMMISSION inducing customers to purchase from and sell to Sills and Company certain securities, and that, instead of effecting such transactions, the defendants converted to their own use and benefit the funds received from customers in payment for such securities and the securities obtained from customers for the purpose of such sales. It is further al- ledged in the indictment that the defendants concealed from their customers that the firm was insolvent and that the defendants made and caused to be made false statements in a financial report filed with the Commission. Indictments were returned in a number of cases involving alleged fraudulent promotions regarding securities of insurance companies. An indictment was returned in the District of Nebraska charging Oharles F. Newell and others with violations of the antifraud and registration provisions of the Securities Act in connection with the sale of stock of Unity Insurance Company. The defendants are charged with investing funds derived from the sale of Unity Insur- ance Company stock in business ventures unrelated to the organization of an insurance company. According to the indictment, in the course of the sales of these securities the defendants falsely represented, among other things, that the purchaser of the stock could have his money back at any time; that the money raised from the sale of the stock would be placed in escrow until the insurance business license or franchise was issued by the State of Nebraska; that the stock was going to rise in price; that the company had the money to qualify and get its insurance license; that the company was doing so well that they would refund the money of the purchaser at any time with 5 percent interest; that the company was allowed by state law to spend only 24 cents per share for expenses; and that certain persons had made substantial investments in the Unity Insurance Company. In addition, the indictment charged that the defendants concealed that the principal organizers, officers and directors of the company did not invest any money in the company, and that the stock purchased by investors was stock optioned to an officer or director, and that the greater portion of the purchase price would be retained by the officeror director making the sale. In Ii.S, v. James Lamar McMichael (D. Ala.}, the indictment charges the defendant with violations of the antifraud provisions of the Securities Act, the Mail Fraud Statute and the Fraud by Wire Statute. McMichael, who had been a fugitive, was apprehended in January 1959 in Miami, Fla. The charges as laid in the indictment arose, in part, out of the sale of preorganization subscriptions and certificates for stock of United Security, Inc., a corporation proposed to be organized under the laws of South Carolina, which was promoted by McMichael for the purpose of acquiring a number of financially unstable insurance companies and consolidating them into one TWENTY-FIFTH ANNUAL REPORT 179 company; also, in part, out of personal transactions of McMichael with individual investors involving securities in their portfolios. It is alleged in the indictment that the defendant engaged in a scheme to sell preorganization subscriptions and certificates for both the original stock of United Security, Inc., and personally owned stock of the defendant to be issued after the corporation would be formed, by falsely representing to investors, among other things, that money paid for such securities would be deposited in escrow with The South Carolina National Bank at Greenville, S.C., and that if the corporation did not obtain a charter before a specified date, the funds of the investors would be returned to them. The indictment further alleges that the defendant falsely represented to investors that if they would turn over to him certain stocks of established corporations which they owned, he would be able to sell them at advantageous prices, and that he would accept one-half of the profits as his commission. It is also alleged that he purchased securities from investors and gave them worthless checks in payment therefor. Violations of the antifraud provisions of the Securities Act and of the Mail Fraud Statute also are charged in the indictment in V.S. v, William Isaac Lowry, et al. (D. Ariz.), This indictment charges the defendants with a scheme and artifice to defraud policyholders and stockholders of American Buyers Insurance Company, the bene- ficiaries of a certain trust of which the defendants were the trustees, and the stockholders of The American Buyers Insurance Company (a separate corporation). According to the indictment, the scheme to defraud was devised by the defendants for the purpose of obtaining control and ownership of the property, assets and insurance business of a group of insurance companies of which defendants were the principal officers and directors, and for the enrichment of defendants at the expense of investors and policyholders. As part of the scheme defendants induced those persons to invest funds in the insurance companies and to forego rights to which they were entitled as policyholders and stockholders. Further, it is alleged the defendants diverted insurance business from companies in which such persons were policyholders or stockholders to companies wholly or substantially owned by the defendants. An indictment charging violations and a conspiracy to violate the registration provisions of the Securities Act was returned against Philip H. Meade and others (S.D. Ind.) in connection with the sale of the stock of Farm and Home Agency. According to the indictment, the defendants sold the stock to non-residents of the State of Indiana, which destroyed their claim to an intrastate exemption, and conspired to conceal the true identities of the purchasers of such securities and to create the appearance of sales to Indiana residents by the use of dummies and nominees. 529523--59-15 180 SECURITIES AND EXCHANGE COMMISSION

An indictment was returned in the District of North Dakota charging Samuel Parker Pandolfo and others with violations of the antifraud and registration provisions of the Securities Act, violations of the Securities Exchange Act and violations of the Mail Fraud Statute in connection with the operation of a securities broker- dealer business. The indictment charges, among other things, that the defendant Samuel Parker Pandolfo acquired for himself and his close associates large quantities of securities of Great Northern In- vestment Company, Inc., and thereafter caused to be formed Uni- versal Securities, Inc., to engage generally in the business of a broker- dealer, and particularly to make, maintain and support a market for the Class "A" stock of Great Northern Investment Company, Inc. The indictment also charges that the defendants engaged in a scheme to sell securities through Universal Securities, Inc. by falsely representing to the investors that the prices at which the securities were sold were prices determined by an actual bona fide demand for such securities; that a further rise in the prices of the securities could be expected in the near future because of a rapid rise in the intrinsic value of the shares; and that a rise in the market prices of the securities sold was sure to occur. In addition, the indictment charges that the defendants falsely represented that the Great Northern stock would double in value within a specified period; that investors could resell the securities any time at the price at which they paid for them; and that the price at which such securities were sold was the market price thereof, when in fact said market price was an artificial market price maintained by the defendants, which fact was not disclosed. Abraham Rosen and another defendant were indicted in the District of Massachusetts on charges of violation of the antifraud provisions of the Securities Act and the Securities Exchange Act and the Fraud by Wire Statute. The indictment charges that the defendants solicited funds and securities from customers with the representation that the defendants would invest the funds and the proceeds from the securities for the benefit of the customers, when in truth and in fact, as the defendants well knew, they did not intend to, and did not, invest the moneys as represented, but appropriated the funds to their own use and benefit. An indictment was returned in the Northern District of Tennessee charging Robert Lee Proffer and others with violations of the antifraud provisions of the Securities Act and the Mail Fraud Statute. The indictment charges, among other things, that the defendants induced investors to purchase shares of Old Line Legal Reserve Trust (later the Teachers-Professional Investment Company) by falsely representing to investors that the books of the corporation would be audited by a certified public accountant and that financial statements TWENTY-FIFTH ANNUAL REPORT 181

would be furnished to stockholders at least once each fiscal year; that as of a specified date the corporation had an earned surplus of $13,278.30; that moneys received from the sale of corporation stock would be used primarily to finance and refinance loans on automobiles for the school teachers of Texas; and that in the event investors who purchased stock on the instalment plan failed to complete their purchase contracts, such investors would receive shares of stock of the corporation to the extent of the amount paid in. The indictment also alleges that as a further part of the scheme to induce school teachers to purchase stock of the corporation the defendants caused printed prospectuses to be distributed to school teachers, and that such prospectuses contained names and photographs of well-known educators throughout the State of Texas and representations that some of these individuals were directors of the corporation and that others were "Regional Directors of Areas." In the Eastern District of New York an indictment was returned charging William Spiller and others with violating the antifraud provisions of the Securities Act and the Mail Fraud Statute in the sale of the 7 percent cumulative preferred stock of Budget Funding Cor- poration. The indictment charges that in the offer and sale of those securities the defendants falsely represented that the moneys invested would be used to place second mortgages on residential properties for home improvements on such properties and to place chattel mortgages on chattels owned by established businesses, that a dividend would be declared on the common stock of Budget Funding Corporation, that the common stock was in short supply and would soon be traded on the open market, and that the preferred shares would be called back at a higher price than the purchasers paid for them. In fact, the indictment charges, the defendant concealed from purchasers of the securities that the money received was being directed to the use of the defendant Spiller and corporations controlled by him. As in the past, cases involving alleged fraudulent oil and gas promotions and mining ventures were numerous. In U.S. v, Dudley Pritchett South (D.N.J.) an indictment was returned charging violations and conspiracy to violate the registration and antifraud provisions of the Securities Act in connection with the sale of the common stock of Texas-Western Oil Company, Inc. The indictment charges that in the sale of that stock the defendants misrepresented that Texas-Western had acquired oil producing properties in Kansas and Oklahoma and had a working interest in other specified oil properties, that Texas- Western had a partnership interest in leases located in Nevada and in a 10,000-acre block in Wyoming, that Texas-Western owned a 55 percent interest in a mercury and antimony mine located in Mexico and was building an ultrasonic ore reduction mill on the site of that mine, that the company had an income from its oil produc- 182 SECURITIES AND EXCHANGE COMM:ISSION ing properties in Kansas and Oklahoma, that dividends would be paid on the Company's stock, that the value of the stock would increase sharply in a short period of time and that the stock would be registered and listed on the New York and American stock exchanges. In U.S. v, Thomas E. Robertson, et al (S.D.N.Y.) the indictment alleges that the defendants, in violation of the antifraud provisions of the Securities Act, employed a device, scheme and artifice to defraud investors in the sale of the common stock of American-Canadian Oil and Drilling Corporation; that Thomas E. Robertson, Inc., in exchange for certain oil and gas leases, acquired 500,000 shares of common stock of American-Canadian which it sold to the investing public at various prices without a registration statement being in effect with respect to said shares, and without disclosing that the shares being sold were shares already issued to Thomas E. Robertson, Inc., and that the proceeds from the sales would inure to the use and benefit of Thomas E. Robertson, Inc., and Thomas E. Robertson; and that the defendants made false and fraudulent representations concerning the payment of dividends, the value of the stock, approval by the Securities and Exchange Commission, listing of the stock on a national securities exchange, the value of the properties and their cost of acquisition. Numerous other misrepresentations and omissions also were charged. Violations of the registration provisions of the Securities Act as well as the Mail Fraud Statute are charged in the pending indictment in U.S. v. Texas-Adams Oil Oompany (S.D.N.Y.) which also involved an oil promotion venture. Alleged fraudulent promotions involving mining ventures led to indictments in U.S. v. Olement G. Oafarelli, et al, (D. Utah) ; U.S. v, Silas M. Newton et al, (D. Colo.) ; U.S. v. Arthur L. Damon, et al (S.D. CaL); and U.S. v. William J. Oonrad (N.D. Ohio). In the Oafarelli case the indictment charges fraudulent sales of the common stock of Comstock Uranium Tungsten Co., Inc. According to the indictment, a Regulation A notification and offering circular covering the proposed public offering of 440,000 shares of common stock of Comstock were filed with the Commission, and defendants, instead of proceeding with the Regulation A offering, sold personally owned stock to the public using as an inducement false representations to the effect that the stock would appreciate in market value when it was offered for "public sale" and that the persons approached were being given a special prepublic offering price not afforded to the general public. Other false representations also are charged. In the Newton case a superseding indictment was returned which charges, among other things, that the defendants devised a scheme to defraud investors by means of misleading and false statements and TWENTY-FIFTH ANNUAL REPORT 183 pretenses, which induced them to purchase participation certificates in trusts known as the Yellow Cat Royalty Trust and the Tennessee Queen Royalty Trust, and in fractional undivided interests in mining claims held by the Tennessee Queen Mining Company. The indictment also charges that in connection with the sale of these securities the defendants falsely represented that the properties were of great value; that the company was shipping ore, and the investors were absolutely assured of royalty returns on their investments; that the operators and their associates were highly experienced mining operators; that the operators agreed that they would repurchase or refund the purchase price to some of the purchasers upon demand; and that the investment to be made by the prospective purchasers was safeguarded because of bank trusteeship. In the Damon case the indictment charges that the defendant made fraudulent representations to investors concerning the financial status of Nev-Tah Oil and Mining Company, the potential oil reserves of mining properties owned or leased by the mining company, and the company's earnings and ability to pay dividends. The indictment further charges that Damon acquired control of the company and caused the market price of its stock on the Salt Lake Stock Exchange to rise above 45 cents per share through -the use of flamboyant and misleading reports, letters and oral statements; that he caused the company to issue stock into a series of escrows for release at prices ranging from 9 cents to 45 cents per share, and that he offered and sold escrowed stock at prices in excess of the escrow prices and at artificial exchange prices. In the Oonrad case, the defendant was apprehended after the close of the fiscal year, and pleaded guilty to an indictment charging him with the fraudulent sale of unregistered common stock of Condonna Uranium Mines Limited. In connection with the sale of that stock, according to the indictment, the defendant falsely represented to investors that Kennecott Copper Company would pay more than $10 million for the uranium mining properties owned by Condonna; that the profit to the investors would be more than $8,000 for each $100 invested; that a deal to sell the uranium mining properties to Stand- ard Ore and Alloys Corporation was "signed, sealed and delivered" and the profit to the investors would be $60 for each $1 invested; that that Brush Beryllium Company would advance $500,000 to develop some beryllium mining claims allegedly owned by Condonna Uranium Mines Limited and would buy all the beryllium ore produced at $600 a ton. The Court of Appeals for the Ninth Circuit affirmed the conviction of Helen A. Davenport for conspiracy arising out of a securities fraud involving Edgar Robert Errion and Mount Hood Hardboard and 184 SECURITIES AND EXCHANGE COMMISSION

Plywood Cooperative," The scheme to defraud the investing public included the sale of $1,000 memberships in Mount Hood. Appellant Davenport participated in the fraudulent scheme by allowing her name to be used as a cloak of respectability and her corporation as a conduit by which to siphon off the proceeds from the sale of the memberships. The Court of Appeals rejected appellant's attack on the indictment and held that it sufficiently charged her with a crime. In addition, the Court reviewed the evidence and found it sufficient to sustain the verdict of guilty. In Tellier v. U.S. and Walters v, U.8. the Supreme Court of the United States denied petitioners' writs of certiorari. Tellier had been sentenced to 4% years imprisonment for his activities in running a boiler-room. Walters had received an 1S-month sentence in connection with insurance company promotions. Both these cases are discussed in the 23d and 24th Annual Reports.

DISCIPLINARY PROCEEDINGS AGAINST PERSONS PRACIlClNG BEFORE THE COMMISSION Private proceedings were instituted pursuant to rule II (e) of the Commission's rules of practice to determine whether James T. DeWitt should be temporarily or permanently denied the privilege of practicing as an attorney before the Commission. DeWitt was retained by Cushman Foods Co., Inc. to represent it in connection with a proposed public offering under Regulation A under the Securities Act of 1933. He was given authority by his client to execute all papers necessary to qualify such offering under Regulation A for the purpose of obtaining an exemption from registration with respect to the proposed offering. Included in the notification were financial statements which, together with subsequent amendments thereto, were prepared and filed by DeWitt. These financial statements were false, and DeWitt knew that they were false when he filed them. In addition, he advised Cushman to sell the shares covered by the notification, although the time at which such sales would commence under the regulation had not arrived, and pursuant to that advice Cushman sold over 4,000 shares. DeWitt requested of Cushman moneys which he represented were to be distributed among employees of the Com- mission. Pursuant to this request he received $100, which he thereafter represented to Cushman he had "passed along" to such employees, whereas in fact, no moneys, gifts or inducements of any kind were given to any Commission personnel. At the private hearing there was entered of record DeWitt's "consent to order of disqualification", and

thereafter the Commission issued its opinion 7 in which it found that

• Four other convicted defendants did not appeal. Errfon on his plea of guilty received sentences totaling 12 years. See the 23d and 24th .Annnal Reports for discussions of this case. r Secnrltles .ActRelease No. 4041. TWENTY-FIFTH ANNUAL REPORT 185 DeWitt had filed false financial statements, which he knew to be false, that he obtained moneys from his client under the false pretense that he proposed to use that money to exert an illegal influence on the Commission staff, and that in so doing he had engaged in unethical and improper conduct. Itordered that DeWitt be permanently denied the privilege of appearing or practicing before the Commission. Proceedings under rule II(e) with respect to Bollt and Shapiro, accountants, are discussed below at p. 197 in connection with the activities of the Commission in the field of accounting.

COMPLAINTS AND INVESTIGATIONS Each of the acts administered by the Commission specifically authorizes investigations to determine whether violations of law have occurred. In most instances, the investigations conducted by the Commission are private and nonpublic. However, the Commission may, in its discretion, order a public investigation. It is the policy of the Commission to conduct its investigations privately for a number of reasons. Such a policy is necessary for effective law enforcement and in the interest of fairness to persons against whom unfounded or unconfirmed charges may be presented. Effective enforcement requires that investigations be private in order that suspected violators may not be warned and thereby frustrate the investigation. This policy is similar to that of most law enforcement agencies. The Commission investigates many situations where no violation is ultimately found to exist. To conduct such investigations publicly would ordinarily result in hardship or embarrassment to many innocent persons and might affect the market for the securities in question, resulting in injury to public investors with no coun- tervailing public benefit. Moreover, members of the public would have a tendency to be reluctant to furnish information concerning violations if they thought their personal affairs would be publicized. Pri- vate investigations protect both those who furnish information and subjects of investigation against whom the evidence fails to warrant action. Accordingly, the Commission does not generally divulge the results of any investigation until they are made a matter of public record through proceedings before the Commission or in the courts. The nine regional officesof the Commission, with the assistance of their branch offices,are chiefly responsible for the conduct of investigations. In addition, the special investigations unit of the Division of Trading and Exchanges of the Commission's home officeconducts investigations dealing with matters of particular interest or urgency either independently or assisting the regional offices. Because of "boiler-room" operations in the New York area, much of the work of the special investigations unit is devoted to that area. The Divi- 186 SECURITIES AND EXCHANGE COMMISSION sion of Trading and Exchanges exercises general supervision over and coordination of the investigative activities of the regional offices. It examines and analyzes periodically the results of investigations and recommends appropriate action to the Commission, giving serious consideration to the recommendations of the regional offices in each instance. There are several sources of information which eventually lead to investigations. A primary source of information comes from complaints of members of the public concerning the activities of persons involved in the offer and sale of securities. The Division of Trading and Exchanges and the regional officesof the Commission give careful attention to this information and if it appears that violations of the federal securities laws may have occurred, an investigation is commenced. H the complaint is received by the Division of Trading and Exchanges, the information contained in the complaint is forwarded to the appropriate regional office for such investigative activity as may be deemed advisable. Other sources of information which are of great help to the Commission in carrying out its enforcement responsibilities are national securities exchanges, brokerage companies, state and Canadian securities authorities, Better Business Bureaus and the National Association of Securities Dealers, Inc. Many times information from these sources is helpful, for it comes from persons who are often familiar with the operation of the federal securities laws and are interested in seeing full protection of these laws afforded to the investing public. H, after careful consideration of information received from these and other sources, it appears that violations may have occurred, a preliminary investigation may be made. Many times this investigation discloses a violation due to a misunderstanding or ignorance of the law. In these cases, where no harm to the public has occurred, it is the policy of the Commission to inform the offender of the violation and to make sure that necessary steps are taken for future compliance. Should the offender fail to conform with the requirements of the law, then the Commission takes appropriate action. When the preliminary investigation indicates a serious violation, or appears to require more extensive investigation, including examination of books and records or interviews with more than a few persons, a case is docketed and a full investigation is made. At times it is necessary for the Commission to issue a formal order of investigation which appoints members of the staff as officersto issue subpoenas and take testimony under oath. As is often the case, this step is taken when the principals and others involved in the investigation are un- cooperative, and it is necessary to use the subpoena power in order to determine the exact nature of the activities involved. During the TWENTY-FIFTH ANNUAL REPORT 187

past year, 94 formal orders were issued in connection with the investigations handled through the Division of Trading and Exchanges, an increase of nearly 25 percent over the previous year. In addition investigations are initiated and conducted by the staff of the Division of Corporation where necessary to assist in ascertaining facts with respect to disclosures required to be made or omissions of material information in connection with its examination of registration statements filed under the Securities Act and preliminary proxy soliciting material and reports required to be filed under the Securities Exchange Act. Where necessary, such investigations are conducted with the assistance of the staff of other divisions and regional offices. Upon completion and review of an investigation by the regional office concerned and the Division of Trading and Exchanges, or the Division of Corporation Finance, the Commission takes under consideration the recommendations of its staff concerning the investigation. The Commission, where action is necessary, has the choice of several avenues. When required in the public interest, the Com- mission may refer the case, including evidence and exhibits, to the Department of Justice for criminal prosecution. Should this occur, members of the staff familiar with the case assist the Department of Justice and the United States Attorney handling the case in presenting it to the grand jury. When an indictment is returned, members of the staff aid in the trial of the case. The Commission may, when appropriate, authorize institution of civil proceedings for injunctive relief. In such event, the complaint is filed in the appropriate United States District Court and the case presented by a member of the Commission's staff. The Commission may also institute administrative proceedings when the investigation indicates that a registration statement or report filed with it is false or misleading or omits required information or that a broker-dealer or investment adviser registered with the Commission is violating the federal securities laws. The following table reflects in summarized form the investigative activities of the Commission during fiscal 1959.

Investigations of possible violations of the acts administered by the Commission

Preliminary Docketed Total

Pending June 30,1958 •••.•..• ______New cases ____ • _____' ______' ______. ______'_ 191 770 961 142 384 526 preliminary ______."' __., ____• ______._~ ______r Transferred from 24 24 TotaL __. ______• __. ____• ______.. ______. ___ 333 1,178 1,511 C1osed ______. ______• _. ______. 140 339 479 Transferred docketed .• _____' ___. ______. to 1959. ______••• ______'_ 24 .------839- 24 Pending at June 30, 169 1,008 188 SECURITIES AND EXCHANGE COMMISSION

ENFORCEMENT PROBLEMS WITH RESPECI' TO CANADIAN SECURITIES Enforcement problems relative to the unlawful offer and sale of securities by Canadian issuers and broker-dealers continue to be serious. In such enforcement activities the Commission is severely handicapped in that ordinarily both the violator and essential evidence are in Canada, where persons, books and records are beyond our investigative and subpoena powers. It is therefore difficult, and in most instances, impossible to obtain admissible evidence with respect to such violations. Even when evidence is obtainable, sanctions, such as civil or criminal prosecution or administrative proceedings, cannot be utilized unless personal jurisdiction over defendants can be secured. Despite these difficulties, the Commission, acting within its jurisdictional limitations, has made aggressive efforts to deal with the situation. Hundreds of investigations have been made, injunctions have been secured whenever jurisdiction over violators could be obtained, and a substantial number of criminal indictments have been entered. However, in a test case under the Supplementary Extra- dition Convention consummated in July 1952, the details of which were furnished in our 22d Annual Report, the Canadian courts denied extradition of a person who engaged in the fraudulent sale of securities by mail and telephone to United States residents. Through appropriate diplomatic channels negotiations are still continuing in an effort to correct this situation. In the meantime the Commission is almost wholly dependent upon voluntary cooperation of the Cana- dian provincial enforcement authorities. Canada does not have federal securities legislation nor a federal regulatory body. Such matters are regulated on a provincial basis somewhat similar to the blue sky laws administered by State commissions. In general excellent cooperation has been obtained during the fiscal year from the provinces in the enforcement work of the Commission. One of the most encouraging developments in this area has been the outstanding cooperation afforded by the Saskatchewan Securities Commission. On May 1, 1959,this Commission concluded an arrangement with the Saskatchewan Securities Commission under which the latter will require broker-dealers in that Province to refrain from distributing issues of securities into the United States unless the broker- dealer is registered in compliance with the Securities Exchange Act of 1934 and the security is registered in compliance with the Securities Act of 1933. This is the only such arrangement which the Commission has with any province in Canada and reflects the desire of the Saskatchewan Securities Commission that only legitimate issues be distributed from that Province into the United States. TWENTY-FIFTH ANNUAL REPORT 189 During the past fiscal year the Commission has brought 10 civil actions and instituted three criminal actions in which the illegal sale of Canadian securities in the United States was involved. Details concerning these actions: S.E.O. v, Ralph L. Loomis and F. Payson Tood, SE.O. v. Oanadian Javelin Limited et al, U.8. v. Robert M. Sherwood, S.E.O. v. Scott Taylor and 00., Ino., S.E.O. v. Sidney B. Josephson et al, S.E.O. v. A. G. Bellin Securities Oorp, et al, S.E.O. v. Albert and Oompany, Inc. et al, S.E.O. v.I. B. Morton and Oom- pany, Inc. et al, S.E.O. v. Gotham Securities Oorp, et al, S.E.O. v. Philip Newman Associates et al, U.S. v, Oharles M. Berman et al, S.E.O. v. Lincoln Securities Oorp.et al, and U.S. v. William J. Oonrad are described above in the section on Litigation under the Securities Act of 1933and the section on Criminal Proceedings. To cope further with the Canadian problem the Commission continues to maintain its Canadian Restricted List, which is a list of Canadian issuers whose securities the Commission has reason to believe currently are being, or recently have been, distributed in the United States in violation of the registration requirements of the Securities Act of 1933. The list and supplements thereto are issued to and published by the press, copies are mailed to all registered broker-dealers and are available to the public. They serve as a warning to the public and alert broker-dealers to the fact that transactions in the securities named therein may be unlawful. As a practical matter most United States broker-dealers refuse to execute transactions in such securities. During the fiscal year 1959, 27 supplements (compared to 14 in fiscal year 1958) were issued in which 85 names (compared to 50 names in fiscal year 1958) were added to the list. On May 20, 1959, the list was revised and consolidated, resulting in the deletion of 29 issuers concerning whose securities the Commis- sion had no evidence of a public offering or sale in the United States during the past 3 years. In many instances the companies were no longer in existence due to mergers, charter surrenders, etc. The number of names on the list as of June 30, 1959,was 210. The current list, reflecting additions and deletions to November 25, 1959, follows:

CANADIAN RESTRICTED LIST

Aero Mining Corporation Amican Petroleum and Natural Gas Alba ExploratioIlB Limited Corporation Limited Aldor Exploration and Development Anthony Gas and Oil ExploratioIlB Company Limited Limited Algro Uranium Mines Limited Apollo Mineral Developers Inc. A. L. Johnson Grubstake Arean Corporation Limited Alonette Mines Limited Atlas Gypsum Corporation Limited Amador Highland Valley Coppers Augdome Exploration Limited Limited Ava Gold Mining Company Limited Amerieanadian Mining & Exploration Baranouri Minerals Limited Co. Limited Barbary Gold Mines Limited 190 SECURITIES AND EXCHANGE COMMISSION

Barite Gold Mines Limited Hercules Uranium Mines Limited Basic Lead and Zinc Mines Limited Hoover Mining and Exploration Beaucoeur Yellowknife Mines Limited Limited Bengal Development Corp. Limited Huddersfield Uranium and Minerals Black Crow Mines Limited Limited Cable Mines and OIls Limited Inlet Mining Corp. Limited Cameron Copper Mines Limited International Ceramic :Mining Limited Canada Radium Corporation Limited Irando Oil and Exploration Limited Canadian .Alumina Corporation Limited Jacmar Explorations Limited Canadian Natural Resources Limited Jaylac Mines Limited Can .American Copper Limited Jilbie Mining Company Limited Canso Mining Corporation Limited J omae Mines Limited Cartier Quebec Explorations Limited Judella Uranium Mines Limited Casa Loma Uranium Mines Limited Kaiser Development Corporation Oasgoran Mines Limited Limited Cavalier Mining Corporation Limited Kamis Uranium Mines Limited Centurion Mines Limited Kateri Mining Company Limited Oessland Gas and Oil Corporation Kelkirk Mines Limited Limited Kelly-Desmond Mining Corporation Colville Lake Explorers Limited Limited Ooneor-Chtbougamau Mines Limited Key West Exploration Company Consolidated Easter Island Mines Limited Limited Kimberly Copper Mines Limited Consolidated Exploration and Mining Kipwater Mines Limited Co., Limited Korich Mining Company Limited Consolidated Quebec Yellowknife Mines Kordol Explorations Limited Limited Kukatush Mining Corporation Consolidated Woodgreen Mines Limited Lake Kingston Mines Limited Continental Consolidated Mines and Lake Otter Uranium Mines Limited Oils Corporation Limited Lama Exploration and Mining Com- Copper Prince Mines Limited pany Limited Courageous Gold Mines Limited Lambton Copper Mines Limited Cove Uranium Mines Limited Landolac Mines Limited Cree Mining Corporation Limited Langis Silver and Cobalt Mining Com- David Copperfield Explorations Limited pany Limited Demers Chibougamau Mines Limited Larutan Petroleum Corporation Ltd. Dencroft Mines Limited Lavandin Mining Company Derogan .Asbestos Corporation Limited La vant Iron Mines Limited Desmont Mining Corporation Limited Lee Gordon Mines Limited DeVille Copper Mines Limited Lindsay Explorations Limited Diadem Mines Limited Lithium Corporation of Canada Limited Dolmac Mines Limited Lucky Creek Mining Company Limited Dolsan Mines Limited Lynwatin Nickel Copper Limited DuBar Exploration Limited Mack Lake Mining Corporation Limited DuMaurier Mines Limited Madison Mining Corporation Limited Dupont Mining Company Limited Mallen Red Lake Gold Mines Limited Eagle Plains Developments Limited Marian Lake Mines Limited Eagle Plains Explorations Limited Marple Explorations Limited East Trinity Mining Corporation Marpoint Gas & Oil Corp. Limited Eastern-Northern Explorations Limited Masters Oil and Gas Limited Embassy Mines Limited Megantic Mining Corporation Explorers .Alliance Limited Mercedes Exploration Com pan y Export Nickel Corporation of Canada Limited Limited Mexicana Explorations Limited File Lake Explorations, Limited MexU8can Development Corporation Fleetwood Mining and Exploration Mid-West Mining Corporation Limited Limited Milmar-Island Mines Limited Font Petroleums Limited Mina-Nova Mines Limited Franksin Mines Limited Min-Ore Mines Limited (formerly Gasjet Corporation Limited Ryan Lake Mines Limited) Golden .Algoma Mines Limited Monarch .Asbestos Company Limited Monpre Mining Company Limited Golden Hope Mines Limited Montclair Mining Corporation Limited Goldmaque Mines Limited Montco Copper Corporation Limited Granwick Mines Limited Mylake Mines Limited Hallmark Explorations Limited Nationwide Minerals Limited Halstead Prospecting Syndicate New Campbell Island Mines Limited Harvard Mines Limited New Faulkenham Mines Limited TWENTY-FIFTH ANNUAL REPORT 191

New Goldvue Mines Limited Saskalon Uranium and Oils Limited New Hamil Silver-lead Mines Limited Sastex Oil and Gas Limited New Jack Lake Uranium Mines Savoy Copper Mines Limited Limited Sentry Petroleums Limited New Metalore Mining Company Limited Senvil Mines Limited New Spring Coulee Oil and Minerals Sheba Mines Limited Limited Sheraton Uranium Mines Limited New Surpass Petrochemicals Limited Shoreland Mines Limited New Vinray Mines Limited Sico Mining Corporation Limited New West Amulet Limited Skyline Uranium and Minerals Cor- Norcopper and Metals Corporation poration Limited Normalloy Explorations Limited St. Pierre & Miquelon Explorations Inc. Normlngo Mines Limited St. Stephen Nichel Mines Limited Norseman Nickel Corporation Limited Stackpool Mining Company Limited North American Asbestos Company Strathcona Mines Limited Limited Sudbay Exploration and Mining North Gaspe Mines Limited Limited North Lake Mines Limited Surety Oils and Minerals Limited North Tech Explora tions Limited Tabor Lake Gold Mines Limited Northwind Explorations Limited Taiga Mines Limited Nortoba Mines Limited Tamara Mining Limited Nu-Gord Mines Limited Tamicon Iron Mines Limited Nu-Reality Oils Limited Taurcanis Mines Limited Nu-World Uranium Mines Limited Temanda Mines Limited Obabika Mines Limited Territory Mining Company Limited Ordala Mines Limited Three Arrows Mining Explorations Palliser Petroleums Limited Limited Pantan Mines Limited Torbrook Iron Ore Mines Limited Paramount Petroleum and Minerals Trans Nation Minerals Limited Corporation Limited Trenton Mines Limited Peace River Petroleums Limited Tri-Cor Mining Company Limited Plexterre Mining Corporation Limited Trio Mining Exploration Limited Prestige Lake Mines Limited Trojan Consolidated Mines Limited Principle Strategic Minerals Limited United Copper and Mining Limited Prudential Petroleums Limited United Uranium Corporation Limited Purdex Minerals Limited Upper Ungava Mining Corporation Quebank Uranium Copper Corporation Limited Quebeck Developers and Smelters Val Jon Exploration Limited Limited Valray Explorations Limited Quebec Graphic Corporation Queensland Explorations Limited Vanguard Explorations Limited Quinalta Petroleum Limited Venus Chlbougamau Mines Limited Regal Minerals Limited Vieo Explorations Limited Regal Mining & Development Limited Viscount Oil and Gas Limited Resolute Oil and Gas Company Limited Wakefield Uranium Mines Limited Ridgefield Uranium Mining Corpora- Webbwood Exploration Company tion Limited Limited Riobec Mines Limited Westville Mines Limited Roberval Mining Corporation Whitney Uranium Mines Limited Rockroft Explorations Limited Windy Hill Mining Corporation Rothsay Mines Limited Yukon Prospectors' Syndicate

SEcrION OF SECURITIES VIOLATIONS A Section of Securities Violations is maintained by the Commission as a part of its enforcement program to provide a further means of detecting and preventing fraud in securities transactions. The Sec- tion maintains files providing a clearing house for other enforcement agencies of information concerning persons who have been charged with violations of various Federal and State securities statutes. Con- siderable information is also available concerning violators resident in the provinces of Canada. The specialized information in these files is kept current through the cooperation of the United States Post Office 192 SECURITIES AND EXCHANGE COMMISSION

Department, the Federal Bureau of Investigation, parole and probation officials, State securities authorities, Federal and State prosecut- ing attorneys, police officers, better business bureaus, chambers of commerce and other agencies. At the end of the fiscal year these records contained information concerning 69,013 persons against whom Federal or State action had been taken in connection with securities violations. In keeping these records current, there were added during the fiscal year items of information concerning 9,576 persons, including 3,450 persons not previously identified in these records. The Section issues and distributes quarterly a Securities Violations Bulletin containing information received during the period concerning violators and showing new charges and developments in pending cases. The bulletin includes a "Wanted" section listing the names and references to bulletins containing descriptive information of persons wanted on securities violations charges. The bulletin is distributed to cooperating law enforcement and other agencies in the United States and Canada. Extensive use is made of the information available in these records by regulatory and law enforcing officials. Numerous requests are received each year for special reports on individuals in addition to the information supplied by regular distribution of the quarterly bulletin. All available information is supplied in response to inquiries from law enforcement agencies. During the fiscal year the Commission received 3,730 "securities violations" letters or reports and dispatched 944 communications to cooperating agencies.

APPLICATIONS FOR NON-DISCLOSURE OF CERTAIN INFORMATION The Commission is authorized under the various acts administered by it to grant requests for nondisclosure of certain types of information which would otherwise be disclosed to the public in applications, reports or other documents filed pursuant to these statutes. Thus, under paragraph (30) of schedule A of the Securities Act of 1933, disclosure of any portion of a material contract is not required if the Commission determines that such disclosure would impair the value of the contract and is not necessary for the protection of the investors. Under section 24(a) of the Securities Exchange Act of 1934, trade secrets or processes need not be disclosed in any material filed with the Commission, and under section 24(b) of that act written objection to public disclosure of information contained in any such material may be made to the Commission which is then authorized to make public disclosure of such information only if in its judgment such disclosure is in the public interest. Similar provisions are contained in section 22 of the Public Utility Holding Company Act of 1935 and in section 45 of the Investment Company Act of 1940. These statutory provisions have been implemented by rules specifying the pro- TWENTY-FIFTH ANNUAL REPO:RT 193

cedure to be followed by persons who apply to the Commission for a determination that public disclosure is not necessary in a particular case. The number of applications granted, denied or otherwise acted upon during the year are set forth in the following table:

Applications for non.di8clo8ure during 1959 fiscal year

Number Number Number pendmg Number Number derned pending July I, received granted or with- June 30, 19.58 drawn 1959

Securities Act of 1933 1______2 31 26 4 3 SecuritIes Exchange Act of 1934 ,______4 14 8 7 3 Investment Company Act of 1940 •______0 6 6 0 0 Totals ______6 .'il 40 11 6

1 FIled. under rule 485. , Filed under rule 24b-2. , Filed. under rule 4.5a-l.

ACTIVITIES OF THE COMMISSION IN ACCOUNTING AND AUDITING Successive reports of the Commission have called attention to the fact that the detailed provisions of the several acts administered by the Commission recognize the importance of dependable informative financial statements which disclose the financial status and earnings history of a corporation or other commercial entity. These statements, whether filed in compliance with the statutes administered by the Com- mission or included in other material available to stockholders or prospective investors, are indispensable to investors as a basis for investment decisions. The Congress recognized the importance of these statements and that they lend themselves readily to misleading inferences or even deception, whether or not intended. It accordingly dealt extensively in the several statutes administered by the Commission with financial statement presentation and the disclosure requirements necessary to set forth fairly the financial condition of the company. Thus, for example, the Securities Act requires the inclusion in the prospectus of balance sheets and profit and loss statements "in such form as the Commission shall prescribe" s and authorizes the Commission to prescribe the "items or details to be shown in the balance sheet and earnings statement, and the methods to be followed in the preparation of accounts * * *." 9 Similar authority is contained in the Securities Exchange Act,IO and more comprehensive power is embodied in the

Investment Company Act 11 and the Holding Company Act.12

8 Sections 7 and 10 (a), Schedule A, paragraphs 25 and 26. • Section 19(a). ,. Section 13(b). n Sections 30, 31. uSections 14, 15. 194 SECURITIES AND EXCHANGE COMMISSION The Securities Act provides that the financial statements required to be made available to the public through filing with the Commission shall be certified by "an independent public or certified accountant." 13 The other three statutes permit the Commission to require that such statements be accompanied by a certificate of an independent public accountant," and the Commission's rules require, with minor exceptions, that they be so certified. The value of certification by qualified accountants has been conceded for many years, but the requirement as to independence, long recognized and adhered to by some individual accountants, was for the first time authoritatively and explicitly introduced into law in 1933. Out of this initial provision in the Securi- ties Act and the rules promulgated by the Commission," and the action taken by the Commission in certain cases," have grown concepts of accountant-client relationships that have strengthened the protection given to investors. As shown above, the statutes administered by the Commission give it broad rule-making power with respect to the preparation and presentation of financial statements. Pursuant to authority contained in the statutes the Commission has prescribed uniform systems of accounts for companies subject to the Holding Company Act; 17 has adopted rules under the Securities Exchange Act governing accounting and auditing of securities brokers and dealers; 18 and has promulgated rules contained in a single, comprehensive regulation, identified as Regulation S-X,I9 which govern the form and content of financial statements filed in compliance with the several acts. This regulation is implemented by the Commission's Accounting Series Releases, of which 82 have so far been issued. These releases were inaugurated in 1937, and were designed as a program for making public, from time to time, opinions on accounting principles for the purpose of contributing to the development of uniform standards and practice in major accounting questions. The rules and regulations thus established, except for the uniform systems of accounts, prescribe accounting to be followed only in certain basic respects. In the large area not covered by such rules, the Commission's principal reliance for the protection of investors is on the determination and application of accounting principles and auditing standards which are recognized as sound and which have attained general acceptance.

'" Sections 7 and 10(a), Schedule A, paragraphs 25 and 26. 1< Securities Exchange Act, section 13(a) (2) ; Investment CompllllYAct. section 30(e) ; Holding Company Act, section 14. 15 See, for example, rule 2-01 of regulation S-X. 1. See, for example. Securities Exchange Act Release No. 3073 (1941); 10 S.E.C. 982 (1942) ; and Accounting Series Release No. 68 (1949). 17 Uniform System of Accounts for Mutual Service Companies and Subsidiary Service Companies (effective Aug. I, 1926) ; Uniform System of Accounts for Public Utility Holding Companies (effective Jan. I, 1937; amended e1l'ectiveJan. 1. 1943). :18 Rule 17a-5 and Form X-17A.-5 thereunder • .. Adopted Feb. 21. 1940 (Accounting Series Release No. 12); revised Dec. 20. IMO (Accounting Serles Release No. 70). TWENTY-FIFTH ANNUAL REPORT 195 Since changes and new developments in financial and economic conditions affect the operations and financial status of the several thousand commercial and industrial companies required to file statements with the Commission, accounting and auditing procedures cannot remain static and continue to serve well a dynamic economy. It is necessary for the Commission to be informed of the changes and new developments in these fields and to make certain that the effects thereof are properly reported to investors. The Commission's accounting staff, therefore, engages in studies of the changes and new developments for the purpose of establishing and maintaining appropriate accounting and auditing policies, procedures and practices for the protection of investors. The primary responsibility for this program rests with the Chief Accountant of the Commission who has general supervision with respect to accounting and auditing policies and their application. Progress in these activities requires constant contact and cooperation between the staff and accountants both individually and through such representative groups as, among others, the American Accounting Association, the American Institute of Certified Public Accountants, the American Petroleum Institute, the Controllers In- stitute of America, the National Association of Railroad and Utili- ties Commissioners, the National Federation of Financial Analysts Societies, as well as other government agencies. Recognizing the importance of cooperation in the formulation of accounting principles and practices, adequate disclosure and auditing procedures which will best serve the interests of investors, the American Institute of Certi- fied Public Accountants, the Controllers Institute of America, and the National Federation of Financial Analysts Societies regularly appoint committees which maintain liaison with the Commission's staff. The many daily decisions of the Commission require the almost constant attention of some of the chief accountant's staff. These include questions raised by each of the operating divisions of the Com- mission, the regional offices and the Commission. This day-to-day activity of the Commission and the need to keep abreast of current accounting problems cause the chief accountant's staff to spend much time in the examination and re-examination of sound and generally accepted accounting and auditing principles and practices. From time to time members of this staff are called upon to assist in field investigations, to participate in hearings and to review opinions, insofar as they pertain to accounting matters. Prefiling and other conferences, in person or by telephone, with officials of corporations, practicing accountants and others, occupy a considerable amount of the available time of the staff. This procedure, which has proven to be one of the most important functions 529523---69---16 196 SECuRITIES AND EXCHANGE COMMISSION of the Officeof the Chief Accountant, and of the Chief Accountant of the Division of Corporation Finance and his staff, saves registrants and their representatives both time and expense. Many specific accounting and auditing problems arise as a result of the examination of financial statements required to be filed with the Commission. Where examination reveals that the rules and regulations of the Commission have not been complied with or that applicable generally accepted accounting principles have not been adhered to, the examining division usually notifies the registrant by an informal letter of comment. These letters of comment and the correspondence or conferences that follow continue to be a most convenient and satisfactory method of effecting corrections and improvements in financial statements, both to registrants and to the Commission's staff. Where particularly difficult or novel questions arise which cannot be settled by the accounting staff of the divisions and by the Chief Accountant, they are referred to the Commission for consideration and decision. By these administrative procedures the Commission deals with many accounting questions. Inquiries in ever-increasing volume as to the propriety of particular accounting practices come from accountants and from companies not presently subject to any of the acts administered by the Commission who wish to have the benefit of the Commission's views and thus utilize and apply the Commission's experience to the facts of their own case. Teachers of accounting and their students also use the public files and confer with the staff in the study of accounting problems. Shortly before the opening of the year under report the Commis- sion amended rule 2-01 of regulation S-X relating to the independence of accountants certifying financial statements filed with the Commission for the purpose of giving formal recognition to administrative practices which have been in the process of development for some time. The revision makes no material change in the policy set forth in prior decisions of the Commission and in published opinions of the Chief Accountant. In the revision of this rule the Commission has recognized the impact of mergers and the growth of corporations through widespread affiliations, The emphasis in the rule has been changed to make it clear that where relationships described in the rule exist the Com- mission will find that an accountant is in fact not independent with respect to the company involved, but in those instances where lack of independence is not established the Commission will make no finding with respect to the accountant's independence. A few months after the revision of rule 2-01 of regulation S-X mentioned above, the Commission announced the publication of an additional release in its Accounting Series dealing with independence TWENTY-FIFTH ANNUAL REPORT 197 of accountants," In connection with the revision of rule 2-01 practicing accountants had indicated that an interpretative release similar to Accounting Series Release No. 47 would be a helpful guide to the profession. TIns new release, which summarizes previously unpub- lished rulings on independence in the Commission's experience under rule 2-01 since the publication of Accounting Series Release No. 47 on January 25, 1944, together with prior releases and Commission decisions reflects the development of policy regarding the practice of accountants before the Commission over a period of some 25 years. In Accounting Series Release No. 47 it was stated that it was not feasible to present adequately in summarized form the circumstances existing in particular cases in which it was determined not to question an accountant's independence. The growth of the accounting profession since 1944 and the number of inquiries received from public accountants unfamiliar with the rules suggested the need for publication of rulings in this category. In view of this development it was determined to review the administrative rulings in this area and to state briefly in the new release the relationships which existed in select cases where an accountant was not denied the right to certify the financial statements because under the circumstances it was concluded that the independence of the accountant was not prejudiced. During the fiscal year the Commission issued its Findings, Opinion and Order in a proceeding instituted under rule II (e) of its rules of practice against Bollt and Shapiro, Theodore Bollt and Bernard L. Shapiro." The Commission found that the respondents had failed to comply with rules and regulations of the Commission and with generally accepted accounting standards, and had engaged in improper and unethical professional conduct. Specifically, the Com- mission found that where a partner of an accountant certifying the financial statement in a registration statement pursuant to the Securi- ties Act of 1933 is the principal officer and controlling stockholder of the registrant, the certifying accountant is not independent with respect to the registrant. The Commission concluded that where the partner in the firm of certified public accountants who was the principal officer and controlling stockholder of the company which filed a registration statement with the Commission caused the other partner to certify registrant's financial statements as an independent public accountant knowing that the certifying partner was not qualified to furnish an independent certification and sought to conceal the partnership relationship, the privilege of practicing before the Commis- sion should be denied to the firm and the partner controlling the registrant until they obtain the prior approval of the Commission to practice before it in the future. The Commission further concluded

III Accounting Series Release No. 81. Dec. 1l" 19.158. II Accounting Series Release No. 82, Jan. 28. 1Qll9. 198 SECURITIES AND EXCHANGE COMMISSION that the privilege of practicing before the Commission of the certifying accountant should be suspended for 30 days. During the year the conflicting views of public utilities, public accountants, and regulatory agencies with respect to accounting for deferred taxes reached a stage requiring formal public review by the Commission. The matter arose because the effect of section 161 (liberalized depreciation) and section 168 (accelerated amortization) of the Internal Revenue Code of 1954 is to permit the tax-free recovery from operations of capital invested in a plant at a faster rate than would be possible by depreciation methods previously permitted for income tax purposes 22 and because there is a lack of uniformity in the related accounting regulations issued by the several state utility commissions. A tax deferral is recorded when liberalized and accelerated methods of depreciation and amortization are adopted for tax purposes and straight line methods are followed on the books. Most public utility companies have classified the resulting accumulated balance sheet credits to reserves or deferred credits or other nonequity accounts. Others have classified the accumulated amounts as a part of restricted earned surplus in the equity capital section of the balance sheets, while a few others, although identifying them as restricted earned surplus, have not included them in the equity section of the balance sheet. Still other utility companies have not employed deferred tax accounting but have followed what has been called the "flow-through" method and have shown in the income statement normal depreciation charges and the actual current income tax provision without provision for future income taxes. In September 1958 a public utility subsidiary of a registered holding company filed with the Commission a registration statement under the Securities Act of 1933 and a declaration under the Public Utility Holding Company Act of 1935 with respect to the proposed issue and sale of first mortgage bonds at competitive bidding. In the financial statements submitted by the registrant company, which are also subject to the accounting jurisdiction of the Federal Power Com- mission," the balance sheet carried the accumulated credits arising from the use of deferred tax accounting in respect of both liberalized depreciation and accelerated amortization as restricted earned surplus and stated them as a part of the equity capital of the company. The Commission's staff questioned the classification in light of Order No.

.. That this wall the intent of these sections of the Code is disclosed by the Report ot the House Committee on Ways and Means and Report ot the Senate Committee on Finance. See H. Rep. No. 1337 (S3d Cong., 2d Sess.), p, 24, and Sen. Rep. No. 1622 (S3d Cong.• 2d Sess.), p. 26. .. Federal Power Commission Orders No. 203 and No. 204 do not make mandatory the use of deferred tall: accounting for financial accounting purposes by those companies which elect to deduct lIberal1zed depreciation or accelerated amortization in their income tax returns. Rather they provide that where the company /Iou employ deferred tax account- Ing, the balance sheet credit shall be classlfled in a new account (Account No. 266) entitled "Accumulated Deferred Taxes 011 Income." TWENTY-FIFTH ANNUAL REPORT 199

204 of the Federal Power Commission. It should be noted that an order of a state regulatory commission to which this company is subject as to a minor portion of its utility operations authorized a restricted earned surplus classification. The state commission having jurisdiction over the company's major distributing facilities had recently issued an order directing the company to transfer the accumulated credits from restricted earned surplus to a reserve account. The company initiated an appeal from this order.23a Rule 28 promulgated by this Commission under the 1935 Act prohibits a registered holding company or a subsidiary thereof from distributing to its security holders, or publishing, financial statements which are inconsistent with the book accounts of such company or with financial statements filed by it with the Commission. One of the considerations raised by the staff of the Commission in the above described case was whether the applicability of Order No. 204 of the Federal Power Commission to the registrant rendered the publishing of any financial statements inconsistent therewith violative of the provisions of rule 28. In view of the controversial nature of the subject matter and its importance to many registrants, the Commission permitted the registration statement to become effective and the securities to be sold on the basis of full disclosure in footnotes to the financial statements of the different positions taken by the several regulatory agencies concerned with this company's affairs. As a result of this case, the substantial amounts involved in the industry;" and in consideration of differences of opinion as to the proper interpretation of Accounting Research Bulletin No. 44 (Re- vised),25 the Commission issued on December 30, 1958, a "Notice of Intention to Announce Interpretation of Administrative Policy.?" The notice proposed that any financial statement which designates as earned surplus or its equivalent or includes as a part of equity capital (even though accompanied by words of limitation such as "restricted" or "appropriated") the accumulated credit arising from deferred tax accounting in respect of liberalized depreciation or accelerated amortization would be presumed by the Commission "to be misleading or

23a Later, on September 8, 1959, the State commission issued a supplemental order amending its earlier order to permit each utility subject to its jurisdiction to elect to follow either the reserve or the restricted retained income treatment for accumulated deferred taxes . .. Federal Power Commission statistics indicate that as of Dec. 31, 1957, the aggregate amount of accumulated balance sheet credits attributable to both liberalized depreciation and accelerated amortization in respect of electric utility companies and natural gas and pipe line companies is $792,755,000. .. The import of this bulletin, issued in July 1958 by the Committee on Accounting Procedure of the American Institute of Certified Public Accountants, has since been clari- fied by a statement of that Committee that: "A provision in recognition of the deferral of Income taxes, being required for the proper determination of net income, should not at the same time result in a credit to earned surplus or to any other account included In the stockholder's equity section of the balance sheet" . .. Securities Act Release No. 4010. Dec. 30. 1958. 200 SECURrrIES Am> EXCHANGiJ COMAtISSION

inaccurate despite disclosures contained in the certificate of the ao- countant or in footnotes to the statements provided the matters involved are material." 21 Many comments were received in response to the Commission's in- vitation for views and comments. These views have been analyzed and summarized. Public hearings on the proposed policy statement were held before the full Commission on April 8 and 10, 1959, and the Commission has the matter under advisement.

INTERNATIONAL BANK. FOR RECONSTRUCTION AND DEVELOPMENT AND INTER-AMERICAN DEVELOPMENT BANK Section 15 of the Bretton Woods Agreements Act, as amended, exempts from registration under both the Securities Act of 1933 and the Securities Exchange Act of 1934 securities issued or guaranteed as to both principal and interest by the International Bank for Re- construction and Development. The bank is required to file with the Commission such annual and other reports with respect to such securities as the Commission shall determine to be appropriate in view of the special character of the bank and its operations and necessary in the public interest or for the protection of investors. The Commission has, pursuant to the above authority, adopted rules requiring the bank to file quarterly reports and also to file copies of each annual report of the bank to its board of governors. The bank if:'also required to file reports with the Commission in advance of any distribution in the United States of its primary obligations. The Commission, acting in consultation with the National Advisory Coun- cil on International Monetary 'and Financial Problems, is authorized to suspend the exemption at any time as to any or 'all securities issued or guaranteed by the bank during the period of such suspension. By virtue of Public Law 86-147, approved August 7, 1959, which authorizes United States participation in the new Inter-American Development Bank, a similar exemption has been provided for certain securities which may be issued by the new bank. The Commis- sion is considering appropriate rules and regulations with respect to the new bank of the character presently in effect with respect to the International Bank. The International Bank for Reconstruction and Development sold in the United States during the fiscal year only one issue of its primary obligations, in the amount of $100 million, of which $4,300,000 was for delayed delivery. At the end of the fiscal year the total funded debt of the bank was approximately the equivalent of $1.9 billion, of which $1.6 billion was payable in United States dollars. At the same time the subscribed capital stock of the Bank aggregated $9.6 billion of which $7.6 billion constituted the uncalled portion of the subscriptions.

rt Accounting Series Release No.4 (1938). TWENTY-FIFTH ANNUAL REPORT 201

Bank lending during the 12 months ended on June 30, 1959, continued at the high level reached in the previous fiscal year aggregating the equivalent of approximately $703 million. As indicated in the bank's 14th Annual Report, because of the implications of the new level of bank lending in recent years, the governor of the bank for the United States proposed during the fiscal year consideration of an increase in the capital of the bank. This resulted in a proposal by the executive directors of the bank that member countries should be invited to double their capital subscriptions. The executive directors also agreed to recommend additional increases over and above the general 100 percent increase in the subscription of 17 member countries. It was proposed that the authorized capital of the bank be increased from $10 billion to $21 billion. The proposal envisaged that the entire amount of the additional general subscription would be left subject to call and that the board of governors of the bank should decide that calls would only be made if required by the bank to meet its obligations on borrowings or guarantees. These proposals were adopted and, at the end of the fiscal year, legislation necessary to carry the increased subscriptions into effect was being enacted in many member countries. As of September 10, 1959, the proposal to increase the capital of the bank became effective when 34 countries had increased the subscribed capital by $7,664.7 million. At that date total subscribed capital was $17,221.2 million.

OPINIONS OF THE COMMISSION Opinions are issued by the Commission in contested and other cases arising under the statutes administered by it and under the Commis- sion's rules of practice, where the nature of the matter to be decided, whether substantive or procedural, is of sufficient importance to warrant a formal expression of views. These opinions include detailed findings of fact and conclusions of law based on evidentiary records taken before a hearing examiner who serves independently of the operating divisions, or, in an occasional case, before a single Commis- sioner or the entire Commission. In some cases, formal hearings are waived by the parties and the findings and conclusions are based on stipulated facts or admissions. The Commission is assisted in the preparation of findings and opinions by its Office of Opinion Writing, a staff office completely independent of the operating divisions of the Commission and directly responsible to the Commission itself. The independence of the staff members of this officereflects the principle, embodied in the Adminis- trative Procedure Act, of a separation between staff members performing investigatory or prosecutory functions and those performing quasi-judicial functions. In some cases, with the consent of all parties, 202 SECURITIES AND EXCHANGE COMMISSION

the interested operating division participates in the drafting of opinions. Opinions are publicly released and distributed to representatives of the press and to persons on the Commission's mailing list. In addition, the opinions are printed and published by the Government Printing Office in bound volumes entitled "Securities and Exchange Commission Decisions and Reports." During the fiscal year 1959, the Commission issued 143 opinions and other rulings of an adjudicatory nature.

STATISTICS AND SPECIAL STUDIES At its inception the Commission organized a large Research Division to assist in the drafting of rules and regulations to carry out the provisions of the Securities Act and the Securities Exchange Act. The division was staffed with a large number of experts from various phases of the securities business, economists, and statisticians. Many of the Commission's policies and rules, as well as further securities legislation, were based on special studies prepared by the research staff. By 1940most of the initial research work required by the Com- mission for the formulation of rules and regulations had been completed, and the Research Division was dissolved and certain of its activities and general statistical work was transferred to the Division of Trading and Exchanges. While subsequent research and statistical work was of a more routine nature and was chiefly carried out for internal purposes, the Com- mission began to provide more information of a broader economic character as related to the capital markets. During this period the Commission began publication of its series on individuals' saving, corporate liquid position, plant and equipment expenditures and quarterly financial report for manufacturing corporations. Several of these series are joint undertakings with other Government agencies. As public interest grew in the various data prepared and collected by the SEC, more of the statistical material was released and the publication of a monthly statistical bulletin was begun. In recent years, the statistical activities have been co-ordinated with the overall Government statistical program under the direction of the Bureau of the Budget. As the need arises, new surveys are made. One of the most significant in the last few years is the Com- mission's survey of corporate pension funds. All of the series published by the Commission are studied continuously in order to expand and improve them in answer to demands of Government agencies, business and the general public. The regular statistical series which are prepared include data on securities effectively registered under the Securities Act of 1933,offerings of securities by all corporations in the United States (including TWENTY-FIFTH ANNUAL REPORT 203 issues not registered with the Commission, such as privately placed issues and railroad securities), retirements of corporate securities, net change in corporate securities outstanding, stock prices and trading. In addition, the research and statistical activity carried out under the direction of the Bureau of the Budget includes individuals' saving in the United States, income flow and investments of private pension funds of United States corporations, current liquid position of United States corporations, sources and uses of corporate funds, anticipated expenditures for plant and equipment by United States businesses, and a quarterly financial report for all United States manufacturing concerns. The statistical series described below are published in the Com- mission's statistical bulletin and in addition, except for data on registered issues, current figures and analyses of the data are published in quarterly press releases. The Commission's stock price index is released weekly, together with the data on round-lot and odd-lot trading on the two New York stock exchanges. Issues Registered Under the Securities Act of 1933 Monthly and quarterly statistics are compiled on the number and volume of registered securities, classified by industry of issuer, type of security, and use of proceeds. A summary covering the entire 25-year period of the Commission's history appears on page 215, appendix table 1. New Securities Offerings This is a monthly and quarterly series covering all new corporate and noncorporate issues offered for cash sale in the United States. The series includes not only issues publicly offered but also issues privately placed, as well as other issues exempt from registration under the Securities Act such as intrastate offerings and railroad securities. The offerings series includes only securities actually offered for cash sale, and only issues offered for account of issuers. Annual statistics on new offerings beginning with 1934 as well as monthly figures from January 1958 through June 1959, are given in appendix tables 3,4 and 5. Estimates of the net cash flow through securities transactions are prepared quarterly and are derived by deducting from the amount of estimated gross proceeds received by corporations through the sale of securities the amount of estimated gross payments by corporations to investors for securities retired. Data on gross issues, retirements and net change in securities outstanding are presented for all corporations and for the principal industry groups. Stock Market Data Statistics are regularly compiled on the market value and volume of sales on registered and exempted securities exchanges, round-lot 204 SECURITIES AND EXCHANGE COMMISSION stock transactions of the New York exchanges for accounts of members and nonmembers, odd-lot stock transactions on the New York exchanges, special offerings and secondary distributions. Indexes of stock market prices are compiled, based upon the weekly closing market prices of 265 common stocks listed on the New York Stock Ex- change. The indexes are composed of 7 major industry groups, 29 subordinated groups, and a composite group. Individuals' Saving The Commission compiles quarterly estimates of the volume and composition of individuals' saving in the United States. The series represent net increases in individuals' financial assets less net increases in debt. The study shows the aggregate amount of saving and the form in which the saving occurred, such as investment in securities, expansion of bank deposits, increase in insurance and pension reserves, etc. A reconciliation of the Commission's estimates with the personal saving estimates of the Department of Commerce, derived in connection with its national income series, is published annually by the Commerce Department as well as in the Securities and Exchange Commission Statistical Bulletin. Corporate Pension Funds An annual survey is made of pension plans of all United States corporations where funds are administered by corporations themselves, or through trustees. The survey shows the flow of money into these funds, the types of assets in which the funds are invested and the principal items of income and expenditures. Financial Position of Corporations The series on working capital position of all United States corporations, excluding banks, insurance companies and savings and loan associations, shows the principal components of current assets and liabilities, and also contains an abbreviated analysis of the sources and uses of corporate funds. The Commission, jointly with the Federal Trade Commission, compiles a quarterly financial report of all United States manufacturing concerns. This report gives complete balance sheet data and an abbreviated income account, data being classified by industry and size of company. Plant and Equipment Expenditures The Commission, together with the Department of Commerce, conducts quarterly and annual surveys of actual and anticipated plant and equipment expenditures of all United States business, exclusive of agriculture. Shortly after the close of each quarter, data are released on actual capital expenditures of that quarter and anticipated expenditures for the next two quarters. In addition, a survey is made TWENTY-FIFTH ANNUAL REPORT 205 at the beginning of each year of the plans for business expansion during that year.

PUBUC DISSEMINATION OF INFORMATION Public disclosure and dissemination of information with respect to securities offered for public sale and those traded on exchanges is essential if public investors generally are to benefit by the disclosure requirements of the Federal securities laws and if an evaluation of the worth of securities is to be made by a broad segment of the investing public. This is accomplished in part by distribution of the prospectus of offering circular on new offerings, and by filing of annual and other periodic reports with exchanges and the Commission by listed companies. Much data filed with the Commission obtains widespread currency through published securities manuals, investment advisory services, statistical services and otherwise. To facilitate public dissemination of the financial and other proposals filed with and actions taken by the Commission, a daily News Digest is issued which contains a resume of these findings and actions. This digest is distributed initially to the press, and is distributed on a semiweekly basis to a mailing list comprising nearly 7,000 names. The daily digest, for example, contained a summary of the pertinent facts with respect to the proposals for public offering of securities contained in the 1,226 registration statements filed during the past fiscal year. During the year, also, the daily digests contained an informative discussion of each of the 888 orders, decisions and rules issued by the Commission. Much of the information is published in the daily newspapers and in financial and other periodicals. Other releases of an informational nature issued by the Commission include its various Statistical Series releases and announcements of actions, civil and criminal, which arise out of the enforcement of the laws. Members of the Commission and its staff also deliver addresses from time to time before professional and other.groups, and participate in radio or television discussions, to explain the nature and scope of the Commission's functions and activities. Information Available for Public Inspection During every fiscal year thousands of requests for information are received by mail and through telephone calls and personal visits. Most of these requests are answered by employees in the Commission's public reference rooms in Washington, Chicago, and New York City. The files of the Commission provide information of interest to a large cross section of the public. Numerous people visit the public reference rooms seeking information on which to base decisions to buy or sell securities; they are furnished the files which contain financial and other information about the issuers of the securities. Many other visitors consult Commission records. They may be repre- 206 SECURITIES AND EXCHANGE COMMISSION sentatives of legal and accounting firms, corporations and labor unions; they are interested largely in gathering information to be used as specimens, as precedent material, or for other specialized purposes. The inquiries received through the mails and over the telephone follow the same pattern. Copies of any public information filed with the Commission may be examined at the principal office in Washington, D.C. Such information includes registration statements, applications and declarations filed under the various statutes administered by the Commission, together with the records of agency action. In Washington, as in the regional offices, space considerations have necessitated the transfer of some of this material to warehouse-type space in nearby federal records centers. Files from these centers are usually available within 24 hours. The New York Regional Office has copies of recent filings made by companies having securities listed on exchanges other than the New York Stock Exchange and the American Stock Exchange, and copies of current filings of many companies which have effective registration statements under the Securities Act of 1933. The Chicago Regional Office has copies of recent reports of companies which have securities listed on the New York and American stock exchanges. Reports of listed companies on the New York, American and Midwest stock exchanges may be seen at the exchange offices. All regional offices have copies of prospectuses used in recent public offerings of securities registered under the Securities Act, of active broker-dealer and investment adviser registration applications origi- nating in their respective regions and of regulation A letters of notification filed intheir respective regions. The public reference room in Washington had 4,800 visitors during the fiscal year. Requests were filled for an additional 30,513 persons who were sent 630,869 copies of Commission publications. During the fiscal year 128,149 photocopy pages were sold pursuant to 2,021 orders. Additional thousands of persons made use of the facilities provided by the New York and Chicago public reference rooms. TWENTY-FIFTH ANNUAL REPORT 207

PUBLICATIONS Publications currently being issued include: Monthly: Statistical Bulletin. Official Summary of Security Transactions and Holdings of Officers, Directors, and Principal Stockholders. Quarterly: Financial Rep 0 r t s, U.S. Manufacturing Corporations (jointly with the Federal Trade Commission). Plant and Equipment Expenditures of U.S. Corporations (jointly with the Department of Commerce). New Securities Offered for Cash. Volume and Composition of Individual's Saving. Working Capital of U.S. Corporations. Annually: Annual Report of the Commission. Securities Traded on Exchanges under the Securities Ex- change Act of 1934. Companies Registered under the Investment Company Act of 1940. Corporate Pension Funds. Other publications: Decisions and Reports of the Commission. The Work of the Securities and Exchange Commission.

ORGANIZATION The Commission's staff consists of attorneys, security analysts and examiners, accountants, engineers and administrative and clerical employees. An organization chart of the Commission is set forth on the following page. Under the Commission's program of continuing review of its functions and organization, several changes were made in the Division of Corporate Regulation. In March 1959, the position of Chief Finan- cial Analyst was established, and a Branch of Reorganization was created in the Office of the Chief Counsel of the Division. Action taken on bu.dget e8timates and appropriation from fiscal 1950 through fiscal 1960

Fiscal 1950 Flseal1951 FIscal 1952 Flscal1953 Fiscal 1954 Fiscal 1955 Fiscal 1956 Fiscal 1957 Fiscal 1958 Fiscal 1959 Fiscal 1960, estimated Action Average Average Average Average Average Average Average Average Average Average Average employ- Money employ- Money employ- Money employ- Money employ- Money employ- Money employ- Money employ- Money employ- Money employ- Money employ- Money ment ment ment ment ment ment ment ment ment ment ment

Estimate submitted to tbe Bureau of tbe Budget. ______• ______• ______• 1,307 $6, 789, (0() 1,175 $6,675,000 ],127 $6,605,000 1,092 $6,360,000 1,080 $6,810,000 780 $5,124,760 734 $4,997,000 794 $5,749,000 935 $7,178,000 974 $7,500,000 995 $8,437,000 Action by tbe Bureau of tbe Budget ______-177 -819,(0() -40 -250,000 -77 -681,000 -157 -410,000 -142 -810,000 -63 -299,760 ------58 -400,000 -17 -162,000 ------Amount allowed by tbe Bureau of tbe Budget._ 1,130 6,970,000 1,135 6,425,000 1,050 5,924,000 935 5,950,000 938 6,000,000 717 4,825,000 734 4,997,000 794 5,749,000 935 7,178,000 916 7,100,000 978 8,275,000 Action by tbe House of Representatlves ______-70 -220,000 -95 -295,000 -50 -226,000 -125 -704,920 -152 -754, 920 -26 -125,000 -9 -122,000 -8 -49,000 -80 -478,000 -46 -300,000 -56 -475,000 ------SubtotaL _____• ______• ___._._. _. ______1,060 5,750,000 1,040 6,130,000 1,000 5,699,000 810 5,245,080 786 5,245,080 691 4,700,000 725 4,875,000 786 5,700,000 856 6,700,000 870 6,800,000 923 7,800,000 Action by tbe Senate_._ •• __• ______-_ ...... ---- - ... ------+« +200,000 -93 -320,520 -..------42 -245,080 +14 +75,000 +9 +122,000 +8 +49,000 ------+46 +300,000 +56 +475,000 Subtotal __•______• ______• ____ 1,060 6,750,000 1,084 6,330,000 907 5,378,480 810 5,245,080 744 6,000,000 706 4,775,000 734 4,997,000 794 5,749,000 855 6,700,000 916 7,100,000 978 8,275,000 Action by conferees ______---- ... - ... -- -..------22 -100,000 ------... ------6 -25,000 -4 -42,000 ------..------~----._ .... _- -._ ... _------_ .. --_ .... _ ... _- ._-_ ...... _ ... _ ...... - -24 -175,000

Annualapproprlatlon __ •• _____• ___• __• ____• __ 1,060 5, 750, 000 1,062 6,230,000 907 6,378,480 810 6,245,080 744 5.000,000 699 4,750,000 730 4,955,000 794 5,749,000 855 6,700,000 916 7,100,000 954 8, 100, 000 Supplemental appropriation for statutory pay mereesea.; _••• _._____•___•______._. ______- ... --_ ...... l28,250 -....-.-...... ~.._-~..---_ .....- ...... _-- ..-.. 43ti, 000 ... ..-- ...... _- .._-- ...... -..- .. _- ..... ----_ ..... _ ... _---- .. __ .. -- _ .... ------93,180 ------323,000 ------235,000 - ..-_ ... _--- 605.000 -_ .._------_._------

Totalapproprlatlon ______._. ______1,060 6,878,250 1,062 6,230,000 907 5,813,480 810 5,245,080 744 5,000,000 699 4,843,180 730 6,278,000 794 5,749,000 856 6,935,000 916 7,705,000 954 8, 100,000 Mandatory reserve requlred In 1952______._. ---- ..-.._ .. -...._------..-- -32 -150,000 -... _------..... _---_ .. ------..-..__ ..------_ ... ------_ ... _------... ------... _------_ ... _- _ ..... ------... -- -..-..---_ ...... - ... 1,030 6,080,000 ...... _- ... ------_ ...._--- ..------..-...... _ .. -_ .._--_ ...... -- --- ..---_ .. -..-_ ... _ ... ----_ .. _ ..------..------....------..------_ ....------.. --- I

529523-59 (Facc p, 2(9) TWENTY-FIFTH ANNUAL REPORT 209 PERSONNEL, BUDGET AND FINANCE The following comparative table shows the personnel strength of the Commission as of June 30, 1958 and 1959:

lune 30, 1959 June 30. 19li8

Oomrmssioners ______5 5 Staff:Headquarters office ______Regions! offices ______567 M3 365 331 TotaL ______937 879

The table on the opposite page shows the status of the Commission's budget estimates for the fiscal years 1950 to 1960, from the initial submission to the Bureau of the Budget to .final enactment of the annual appropriation. The Commission is required by law to collect fees for registration of securities issued, qualification of trust indentures, registration of exchanges, and sale of copies of documents filed with the Commission." The following table shows the Commission's appropriations, total fees collected, percentage of fees collected to total appropriation, and the net cost to the taxpayers of Commission operations for the fiscal years 1957, 1958, and 1959 :

Percentage of fees collected Net cost of Year Approprl- Fees col- to total Commission ation lected • appropriation operations (percent)

1957______• ______•• ______19li8______• ______• _____ $5,749,000 $2,243,580 39 $3,505,420 16,935,000 2,334,370 34 4,600,630 1959___•• ____• ______• ______• 7, 705,000 2,407,706 31 5,297,294

I Includes a supplemental appropriation of $235,000 to cover statutory pay increases . • Includes a supplemental appropriation of $605,000 to cover statutory pay Increases . • Fees are deposited in the general fund of the Treasury and are not available for ezpenduure by the Oomrmsslon,

2Il Prlnclpal rates are (l) !Aoo of 1 percent of the maximum aggregate price of securities proposed to be offered but not less than $25: (2) ~ of 1 percent of the aggregate dollar amount of stock exchange transactions. Fees for other services are only nominal. 210 SECURITIES AND EXCHANGE COMMISSION

A chart showing the ratio of average employment in the field offices to total average employment for fiscal years 1951-59 follows.

S. E. C. PERSONNEL-U NUMBER

1000

800

DEPARTMENTAL 600 Ratio Of Field To Total Personnel 50

400 10 o I I 195152 53

200

o 1951 52 53 54 55 56 57 58 59 (FISCAL YEAR)

.!I Avereoe E"'o!oynenf

Personnel Program In fiscal 1959, the Commission continued to emphasize the recruit- ing of outstanding college and law school students with the specialized academic training required for the Commission's fields of work. By maintaining close contact with placement offices of various colleges and universities, and through on-campus interviews, the Commission TWENTY-FIFTH ANNUAL REPORT 211 placed a substantial number of applicants of college caliber for its starting professional level positions. In January 1959, the Commission adopted four Merit Promotion Plans covering the following groups of employees: 1. Professional and technical employees in the Headquarters Office. 2. Secretarial, wage board and clerical employees in the- Head- quarters Office. 3. Professional and technical employees in the regional offices. 4. Clerical employees in the regional offices. The purpose of these plans is to apply the Commission's promotion policy systematically and otherwise to comply with Civil Service Commission requirements in that area. Members of the staff were consulted and afforded opportunity for review and comment prior to formal adoption. In April 1959, representatives of the Civil Service Commission inspected the Commission's operation under the plans and found them to be effective and in compliance with its Government- wide Merit Promotion Program. As required by the Government Employees Training Act of 1958, a review was made of the Commission's overall training needs and plans were formulated to meet these needs. On a cooperative basis with other regulatory agencies, arrangements were made for a super- visory training course for middle and top management officials. In addition, the Commission's Division of Corporation Finance and New York Regional Office continued to conduct training sessions for their professional staffs. Under its Incentive Awards Plan the Commission recognized the long service of its career employees by presenting 10- and 20-year service pins and certificates for service with the Commission to a total of 90 employees. In addition, cash awards totaling $6,325 and certificates of merit were presented to 55 employees. The outstanding achievements of members of the Commission's staff continued to receive public recognition in the form of awards made by other organizations. In February 1959 Thomas G. Meeker, General Counsel of the Commission, received an Arthur S. Flemming Award of the Junior Chamber of Commerce of Washington, D.C., as 1 of the 10 outstanding young men in the Federal service. In March 1959, the National Civil Service League awarded certificates of merit to 5 Commission employees-William Green, Atlanta Regional Ad- ministrator; Vito Natrella, Chief Economist, Division of Trading and Exchanges; J. Arnold Pines, Chief Financial Analyst, Division of Corporate Regulation; Harry Pollack, Director of Personnel; and Byron D. Woodside, Director, Division of Corporation Finance. In April 1959, a Rockefeller Public Service Award, 1 of 11 such awards made throughout the Federal service, was granted to Harry Heller, 529523--G9----11 212 SECURITIES AND EXCHANGE COMMISSION

Assistant Director, Division of Corporation Finance. In May 1959, an attorney in the Chicago Regional Office, Sidney Sosin, was awarded It Certificate and Citation of Merit by the 'William A. Jump Memorial Foundation. The Commission is justifiably proud of these distinc- tions earned by members of its staff whose loyal and efficient service has made such a significant contribution to accomplishing the statutory objectives for which the Commission was established. PART XII APPENDIX STATISTICAL TABLES

TABLE I.-A S5-year record of registrations under the Securities Act of 19S5 PARr 1. NUMBER AND AMOUNT OF REGISTRATIONS AND AMOUNT REGISTERED FOR CASH SALE FOR ACCOUNT OF ISSUERS, 193&-59 [Amounts in mIlllons of dollars)

Amount for cash sale for account of Issuers Number of Number of Amount of Fiscal year ended statements statements all registrs- June 30 flIed full}' tlons fully Bonds, de- Preferred Common effective effective Total bentures stock stock and notes

1935 1______1936______440 284 $913 $686 $490 $28 $168 1937______781 689 4,835 3,936 3,153 252 531 1938______967 840 4,851 3,635 2,426 406 802 1939______459 412 2,101 1,349 eee 209 474 1940______375 344 2,579 2,020 1,593 109 318 1941. ______338 306 1,787 1,433 1,112 110 210 1942______337 313 2,611 2,081 1,721 1M 196 1943______235 193 2,003 1,465 1,041 162 263 1944______150 123 659 486 316 32 137 1945______245 221 1,760 1,347 732 343 272 1946______400 340 3,225 2,715 1,851 407 456 1947______752 661 7,073 5,424 3,102 991 1,331 493 6,732 4,874 2,937 787 1,150 1948______567 1949______449 435 6,405 5,032 2,817 537 1,678 455 429 5,333 4,204 2,795 326 1,083 1950______1951______496 487 5,307 4,381 2,127 468 1,786 5,169 2,838 427 1,904 1952______S« 487 6,459 635 9,500 7,529 3,346 851 3,332 1953______665 1954______621 593 7,507 6,326 3,093 424 2,808 M9 631 9,174 7,381 4,240 531 2,610 1955______1956______849 779 10,960 8,277 3,951 462 3,864 981 833 13,096 9,206 4,123 539 4, '44 1957______1958______943 860 14,624 12,019 5,689 472 5,858 6,857 427 5,998 1959______913 809 16,490 13,281 1,226 21,055 15,657 12,095 5,265 443 6,387

I For 10 months ended June 30, 1935. 2 The 1.055 fully effective registrations differ from the l,OM net reglstratlons shown in the text table "Num- ber and dlspositJon of registration statements filed" by reason or (a) the exclusion of 15 regrstranons or Ameri- can Depository Receipts, (b) the exclusion of 2 statements subject to amendments which were not flied prior to the end of the fiscal year, (c) the inclusion of 2 statements which became effective during the 1958 flseal year subject to amendments which were filed In fiscal year 1959 and (d) the mc1uslon of 6 statements which became effective during the 1lscal year but were later withdrawn. 215 216 SECURITIES AND EXCHANGE COMMISSION

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TABLE 2.-Registration8 fully effective under the Securities Act of 1933, fiscal year ended June 30,1959 PART I.-DISTRIBUTION BY MONTHS

[Amounts in thousands of dollars ')

All registrations Proposed for sale for account of ISSUCrs Year and month Number of Number of Amonnt Number of Number of Amount statements ISSUes statements ISSues

July ______1958 85 113 $1,256,119 74 96 $1,128,170 August ____. ______43 67 1,543,109 37 57 824,642 September ______62 95 1,398,501 October ______55 78 1,255,888 98 118 923,240 85 99 828,828 November ______December ______66 83 869,672 55 65 708,3S0 81 125 1,047.287 65 95 750,667

January __• ______1959 February ______88 104 1,088,546 78 85 914,613 73 92 1,414,927 66 83 1,294,481 March ______1,579,115 ApnL ______96 122 79 92 934,364 May ______130 167 2,125,560 114 136 1,577.947 1,401,389 June ______103 136 92 110 1,196,311 130 168 1,009,167 109 124 681,099 Total, llscal year 1959___ 21,055 1,390 15,656,631 909 1,120 12,095,390

PA.RT 2.-PURPOSE OF REGISTRATION AND TYPE OF SECURITY

[Amounts in thousands of dollars ')

Type of security Purpose of registration Bonds, de- An types bentures, Preferred Common and notes 3 stock stock of

All registratrons (estnnated value} ______15,656,631 5,315,915 542,802 9,797,914 For account of issuers for cash sale ______12,095,390 5,264,768 443,352 6,387,270 Oorporate, •• ______• 11,363,114 4,682,492 443,352 6,387,270 Offered to: General public ______9,333,574 4,208,723 367,198 4,757,668 Security holders ______1,275,032 306,697 74,877 893,458 Other special groups ______7f>4,509 17,072 1,277 736,160 Foreign governments ______732,276 732,276 ~------_.._------For account of Issuers for other than cash sale ____ 2,745,997 26,105 86,336 2,W3,550 For account of others than Issuers ______815,244 25,042 13,115 777,087 For cash sale ______703.284 12,268 12,871 678,100 For other purposes ______111,960 12,789 244 98,927

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TABLE 4.-Proposed uses of net proceedsfrom the sale of new corporate securities offeredfor cash in the United States PARTI.-ALL CORPORATE [Amounts in thousands or dollars ']

Proceeds New money Calendar year or Retire- Other month mentor purposes Total gross Total net Total new Plant and Working securities proceeds' proceeds' money equipment capital

1934______1935______397,240 383,547 57,453 31,729 25,724 231.164 94, 932 1936______2.331,630 2, 265, 760 207,649 111,246 96,404 1,864,769 193,341 4,571,680 4,430,522 858,233 380,460 477,773 3,368,427 203,863 1937______2,309,524 2. 238, 786 990,542 573,949 416,594 1,100,341 147,902 1938______2,154,864 2, 109,519 681,303 177,219 1,205,788 222,429 1939______504, 084 1940______2,164,007 2,115,012 324,889 170,145 154,743 1,695,339 ll4. 785 1941. ______2,677,173 2,615,279 568,884 423,968 144, 915 1,854,109 192,280 2, 666,887 2,623,199 868,288 660, IlO4 207,385 1,532, 526 172,384 1942______1,062,288 1,042.556 473,652 287.039 186,613 396,160 172,744 1943______1,169,69:! 1,146,914 167,069 739,147 1944______307,953 140,889 99,809 3,201,691 3,141,847 656,967 251,757 405, 210 2,388,991 95,889 1945______1946______6,010,985 5,901,744 1,079,844 637,803 442,042 4, 554,814 267,085 1947_. ______6,899,646 6,756, 53:! 3,278,828 2,114,682 1,164.146 2,867,516 610,238 1948______6,576,824 6,466,053 4, 590, 540 3,408, 523 1,182, 017 1,351,627 523,886 1949______7,077,820 6,959,046 5,929,280 4,220,880 1,708,400 307,445 722,321 1950______• _. ___ 6,051,550 5,959,260 4,606.326 3,724,165 882,160 400,966 951,968 1951______. ______6,361,043 6, 261,444 4, 006. 480 2;005,598 1,040,881 1,271,230 983,735 7,741,099 7,606,520 6,531,403 5,110,105 1,421,298 486,413 1952______588.703 1953______• ______9,534,162 9,380,302 8,179,MB 6,311,802 1,867,746 864,056 8,897,996 8,754, 7:11 7,959,966 5,646,840 2, 313, 126 260,023 .=:~ 1954______9,516,168 9,365, OlIO 6,780,196 5,110.389 1,669,806 1,875,398 709,496 1955. ____• _____• ______1956______• ___ 10,240,155 10,048,855 7,957,394 5,333,328 2,624,066 1,227,494 863,967 1957______10,938,718 10,748,836 9,662, 95:! 6,709,126 2, 953,826 364,459 721,424 1953. ______12,883,533 12, 661, 300 11,783,879 9,039,778 2, 744, 101 214, 294 663,127 11,553,343 11,371,563 9,907,135 7,792, 008 2, 115, 127 548, 952 915,475

Jannary ______1958 •______Febrnary ______• 826,525 815,735 713,773 605,221 108,552 87,246 14, 716 March _. ______876,725 858,053 844,289 580,412 263,877 1,040 12, 724 AprIL ______•______1,614, 781 1,598, 999 1,508,033 1,379.954 l28,079 45,600 45,367 May ______1,229,845 1,210,884 1,035,572 885,663 149,909 70,934 104,378 June ______707,006 691,622 527,281 452,279 76, 001 94,989 69,351 July ____•______960,669 945,657 717,857 695,416 l22,442 69,144 168, 656 August_. ______1,198,870 1,176,486 1,029,254 889,363 139,891 69,866 77,365 September ______674, 673 564,237 489,121 405,364 83,756 24,688 60,429 October ______1,136,960 1,120,806 1, 016, 829 605,760 411,069 6,698 97,279 November ______•___• 890,001 873, 200 744,349 603,580 .240,769 10,771 118,079 December ______• 542, 170 533,126 460,295 346, 749 113,546 15, 244 67,537 1,000,218 982,753 820,482 642, 248 278,234 62, 733 99,644 Jannary ______1959 February ______885,430 869, OlIO 794,005 489,713 304,292 29,060 46,{):l5 March ______770,083 763,733 699,968 461,237 138, 732 9,187 144,678 Aprll ______•• ___ 655,679 639,847 639,082 404,568 134,616 8,731 92,034 May ______927,952 907,966 832,335 612, 198 220,137 9,266 66,365 June ______828, 560 808,879 764, 216 656,100 208, 116 17,385 27,278 910,497 889,678 814,010 657,183 256,827 15,276 60,294

See footnotes at end or table. TWENTY-FIFTH ANNUAL REPORT 229 TABLE 4.-Proposed uses of net proceedsfrom the sale of new corporate securities offeredfor cash in the United States-Continued PART2.-MANUFACTURING [Amounts In thousands of dollars ']

Proceeds New money Calendar year or Retlre- Other month I mentof purposes Total gross Total net Total new Plant and Working securities proceeds' proceeds' money equipment capital

1948______• ______1949______. ______2, 225, 757 2,180,005 1,726,297 762,778 963,519 53,919 399,879 1,414, 176 1,390,872 1950_. _. ______. ______851,257 542,078 309,180 44,303 495,311 1951. ______• ______. ______1,200,017 1,175,363 688,074 312,701 375,374 149,010 338,279 1952______• _____• ______3,121,853 3,066,352 2,617,233 1,832,777 784,456 220,828 228,291 1953______. ______4,038,794 3,973,363 3,421,892 2, 179, 563 1,242,329 260,850 290,621 1954______.• ______2, 253, 531 2, 217, 721 1,914, 853 1,324,675 590,178 90,115 212,753 1955______2, 268,040 2, 234,016 1,838, 907 1,000,495 829,413 189,537 205,571 1956______• ______2,993,658 2,929,734 2,020,952 1,265,272 755,680 532, 571 376,210 1957_____• ______•__ 3,647,243 3,578,502 2,944,378 1,928,034 1,016,344 242,684 391,440 4, 233, 70s 4, 153, 534 3,764, 423 2,644,460 1,119,963 49,131 1958____• ______. ______._ 339,980 3,515,407 3,459,399 2, 851, 033 2,027,328 823,705 194,629 413,738 1968 :ranuary _._____. ______•••• February ______156,735 154,968 136,292 116,783 19,500 9,620 9,056 179,297 172, 634 169,366 110,462 58,904 60 3,208 March __•______' ______•• 239,933 236,296 189,190 121,038 68,152 40,493 6,614 631,560 623,035 535,772 433,681 102,091 10,559 76,704 191,939 188,750 121,055 98,699 22,356 26,502 41,193 :ruly____•__••• ______296,142 292,734 211,592 156,137 55,455 39,521 41,620 ~!:======557,387 548,352 482,899 381,505 101,393 22,225 43,228 August._. ______•______129,398 127,582 99,370 73,987 25,383 14,380 13,832 September _•• ______•__• 483,375 477,451 390,439 335,785 54,653 4,346 82,666 October __•______. ____ 277,250 271,432 216,713 102,150 114, 563 6,644 48,074 November ______' ______• 131,285 128,853 105,550 43.948 61,603 8,936 14,367 December •• _._._____._. __ 241,lOS 237,313 192,794 53,152 139,643 11,342 33, 177 1969 :ranuary ••__•__•____._. ___ February ______168,953 165,846 139,694 50,601 89,093 17,410 8,743 March ••• ______•____ 131,699 127,995 67,853 39,652 28,201 4,877 55,265 AprIL ____•______•__•_____ 100,328 97,483 83,482 52,381 31,101 5,642 8,359 May ______•______290,143 283,618 236,691 162, 437 74,254 6,762 40,164 :rnne ____•______• 268,120 258,168 231,833 153,905 77,928 9,704 16,632 236,031 227,175 204,139 80,100 124,040 5,999 17,036

Bee footnotes at end of table. 230 SECURITIES AND EXCHANGE COMMISSION

TABLE 4.-Proposed use of net proceedsfrom the sale of new corporate securities offeredfor cash in the United States-Continued PARr3.-EXTRACTIVE. [Amounts In thousands of dollars s]

Proceeds Newmouey Calendar year or Retire- Other month' mentof purposes Total gross Total net Total new Plant and Working securities proceeds' prooeeds' money equipment capital

1958_____1948-195'•• ______• 1954______235,368 222,051 199,151 113,104 86,048 1,912 20,988 1911S______•______538,597 513,596 334,704 215.758 118,946 45,624 133,268 1956______415,289 390,758 325,490 197,394 128,096 3,921 61,347 1957______455,523 435,691 304,909 211,029 93,880 37,849 92,934 1958______• __ 288,574 276,809 242,826 159,783 83,042 6,833 27,145 246,565 239,274 184,092 95,221 88,871 2,033 58,149

January ______1958 14,225 13,620 13,194 8,017 5,177 0 326 18,059 17,712 13,473 9,886 3,587 0 4,239 ApriLr::'r%a~:==:______.: ===• ______======._ 22,406 22,094 21,603 20,464 1,139 67 424 May ______41,298 40,083 32,441 13,243 19,198 0 7,643 June ______• ___• _____• ___ 6,882 6,560 6, 136 3,240 2,896 0 424 July _____ • ______• ___ 16,139 15,562 15,361 9,825 5,586 0 200 August ___• _____• _____• ___ 3,954 3,800 3,637 2,249 1,388 0 163 38,813 38,078 22,341 10,824 11,518 998 14,739 September ____•• _____• ___ 12,801 12,232 10,339 3,019 7,320 500 1,393 October ______• ___ 17,457 November _____• _____• ___ 16,418 14,676 4,841 9,834 6 1,736 December • _____• ______40,929 40,385 18,389 3,646 14,743 362 21,~ 13,603 12,829 12,501 5,967 6,535 100 1959 January __• ______• ______• February ______19,492 18,975 18,659 15,795 2,864 0 316 March ______4,145 3,914 3,322 1,001 2,321 0 59Z 9,821 9,499 7,841 2,574 5,267 596 1,062 8,927 8,692 8,047 2,205 5,842 168 476 Jtfar:::======une ______• ____ 25, 245 24,535 24,288 6,005 18,283 0 247 14, 946 14,458 11,608 6,358 5,250 1,130 1,720

PARr4.-ELECTRIC, GAS AND WATER

1948____• ___• ______1949______•______• ____ 2,187,390 2,149,672 1,871,931 1,840,599 31,331 144,388 133,354 1950______•______2, 319,828 2,275,898 1,837,545 1,818,560 18,986 233,390 204, 964 1951. ______2,648,822 2,608,491 1,728,378 1,711,320 17,058 681,577 198,587 1952___• ______2,454,853 2,411,714 2,186,248 2,158,823 27,425 85,439 140,027 1953______• ______2,674, 694 2,626,377 2,457,823 2,441,862 15,961 87,726 80,827 1954______3,029,122 2, 971, 911 2,755,852 2,737,082 18,770 67,034 149,025 1955______3,713,311 3,664,922 2,597,651 2,582,366 15,285 989,799 77,473 1956_. ____• ______2,463,729 2,428,158 2,218,094 2,205,655 12, 439 174, 015 36,049 1957•• _____• _____• _____• __ 2,529,175 2,487,493 2,409,885 2,394, 928 14, 957 13, 'i94 63,814 3,938,087 3,871,899 3,659,189 3,645,919 13,271 51,280 161,430 1958_._. __•• _____• ___ '_' __ 3,804, 105 3,743,395 3,441,074 3,411,355 29,719 138,392 163,928 1958 January ___• __•__• _____• __ 326,067 321,782 319,314 319,243 71 234 2,234 375,314 367,756 367,756 350,210 7,547 0 0 408,040 402,141 378,922 378, 922 0 0 23,219 r:~======319,700 315,469 292,877 285,880 6,997 22,452 140 345,017 339,325 301,683 300,157 1,527 37,547 95 Jtfar:::::_:::======nne ___•___• ______._ 1uly ______• _____• __ 430,719 424,663 359,062 359,061 1 15,924 49,677 August __._ • ______401,961 393,544 325,761 325,642 118 46,369 21,414 286,604 281,487 276,562 274,823 1,739 162 4,763 Seplember ___•______•• _ 183,361 180,812 178,646 178,605 41 0 2, 166 October __• ______316,455 311,105 265,516 1,128 0 44, 462 N ovem ber _. __•______• __ 266,643 December _. ______129,713 127,987 125,567 125,348 219 1,844 576 281,154 277,323 248,280 237,949 10,330 13,860 15,183 1959 January ______•______' ____ 301,940 296,756 273,300 273,163 137 1,955 21,502 190,756 187,593 183,074 182,436 588 0 4, 519 335,721 330,963 290,229 268,590 21,639 0 40,734 r:~=::::::=:====:=== 319,583 313,802 305,795 305,467 329 0 8,007 348,144 342,378 337,804 330,363 7,441 4,218 356 ~!::::::==:::::::::::: 316,760 312,996 312,348 311,580 768 0 648

See footnotes at end of table. TWENTY-FIFTH ANNUAL REPORT 231

TABLE 4.-Proposed uses of net proceeds from the sale of new corporate securities offered for cash in the United States-Continued

PART 6.-RAILROAD [Amounts In thousands of dollars I]

Proceeds New money Calendar year or Retire. Other month' mentof purposes Total gross Total net Total new Plant and Working securities money capital proceeds • proceeds' equipment

1948______623,348 616,758 645,871 485,694 60,177 56,726 15,161 1949______459,982 456,353 441,392 441,392 0 11,lM 3,797 1950. ______• ______564,100 648,300 301,408 281,800 19,618 192,651 64,307 1951._. ______335,081 331,864 296,917 291,886 6,030 34,214 733 1952______._. _____ 625,205 520,817 286,526 286,476 50 223,532 10,758 1953____. __ . __ . ____• ___• __ 302,397 298,004 267,024 244,254 22,770 31,879 0 1964__ ._ .. _ . ______. ______479,322 474, 180 209,585 202,441 7,144 261,345 3,250 1965_. ______. ______.• _ 647,777 640,345 215,702 214,411 1,291 318,965 5,679 1956. ______.. _. 382,012 378,159 365,447 365,447 0 12,713 0 1957._ .. ___. ___. ______343,647 340,244 326,409 326,409 0 13,835 0 1958._ ... _. ____ ._ ._. ______238,352 235,542 206,381 188,784 17,597 29,161 0

1968 January _. _____ . ______68,562 67,810 43,659 43,559 0 24,251 0 February ___ . ___• ______17,252 17,074 17,074 17,074 0 0 0 March •• _____. _._. ______40,036 39,410 34,500 18,858 15,641 4,910 0 19,649 19,393 19,393 19,393 0 0 0 1,956 0 0 tf:---~::::::::::::::::: : 12,~ 11,845 11,845 9,889 June , •______._ .. _.__._ 487 487 487 0 0 0 July. ______. ___....• ___ 28,179 27,816 27,816 27,816 0 0 0 August •• _._. ____. _____•• 11,280 11,136 11,136 11,136 0 0 0 September _•• ______. 3,921 3,892 3,892 3,892 0 0 0 October .. _ .• ______. ___ 11,122 11,002 11,002 11,002 0 0 0 November • ______. ___ 14,483 14,324 14,324 14,324 0 0 0 December •• __. __._ .•. ____ 11,468 11,352 11,352 11,352 0 0 0

1969 January •__. ____. ____.. _•. 20,597 20,351 20,351 20,351 0 0 0 February _____ ...... _•• __ 24,193 23,993 23,993 23,993 0 0 0 March ••• ______.... _ .• _._ 7,337 7,270 7,270 7,270 0 0 0 ApriL. _. ______._. __ .• _._ 17,288 17,132 17,132 17,132 0 0 0 19,509 19,291 19,291 19,291 0 0 0 ~t:::::::::::::::::::: 20,391 20,153 20,153 17,223 2,930 0 0

PART 6.-TRANSPORTATION OTHER THAN RAILROAD

1948_. ______••• _. ______131,924 130,918 126,463 114,705 11,758 745 3,710 1949____ . ___••• __• ______340,315 338,695 302,320 298,865 3,455 272 36,102 1950____• ______. __ ._. 259,057 257,182 242,902 241,599 1,303 3,420 10,860 1951. ______. __ 159,227 158,240 131,009 123,217 7,792 18,478 8,753 1952____. __• __._ •• ___• __._ 467,094 462,006 410,778 377,064 33,713 1,119 50,109 1953_. ___•••• ______.•• _._ 298,036 289,859 264,880 260,568 4, 312 3,949 21,031 1964_•• __• ______299,432 296,907 270,342 267,042 3,300 9,073 17,493 1956••••• _•• _____••••• ____ 345,280 341,717 237,300 220,971 16,395 18,769 85,582 1956_._. ______• ____ 342,000 335,772 322,856 298,537 24,318 7,147 5,770 1957•••• ___• ___._ ••• ______479,921 475,421 465,095 456,665 8,430 204 10,122 1958•• _____•••• _. ______•• 585,539 580,031 474,438 458,345 16,093 8,505 97,088

1968 January _. ______._. ______39,081 38,961 38,634 38,568 71 0 327 February _••• __ ... ______. 25,418 25,354 24,549 23,698 851 0 806 March. _. ___•.. __ . ______26,081 25,956 25,108 24, 761 347 0 847 ApriL •• _._ •••.•. ______.•• 69,218 68,211 68,167 67,774 393 0 44 12,363 11,892 11,892 8,245 3,647 0 0 ~t :::::::::::::::::::: 106,228 105,130 42,457 36,327 6,131 0 62,673 July ._ ••• _•• ______..• _._ 30,941 30,784 30,784 30,1111 604 0 0 August_ •••• ______.. ___ 21,999 21,884 15,128 14, 766 362 6,448 308 28,858 28,790 28,288 28,019 269 0 502 ~~:~~::::::::::::::::71,274 70,304 68,101 65,695 2,406 88 2,115 November ______11,348 11,216 11,118 10,804 314 48 48 December •• ______. ____ 142, 730 141,550 110,213 109,513 700 1,920 29,418

1969 January ______••••• _•• ____ 62, 572 62,125 58,027 51,641 6,387 2, 049 2,049 February ••• __••• _•• ____• 134,127 133,273 127,458 123,182 4,276 2,908 2,908 March ••• ______45,651 44,228 36,384 35,497 887 549 7,296 58,040 67,931 56,956 56,431 526 487 487 19,926 19,239 18,010 16,912 1,098 394 835 76, 701 76,263 76,113 75,998 116 75 75 ~t:======: == See footnotes at end of table. 232 SECURITIES AND EXCHANGE COMMISSION

TABLE 4.-Proposed uses of net proceedsfrom the sale of neto corporate securities offeredfor cash in the United States-Continued PUT 7.-00MMUNICATION [Amounts in thousands of dollars IJ

Proceeds New money Calendar year or Retire- Other month I ment of purposes Total gross Total net Total new Plant and Working securities proceeds. proceeds. money equipment capital

1948______1949______901,663 891,373 870,321 868,470 1,8:;0 1,714 19,337 19.'iO______571,080 566,566 504, 557 502,679 1,877 49,Z17 12,132 1951.. ______399,391 395,172 304,006 300,264 3,741 81,002 10,164 1952______•• ___ 612,080 605,095 594,324 574, 417 19,907 5,231 5,540 1953__• ______~___• ______760,239 753,169 738,924 736,996 1,928 6,095 8,151 1954______881,853 873,726 860,967 841,600 19,367 3,164 9,5!l6 1955______720,102 710,819 641,487 639,376 2,111 60,089 9,243 1956______•• 1,132, 271 1,121,408 1,039,611 1,038,092 1,520 76,567 5,230 1,419,457 1,405,006 1,371,471 1,369,832 20,674 1957______1,639 12,861 1,461,748 1,444,446 1,427,977 1,425,696 2,281 3,904 12,566 1958______1,423,776 1,411,831 1,265,315 1,262,382 2,933 118,112 28,404

January ______1958 February ______85,564 84,459 34,4:;9 34,374 85 00,000 0 March ______35,834 3:;,476 35,476 35,431 45 0 0 ApriL ______._ 800,418 796,756 79:;,300 795,3liO 0 0 1,406 May ______78,807 77,190 39,529 39,467 62 37,236 425 June. ______41,662 41,216 10,457 10,457 0 29, see 793 JuIy ______._ 12,490 12,349 11,952 11,875 76 397 0 August.. ______102, 141 100,854 100,301 100,199 102 0 552 14,0:;11 13,912 8, 462 7,670 792 0 5,400 September ______10, 1M 9,742 6,612 5,488 1,125 513 2, 617 October ______48,241 47,733 30,918 30,460 458 0 16,815 November ______90,256 89,134 88,935 88,890 45 0 198 December ______104, 147 103,011 102,863 102, 721 142 0 147 January ______1959 35,212 33,985 33,787 33,730 57 0 198 62,805 61,927 61,853 61,853 0 0 74 9,760 9,429 Ar:~~:_=:::::::=::::::pnl, ______9,379 9,379 0 0 00 May ______16,313 15,989 15,989 15,899 90 0 0 June ______6,070 5,896 5,846 5,846 0 0 00 21,900 21,678 21,306 21,306 0 0 371

See footnotes at end 01 table. TWENTY-FIFTH ANNUAL REPORT 233

TABLE 4.-Proposed uses oj net proceeds Jrom the sale oj new corporate securities offered [or cash in the United States-Continued

PART 8.-FINANCIAL AND REAL ESTATE [Amounts In thousands of dollars 1]

Proceeds New money Calendar year or Retire- Other month. ment of purposes Total gross Total net Total new Plant and Working seeuntles proceeds' proceeds' money equipment capital

1948______1949______593,649 587,180 484, 779 12,717 472,062 30,275 72,126 1950______599,105 592,559 440,453 43,079 397,374 34,530 117,576 1951______746,740 739,263 480,154 24,309 455,846 loo,42ll 158,679 1952______524, 616 515, 2£>7 368,485 15,686 352,800 66,030 80,751 1953______515,178 508,18-1 409,630 14,243 395,387 60,498 38,056 1954______1,576,048 1,560,672 1,452,279 32,116 1,420,162 24,225 84, 168 1955______1,075,818 1,061,015 619,155 29,547 689,608 273,043 168,817 1956______1,898,677 1,867,887 1,606,145 33,472 1,572,672 56,010 205,731 1957______1,855,953 1,831,550 1,703,487 39,038 1,664,449 16,947 111,116 1958______1,795,413 1,768,353 1,635,740 241,48-l 1,394,276 67,314 65,298 1,088,299 1,060,792 900,109 186,773 713,336 46,887 113,796 1958 January ______February ______121,328 119,995 114,523 33,843 80,630 3,104 2,368 March ______218,486 215,335 210,294 18,524 191,770 980 4,061 AprlL ______51,501 50,788 40,297 7,871 32,42£> 130 10,361 40,289 38,473 22,615 5,877 16,737 35 15,824 80,055 75,604 52,474 14, 247 38,227 294 22,836 Juiy ______83,742 80,367 69,395 17,791 51,604 1,954 9,018 August ======______36,560 34,866 24, 618 11,845 12,773 1,272 8,976 ~t 41,766 5,556 36,211 799 8,185 September ______51,647 50,749 October ______33,798 32,121 2£>,656 3,404 23,252 139 5,326 114,354 16,303 98,051 437 2,460 November ______119,530 117,251 89,297 87,592 72,730 44,114 28,617 3,921 10,941 December ______162,065 157,651 110,388 7,398 102,990 33,823 13,439

1959 January _____• ______February ______226,451 222,752 208,563 12, 911 195,653 1,803 12,386 March ______115,653 113,874 106,319 12,942 93,377 1,165 6,389 AprlL ______106,898 102,844 70,312 13,302 57,010 1,101 31,430 143,179 139,967 127,940 14, 827 113,114 746 11,282 107,892 105,968 99,881 10,119 89,762 1,142 4,946 99,794 95,568 66,821 11,022 55,799 722 28,025 ~t .:======See footnotes at end of table. 234 SECURITIES AND EXCHANGE COMMISSION

TABLE 4.-Proposed uses oj net proceeds from the sale oj new corporate securities offered [or cash in the United States-Continued

PART9.-COMMERCIAL AND MISCELLANEOUS [Amounts In thousands of dollars II

Proceeds New money Calendar year or Retire. Other month' mentof purposes Total gross Total net Total new Plant and Worlong securities proceeds' proceeds' money equipment capital

1948 ' •• ______1949 ,______414,090 403,049 303,619 135,917 167,701 20,676 78,754 1950 ,______347,064 338,317 228,801 77,513 151,288 28.030 81,486 552, 916 537,606 261,559 93,516 168,043 63,139 212,908 1951 ,______517,988 337,187 113,299 56,194 124,607 1952 ,______533,383 223,888 552, 958 536,386 453,975 275,598 178,377 24,235 58,176 1953. ______1954______326,640 319,877 244, 960 93,441 151,519 37,745 37,172 421,547 409,635 268,364 164,365 104,000 46,889 94, 382 1955______135,974 46,676 1956______443,473 428,848 294,035 158,061 88,138 1957______•______307,355 296,663 240,521 102,281 138,239 12,652 43,491 1958. ______342, 435 330,593 262,220 139,382 122,838 21,788 46,585 656,299 641,298 584,692 161,819 422,873 11,234 45,372

January ______1968 14,964 14,241 13,798 10,839 2,959 37 405 February ___ • ______7,065 6,711 6,301 5,128 1,173 0 410 March. __• ______12,689 10,374 2,496 AprIL ______• 26,365 25,558 23,063 0 May • ____• ______29,423 29,029 24,778 20,347 4,431 652 3,599 17,087 16,431 11,740 7,346 4,395 680 4.010 June.; ____•______3,912 3,639 1,348 5,468 July ______• __ 14,710 14,366 7,551 37,748 36,470 33,439 9,927 23,512 0 3,031 August, ______•______20,773 19,408 14,355 6,603 7,752 1,900 3,153 September __• ______380,690 375,765 371,956 47,546 324,409 1,200 2, 610 October ______• __ 28,672 27,954 21,941 7,612 14.329 3,596 2,417 November ____•____• _____ 34,859 33,636 23,681 15,676 8,005 132 9,823 December ______• _____ 43,944 41,730 32,090 14,196 17,895 1,688 7,952 1969 January ______• 50,212 48,300 41,623 31.521 10,102 5,844 833 February ______106,805 101,164 26,097 16,128 9,969 236 74,831 March. ______• ___ 40,263 38,132 34,184 15,574 18,610 844 3,104 74,478 70,835 63,783 37,801 25,983 1,102 5,950 35,655 33,403 27,263 13,659 13,604 1,927 4,213 Junetfa~:~~______= = === .: .: ======123,974 121,288 101,521 33,596 67,925 7,349 12, 418

I Sllght discrepancies between the sum of figures In the tables and the totals shown are due to rounding . • Total estimated gross proceeds represent the amount paid for the securities by Investors, whlIe total estimated net proceeds represent the amount received by the issuer after payment of compensation to distributors and other costs of flotation . • For earlier data see 18th Annual Report. , For the years 1948 through 1952lssues of extractive companies are Included In the category" Commercial and miscellaneous " TWENTY-FIFTH ANNUAL REPORT 235

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TABLE 6.-Notifications filed pursuant to regulation A under the Securities Act of 1939 for the fiscal years 1995-59

Proposed dollar amount Dollar amount of securities proposed to Number of of securities be offered under regula- FiScal year ended June 30 notl.flea- proposed to tion A as a percent of tlons filed be offered proposed offering. under registration for the same llscaIyear

Percent Sept. I, 1934to June 30, 1935" _ 1936" __ • • • __ 193 $16, 734, 812 1.0 388 32, 122, 081 .7 1937"_ • :_. __• • __• __• _ 475 37,738,589 1938" _ • • •• _•• _. ••• .7 1939" •• _. •• __• • _ 353 26,827,793 1.2 37,738,589 1.4 1940" • __• • ._. • ._ •• __ 515 338 22, 602, 694 1.2 1941" •• • __• • __ 1,006 32, 287, 762 1.0 1942*_ •• •__•. • __• • • __• _ 1943" •• • • • • __ 558 26,399,630 1.4 1944" • ._. __•• • __ 353 17,986,987 1.9 1945" • • • • • __ 427 21,933,944 1.2 678 38,848,893 .9 1946 . , • •• • __ 2.5 1947 ._. . • • _ 1,348 181, 600, 155 1,513 210.791, 114 3.0 1948 • • ._ • • __• __• _ 1,610 209, 485, 794 3.4 1949_ • ••• _' • • • __ 1,392 186, 782, 661 3.6 1950 •• ••• ._._. •• •• ._ ._. __ 1,357 171,743,472 3.3 1951__ ._. • • • •••• 174,277,762 1952 • ._. • • _._. __._ 1,358 2.7 1, 494 210, 672, 956 2.3 1953. " ~. __• __•• _. • • • _ 1,528 223, 350, 026 2.1 1954_ • _, . • • • __•• __ 1,175 187, 153, 226 2.1 1955_•• • . __._ •• _. • ._._ •• _ 1,628 296,267,000 2.7 1956 , • • _•• __• • __• _ 1,463 273,471,548 2.1 1957 • ._. ._. • .• _ 919 167,269,900 1.1 732 133, 889, 109 .8 ~~gg= ===: =:=::::= .; :::: ::===:= :==:=::===== :==== 854 170, 241, 400 1.0 Totals_ • • •• .. • _ 23,555 3, 107, 217, 897 1.8

"Prior to May 15, 1945, the maximum amount which the Commlssion could exempt from registration under secnon-atb) was $100,000. On that date section 3(b) was amended by the Congress to substitute $300,000 for $100,000• • Effective January 2, 1941, the Commission adopted Form S-3(b)-1 for notl.flcatlons under regulation .. A" and directed that they be filed in the regional offices. Prior to sucb date no written notlftcations were required to be filed for offerings of less than $30,000.

TABLE 7.-Su8pen8wn orders i8sued pursuant to RegUlations A and D under the Securities Act of 1993 during the fiscal year 1959 Temporary Suspension Orders- Regula tion A: Academy Uranium & Oil Corp., Salt Lake City, Utah; Securities Act Release No. 4011 (December 29,1958). Acme Tool and Engineering Corp., Kensington, Md.; Securities Act Re- lease No. 4091 (June 5,1959). Amber Oil Co., Inc., Fort Worth, Tex.; Securities Act Release No. 3977 (October 14, 1958). American Horse Racing Stables, Inc., Carson City, Nev.; Securities Act Release No. 3994 (November 18, 1958). American Television & Radio Co., St. Paul 1, Minn.; Securities Act Re- lease No. 4096 (June 12, 1959). Arizona Aviation & Missile Oorp., Phoenix, Ariz.; Securities Act Release No. 3964 (September 8, 1958). Arizona Uranium Corporation., Las Vegas, Nev.; Securities Act Release No. 4027 (February 4, 1959). Armed Forces Investment Fund, Inc., Scottsdale, Ariz.; Securities Act Release No. 4036 (February 17,1959). Atlantic County Development Corp., Brigantine, N.J.; Securities Act Release No. 4065 (April 6, 1959). TWENTY-FIFTH ANNUAL REPORT 237

TABLE 7.-Buspension orders issued pursuant to Regulations A and D under tbe Becarities Act of 1933 during the fiscal year 1959-Continued -

Temporary Suspension Orders-Continued Regulation A-Continued Avalon Investors Oorp., Levittown, N.Y.; Securities Act Release No. 4065 (April 6, 1959). Ben Hur Gold, Inc., Boise, Idaho; Securities Act Release No. 4070 (April 20,1959). Big Horn Mountain Gold and Uranium Co., Boulder, Colo.; Securities Act Release No. 4006 (December 11, 1958). Bonus Uranium, Inc., Denver 4, Colo.; Securities Act Release No. 4069 (April 15, 1959). Brookridge Development Corp., Queens, N.Y.; Securities Act Release No. 4087 (May 26, 1959). The Brown-Miller Enterprises, Inc., Denver, Colo.; Securities Act Release No. 4027 (February 4, 1959). Brown Mineral Research, Ine., Denver, Colo.: Securities Act Release No. 4027 (February 4, 1959). Central Publications Service, Ine., New York, N.Y.; Securities Act Re- lease No. 408-A (May 19, 1959). Colorado Reduction Corp., Columbus 15, Ohio; Securities Act Release No. 4052 (March 13, 1959). Coltex Uranium Co., Inc., Canon City, Colo.; Securities Act Release No. 4090 (June 8, 1959). Condor Petroleum Co., Inc., Dover, Del.; Securities Act Release No. 3944 (July 11, 1958). Consolidated Petroleum Industries, Inc., San Antonio, Tex.; Securities Act Release No. 4095 (June 10, 1959). Cordillera Mining Co., Denver, Colo.; Securities Act Release No. 4105 (June 26,1959). De Lys Theatre Associates, Inc., New York 23, N.Y.; Securities Act Re- lease No. 4082-A (May 19,1959). De-Vel-Co Mineral Development Co., Denison. Tex.; Securities Act Re- lease No. 4043 (March 2,1959). Desert Treasure Uranium Co., Midvale, Utah; Securities Act Release No. 4090 (June 8,1959). Dinosaur Uranium Corp., Salt Lake City, Utah; Securities Act Release No. 4011 (December 29, 1958). Dogs of The World, Inc., Baltimore 2, Md.; Securities Act Release No. 3983 (October 29, 1958). Easy Lift, Ine., Salt Lake City, Utah; Securities Act Release No. 4090 (June 8, 1959). Economart, Ine., Jamaica, N.Y.; Securities Act Release No. 4065 (April 6, 1959). Electronics Industries, Ine., Phoenix, .Ariz.; Securities Act Release No. 3981 (October 20, 1958). Elijo Oil and Mining Corp., Las Vegas, Nev.; Securities Act Release No. 4016 (January 13, 1959). Empire Exploration Limited, Ine., Gooding, Idaho; Securities Act Release No. 4007 (December 22, 1958). Empire Oil Oorp., New York, N.Y.; Securities Act Release No. 4068 (April 14,1959). 238 SECURITIES AND EXCHANGE COMMISSION

TABLE 7.-Suspensron orders issued pursuant to Regulations A. and D under the Securities .Act of 1939 during the fiscal year 1959-oontinued

Temporary Suspension Orders-Continued Regulation A-Continued Far West Oil and Exploration Co., Portland 11, Oreg.: Securities Act Release No. 4029 (February 6, 1959). Ferris Records, Inc., New York, N.Y.; Securities Act Release No. 4065 (April 6, 1959). Florida National Development Corp., Miami Beach, Fla.; Securities Act Release No. 3966 (September 12, 1958) . Forest Grove Homebuilder & Investors, Ine., Forest Grove, Oreg. ; Securi- ties Act Release No. 3976 (October 13, 1958). Greenlite Uranium Corp., Las Vegas, Nev.; Securities Act Release No. 4105 (June 26, 1959). Russell Gulch Uranium Co., Inc., Central City, Colo.; Securities Act Re- lease No. 4003 (December 10, 1958). Hamilton Oil and Gas Corp., Denver 2, Colo.; Securities Act Release No. 4093 (June8,1959). The Haratine Gas & Oil Co., Ine., Euclid 17, Ohio; Securities Act No. 3987 (October 31, 1(58) . Helicopter Transports, Ine., Reno, Nev.; Securities Act Release No. 3963 (September 5, 1958). Inter-River Corp., Las Vegas, Nev.; Securities Act Release No. 4011 (De- cember 29, 1958). Macinar, Inc., Washington 5, D.C.; Securities Act Release No. 4063 (April 1,1959). Mastex Oil Oorp., Holyoke, Mass.; Securities Act Release No. 8962 (Sep- tember 18,1958). Mecca Uranium and Oil Corp., Denver, Colo.; Securities Act Release No. 4027 (February 4, 1959) . Micro-Mechanisms, Livingston, N.J.; Securities Act Release No. 4065 (April 6, 1959) . Missile Oil Corp., Los Angeles, Calif.; Securities Act Release No. 3947 (July 21,1958). Mountain States Uranium, Inc., Denver (Lakewood) Colo.; Securities Act Release No. 4082 (May 19, 1959) . National Land Co. of Ariz., Scottsdale, Ariz.; Securities Act Release No. 4036 (February 17, 1959). Niagara Uranium Corp., Salt Lake City, Utah; Securities Act Release No. 4027 (February 2, 1959). North American Exploration Co., Inc., Spokane 1, Wash.; Securities Act Release No. 4065 (April 6, 1959). O'Bannon Uranium Co., Odessa, Tex.; Securities Act Release No. 4027 (February 4, 1959). Old Faithful Uranium, Ine., Casper, Wyo.; Securities Act Release No. 4105 (Jnne26, 1959). Oregon Uranium Corp., Portland Oreg.; Securities Act Release No. 4035 (February 16, 1959). Peneal Oil Corp., New York, N.Y.; Securities Act Release No. 4029 (February 6,1959). Plateao Uranium Oorp., Farmington, N. Me:x:.; Securities Act Release No. 4090 (June 6, 1959). TWENTY-FIFTH ANNUAL REPORT 239

TABLE 7.-Suapenawn oraers isaued purauant to Regulationa A and D under Ihe Securitiea Act of 1933 during the fiscal year 1959-Continued Temporary Suspension Orders-Continued Regulation A-Continued Pumpkin Buttes Uranium Oo., Inc., Rapid City, S. Dak.; Securities Act Release No. 4105 (June 25, 1959). Red Lane Calcareous Sinter Co., Ine., Thermopolis, Wyo.; Securities Act No. 4069 (Apri115, 1959). Research Mutual Oorp., New York, N.Y.; Securities Act Release No. 3950 (July 29,1958). Security Electronics Corp., New York, N.Y.; Securities Act Release No. 4065 (April 6, 1959). Sheldon Enterprises, Inc., Paterson, N.J.; Securities Act Release No. 4065 (April 6, 1959). Silvaire Aircraft and Uranium Co., Fort Collins, Colo.; Securities Act Release No. 4090 (June 8,1959). Southcoast Ine., Charleston, S.C.; Securities Act Release No. 4003 (De- cember 10, 1958). Sports Arenas (Delaware) Ine., Yorktown Heights, N.Y.; Securities Act Release No. 4001 (December 8, 1958). Stanway Oil Corp., Los Angeles 46, Calif.; Securities Act Release No. 3993 (November 17, 1958). Starfire Uranium and Development Corp., Tooele, Utah; Securities Act Release No. 4069 (April 15, 1959). Stillman Uranium, Ine., Hayward, Calif.; Securities Act Release No. 4003 (December 10, 1958). Summit Finance, Ine., Summit, N.J.; Securities Act Release No. 4065 (April 6, 1959). Surety on Co., Provo, Utah; Securities Act Release No. 3982 (October 21,1958). Texas General Corp., New York 7, N.Y.; Securities Act Release No. 4053 (March 17,1959). United Drive-In Theatres Oorp., New York 51, N.Y.; Securities Act Release No. 3950 (July 29,1958). United Standard Corp., Brenham, Tex.; Securities Act Release No. 3983 (October 29, 1958). Universal Fuel and Chemical Corp., Farrell, Pa.; Securities Act Release No. 3994 (November 18, 1958). Universal Securities, Inc., Bismarck, N. Dak.; Securities Act Release No. 3958 (August 20,1958). Uran Mining Oorp., Rochester, N.Y.; Securities Act Release No. 4035 (February 16,1959). Uranium Enterprises, Ine., Denver, Colo.; Securities Act Release No. 4027 (February 4, 1959). George Wiener as "Dis Mus Be Der Place Co.", New York, N.Y.; Securi- ties Act Release No. 4082-A (May 19, 1959). Western Factors, Ine., Salt Lake City, Utah; Securities Act Release No. 4067 (April 13, 1959). Western Lead Products Co., Los Angeles, Calif.; Securities Act Release No. 3974 (October 10, 1958). Wey-Do-Manufacturing Co., Inc., Brooklyn 1, N.Y.; Securities Act Release No. 3997 (November 24,1958). 240 SECURITIES AND EXCHANGE COMMISSION

TABLE 7.-Suspemion orders issued pursuant to Regulations A and D under the Securities Act of 1999 during the fiscal geM 1959-Continued

Temporary Suspension Orders-Continued Regulation D: Bishu Mines, Ltd., Toronto, Canada; Securities .Act Release No. 4047 (March 9, 1959). Bullet Hill Mining Co., Ltd., Sudbury, Canada; Securities .A~ Release No. 4047 (March 9, 1959). Caneonti Mines, Ltd., Toronto, Canada; Securities .Act Release No. 4047 (March 9,1959). East Lemhi Mining Co., Spokane, Wash.; Securities .Act Release No. 4047 (March 9, 1959). Empire Exporations, Ltd., North Vancouver, B.C., Oanada r Securities .ActRelease No. 4047 (March 9,1959). Triumph Mines, Ltd., Seattle, Wash.; Securities .Act Release No. 3946 (July 15,1958).

Permanent Suspension Orders : Findings, opinions and orders permanently suspending the exemption after hearing were issued during the fiscal year in the following cases under Regulation .A: North Sta-r Oil .E Uranium Oorp., Securities Act Releases Nos. 3952 and 3995 (August 7 and November 25,1958). Profile Mines, tne; Securities Act Release No. 3953 (August 8, 1958). Arliss Plastics Oorp., Securities .Act Release No. 3979 (October 17, 1958). New England Uranium-Oil Oorp., Inc., Securities .Act Release No. 4008 (December 24, 1958). Salesology, Inc., Securities Act Release No. 4019 (January 22, 1959). Mon-O-Oo Oil Oorp., Securities .Act Release No. 4024 (February 4, 1959). Bald Eagle Mining 00., Securities .Act Release No. 4048 {March 12, 1959). Gob Shops of America, Inc., Securities Act Release No. 4075 (May 6, 1959). Inspiration Lead 00., Inc., Securities Act Release No. 4076 (May 7, 1959). In Mid-Hudson Natural Gas Oorp., Securities Act Release No. 3985 (Novem- ber 3, 1958) the temporary suspension order was vacated after hearing. TWENTY-FIFl'H ANNUAL REPORT 241

TABLE 8.-Brokers and dealers registeredunder the Securities and Exchange Act of 1984 l-effective registrations as of June 80, 1959, classified by type of organization and by location of principal office

Number of registrants Number of ~OPrietors. partners. o eers, etc. :I I Location of principal office Sole Part- 801e Part- Total proprl- nero Oorpo- Total proprl- ner- Oorpo- etor- ships rations' etor- ships rations' ships ships ------Alabama ______36 12 6 18 107 12 20 75 Alaska ______A:rIzoDa ______• ______I 1 0 0 1 1 0 0 Arkansas ______• ______• __ 30 5 9 16 114 5 21 88 Callfornla ______23 6 3 14 69 6 6 57 Colorado ______353 142 83 128 1.250 142 449 659 COnnecticut. ______93 31 8 64 312 31 29 252 Delaware ______43 15 13 15 188 15 62 111 14 3 4 7 69 3 22 44 District of Columbla ______Florlda ______102 34 21 47 399 34 97 268 Georgla ______•______102 42 15 45 269 42 37 190 HawalL ______44 10 6 28 228 10 26 192 Idaho ______• ______39 15 11 13 135 15 26 94 DlInols ______• ____ 15 9 1 5 32 9 3 20 185 41 62 82 872 41 298 533 IowaIndlana______• ------52 23 5 24 164 23 9 122 Kansas ______36 15 5 16 95 15 11 69 Kentucky ______• ______34 10 6 18 138 10 17 111 Loulslana ______•______18 7 5 6 65 7 18 40 Malne ______- ______69 37 13 9 112 37 42 33 Maryland ______31 10 2 19 89 10 7 72 13 155 22 48 Massacbusetts ______• 48 22 13 85 199 78 32 89 910 78 215 617 Mlcblgan ______•______167 MInnesota ______68 11 18 29 272 11 94 52 9 9 34 270 9 32 229 MissIssIppI. ______21 Mlssourl __ • ______•______22 10 6 6 47 10 16 90 22 19 49 464 22 117 325 Montana. ______• ______16 N ebraska ______• ______11 7 1 3 25 7 2 N evade ______27 9 1 17 130 9 3 118 7 6 0 2 9 6 0 4 New Hampshlre ______9 New Jersey ______10 8 0 2 17 8 0 227 130 38 59 477 130 106 241 New Mexlco ______13 6 4 3 33 6 12 15 New York State (excluding New 404 258 40 106 786 258 121 407 40 15 5 20 168 15 13 140 NortbN ~J~k c~~Jna::====Dakota ______:======:• ______•__= 2 9 Oblo ______6 2 1 3 13 2 134 27 38 69 571 27 181 363 Oklahoma ______43 Oregon. ______44 26 7 11 84 26 15 29 6 6 17 100 6 14 80 Pennsylvania ______209 68 81 70 872 68 383 431 Rbode Island ______16 2 10 4 42 2 29 11 South Carollna ______•______26 10 4 12 78 10 9 59 South Dakota ______12 Tennessee ______10 7 0 3 19 7 0 161 12 29 120 Texas ______•______42 12 10 20 222 27 100 652 95 85 472 Utab. ______--- ______95 40 7 6 27 141 7 25 109 Vermont ____• ______• ____• ______2 9 Vlrglnla ______3 2 0 1 11 0 13 151 19 66 66 Wasblngton ______46 19 14 84 45 7 32 241 45 16 180 West VIrgInIa ______2 29 8 9 12 Wisconsln ______13 8 3 47 11 5 31 208 11 26 171 Wyoming ______•______------9 7 1 1 16 7 3 6 ------TotalCity) (excluding______New York 3,498 1,402 684 1,412 11,850 1,402 2,908 7,540 New York City ______1,356 360 591 405 6,239 360 3,699 2, 180 Total ______-. ------4,854 1,762 1,275 1,817 18,089 1,762 6,607 9,720

I Does not Include 53 registrants wbose principal offices are located In foreign countries or other territorial Jurisdictions not listed • • Includes directors, officers, trustees, and all other persons occupying stmtlar status or performing similar functions. J Allocations made on tbe basis of location of prtncipal offices of registrants, not actual location of persons. InCorxnatlon taken from latest reports Clled prior to June 30, 1959• • Includes all forms of organizations other than sole proprietorships and partnerships. 242 SECURITIES AND EXCHANGE COMMISSION

TABLE 9.-Number of stock and bond issues listed and registered on national securities exchanges and the number of issuers involved as of the close of each fiscal year ended June 80, 1936 through 1959 [UndupUcated count]

Total stock Fiscal year ended June 30 Stock Bond and bond Number of Issues ISSUes Issues Issuers

1936_. ______. ____• ____• ___ . ______• ______• ___• ____._ 2,662 1.533 4,195 1937____• _____• ___• ______• ______• ____• ______2,303 1938______• ______• ___ 2,867 1,501 2,368 2.489 2, 847 1,467 1939______. _. ______•• ______• ______' ____' ___. 4,314 2, 485 1940______. ______. ______. ______2,798 1,450 4,248 2.449 2,747 1,411 4,158 2,408 1941.. ______1942______. ______• ____• ______2,694 1,342 4,036 2, 350 2,661 1,307 3,968 2,299 1943•• ______. ______1944______• ____• ______. __ ._. ______2,607 1,259 3,866 2,244 2,550 I, 18S 1945_. ______.. ______. ______• ____• ____• ____ 3,735 2, 196 2,541 1.134 3,675 2, 185 1946______• ___• _. _.• __ . _. ____• ___ .. ____. ___ .• ______2, 552 1,033 3,585 2,188 1947______• ______• ______• __ . _. ______. _____ 2, 562 998 3,560 2, 215 1948__• __._. ____• ______• __• ____• ____• ______• ______2, 557 964 3,521 2,:m9 1949_____• _. _. __• ____• __ . _. ____• __ . _. ____• __• ___. _•• __ ._ 2,570 979 3,549 2, 194 1950. __' ___• __. ______• ____._. _____••• ______2,573 971 3,544 2, 182 1951. •• _•• ______• __• _. ______. __• ______2, 581 942 3,523 2,188 1952. _. __• _. ______• ______• ____• ____• ______2,624 964 3,588 2, 192 1953__• _•• _. ____• __• ______• ______• __ 2,651 1.002 3,653 2, 210 1954__• _•• _. ______• ___' ____' _____• ___' ______' ______2. 641 1,009 3,650 2,204 1955_____• ______•• ______. ______1956____•• ______. _____• ______2,645 1,013 3.658 2, 219 2,659 1,027 3,686 2,253 1957. ___• ______• __• ______• ______2,667 1958___• ______• ______• ____ 1,063 3.730 2,256 2,663 1,132 3,795 2,236 1959_._ ••• _. ____• ___• ___• ___•• _____• ______._ 2, 631 1,177 3,808 2,236 TWENTY-FIFTH ANNUAL REPORT 243

TABLE lO.-Number of issuers listing and registering securities for the first time on a n{ltional securittes exchanqe and the number of issuers as to uihsch. the registration of all secunties was terminated during the fiscal years 1936 through 1959 [Undupllcated count]

Number of issuers as to which-

Securities LIStingand Becunties Fiscal year ended June 30 were listed registratlonof were listed and registered all seeurrties and registered for the first was termi- on a national time on a na- nated during securities ex- tronal securl- the fiscal year change as of tie>exchange 1nne 30

1936 • • • • _ 1937 • _ 2,353 50 2,303 1938 " • _ 266 80 2,489 1939 _ 83 87 2,485 1940 • • _ 67 103 2,449 1941. • _ 36 77 2,408 1942 • • _ 25 83 2,350 1943 • • _ 17 68 2,299 1944 • _ 14 69 2,244 1945 • • _ 23 71 2,196 1946 • • _. • _ 25 36 2,185 1947 • _ 78 75 2.188 88 61 2,215 1948 • 0 _ 1949 _ 49 55 2,209 37 52 2,194 1950 0 • _ 1951 _ 49 61 2,182 1952 _ 58 52 2,188 1953 _ 51 47 2,192 1954 • - - _- _ 71 53 2,210 1955 _ 37 43 2,204 1956 • _ 00 75 2,219 2,253 1957 • - -_ - _ 109 75 83 80 2,256 1958 • 0 _ 1959 • _ 54 74 2,236 73 73 2,236

52911~9>---19 244 SECURITIES AND EXCHANGE COMMISSION

TABLE ll.-Number of issuers and security issues on exohanqe« PART 1.-UNDUPLICATED NUMBER OF STOCK AND BOND ISSUES ADMITTED TO TRADING ON EXCHANGES AND THE NUMBER OF ISSUERS INVOLVED, AS OF JUNE 30, 1959

Total Issuers Status under the act" Stocks Bonds stocks Involved and bonds

Registered pursuant to sections 12 (b), (c),and (d) _____ 2.631 1,177 3,808 2.236 TempornrllY exempted from registrataon by Commis- sion rule .. ______12 6 17 9 Admitted to unIlsted tradlng privileges on registered exchanges pursuant to section 12(1)______233 33 266 211 Listed on exempted exchanges under exemption orders of the CommISSIOn. _ . __ . ___ . __• ___• ____• __ ._. __• ____ . 70 8 78 56 Admitted to unlisted trading privileges on exempted exehsnzes under exemption orders of the Commission.. 16 0 15 15 Total. __•___ •. ___• ______2, 961 1.223 4.184 2.527

"Registered: Section 12(b) of the set provides that a security may be registered on a national securities exchange by the issuer filing an application with the exchange and with the Commission eontainlne certain types of specified mformation, Section 12(c) authorizes the Oomnnssion to require the submisslon of mformatron of a comparable character If In its Judgment information speeifled under section 12(b) Is map- plleabla to any specified class or classes of lssners. Beotion 12(d) provides that If the exchange authorities certify to the Commission that the security has been approved by the exchange for Iistmg and registration, the registration shall become effective 30 days after the receipt of such certification by the Commission or within such shorter period of time as the Oornmlssion may determine. Temporanly exempted: These are stocks of certain banks and other securities resulting from mergers, consolidations etc., which the Commission has by published rules exempted from registration undet specified condl tlons and for Stated periods. Admitted to unlisted trading privileges: Section 12(1) provides, In effect, that securities which were admitted to uoltsted trading privileges on March 1, 1934 (Le., without applleatrons for listing filed by the issuers) may continue such status. Additional securities may be granted unlisted trading privileges. On exchanges only If they are listed and registered on another exchange or the issuer Is subject to the reporting requirements of the act under section 15(d). Listed on exempted exchanges: Certain exchanges were exempted from fnIl registration under section 6 of the act because of the limited volume of transactions. The Commission's exemption order specifies that securities which were listed on the exchange at the date of such order may continue to be hsted thereon, and that thereafter no additional seeurrtles may be listed except upon compliance with section 12 (b), (c) and (d). Unlisted on exempt exchanges' The Commission's exemption order specifies that securities which were admitted to unlisted trading privileges thereon at the date of such order may continue such privileges, and that no additional securities may be admitted to unlisted trading privileges except upon compliance with section 12(1).

PART 2.-NUMBER OF STOCK.AND BOND ISSUES ON EACH EXCHANGE AND NUMBER OF ISSUERS INVOLVED, AS OF JUNE 30, 1959.

Stocks Bonds Exchanges Issuers R X U XL XU Total R X U XL Total ------American. ______Boston ______-___ 814 632 5 234 --.--. ------871 25 2 33 -----. 60 436 73 2 372 --. ------447 16 ------.---. 16 C~~~_~~~~_~~ ____ ClnclnnatL ______12 7 -----. 5 ------12 -----jj- ----i------.-. 133 46 1 95 ------142 ------10 Colorado Sprlngs ____ 11 12 ------12 Detrolt ______------_ ... - --..------222 103 1 125 ---53- ---ie- 229 -- ..------g- Honolulu ______58 ------69 ----is------8 Midwest. ______454 398 2 113 ------513 ------15 New Orleans ______13 4 ------14 ------18 1 ------1 New York Stock ____• 1,294 1,512 2 ------1,514 1,214 3 ------... - 1,127 PllClllc Coast. ______• 482 298 5 248 ------551 20 ------20 Phlladelphla-Baltt-more ______531 154 10 443 ------607 53 ------53 Plttsburgh ______• 116 47 1 75 ---26------123 1 ------1 Richmond ______• 17 ------26 --..------Salt Lake. ______90 88 ------4 ------92 -- ..------SanMlnlngFrancisCO______Spokane ______46 47 ------..----- 47 -- ..------Wheellng ______26 23 ------6 29 -- ..------...----- ~------..---- 13 ---_ .._------_ ... 12 3 15 -- ..--~------

Symbols: R-reg!stered- X-tempomrlly exempted: U-sdmltted to unlisted trading privileges; XL- listed on an exempted exchange; XU-sdmltted to unlisted trading privileges on an exempted exchange. N OTE.-Issues exempted under section 3(a)(12) of the act, such as obligations of the United States Govern- ment, the States and cities, are not Included In this table, TWENTY-FIFl'H ANNUAL REPORT 245

TABLE 12.-Unli8ted 8wck8 on 8eeuritiu exchanges 1 PART I.-NUMBER OF STOCKS ON THE EXCHANGES IN THE VARIOUS UNLISTED CATEGORIES a AS OF JUNE 30, 1959

Unlisted only' Listed and registered on another exchange Exchanges

Clause 1 Clause 3 Clause 1 Clause 2 Clause3'

Amerlcan ______Boston ______192 2 35 ( 1 1 0 149 222 0 Chicago Board or Trade ______Clnclnnati ______3 0 2 0 0 Detroit ______0 0 0 95 0 Honolnlu ______0 0 14 111 0 Midwest ______16 0 0 0 0 New Orleans ______0 0 0 U3 0 Pacific COIlSt______8 0 4 2 0 26 0 59 163 0 Philadelphia- Baltimore ______Pittsburgh ______4 0 241 198 0 Bait Leke ______0 0 16 59 0 Spokane ______3 0 0 0 1 Wheellng ______4 0 1 1 0 0 0 0 3 0 Total' ______257 2 521 971 2

PART 2.-UNLISTED SHARE VOLUME ON THE EXCHANGES-CALENDAR YEAR 1958

Unlisted only S Listed and registered on another exchange Exchanges

Clause 1 Clause 3 Clause 1 Clause 2 Clause 3'

American ______Boston ______29,595,131 16,290 5,332,025 391,700 14,500 6,563 0 2, 320, 414 2, 028, 213 0 Chicago Board of Trade ______CincinnatI. ______0 0 0 0 0 Detrolt ______0 0 0 366,4113 0 Honolulu- ______0 0 219,191 1,743,802 0 Midwest ______67,772 0 0 0 0 New Orleans ______0 0 0 9,886,215 0 45,839 0 195 100 0 PaCific Coast. ______2,454,581 0 3,648, 773 5,509,029 0 Phl1adel phla- Baltimore ______573 0 3,946,683 2,902,552 0 Plttsburgh ______Salt Lake ______0 0 247,222 179,833 0 61 0 0 0 68 178, 314 0 6,782 65 0 ~::g:::::::::::::::::::::::: 0 0 0 2,904 0

TotaL ______0 ______32,348,884 16,290 15,721,235 22,990,876 14,568

1 Refer to text under heading "Unlisted Trading Privileges on Exchanges." Volumes are as reported by the stock erehanges or other reporting agencies and are exclusive of those In short-term rights. a The esteeortes are according to clauses I, 2, and 3 or sec. 12 (0 of the Securities Exchange Act. a None of these Issues has any listed status on any domestic exchange, except that 9 of the 26 Pacific Coast Stock Exchange Issues are also listed on an exempted Exchange. , These Issues became listed and registered on other exchanges subsequent to their adm!sslon to unlisted trading on the exchanges as shown. I Dupllcatlon of Issues among exchanges brings the figures to more than the actual number of Issues In- volved. 246 SECURITIES AND EXCHANGE COMMISSION

TABLE 13.-Dollar volume and share volume of 8aleB effected on securities exchangeB in the le-month period ended Dec. 31, 1958 and the 6-month period ended June 30, 1959 [Amounts In thousands) PART 1.-12 MONTHS ENDED DEC. 31,1958

Stocks I Bonds' Rights and warrants 'I'otal rnar- ket vatue (dollars) Market Number Market Principal Market Num- value of shares value amount value ber of (dollars) (dollars) (dollars) (dollars) units --- Registered exchanges, 39,961,671 38, 264, 291 1,306,297 1,553,627 1,583,051 143,754 ---93, 302 American. _____• ______2,792,990 Boston ______• __• ______2,884,580 256,541 20,094 21,449 71,496 11,556 271,601 269,545 5,610 107 80 1,948 707 Chreago Board of Trade 0 0 0 0 0 0 0 Cmcmnatf , ______31,189 31,013 654 148 271 29 36 Detrolt. ______141,933 141,826 4,818 0 0 107 64 Mldwest ______1,039,687 1,037,997 28, 549 0 0 1,689 1,267 New Orleans ______981 980 49 1 1 0 0 New York ______34,350,996 32,754,299 921,526 1,532, 556 1,560,560 64,141 77,236 Paerfle CoasL ___• __• __ 811,867 808,002 40,095 474 358 3,392 1,732 Phlladelphla-Baltrrnors 388,454 387,272 9,636 247 332 935 616 Pittsburgh ____• ______33,901 33,898 1,561 0 0 4 24 SaJt Lake ___ ._. ___• ____ 2, 474 2,460 19,877 0 0 13 63 San Francrseo Mming __ 2,015 2,015 14,169 0 0 0 0 Spokane, • ______1,993 1,993 3,209 0 0 0 0 = Exempted exchanges, 11,579 11,256 876 64 71 259 ---103 Colorado Springs __•____ 22 22 205 0 0 0 0 Honolulu, •• ______• 10,421 10,098 636 64 71 259 103 Richmond. __• _____•• __ 662 662 17 0 0 0 0 Wheeling_. ______•• __ 474 474 17 0 0 0 0

PART 2.-6 MONTHS ENDED 1VKE 30, 1959

Registered exchanges, 29,181,840 28, 111,810 906,968 993,147 920,825 76,883 ---68,850 American ______._ 2,885,449 2,817,607 248, 456 14,776 19,906 53,007 7,608 Boston. ______181,953 181,953 3,288 0 0 0 0 ChicagoTrade ______Board._. of______0 0 0 0 0 0 0 Cinclnnatl, ______18,494 18,400 368 63 107 31 64 Detroit __._._. ______93,145 93,137 2, 801 0 0 8 34 MId west, ______745,581 745,356 18, 226 1 2 223 255 New Orleans ______779 779 34 0 0 0 0 New York ______24,402,677 23,402,701 563,656 978,193 900,679 21,783 56,758 Pacifle Coast ______539,774 b38.614 28,070 5 2 1,155 535 Philadelphia- Baltlrnore ______285,318 284,603 6,190 109 129 606 3,546 Prttsburgh.,., ______• ___ 23,962 23,962 652 0 0 0 0 SaJt Lake ___• ______2,406 2, 396 21,152 0 0 10 50 San Frsncisco Mlnmg __ 1,514 1,514 12, 852 0 0 0 0 Spokane ______1,223 0 788 788 0 0 0 = Exempted exchanges, 9,627 9,588 720 40 34 0 ---0 Colorado Springs ______• 28 28 231 0 0 0 0 Honolniu ___ • ______9,023 8,983 474 40 34 0 0 RIchmond. _• ______• __• 378 378 8 0 0 0 0 Wheellng ______•• _____ 198 198 7 0 0 0 0

I "Stocks" include voting trust certIficates, Amcrican depository receipts, and certificates of deposit . • U.S. Government bonds are not Includea In these data NOTE.-VaJue and volume of sales effected on registered secuntles exchanges are reported In connection with fees paid under section 31 of the Securities Exchange Act of 1934. For most exchanges the figures represent transactions cleared during the calendar month. FIgures may dl1Ier from comparable data In the Btatlstreal Bulletin due to revisions of data by exchanges. Figures have been rounded and will not necessarl1y add to totals shown. TWENTY-FIFTH ANNUAL REPORT 247

TABLE 14.-Block distributions (Value In thousands of dollars]

Special offerings Exchange distributions Secondary distributions Calendar year Num- Shares Value Num- Shares Value Num- Shares Value ber soid ber sold ber sold

1942' ....•...... 79 812,390 22,694 ------116 2,397,454 82,840 1943...... 80 1,097,338 31,054 ------.------81 4,270,580 127,462 1944...... 87 1,053,667 32,454 ---.------.----.------94 4,097,298 135,760 1945••...... 79 947,231 29,878 ------.------.-.---. 115 9,457,358 191,961 1946•...... •. 23 308,134 11,002 ------.------.- 100 6,481,291 232,398 1947••...•...... 24 314,270 9,133 ------_.--. -.--- ..- 73 3,961,572 124,671 1948.....•.....•. 21 238,879 5,466 ------.------95 7,302,420 175.001 1949...... 32 500,211 10,956 ------.------.- 86 3,737,249 104,062 1950...... ____._ 20 150.308 4,940 77 4.280,681 88,743 1951. __. ______------.------._----- 27 323,013 10,751 ---.---- .------.-- 88 5,193,756 146,459 1952. _____.. _. ___ 22 357,897 9,931 76 4,223,258 149,117 1953. ___. ______------.-.-- 17 380,680 10,486 -.-----. ------.------68 6,906,017 108,229 1954___. ______14 189,772 6,670 57 705,781 24,664 84 5,738,359 218,490 1955______• ______9 161,850 7,223 19 258,348 10,211 116 6,756,767 344,871 1956. ______8 131,755 4,557 17 156,481 4,645 146 11,696,174 520,966 1957______5 63,408 1,845 33 390,832 15,855 00 9,324, 500 339,062 1958. ______5 88,152 3,286 38 619,876 29,454 122 9,508,505 361.886

1 The first Special Offering Plan was made effective Feb. 14, 1942; the Plan of Exchange Distribution was made effective Aug. 21, 1953 secondary' distributions are not made pursuant to any plan hut generally exchanges require members to 0btam approval of the exchange to participate In a secondary and a report on such distribution is llled with this Oomrmsslon, 248 SECURITIES AND EXCHANGE COMMISSION

TABLE I5.-Comparative share sales and dollar volumes on exchanges [Annual sales, including stocks, warrants and rights, as reported by all United ststes exchanges to the Commission. Figures for merged exchanges are Included In those of the exchanges Into which they were merged} -

Year Shares sales ~YS AMS MSE PCS PBS BSE DSE PIT CIN Other % % % % % % % % % % I------1935______681, 970, 500 73.13 12.42 1.91 2.69 0.76 0.96 0.85 0.34 0.03 6.111 1936______962, 135, 940 73.02 16. 43 2.18 2.96 .69 .72 .74 .32 .04 2.90 1937_•• ______838, 469, 889 73.19 14. 75 1.79 3.23 .70 .83 .59 .38 .03 4.51 1938_. ______543,331,878 78. 08 10.55 2.27 2.67 .79 1.03 .75 .25 .04 3.57 1939. ______468, 330, 340 78.23 11.39 2.26 2.35 .93 1.18 .76 .25 .05 2.60 1940__• ______377, 896, 572 75.44 13.20 2.11 2.78 1.02 1.19 .82 .31 .08 3.05 1941._. ______311, 150, 395 73.96 12. 73 2.72 2.69 1.24 1.50 .87 .36 .14 3.79 1942______221, 159, 616 76.49 11.64 2.70 2.62 1.08 1.39 .90 .29 .12 2.77 1943. ______486, 290, 926 74.58 16.72 2.20 1.92 .85 .76 .64 .20 .07 2.06 1944. ______465, 523, 183 73.40 16.87 2.07 2.40 .79 .81 .86 .26 .06 2.48 1945. ______769, 018. 138 65 87 21. 31 1.77 2.98 .66 .66 .79 .40 .05 5.51 1946.. ______603, 076, 532 66.07 19.37 174 3.51 .68 .84 .63 .28 .05 6.83 1947______513,274, 867 69.82 16.98 1.67 4.22 .90 1.05 .66 .19 .08 4.43 1948______571, 107, 842 72.42 15.07 1.63 3.95 .87 .76 .68 .18 .08 4.36 1949_ .. ___.. _ 516,408,706 73.51 14. 49 1.67 3.72 1.21 .93 .73 .18 .09 3.47 1950_____ .. __ 893, 320, 458 76.32 13.54 2.16 3.11 .79 .65 .55 .18 .09 2.61 1951. .. _.... _ 863, 918, 401 74.40 14. 60 2.10 3.54 .76 .70 .58 .16 .08 3.08 1952.. __ .... _ 732, 400. 451 71.21 16. 08 2.43 3.85 .85 .73 .55 .16 .09 4.05 1953__ .. _____ 716,732,406 72.64 15.85 2.28 3.90 .83 .81 .55 .15 .11 2.88 1954______1,053,841,443 71.04 16.87 2.00 3.24 .88 .50 .53 .13 .07 4. 74 1955.. ______1.321,400,711 68.85 19.19 2.09 3.08 .75 .48 .39 .10 .05 5.02 1966_... _____ 1, 182. 487, 085 66. 31 21.01 2.32 3.25 .72 .47 .49 .11 .05 5.27 1957_. ______1,293,021,856 70.70 18.14 2.33 2.73 .98 .40 .39 .13 .06 4.14 1958..... ____ I, 400, 578, 512 71.31 19.14 2.13 2.99 .73 .45 .35 .11 .05 2. 74 Six months to June 30. 1959____• __ 976, 538, 000 63.53 26.22 1.89 2.93 1.00 .34 .29 .07 .04 3.69 Dollar volume (000 omitted) 1935.. __ .... _ $15,396. 139 86.64 7.83 1.32 1.39 .68 1.34 .40 .20 .04 .16 1936_____ .. __ 23,640.431 86.24 8. 69 1.39 1.33 .62 1.05 .31 .20 .03 .14 1937.... _____ 21,023,865 87.85 7.56 1.06 1.25 .60 1.10 .24 .20 .03 .11 1938.. ______12,345,419 89.24 5.57 1.03 1.27 .72 1.51 .37 .18 .04 .07 1939______11,434,528 87.20 6.56 1.70 1.37 .82 1. 70 .34 .18 .06 .07 1940.. ______8,419,772 85.17 7.68 2.07 1. 52 .92 1.91 .36 .19 .09 .119 1941. .. ______6,248,055 84.14 7.45 2.59 1.67 1.10 2.27 .33 .21 .12 .12 1942.. ______4,314,294 85.16 6.60 2.43 1.71 .96 2.33 .34 .23 .13 .11 1943______.. _ 9,033,907 84. 93 8.90 2.02 1.43 .80 1.30 .30 .16 .07 .09 19« .. ____ .. _ 9,810,149 84.14 9.30 2.11 1. 70 .79 1.29 .34 .15 .07 .11 1945_____ .. __ 16,284,552 82 75 10.81 2.00 1.78 .82 1.16 .35 .14 .06 .13 1946.. __ .... _ 18,828,477 82.65 10.73 2.00 1.87 .79 1.23 .33 .16 .07 .17 1947...... _ 11,596,806 84.01 8.77 1.82 2.26 .91 1.51 .36 .14 .11 .11 1948.. ______12,911,665 84.67 8.07 1.85 2.53 .88 1.33 .34 .14 .10 .09 1949...... ___ 10,746,935 83.85 8.44 1.95 2.49 1.11 1.43 .39 .13 .12 .09 1950.... _____ 21,808.284 85.91 6.85 2.35 2.19 .92 1.12 .39 .11 .11 .05 1951.. ______21,306,087 85.48 7.56 2.30 2.06 .89 1.06 .36 .11 .11 .07 1952...... __ 17,394, 395 84.86 7.39 2.67 2.20 .99 1.11 .43 .15 .12 .08 1953.. ______16,715,533 8525 6.79 2.84 2.20 1.06 1.04 .46 .16 .13 .07 1954.. ______28, 140,117 86.23 6.79 2.42 2.02 .94 .89 .39 .14 .10 .08 1955.. ______38,039,107 86.31 6.98 2.44 1.90 .90 .78 .39 .13 .09 .08 1956. _____ .. _ 35,143,115 84. 95 7.77 2.75 2.08 .96 .80 .42 .12 .08 .07 1957.. ______32,214,846 85 51 7.33 2.69 2.02 1.00 .76 .42 .12 .08 .07 1958.. ______38,419,560 85.42 7.45 2.71 2.11 1.01 .71 .37 .09 .08 .05 Six months to June 30. 1959.. _ ... _ 28, 198, 281 83.07 10.18 2.64 1.91 1.01 .65 .33 .08 .07 .06

Symbols: NYS, New York Stock Exchange; AMS, American Stock Exchsnge; MSE, Midwest Stock Exchange; PCS, pacifto Coast Stock Exchange; PBS. Philedelphla.Baltlmore Stock Exchangej" BSE. Boston Stock Exchange; DSE, Detroit Stock Exchange; PIT, Pittsburgh Stock Exchange; OIN, ulnoln- nat1 Stock Exchange. TWENTY-FIFTH ANNUAL REPORT 249

TABLE l6.-Number oj proxy statement» filed under Regulation 14, the number that included stockholder prop08als under Rule 14a-B, th, number oj 8uch prop08al8. and the net number oj stockholder« who8e prop08als were included

Numberot Numberot manage- Number ot stockholders Number or moot's such whose definitive F1SC8lyear ended lune 30 proxy state- stockholder proposals proxy menta that proposals were In- statements Included eluded (net tiled stockholder number 1) proposals

1939 ' ______1940______------1.595 1941______-- .. ------1.626 1942______------1,620 1943______------00- .------.. _----- 1.655 1944..______• ______'Zl 19 1.427 1945______20 38 17 1,501 1946______14 34 17 1,630 lW7 ______- ______19 34 9 1.670 1943______15 29 13 1.677 1949______38 57 18 1.677 1950______43 68 21 1,702 1951______• ______57 97 24 1.668 1952______40 68 24 1.805 1968______• ______45 70 29 1,818 19M______M 90 39 1,817 1955______68 87 31 1,858 1956______63 92 36 1,934 1957______65 102 III 2.016 1958______77 1'Zl 33 1,991 1959______• ____ 95 165 39 1,929 99 156 48 1.975

1 Each stockholder was counted only once each year regardless ot the number of companies and proposals Involved. 'The first substantive proxy rules were effective on Oct. 1. 1938.and revised to Inclnde stockholder proposals tor the 1943proxy season. 250 SECURITIES AND EXCHANGE COMMISSION

TABLE l7.-Number oj original and amended reports filed by directors, officers, and principal stockholders under sec. 16(a) of the Securities Exchange Act of 1934, sec. 17(a) of the Public Utility Holding Company Act oj 1935, and sec. 30(f) oj the Investment Company Act oj 1940, showing their beneficial ownership oj, and their transactions in, equity securities oj the registrant

Fiscal year ended June 30 Sec. 16(a) of Sec. 17(a) of Sec. 3O(f) of Total reports 1934 act 1935 act 1940 act filed

1935______•... __ .... __ .... __ .. __ •... _..... __ 12,638 ------~------~ 12,638 1936____.... _. _.. ____... __.. _. __ .. ___. _. __ ... ___ 43,263 509 ------43,772 1937___..... __. ______._. __ ... ___.. _ .•. _____. __ .. 30, 123 460 ------.------30,583 1938___. ______.. ____•. ___.... _. __._ .•. ____•. __ ._ 21,810 929 ------22,739 1939__...• __ ... , __ ..•. __... __•.•.. __., __..•. ___. 18,323 1,043 --.------19,366 1940_. ______. _' ______. ____ •. _.. _. ____. __ .. _ 18,342 903 ------. 19,245 1941.... _. __... _....•. ______..• ____ .,. __ .•..... 16,312 693 2,413 19,418 1942__.. ___.. __' _____. __ . _____.• _. __.. _____.... _ 16,412 742 1,446 18,600 1943__ . ______. ______.. _. _____ . __ ., _. ___. __ .. 13,363 445 1,164 14, 972 1944_____. ______. _ •. ______. ______- _____- ____ 13,183 539 1,043 14, 765 1945__... _____.- ____•. _" _ .. ____ . __.. __. ___ . __ .. 15,045 498 1,070 16,613 1946______.. ___. __• __... __ .. _. ______.. __... __ 17,838 447 1,265 19,550 1947_... ____ ... _. _.. __ . _.. ___..• ____ .. __..•. _ ... 18,620 553 916 20,089 1948______.. ______.. .______. ___. _____' __.. 16,570 557 664 17,791 1949_. ___ •. __ . __.... _____. __...• ______. __. ___ 17,976 675 702 19,353 1950___. _____. ___. __ ... ____....• _._ . __ ._. ___.. __ 18,314 721 774 19,809 1951.. __ . __. ____.. ___. ______. ___. __ . __ .... __ . ___ 20,776 509 833 22, 118 1952. _.. __.. __ ._ .. ____.. _____' _. ______._ .. __.. __ 20,013 420 628 21,061 1953____.... _____. __ ., ______. ____. ______. __ 21,516 393 424 22,333 1954_... ___ . ____. ______... __.... _. _..• __.. __ ... _ 22,583 331 285 23,199 1955_. ___... ____.. ____.. _ ._ ..... _. ______.. _' ... _ 28,010 532 433 28,975 1956___. __ ... _._ ._. ___. ______. ______31,003 322 676 32,001 1957_... ____ .. __. _. _____. _____.. ____._. __.. ___.. 33,486 296 661 34,443 1958_. ____..... ___. _____... _.... ______.... __.. 32,290 361 475 33,126 1959______. ___.. ____ . _____. __ . ___.. ______.. _ 38,058 366 851 39,275

25-year total ______. ____ .. __ ... ______. ____. 555,867 13,244 16,723 585,834

TABLE 18.-Number and principal types of periodic reports filed under sec. 13 of the Securities Exchange Act of 1934 by issuers having securities listed and registered on national securities exchanges during the fiscal years 1936 through 1959, and the number of such issuers as oj the close of the fiscal year

Annual re- Quarterly Number of ports on and semi- Current re- Issuers hav- Fiscal year ended June 30- Form IO-K annual reo ports on ing securities or its equiv- ports on Form SeK listed and alent forms Form ll-K I registered as ofJune 30

1936.•••.... _ ...•. __. __ .• _.••• ____ .. __ •. __.. _••. 1,500 ------i;7oo. 2,303 1937.• __ ... __ .. ______. ______.. _.• ______.. ____ 2,231 ------2,489 1938. ______.. __ .•...... •.•... _. __ ..•••...... __ 2,310 ------2,319 2,485 1939__. __ ... __..•.. _...... _ ... _.•.... _•. ____ . __ 2,315 ------2,342 2,449 1940.• __.... ___. __. ___ ... ___.... _..... ____... ___ 2,289 ------.---- 2,448 2,408 1941.. __ .... ____•.. _•..... __.... __ .... _. _..... _. 2,390 -----.-.------2,295 2,350 1942_.. _. _.. _____... ___... __ ...... •.. _.... _. 2,148 ------~-----~- 2,470 2,299 1943_... __ . ____ . __.. __ .... __ .... ___ ...•. _•.••..• 2,073 ------~----- 2,340 2,244 1944. __ . __ . _..• __. ___..... __ ... ____ ..... _•..• ___ 1,996 ------~------2,572 2,196 1945__ .. ___•. __•...... __ .... ____ .••..... _. __ •. __ 2,167 -._-----~----- 2,752 2,185 1946______. ______.... _. __ .. __ ... __ .. __• __ . 2,029 1,654 3,394 2,188 1947._ •.. __ •.....•..... _. ______..•••... __... _ .. _ 2,189 5,832 3,302 2, 215 1948. _. __•. ___• _. ____.•... __.• __• _....•. _____.•• 2,123 5,545 3,214 2,200 1949__• __.•• ___ . _____. _. ____• ____•• _...... • _ .• _ 2,139 5,559 3,207 2,194 1950..•.. ___•••.• _••.. _. _.. __ . __ .•. _. _ .•...••. __ 2,091 5,562 3,252 2,182 1951. .•• ____ ••..... __ .•...••..••. __ ..•.• __..• __ . 2,184 6,042 2,750 2,188 1952. __•. __••....•.. __• __.. ___.. ____••. _____• __. 2,150 5,734 2,861 2,192 1953.••.... _...... ______. __ . __•.••.• _. __.••• __ . 2,134 6,080 3,513 2,210 1954.• _.. __ •... ____... ___... _•...• __ ..... ____ ..• 2,050 --_.~------3,440 2,204 1955. __....•....••. __.. __...•.... __...... • _•• __ . 2,123 ------2,857 2, 219 1956.. _ •.. __...... ____ •. __. __ .• _.•...••. ______2,154 1,554 3,367 2,253 1957____ ...• ______...... __ . _ •... _..... __._ .•. __ 2,178 1,466 3,575 2,256 1958..•..... __ . ____. ___. __ ..•. __..... _.•.. ____.. 2,269 1,884 3,427 2, 236 1959..• __ ....•...• _•.. ___...•. ___. _. __.• ______.. 2,223 1,685 3,650 2,236

I QuarterlY reports of gross sales were required from 1946 through 1953, and Form ll-X semiannual condensed earnings for first 6 months of the registrant's fiscal year were required beginning tn 1956 fiscal year. TWENTY-FIFTH ANNUAL REPORT 251

TABLE 19.-Number and principal types of periodic reports filed under sec. 15(d) of the Securities Exchange Act of 1934 by issuers having registered securities under the Securities Act of 1933

Annualre- Quarterly Number oC ports on and senu- Cnrrent re- issuers re- Fiscal year ended June 30 Form IG-K annual reo ports on qulred to file or its equtv- ports on Form ll--K reports under alent Corms Form If-K I sec. 15(d) as of June 30

1937______.. ____. _. __. ______. ____ 1938___.• __. ______' ___.• ______. _._ 30 ~------.------.-_. 80 150 165 1939_. _ .. ______. _. _. _•. ____. __ . ______. ______.------172 .------.--- .------180 1940______• ______._ . ___.• ______. _____... __ . ___ 252 1941. ______. ____•• ___• _. _. __. __ . ______.------274 255 .------279 1942___. ______. __.. ____• __. _____ .-. ______' ______324 1943.. _____ . ____ . ______.. ___. _____ . ____ . _____ .------.------337 327 241 - 370 1944__• ___ . ___._. __ •. ____.. _ .. __• ___. __ . _... ___. - -- - - ~-- --- 348 250 ----.------382 1945_. __ . __ .. _. ___ . 377 300 42.1 1946______. ___. _.• :::::::::::::::::::: :::::::: ------1947_. ______.. _ ._. __. ______. ______._ 436 260 ------558 601 296 839 1948. ______._. ______. ___ . ____.. ______... ___. -----_.-- --- 1949______• ______. ____- ______• ____ 680 298 ------~- - -- 875 744 833 180 976 1950______.• _. _____._. _____. ___. ___ . _. __._ .. _ 753 2,094 284 977 1951_____• ____• ____• __. ______. ___•• _____. __ 735 2,596 400 971 1952_____•. ___• _____. __. __. __. ______._ ._. _.• __._ 715 2,594 604 978 1953__. ______• _. ___. _. _. _. __ •. _____. __. ______. 825 2,615 916 1,014 1954_. __.• ___. ______.. _____ . __ .. ____ •. _____._ 834 973 1,058 1955___.. ______. _. ___. _" __• _____•• _. __ .------1956__. _•• ____• ______. ____•• ____• ___• ____ 950 .------_.-- 970 I, 164 1,02.1 .112 1,066 1,167 1957__. __ •. _ . __ . __ . __ . __• __ . _____• ___. ___ . ______1,159 633 1,299 1,274 1958.... _. _. __• _. ______• ___•• " __ .•• __. _____ 1,270 886 1,405 1,365 1959____.• ____ . _. _. __•_____ .. ___• _. __• _. ___" __. 1,480 848 1,718 1,503

I Quarterly reports o~vestment companies from 1943 through 1948.'lJRequlrement to file Form If-K quarterly reports or gross sales was added In the 1949 fiscal year and continued through the 1953 fiscal year. Semiannual condensed earnings reports for the first 6 months oC the registrant's fiscal year were required beginning In the 1956 fiscal year.

TABLE 20.-Reorganization proceedings under chapter X of the Bankruptcy Act in which the Commission participated, fiscal years 1939-59

Number of appearances filed Aggregate A!.~egate FL~cal year June 30 assets (000 In e tedness omitted) (000 Principal SubSidiary Total omitted)

1939-43_. __• _____ .• _ ... __._ •• _ ..... ____ 243 50 293 $2,625,791 $1,639,163 1944•• __••••••••• _••• ____•• ___• ___._. __ 19 9 28 130,995 73,698 1945. _••• _" • ___•• __._ •• ___•• _ ._ •• _____ 9 0 9 280,589 256,970 1946. _____•••• _. __._. _._ •••• __•• ______9 0 9 9,615 11,636 1947•••• ___••• ____._._ •• __._. ___••• _. __ 9 5 14 15,457 13,135 1948••• _•• _•••••• _•••• _._. __• _•• ,_, _•• _ 10 1 11 28,487 32,620 1949_•• _. __._ ... _•••• _••••• _._ •• _•• ____ 9 4 13 108,390 99,417 1950••• _•• _••• __• _. ___• ___._. ____• ____• 5 4 9 24,985 29,006 1951_. __•• , •• ___••• ____• __._ •• " " _____ 5 0 5 3,243 3,028 1952•• ____••• _. _._._ •• ___••• __' ••• , ___• 6 2 8 8,834 5,625 1953__ •• __••••••• _._._ ••••••• _•• ____••• , 3 7 7,761 3,661 1954••• "'_' _•__• ___• __••• __..... ___• __ , 2 6 8,520 17,373 19M •• "". _____._ ••• _•• _•• _ ._ ••• ___ --_ 2 4 6 112, 769 112,343 1956••••• _._ •• _•• _._ •• __•••• __••• __•• __ 6 0 6 15,578 16,837 1957•• _•• _•• _. __•• __• ___••• _••••• _•• ___ 9 0 9 61,136 67,928 1958••• __••• _•• _...... _•••• _. _'_ '" • ___ 9 0 9 76,499 67,987 1959••• _•••• _••• _ ...... _•• ' _" ____. 13 2 15 62,037 39,165

Totals ••• _._. _._ ...... _"" __'" 371 86 457 3,580,686 2,489,692 252 SECURITIES AND EXCHANGE COMMISSION

TABLE 21.-Reorganization proceedings under Chapter X of the Bankruptcy Act in which the Commission participated during the fiscal year 1959

Securities and Ex- Petition change Com- Debtor District court Petition filed approved mlsslon notice of appearance filed

Alaska Telephone Corp ______W D. Wash _____ Nov. 2,1955 Nov. 21,1955 Nov. 7,1955 American Fuel & Power Co ______E.D. Ky ______Dec. 6,1935 Dec 20,1935 May 1,1940 Buckeye Fuel Co ______do ______Nov.do 28,1939______Nov.___do 28,1939______Do. Bnckeye Gas Service Co ______.do ______Do. Carbreath Gas Co ______do ______do ______do ______Do. Inland Gas Distributing Co ______do ______do ______do____ Do. Automatic Washer Co ______S.D. Iowa ______Oct. Nov. 2,1956 Nov. 2,1956 IlL ______17,1956 Brookwood Country Club ,______N.D Feb. 17,1959 Mar. 3,1959 Mar. 19,1959 Central States Electric Corp ______E.D Va ______Feb. 26,1942 Feb. 27,1942 Mar 11,1942 Coastal Fmance Corp ______D.Md ______Feb. 15,1956 Feb. 18,1956 Apr. 16,1956 Columbus Venetian Stevens Bulldings, N.D. IlL ______Aug. 30, 1955 Aug. 31,1955 Oct. 3,1955 Inc. _____do ______DePaul Educational Aid Society , ______Jan. 1,1959 Jan. 13,1959 Feb. 4,1959 Dumont-Airplane & Marme Instru- S.D. N Y ______Oct. 27,1958 Oct. 27,1958 Nov. 10,1958 ments, Inc' La John ManufacturIng Co ______do ______Oct. 31,191>8 Oct. 31,1958 Do El-T'mnles Inc.l. ______E.D Pa ______Nov 25,1958 Nov. 25,1958 Jan. 16,1959 Empire Warehouses, Inc ______N.D. IlL. ______June 15,1956 June 15,1956 July 19,1956 Equitable Plan Co ______S.D. CallL _____ Mar. 18,1958 May 29,1958 Mar. 27, 1958 Frank Fehr Brewing Co ______W.D. Ky ______Aug. 13,1957 AUI!. 14,1957 Nov. 8,1957 General Stores Corp ______S.D. N.Y. _____ Apr 30,1956 May 1,1956 May 23,1956 Adolf Gobel, Inc ______D. N.J._- ______do ______July 23,1953 Dec. 28,1953 Sept. 8,1953 Eastern Edible Refinery Corp ______June 23,1951 June 23,1954 Oct. 14,1954 Gobel's Q F. Distrfbutors ______do ______do ______do ______do ______Do. Gobel Pharmaceuticals, Inc ______do ______do ______Do. Metropohtan ShortenIng Corp ______do ______do ______do ______no, Green Rlver Steel Corp ______W. D. Ky ______Sept. 13. 1956 Sept. 18, 1956 Oct 5,1956 Horstlng 011 Co ______D.N. Dak, _____ Mar. 17,1952 Mar. 17,1952 Sept. 30, 1955 Hudson & Manhattan Rallroad Co ______S.D. N.Y ______Aug. 11,1954 n-e, 14.1954 Jan. 7,1955 Inland Gas Corp ______E.D. Ky ______Oct. 14, 1935 Nov. 1,1935 Mar. 28,1939 Intemational Power Securities Corp.' ____ D. N.J. ______Feb. 24,1941 Feb. 24,1941 Mar. 3,1941 International Railway Co ______W.D. N.Y ______July 28,1947 July 28,1947 AUI(. 4,1947 F. L. Jacobs Co.' ______E.D. Mich ______Mar. 17, 1959 Mar. Ill, 1959 Mar. 20.1959 Keeshln Freight Lines, Inc ______N D ill______do ______Jan. do 31,______1946 Jan.____do 31,1946______Apr. 25 1949 Keeshln Motor E¥f.CSS Co., Inc _____ Do Seaboard Freight Ines, Inc ______do ______do ______do ______do ______Do. National Frelzht Lines, Inc ______do ______do ______Do. Kentuckl Fuel Gas Corp ______ED. Ky ______Oct. 25, 1935 Nov. 1,1935 Mar. 28,1939 Liberty aklng Corp ______S.D. N.Y ______Apr. 22, 1957 Apr. 22,1957 Mav 2,1957 Ludman Corp.' ______S.D. Fla ______._ Sept. 18,1958 Oct. 9,1958 Oct. 21. 1958 Magnolia Park, Inc ______E,D. La ______Muntz TV, Inc ______Oct. 16, 19,~7 Feb. 26, 1958 Oct. 24,1957 N.D. IlL ______._ Mar. 2,1954 Mar. 3,1954 Mar. 4,1954 Tel.A -Vogue ______•______do ______do ______.do ______do ______Do. Muntz Industries, Inc.; ______do ______do ______Do. Northern Steel Corp.'. ______Conn ______Feb. 1,1957 Feb. 5,1957 Feb. 19,1957 Parker Petroleum cO Inc ______• ______W.D. Okla._. ___ May 6,1958 May 6,1958 June 9,1958 Pittsburgh Rallways 0______W.D. Pa ______c _____Maydo 10,1938______May____00 10,1938______Jan. 4,1939 Pittsburgh Motor Coach Co ______do ______Do. San Souci Hotel, Inc.' __•______D. Nev ______Sept. 16,1958 Scranton Corp.' ______•______Aug. 1,1958 Aug. 1,1958 M.D. Pa ______Apr. 3,1959 Apr. 3,1959 Apr. 15,1959 Hal Roach studtos., ___•______do ______do ______do ______Seaboard Drug Co ______Do. S.D. N.Y .. _____ May 7,1957 May 10,1957 June 25,1957 Selected Investments Trust Fund ______Selected Investments Onrp., ______}N.D.Okla ______Mar. 3,1958 Mar. 3,1958 Mar. 17,1958 D. Wyo ______Shawano Development Co •______Apr. 3,1959 Apr. 13,1959 May 20,1959 Sierra Nevada 011 Co ______D_ Nev ______June 22,1951 June 22,1951 Jnly 25, 1951 Silesian American Corp ______S.D. N.Y ______July 29,1941 July 29,1941 Aug. 1,1941 South Texas Oil & Gas Co.' ______S.D. Tex ______Feb. 2,1958 Feb. 2,1958 Feb. 15,1958 Nev ______July 19,1956 Sept. 10, 1956 Sept. 7,1956 D. Utah .. ______~~dB:l g'.:;-p~i_-_~~======May. 13, 1958 Aug. 12,1958 Sept. 30, 1958 Swan FInch Oil Corp ______S D. N.Y ______Jart. 2,1958 Jan. 2,1958 Jan. 27,1958 Texas Portland Cement CO.I______RD. Tex ______July 7,1958 July 7,1958 Aug. 12,1958 Third Avenue Transit Corp ______S.D. N.Y. ______do. ______Oct. 25, 1948 _____Junedo 21,1949______Jan. 3,1949 Surface Transportation Corp ______June 21,1949 July 7,1949 Westcbester St. Transportation Co., _____do ______do ______do ______Inc. _____do ______Do. Westchester Electric R R. Co ______•• .do______do ______Do. Warontas Press, Inc ______do ______.do ______Sept. 8, 1949 Sept. 8,1949 Sept. 8,1949 Yonkers Rallroad Co ___• ______June 21,1949 June 21,1949 July 7,1949 TMT Trailer Ferry, Inc ______S.D. Fla ______June 27,1957 Nov. 15,1957 Nov. 25,1957 TrInity Butldlngs Corp. of N.Y ______S.D. N.Y ______Jan. 18,1945 Jan. 18,1945 Feb. 19, 1945 U.S. Durox Corp, of Colorado ' ______D. Colo ______Feb. 4,1959 Feb. 9,1959 Mar. 31,1959 Verdi Development Co.' •______C.D. Utah ______Feb. 25,1959 Mar. 11,1959 Apr. 3,1959

, Commission Illed notice of appearance In fiscal year 1959• • Reorganization proceedIng closed during IIscal year 1959. , An earller petition was filed in the District of Nevada on Oct. 17, 1958. Tbe CommissIon filed a notice of appearance In Nov. 18, 1958. Upon dlsmlssa1, petition was filed In Utah. TWENTY-FIFTH ANNUAL REPORT 253

TABLE 22.-Number of indentures filed and qualified under the Trust Indenture Act of 1989 and the dollar amount of debt securities involved, fiscal years 1940-59

Number of Dollar Nurnberof Dollar mdentures amount of Indentures amount of Fiscal year ended June 30 filed for debt seeurt- that were debt securi- quahflcation ties involved qualIfied ties Involved during the (in b1lllons) during the (In billions) year year

1940______1941______43 $0.663 30 $0 440 1lI42______93 2.101 94 1. 670 1943______• ______84 1 101 73 1. 107 1944..______• ______46 .400 37 .312 1946______67 .690 70 .717 1946______117 2 207 98 1. 791 1947______• 132 2.838 136 2.988 1948______108 2 692 96 2.666 1949______121 2 564 122 2 446 1950______127 2.606 124 2.558 1951______96 1. 742 97 1. 865 1952______• ______109 2.025 103 1.922 1953______• 163 3 308 164 3 063 1954. ______144 2 751 141 2 838 1955______145 3 688 139 3 378 1956______•______163 3 675 157 3 721 1957______183 4 495 168 3 992 1958______244 5.466 237 5 507 1959______252 7.066 237 6 414 202 3 686 192 4 229

TABLE 23.-Number of investment companies registered under the Investment Company Act of 1940 and the approximate dollar amount of gross assets at the end oj eachfisool year, 1941-59

Registered New regis. Regtstra- R~tered Gross assets Fiscal year ended June 30 at the be- trations tlons ended at t e close at the end ginning of during the during the of the year of the year the year year year (billions)

1941 ______19421______• ____ 0 450 14 436 $2 5 1943______- ____ 436 17 46 407 2 4 1944______407 14 31 390 2 3 1945. ______390 8 27 371 2.2 1946______371 14 19 366 3.3 13 18 361 3.8 1947______366 1948______• ______361 12 21 352 3.6 359 3 8 1949______352 18 11 359 12 13 358 3.7 1950______- ____ 358 26 18 366 4.7 1951______. ______1952______. ______366 12 10 368 5.6 6 8 1953______368 13 14 367 1964______367 17 16 369 7.0 1965______369 20 5 384 8.7 1956______384 37 34 387 12.0 1957______387 46 34 399 14 0 1958______- ____ 399 49 16 432 15 0 1959______-- ____ 432 42 21 453 17.0 453 70 11 612 20.0

I The act became effective as of Nov. I, 1940. 254 SECURITIES AND EXCHANGE COMMISSION

TABLE 24.-Number of annual and other periodic reports and sales literature filed by registered investment companies and other perS01lSunder the Investment Com- pany Act of 1940, fiscal years 1941-59

Annualre. OwnershIp ports on Quarterly Sales and FIscal year ended June 30 Form reports s~rt,tJfd::S literature transactions N-30A-l, on Form pursuant to pursuant to reports etc. N-JOB-l sec.30(d) sec.24(b) pursuant to sec. 30(0

1941•• _•• ___• ______1942. ___• ______• ______• .. ------.- _ .. _--_.------264 - .._ ..--_._----- 2, 413 196 196 633 947 1,446 1943••••• __•• ____• _____• ______• 1944••• ______• ______215 911 1,078 1,069 1,1M 1945_. ______• ______• 248 809 706 910 1,043 1946____• ______• ___ 235 768 671 1,489 1,070 1947. _____• ______. ______•• ___ 213 780 710 1,752 1,265 1948______226 790 718 1,935 916 1949______. __ 219 762 688 2,110 664 228 788 662 1,910 1950. ______.. ______702 1951. ______• ______224 818 637 2,121 774 251 869 673 2,596 833 1952__ . ______•• ______. 245 871 1963______. ______. ______625 2,106 628 245 888 664 1,769 424 1954___ .• ______. ___. ______252 1,829 285 19M ____ . ____.. ____. ______• ___ 868 686 1956____ .. ___. ______. ______260 197 674 1,829 433 267 195 698 1,935 676 1957____ . ____ . _____. ______• ___ 280 172 734 2,164 661 1958_. __ . ______•• ___ 305 1959. ___• ______• ______• ___ 163 887 2, 416 475 349 179 1,003 2, 722 851

TABLE 25.-Summary of cases instituted in the courts by the Oommission under the Securities Act of 1988, the Securities &change Act of 1984, the Public Utility Holding Company Act of 1935, the Investment Company Act of 1940, and the Investment Advisers Act of 1940

Total Total Cases Cases Cases In- Total Cases cases In. cases pending pending stituted cases closed stttuted closed at end at end during pending during Types of cases up to end up to end of 1959 of 1958 1959 durmg 1959 of 1959 of 1959 fiscal fiscal fiscal 1959 fiscal fiscal fiscal year year year fiscal year year year year ------Aetions to enjoin violatrons of the above acts.,______._ 900 844 56 63 58 III 55 Actions to enforce subpenas under the Secunties Act and the Seeuritles Exchange Act. 71 71 0 1 2 3 3 Actions to carry out voluntary plans to comply WIth sec. ll(b) of the Holding Com. pany Act ____• ______• ______127 125 2 5 2 7 5 MIscellaneous scncna., ______133 127 6 4 3 7 1 TotaL ______------1,131 1,067 M 63 65 128 M

1 ThIS Includes civll and cnmlnal contcmpts not Included In prior statistics. TWENTY-FIFl'H ANNUAL REPORT 255

TABLE 26.-BummaTlI oj ca8es instituted against the Commission, ecses in which the Commission participated a8 intervenor or amicus curiae. and reorganization ca8e8on appeal under ch, X in which the Commission participated

Total Total Cases Cases Cases In- Total Cases cases In- cases pending pending stltuted cases closed stltuted closed at end at end during pending during Types of cases up to end up to end of 1959 of 1958 1959 during 1959 of 1959 of 1959 fiscal fiscal fiscal 1959 fiscal fiscal fiscal year year year fiscal year year year year ------Actions to enjoin enforcement of Securities Act, Securities Exchange Act. and Public Utility Holding Company Act with the exception of subpenasmlssIon ______Issued by the Com- M 64 0 0 0 0 0 Actions to enlr: enforcement of or camp ee with sub. stonpenas______Issued by the Oommts- 8 8 0 0 0 0 0 Petltlons for review of Com. mlsslon's orders by courts of appeals under the various acts ad.mlnlstered by the Commlsslon ______215 206 9 14 6 20 11 Miscellaneous actions agalnst the Commission or officers of the Commlsslon and cases In which the Commission par. am/CUIticlpated cur/at1I8______Intervenor or 208 197 11 4 12 16 6 Appeal cases under ch. X In which the Commlsslon par- tlclpated ______._ 167 155 12 4 13 17 5 --- Total. ______._. ______------662 630 32 22 31 53 21 256 SECURITIES AND EXCHANGE COMMISSION

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TABLE 36.-Reorganization cases under ch, X of the Bankruptcy Act pending during the fiscal year ended June 30, 1959, in which the Commission participated when district court orders were challenged in appellate courts

Name of case and UnIted States Nature and status of case Court of Appeals

El-Tronles, Inc., debtor; Charles R. Appeals from orders of Feb. 9, 1959, and Feb. 26, 1959, authorizing Frost and Connecticut Telephone the assignment of certain government contracts to PIasecki and Electrical Oorp., appellants Aircraft Oorp., and referring matters to Thomas J. Curtin as (3d Clrcmt). referee and special master to make findings of fact and conclusIons of law with his report and recommendations thereon. The district court, In April 1959, approved the stlpulatlon for dismissal of appeals. Closed. Frank Fehr Brewing Co., debtor; Appeal from order of Mar. 17, 1959, finding value of debtor such Fehr Kramer, appellant (6th CIr- that common stockholders' Interests could be eliminated, and cult), con1lrmlng the amended plan of reorganization. MotIon by trustee to dismiss appeal, served May I, 1959; denIed by CA-6, May 26, 1959. Appellant's brIef served May 15, 1959. Com- mission's brief supporting distrIct court order served May 20, 1959. Appellant's reply brIef filed May 25, 1959. CA-6 on June 16, 1959, allirmed the order of the district court. General Stores Oorp., debtor; Lewis Appeals from orders of June 12, 1958, and July 1, 1958, fixing appel- J. Ruskin, appellant (2<1 Circuit). lant collateral trustee's lien for compensation and expenses, and denying appellant's motion for leave to receive compensation from Ford Hopkins Co. and Stlneway Drug Oo., subsidiaries of debtor. Commission's brief, In support of the district court's orders, filed Feb. 27, 1959. Appellant's reply bnef filed Mar. 10, 1959. Case argued Mar. 11, 1959, decision reserved. Pending. Adolph Gobel, Inc, debtor; George Appeal from order of Mar. 6, 1959, denying motion of appellants to Kraus, MIchael DeAngelis, An- quash certain subpoenas IsSUed to them. Appellants' motion, thony DeAngelis, and Trans-World Mar. 16, 1959, for an order to continue the stay In the distrIct Refining Oorp., appellants (3d court pending appeal. Trustee's motion, Mar. 24, 1959, to dis- Circuit). miss the appeal. Appellants' memorandum In support of motIon for continuance of stay, served Mar. 30, 1959. Trustee's memorandum In support of motion to dismtss appeal and In opposition for stay, served Apr. 1, 1959. Stipulation, Apr. 16, 1959, by all parties for dismissal of appeal. Closed. Hudson & Manhattan Railroad Co., Appeal from order of May 1, 1959, approving the modIfied amended debtor; George Spitzer, Henry plan of reorganization. Pending. Miller, Sr., Ellis & Co , and Gres- ham Street Nominees, Ltd., appellants (2<1 Circuit). Inland Gas Corp., et al., debtors; Appeals from orders of May 13, 1958, and June 2, 1958, finding the Thomas Choate and Harmon L. plan for reorganization of Feb. 25, 1958, as amended, fair, equit- Remmel, Charles J. Gregory and able and feasible. Oomrmsston's memorandum opposing motion Clyde L. Paul, Paul E. Kern, Elmo to dismiss the appeals, filed July 24, 1958. Commission's brief E. Allen, George H. Greenwald and supportmg the appeals filed Oct. 15, 1958. Reply briefs tiled Edward D. Spilman, appellants In Dec. 1958. Order Jan. 15, 1959, by CA-6, dismissing all appeals (6th Circuit). and alllrmlng orders of the district court. Petitions for wrIts of certiorari filed In Supreme Court, Mar. 1959. Commission's memorandum supporting petitions for writs of certiorari, tiled Apr. 14, 1959. Supreme Court, Apr. 27, 1959, denied petitions for writs of eerttorart. Petition for rehearing filed May 22, 1959, In the Supreme Court, and denied June 8, 1959. Closed. Inland Gas Corp., et al., debtors; Appeals from order of June 1, 1959, In aId and consummation of Paul E. Kern, Jerome Prince, plan of reorganizatlon, and denying leave to tile proposed altera- Charlotte Heine, and the Allen tions and modifications to plan. Motion In CA-6 for advance- Committee, appellants (6th Cir- ment of hearing of case and stay pending appeal. BrIef of Colum- cuit). bia Gas System, June 13, 1959,In opposition to appellants' motion. Commission's response, June 16, 1959, In support of motion. Order, June 26, 1959, granting motion for stay pending appeal. Pending. F. L. Jacobs Co., debtor; Milton S. Appeal from order of Apr. 15, 1959, denymg the receivers' motion to Gould, Lazarus Joseph, appellants vacate tbe order approving tbe petition for reorganizatron or to (6th Circuit). dismiss the petition and transfer tbe ch. X proceedings to the Soutbern DIStrict of New York. Order, June 23,1959, extending time to docket record on appeal. Pending. MagnolIa Park, Inc., debtor; Stephen Appeal from order of Feb. 25, 1958, approving petition for reorgan- Goldring and Malcolm Wolden- ization. Commission's memorandum, May 2, 1958, In opposltton berg, appellants (5th Circuit). to appellants' petition for writ of mandamus and probibitlon or for a supersedeas or stay of the dlstnct court's order of Feb. 25, 1958. Order, May 21 1958, denying leave to file petition for writ of mandamus and refusing the alternative application for supersedeas. Appelants' brief filed Nov. 14, 1958. CA-5, Jan. 8, 1959, granted motion by appellants and trustee for postponement of hearing pending settlement negotlattons and Instructed counsel to advise court by Mar. 15, 1959, whether appeals will be dismissed. Pending, Appeals from orders of Dec. 18 1958, Dec. 19, 1958,and Jan. 22, 1959, Magnolia Park, Inc'l debtor; Sport- service Oorp., ana New Orleans approving and confirming p 1an of reorganization, and disallowing Bportservlee, Ine., appellants (5th vote of Sportservlce, Ine., against the plan as not made In good Olrcuit). faith. Pending. TWENTY-FIFTH ANNUAL REPORT 285

TABLE 36.-ReorganizatiOn cases under cb. X 01 the Bankruptcy Act pending during the fl,scal year ended June 30, 1959, in which the Oommission participated when district court orders were challenged in appellate courts-Continued

Name of case and United States Nature and status of case Court of Appeals

Selected Investments Oorp., and Appeal from order of Mar. 3, lQ58, findmg certain trust certlficates Selected Investments Trust Fund, to be debt securities, findlug debtors bankrupt and approving debtors; Selected Investments ch, X pennon: and appeal from orders dated May 2, IQ58, June Corp., Selected Investments Trust 23,lQ58, and July 18, iQ58, denying debtors' objections to retention Fund, Hugb A. Carroll, Julia L. in office of trustee and overruling objection of certain cortiflcate Moore Carroll, William A. Rigg, C. holders to ch X proceeding. Petttion for writ of prohtbttion seek- M. Holliday and Herschel Hillery; ing to stay lower court proceeding filcd Apr. 4, tQ58, denied by O'Bryan, O'Bryan & O'Bryan, CA-lO S.E.C. motion dated July 3, IQ58, to djsmtss appeals Walter, D. Hart, Jack Hart, Lin- on procedural grounds. CommISSIOn's bnet, Sept. 4, lQ58, sup- wood O. Neal, appellants (10th porting the orders of the district court. Opnuon, Oct 14, IQ58, Olrcurt), affirming the orders of the dlstnct court. Petition for rehearing filed Oct. 31, lQ58; Commission's response served Nov. 7, lQ58; petition for rehearing darned Nov. 10, lQ58 Petition for writ of certiorari filed Dec. 21, lQ58; Commission's and respondent's briers m opposition filed Jan. lQSQ;and petition for writ of certiorari deuied by the Supreme Court on Feb. 24, lQ59. Closed. Selected Investments Oorp., and Appeals from order of Jan. 14, lQS9, directing the trustee to make Selected Investments Trust Fund, dtstnbutlon of substannal part of the assets of the trust fund. debtors; Walter D. Hart and Jack CommiSsion's memorandum supporting motion for stay filed Jan. Hart, appellants (10th Circuit). 2Q, 1959. Trustee's response opposing motion for stay filed Jan. 2Q, 1959. Order by CA-lO, Jan. 30, 195Q,staymg distrlbutron of funds until further order ofthe court. Oomnnssion's response to motion to vacate stay, Mar. 13, 195Q. Order, Mar. 26, 195Q, denying motion to vacate stay. Pending. Swan-Finch Oil Oorp., debtor; Appeal from order of July I, 1958, directing certain assets and pro- .American Leduc Petroleums, Ltd., ceeds therefrom which appellants received as a pledge be tnrned American Canuck Petroleums, over to the trustees; and determtnation that reorganization court Ltd., Orleans Industries, Ine., and had summary [unsdienon to determine ownership: and appeal Penn Canadian Oil Co, Swan by trustees from order of Nov. 21, 1958, determirung summarily Finch Oil Corp. Trustees, appel- ownership of certain other property. Order by CA-2, Aug. 6, lants (2<1 Olrcurt), 1958, denying application for vaeatmg tnjuneuve provisions of the 2 orders entered on July I, 1958. Order, Sept 5,1958, denying motion for a stay of July I, order pending appeal. CommISSIOn's bricf in support of Juiy I, order of the dlstrrct court, filed In Dec. lQSS. CommiSsion's memorandum opposing Nov. 21, order, filed Feb. 6, lQ59. Oplu1on by CA-2, Apr. 2Q, lQS9, affirming the July I, order. Appeal from Nov. 21, order still pending, Third A venue Transit Corp. and Appeal from oplnion of Feb. 6, lQ58, denying applleation of Amen, subsidiary corporations, debtors; Gans, Weisman and Butler for compensation and denying the Hiram S. Gans; Hays St. Johu, applleatron for approval of a certain transfer of securlties; and Abramson and Heilbron; Surface appeal from order of July 22, lQ58, awarding and denying final Transit, Inc., et al; Reus & Chand- allowances. Oommlssron's memorandum Oct. 6, 1958, on appli- ler, Inc., James Hodes, Lester T. cations for leave to appeal from order of final allowances. Briefs Doyle, I. Howard Lehman, appel- filed in Jan. and Feb. lQSQ. Oommtssion's brief filed Mar. 12, lants (2<1 Circuit). 195Q, on final allowances. Opinmn, May 11, lQ59, affirmrng in part, modifying and reversing in part, decision of the district court. Pattnons for rehearing filed in May, lQ5Q. Commission's answering letter to petition for rehearing of Baker, Obermeier & Rosner, filed in May, lQS9. Order June 8, lQ59, denying petl- tions for rehearing. Petitions for writ of certiorari filed. Pendlug. Third A venue 'I'ransit Corp., et al., Appeal from order of Dec. 23, lQ58, denying motions for orders debtors, A. PbIllp Woo)fson, appel- vaeatmg order of Dec. 17, lQOO;and order of July 18, lQ58, and lant (2<1 Circuit). motion to compel the Oommtssion to institute erlminal proceedings against the New York Stock Exchange. Briefs filed in Mar. and Apr. lQS9. CommiSsion's motion, Mar. 31, 1959, for dismissal of appeal. Order, Apr. 10, lQ59, granting motion for dismissal of appeal. Petition for writ of certiorari filed Apr. 2Q 1959; Commission's brief in opposition filed May zr, lQ59; derned by the Supreme Court in June 8, lQ59. Petition, June 1959, for rehearing of order denying petition for a writ of certiorari. Pending. Third A venue Transit Oorp., et ~'l Appeal from order of June ~l 1959, directing appellant to repay a debtors; JulIUS Ksss, appellant ('"l certain sum of money to me trustee which he received for past Circuit). legal services after petition for reorganization had been filed. Pending. TMT Trailer Ferry, Inc., debtor; Appeal from order of Mar. 6, 19S9, confirming trustee's plan of Protective Committee for Indepen- reorganization. Pending. ent Stockholders, appellants (5th Circuit). 286 SECURITIES AND EXCHANGE COMMISSION

TABLE 37.-A 2B-year 8ummary of criminal casu developed bythe CommisBion-fiscalyear81934-59 [See table 39 for cIassification of defendants as broker-dealers, ete.l

Number Number Number of these Number of persons of such defend- of cases as to eases III Number Number Number ants as to Number referred whom which of de- of these of these whom of these Fiscal year to De- proseeu- indlct- fendants defend- defend- proceed- defend- partment bon was ments indicted ants con- ants ac- Ingswere ants as to of Justice reeom- were ob- in such vlcted quitted dismissed whom in each mended tained by cases I on motion eases are year in each United of pending s year States United attorneys States attorneys ------1934______7 36 3 32 17 0 15 0 1935______14 5 0 1936______29 177 149 84 60 1937______43 379 34 368 164 46 158 0 30 144 32 0 1938______42 128 78 34 40 113 33 134 75 13 45 1 1939______52 245 47 292 199 33 60 0 1940______0 1941. ______59 174 51 200 96 38 66 M 150 47 145 94 15 36 0 1942______194 49 1943______50 144 46 108 23 14 31 91 28 108 62 10 33 3 1944______5 11145 ______27 69 24 79 48 6 20 1946______19 47 18 61 36 10 14 1 16 14 13 8 4 15 1947______44 40 1948______20 50 13 34 9 5 16 4 1949______16 32 15 29 20 3 6 0 1950______27 44 25 57 19 13 25 0 18 28 15 27 21 1 5 0 1951. ______29 42 24 48 37 5 6 0 1952______13 1953______14 26 24 17 4 3 0 18 32 15 33 20 6 5 2 19M______19 10 6 7 1955______19 44 52 29 1956______8 12 8 13 7 0 6 0 17 43 16 44 27 5 10 2 1951______18 1 2 51 1958______26 132 80 26 15 51 12 25 7 2 0 16 1959______----J 45 ----217 ----20 ----75 ----6 ----1 ----1 ----67 TotaL ______741 2,550 • 602 2,487 1,319 295 , 665 188

I The number of defendants III a ease is sometimes increased by the Department of Justioe over the number against whom prosecution was recommended by the Commission. For the purpose of this table, an individual named as a defendant In 2 or more Indictments in the same ease Is counted as a single defendant. J See table 38 for breakdown of pending eases. p 22 of these references as to 131 proposed defendants were still being processed by the Department of Justice as of the close of the fiscal year, and also 5 of the 1957 and 1958references as to 79 proposed defendants . • 555 of these eases have been completed as to 1 or more defendants. Oonvretrons have been obtained in 481 or 87 percent of such cases. Only 14 or 13 percent of such eases have resulted III acquittals or drsmissals as to all defendants, this includes numerous eases III which indictments were dismissed WIthout trail because of the death of defendants or for other admmlstratlve reasons. See note 5, Infra. , Includes 56 defendants who died after indictment. TWENTY-FIFTH ANNUAL REPORT 287

TABLE 38.-Summary of criminal cases developed by the Commission which were still pending at June 80, 1959

Number Number of such defendants of such as to whom cases are 'till Number defend. pending and reasons therefor of de- ants as Cases fendants to whom in such cases Not yet Awaiting Awaiting cases have been appro- trial appeal com. hended pleted ------Pending, referred to Department of Jus- tice In the fiscal year: 1938.•...... •...... ••...... 1 2 1 1 0 0 1939.•...... 0 0 0 0 0 0 1940...... 0 0 0 0 0 0 1941...... 0 0 0 0 0 0 1942•.•...... •...... 2 18 4 13 1 0 1943.•...... 1 6 2 2 1 0 1944.•.... _ ...... 1 7 2 6 0 0 1946...... •...... 1 1 0 1 0 0 1946..•...... _..... """ ...... 4 16 1 16 0 0 1947...... •...... •• 1 6 1 4 0 0 1948.•...... •• 0 0 0 0 0 0 1949...... •...... •• 0 0 0 0 0 0 1960.•...... •.•... 0 0 0 0 0 0 1951•...•...... ••.... 0 0 0 0 0 0 1962.....•...... 0 0 0 0 0 0 1963..•.•• _ ...... 2 12 10 1 1 0 19M .••...•...... 1 7 0 7 0 0 1966.•...••...... •...... 0 0 0 0 0 0 1966.•....•...... 2 2 0 0 2 0 1967...... 10 52 1 4 43 4 1968...... •...... •...... •...... 6 16 0 1 15 0 1959...... •..•.•.....•..••....•••••••.. 19 75 8 7 69 1 ------TotaL .•...... 161 1218 30 61 122 6

SUMMARY ~g~~:r~~.~-..-.'::=::= ==: .: === : ==:: .. =.: = : : ==:::::::======::::: = =::::::::::::: .: = =::::::: == 4~ Total defendants as to whom cases are pending 1••••••••••••••••••••.••••••••••••••••••••••••••.•••••• 446 1 Except for 1967, 1968, and 1959 indictments have been returned In all pending cases. As of the close of the fiscal year, indictments had not yet been returned as to 210 proposed defendants In 27 cases referred to the Department of Jnstlce In 1957, 1968, and 1909. These are re1Iected only In the recapitulation of totals at the bottom of the table.

TABLE 39.-A. ~6-year summary classifying all defendants in criminal cases developed by the Commission-1834 to June 30. 1858

Number ssto whom Number Number Number Number cases were ssto indicted convicted acquitted dismissed whom on motion cases are of United pending States attorneys ------Reglstered broker-dealers 1 (Including principals of such firms) ...•••••...... •...... •••...... •••••..•.. 377 226 24 100 27 Employees of such registered broker-dealers ..•.•..•. 163 66 17 43 28 Persons In general secunties bnslness but not as registered broker-dealers (Includes principals and em. 736 370 62 261 42 ABIglh~i.:==:======:======.: ======---1,222 ---668 ---192 ---281 ---91 TotaL •••••...•...•••.•...••••••...•••••...•••• 2,487 1,319 295 686 188

1 Includes persons registered at or prior to time of indictment • • The persons referred to In this column, while not engaged In a general business In securities, were almost without exception prosecuted for violetlons of lew mvolvlng securities transactions. 288 SECURITmS AND EXCHANGE COMMISSION

TABLE 40.-S8-year eummaru of all injunction esses instituted by the Commission, 1934 to June 30, 1959, by calendar year

Number of cases instituted Number of cases In which by the Commission and injunctions were granted the number of defend. and the number of de- Calendar year ants involved fendants enjoined I

Cases Defendants Cases Defendants

1934______• ___ ._. _. ______• ____• 1935______- _- - - ___- _. ______• __ 7 24 2 4 1936______-_ -_ - ______36 242 17 56 42 116 1937______- - - - _- _- _- _- ______36 108 96 240 91 211 1938______------. - - - - -. - _- ______70 152 73 1939______. ______- -._ - - •. - - - - _- ______153 57 154 61 165 1940______- - -- -_ - - - _- _- ______40 100 42 99 1941. ____• ______. _____- __------_ -. -. __• _. ___ 112 1942____• ______• _._. - _- _- _ -. ____•______40 36 90 21 73 20 1943______• ______- - _- _ -. -. - _- ______• ____ 54 1944______- ______._. ____•• _ 19 81 18 72 18 80 14 1945______- _- _- ___- ______• _•• _ 35 21 74 21 57 1946______- _- ___-_ - ____------___ --.-- __• ______21 45 15 34 1947______------______._ •• _. ___ 20 40 1948______------_ -. - ______• ___ 20 47 19 44 15 26 1949______•• _. _____• ______-. -. -. - _- _- _. ___._. ___ 25 59 24 55 1950______------_- _-. __- _- ___ 27 73 26 7l 1951. ____• ______- _- - - __- -. -. -_ -___• ___ 22 67 17 43 1952__•• ______• __------. -_ -. -. -._ ._. ____ 103 1953______•______- ____• ______._._. __ ._ 27 18 50 20 41 23 68 1954_____• ______._. __- --. - - - -. ___ ._ ._. - •••• _ 22 59 22 62 1955__•• ______- ___------. - - - __ -. -. - _____ 54 1956__• ______- ______• _. _._. _• __ ._ 23 19 43 53 122 42 89 1957___••• ______• ___- - - - - ._. -. -. -. ___•• _" 58 192 32 93 1958______------__ ._. -___• ___ 7l 408 51 158 1959 (to June 30) •• ____• ___._._. ___• ___•• _. _____ 25 109 43 130 Total. ______• ____ ._ 900 2,864 J 798 2,073

SUMMARY

Cases Defendants

Actions tnsntnted., __...... ____•______•••• _...... _... __.. 900 2,864 Injunctions obtamed. •_____•____•_•• _... ______...... 783 2,073 Actions pending., ...... _____•____._. _____•__._ ...... __ 29 J 289 Other dlsposlnons ,____- - - .... -- ...... ------.-.------.-- -. --- .- ... 88 502 TotaL. ______• ______... 900 2,864

I These columns show disposition of cases by year of disposition and do not necessarily reflect the disposl- tlon of tbe cases shown as having heeu Instituted In the same years • • Includes 15 cases which were counted twice In this column because injunctions against different defend. ants In the same cases were granted In dlfierent years • • Includes 45 defendants In 12 cases In which Injunctions have been obtained as to 129 codefendants. , Includes (a) actions dismissed (as to 434 defendants); (b) actions discontinued, abated, vacated, aban- doned, stipulated, or settled (as to 53 defendants); (c) actions In whIch judgment was denied (as to 11 de. fendants); (d) actions ill which prosecution was stayed on stipulation to discontinue misconduct charged (as to 4 defendants). o