45th Annual Reportof the Securities and

Exchange Commission

for the fiscal yearended September 30, 1979

For sale by the Supenntendent of Documents, U S. Government Pnntong OfficeWashongton, D.C 20402

Stock Number 046-000.00121.4

Chairman's Letter of Transmittal

The Honorable Walter F. MondalePresident, U.S. SenateWashington, D.C. 20510

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

Gentlemen'

I am pleased to transmit the Annual Report of the United StatesSecurities and Exchange Commission for the fiscal year endedSeptember 30, 1979. As I have in connection with the Cornrmssion's lasttwo Annual Reports, I would like to summarize in this letter some of thesignificant challenges which the Commission has faced, andachievements which it has realized, during the past year. I want also todescribe several of the areas to which the Commission will be devotingits efforts in the coming year.

After 45 years of successful administration of the Federal securitieslaws-a period during which the Cornrnission earned recoqrutron as ahiqhly effective Federal regulatory agency-It is taking a close look atwhether its rules, procedures, and internal operations remain adequateand appropriate to the capital markets of the 1980s. This examinationcomes at a time when the Commission is already facing the challenge ofstretching limited resource levels to meet its steadily Increasingresponsibilities.

Since 1975, during a period In which the Commission actually 1051 asignificant number of staff positions, the Commission has experiencedan explosion in the number and complexity of ItS regulatoryresponsibilities-in large part, for two specific reasons. First. SIgnificantchanges have occurred in the financial markets and cornrnuruty-i-including greatly expanded market activity. increasing complexity offinancial transactions, the development of a new mix of financialproducts being offered to the public, and the increasinqly hiqh financialleverage of the broker-dealer industry. As illustrations, during the periodfrom 1975, the number of shares annually traded in the NASDAQsystem increased over 150 percent, the number of contracts forexchange-traded options increased over 250 percent, the number ofregistered investment advisers increased by approximately one-half,there were approximately $100 billion worth of successful tender offers,and in the last year alone the assets of money market funds increased

almost five-fold. Such remarkable growth is expected to continue-inJanuary 1980, the volume of trading in New York Stock Exchange-listedsecurities on the composite tape, American Stock Exchange-listed andover-the-counter traded securities totaled 2.165 billIon shares. Just ayear earlier, the January figure was less than one-half that amount; twoyears earlier, it was only about one-third of this year's figure.

Second, during this same five-year period, Congress charged theCommission with a wide range of new regulatory responsibihties andlegal oblIgations Some of these mandates to which it must allocateSIgnificant resources, such as the Freedom of Information Act, are notunique to the Cornrrussion. But other requirements are. For example, in1975 Congress directed the Commission to facilitate the establIshmentof a national market system for securities. Further, the Commission hasbeen charged with implementing the Forerqn Corrupt Practices Act andhas undertaken a greater role to achieve more effective oversiqht andself-regulation of the accounting profession. The Commission also hasdevoted considerable resources to reviewinq the American LawInstitute's proposed Federal Securrtres Code, WhICh, it is anticipated, willbe introduced In the Congress. Moreover, recent Judicial developments,which have severely hampered private rights of action, mean that inmany cases, no party other than the Commission can seek judicialenforcement of the federal secunties laws.

Major changes In the Commission's operations have been necessary tocope WIth this increased workload in the face of dirnlnished staffallocation. In order to maintain the Commission's traditionally high levelof investor protection, it has had to increase efficiency, reallocatepersonnel, reorganize structure, develop new management strategies,and rely on unpaid overtime donated by its highly-motivated staff. Thisdrive for even more efficient utilization and allocation of our resourceswill, of necessity, continue in the coming year. Nonetheless, such effortscan accomplish only so much. The Commission is concerned thatcontinually growing demands on lImited resources impair its existingprograms and functions. In a number of areas, underallocation of staff,because of needs to irnrnedrately meet other demands, already hasresulted in performance capabilities diminishing to a level which theCommission does not consider adequate. For example, theCornrnissron's lnspections of many of the financral entities which Itregulates are too Infrequent to be optimally effective In protecting thepublIc

The Securities Markets

The Commission continued its efforts, during fiscal 1979, toimplement ItS Congressional mandate to facilitate the establIshment of anational market system for securities. As part of its efforts to Identifythe objectives and framework of such a system, during fiscal 1979, theCornrnission proposed three siqnificant rules: Rule 11AcI-3 to provideprice protection for public limit orders; Rule 19c-3 to limit extension ofoff-board trading restrictions; and Rule 11Aa2-1 to define criteria for

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securities to "qualify" for trading in a national market system. Thesecurities industry, meanwhile, stengthened the two principalexperiments In technology which may become, or help determine, afoundation of a national market system-the Intermarket Trading Systemand the Cincinnati multiple-dealer trading facility. Both of these projectsalso received authority from the Commission to continue operating untilJanuary 31, 1983. Two additional private sector Initiatives in this areawere the commitment by the participating exchanges in the IntermarketTrading System to a joint limit order protection plan, and the agreementby the New York and American Stock Exchanges to make generallyavailable their common message switch.

Trading in exchange-listed options also received a great deal ofattention from the Commission during the fiscal year. In December1978, the Special Study of the Options Markets submitted to theCommission the l,OOO-pagereport of its comprehensive 14-monthstudy. The Commission released the staff's report publicly in February1979, and announced the conditions under which it would permit anexpansion in options trading. During the balance of the fiscal year andinto fiscal 1980, the staff worked closely with the securities industry'sself-regulators toward implementing many of the recommendations ofthe Study. Although the task was complex and difficult, the cooperationbetween the Commission's staff and the industry's representatives hasbeen excellent. I anticipate that in the coming fiscal year theCommission will authorize an expansion of trading in this segment ofthe securities market.

The Full Disclosure System

The Commission's statutory mandate to require corporations todisclose all material information to the investing public is at the heart ofthe capital forrnation process. In accordance with the 1977recommendations of its Advisory Committee on Corporate Disclosure,the Commission is pursuing an on-going program designed to enhancethe effectiveness of its disclosure requirements, while reducing attendantburdens to the extent practicable. During the fiscal year, theCornrnissron took a number of important steps towards this goal

As part of this program, the Commission has begun a thorough reviewof filings under the separate disclosure systems prescribed by its twomost fundamental disclosure statutes-the Securities Act of 1933 andthe Securities Exchange Act of 1934-to reduce reporting burdens andpaperwork by more precisely tailoring the reportmg requirements to thecharacteristics of particular registrants and to the needs of theirinvestors. This program also has been substantially advanced by theCommission's efforts, which culminated in proposals, publishedsubsequent to the close of the fiscal year, to amend Form 10-K to serveas the cornerstone of a new "integrated" disclosure system and tocentralize the instructions for financial statements in various reportingforms. In addition, during the last fiscal year, the Commission continuedits efforts to encourage issuers to provide investors with forward-lookingand other forms of "soft" information, such as performance projections.

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Other actions by the Commission during fiscal 1979 designed to makethe full disclosure system more effective include the adoption ofsignificant rules governing public tender offers and "going private"transactions. In addition, important progress was made in theCommission's comprehensive examination of shareholder participationin the process of corporate accountability. That study, which began in1977, has resulted in slqnifrcant amendments to the Commission's proxyrules in both fiscal 1978 and 1979. The study's final report is expectedduring 1980.

One of the Commission's major initiatives during fiscal 1979 has beenits efforts to facilitate capital formation by small businesses WIthoutmaterially diminishing the protections afforded public investors. TheOffice of Small Business Policy, established in June 1979, serves asliaison with the small business community and generates proposals toeliminate unnecessary impediments to the ability of small businesses toraise capital in the securities markets. As a result ofthat Office'srecommendations, the Commission has liberalized the rule regardingresale of restricted securities, adopted a new "short form" registrationstatement for certain smaller issuesof securities, and created a newexemption from registration for other types of relatively small issues ofsecurities. In coordination with the Department of Commerce, theCommission also developed a monitoring program to asessthe impact ofour regulations on small businesses, and in conjunction with the SmallBusiness Administration, is studying the role which regional broker-dealers play in the capital formation process.

In order to make the Commission's review of corporate disclosuredocuments more meaningful, the staff unit with primary responsibility inthis area, the Division of Corporation Finance, has been reorganizedwith its operational branches restructured according to industry groups.The Division's new operational plan recognizes that the staff cannotadequately review every document filed, and relies, instead, on an "auditmode" and quality control techniques to enable the staff to give promptand thorough scrutiny to key filings while devoting less resources toreviewing more routine documents.

Investment Compances and AdVIsers

Staff task forces are conducting a comprehensive review of theCommission's regulation of investment companies and investmentadvisers. With regard to investment companies, the Commission hasadopted a number of rules to lessen the costs and burdens associatedwith their regulation-which historically has been based, to a largeextent, on the Commission's prior-clearance of transactions-byenhancing the role of directors in managing investment companies. Thegoal of diminishing the Comrrussion's presence in routine investmentcompany business decisions also is reflected in the Cornrnisston'swithdrawal, in March, of its "Statement of Policy" on investmentcompany advertising and in its adoption, in August, of Rule 434d topermit investment companies much more flexibility in mass media

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advertising. The effect of these actions place responsibility for fairpresentation of investment company advertising material on boards ofdirectors rather than on arbitrary rules and staff clearances. TheCommission also has requested public comment on a proposal to relaxthe prohibition against an investment company's using its assets tomerchandise the sale of its shares. These efforts by the Commission tode-emphasize governmental prior-clearance of investment companies'business practices, while resulting in substantial private sector benefits,will place even greater emphasis on its increasingly stretched inspectioncapabilities to determine that such practices comply with the Federalsecurities laws.

As to investment advisers, the Commission has identified anomaliesin the pattern of investor protection which It is striving to resolve withthe least possible burden to that industry. For example, in response to along-standing concern as to the adequacy of information provided toclients of investment advisers, the Commission adopted a new rule torequire that certain investment advisers disclose to clients andprospective clients their background and business practices.

Ensuring Informed Regulation

The Commission recognizes that no regulatory agency cansuccessfully fulfill its legislative mandate unless it understands theindustry it regulates and the economic consequences of its actions.Accordingly, the Commission is placing increasing emphasis ongathering and analyzing empirically-based information.

As part of its efforts to better assess the consequence of itsregulations, the Commission has strengthened its capability foreconomic analysis. The revised format of the Commission's annualreport on the securities industry and the recent report on the impact ofthe Commission's implementation of the Conqressronally-rnandatedseparation of money-management and floor brokerage illustrate thiscapability. Such analyses of economic conditions in the industrycontribute importantly to the Commission's decision-makmg processes.

To further improve its oversight of the operations of the securitresmarkets dunng the fiscal year, the Commission Implemented a pilotproject phase of its Market Oversight and Surveillance System, whichwill provide the Commission a much enhanced capability to surveil themarketplace. In view of the increased volume and complexity of thesecurities markets, the Commission's existing approaches are no longeradequate. This system will supplement, not supplant, the marketsurveillance performed by self-regulatory organizations, in accordancewith the Commission's strong commitment to the traditional frameworkof the securities industry's self-regulation.

Inspection and Enforcement

An essential medium for assuring compliance with the securitieslaws-and for assessing the impact of the Commission's regulation-is

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Its inspection program, a responsibility which is receiving an enhancedemphasis although remaining understaffed. The Commission'sInspection program of regulated entities-including self-regulatoryorganizations, broker-dealers, investment companies and investmentadvisers-provides a vital discipline and the opportunity to examine thepractical effects of regulation on such entities and on the investingpublic.

Moreover, in appropriate circumstances, the Commission inimplementing its regulatory responsibilities, will initiate enforcementactions. The Annual Report relates some of the more significantenforcement actions concluded during the year. The Commissioncontinues its longstanding commitment to such a vigorous enforcementprogram, which is necessary to the credibility of the Commission'sprograms to protect public investors and the integrity of the securitiesmarkets. This commitment has become even more compelling in recentyears as court decisions have severely hampered the private rights ofaction by which Investors themselves might otherwise have proceededagainst perpetrators of illegal practices.

Accountmq Mallers

In response to its 1977 undertaking to a Senate Subcommittee toreport periodically on the accounting profession's response in meetingits challenges, as well as the Commission's own initiatives in this area,the Commission, in July 1979, submitted its second Report on theAccounting Profession and the Commission's Oversight Role. TheReport concluded that sufficient progress has been made to meritcontinued opportunity for the profession to pursue efforts at self-regulation.

In accordance with such efforts, the Commission continued its closeliaison in support of the work of the Financial Accounting StandardsBoard to address emerging accounting problems, such as the effects ofinflation on financial reporting. It strongly endorses the Board's programto develop an overall conceptual framework in which to consider suchproblems.

As part of its on-going responsibilities to oversee the accountingprofession, in June 1979, the Commission issueda releaseconcerningcertain factors which may affect the independence of accountants inperforming nonaudit services for publicly-held audit clients, and certainfactors which should be considered in determining to engage acorporation's independent accountants to perform nonaudit services. Italso proposed during the year a rule requiring that managementstatements on internal accounting controls be included in corporations'annual reports on Form 10-K. Further, during the fiscal year, theCommission adopted amendments to certain forms and regulations toimprove disclosure requirements relating to oil and gas reserves andoperations, and proposed actions to encourage review by auditors ofinterim financia I information.

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• • •

This summary provides only a very brief synopsis of the significantactivities in which the Commission is engaged throughout ItS operations.Among the many others are: the important role we play in assistingFederal courts with regard to shareholder interests in reorganizations ofpublicly-held companies; the installation of micrographic and computersystems which have brought to the Commission's information-handlingprocedures the benefits of current technology, and unprecedentedefforts to employ effective evaluation, management and developmentcapabilities to further enhance the quality of our most valuableresource-our staff. All of these efforts, and others, are covered in thepages of this Annual Report-whose format, incidentally. has beenrevised durinq the past two years Into a slimmer, more readable andmore timely document.

I believe that this is one of the most Important periods in theCommission's nearly half-century of existence. The American corporatecommunity, the securities Industry, and the markets. themselves, arechanging rapidly to meet the challenges of the 1980s. The Commission,working closely with the Congress which oversees our operations, WIththose in the private sector whom we regulate, and in the interests ofInvestors, is also changing to meet these challenges. I have everyconfidence that the Commission will strive to perform ItS responsibilitieswith the professionalism and dedication which Congress and theInvesting public have come to expect.

Sincerely,

Harold M. WilliamsChairman

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

CommissionersHAROLD M. WILLIAMS of California, ChairmanPHILIP A. LOOMIS, JR., of California

JOHN R. EVANS of Utah

IRVING M. POLLACK of New York

ROBERTA S. KARMEL of New York

Secretary: George A. Fitzsimmons

Executive Assistant to the Chairman: Daniel L. Goelzer

Term expiresJune 5

19821984198319801981

Principal Staff OfficersBenjamin Milk, Executive DirectorEdward F. Greene, Director, Dtoision of Corporation Finance

Lee B. Spencer, Deputy DirectorWilliam C. Wood, Associate DirectorMary E. T. Beach, Associate DirectorMichael J. Connell, Associate Director

Stanley Sporkin, Director, Division of Enforcement(Vacant), Deputy Director]Irwin M. Borowski, Associate DirectorTheodore Sonde, Associate DirectorDavid P. Doherty, Associate DirectorTheodore A. Levine, Associate Director

Douglas S. Scarff, Director, Division of Market Requletiotv'Sheldon Rappaport, Deputy Director(Vacant), Associate Director(Vacant), Associate Director(Vacant), Associate Director

Sydney H. Mendelsohn, Director, Division of Investment ManagementMartin C. Lybecker, Associate DirectorJoel Goldberg, Associate Director

Aaron Levy, Director, Division of Corporate RegulationGrant Guthrie, Associate Director

Ralph C. Ferrara, General CounselJacob H. Stillman, Associate General CounselRobert C. Pozen, Associate General Counsel(Vacant), Associate General Counsel

Paul Gonson, Solicitor to the Commissions

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Andrew L. Rothman, Director, Office of Public Affalr$Chiles T. A. Larson, Deputy Director

A. Clarence Sampson, Chief AccountantSteven J. Golub, Deputy Chief Accountant

Steven E. Levy, Director of Economic and Policy ResearchWilliam Stern, Director, Office of Opinions and Review

Herbert V. Efron, Associate DirectorR. Moshe Simon, Associate Director

Warren E. Blair, Chief Administrative Law JudgeLawrence H. Haynes, ComptrollerRichard J. Kanyan, Director, Office of Admmistrative ServicesJames C. Foster, Director, Office of PersonnelJoseph F. Olivo, Jr., Director, Office of Reports and Information ServicesJohn D. Adkins, Director, Office of Data ProcessingJustin P. Klein, Director, Office of Consumer Affairs4

Matthew R. Schneider, Director of Legislative Affairs

1 Former Deputy Director, Wallace L Trrnrneny, left the Cornrmssion on December 7. 19792 Former Director. Andrew M Kletn.jeft the Commission on October 12, 19793 Former Solrcuor. Devrd Ferber. retired from the Commission on September 28. 19794 Mr Klem IS now parttcrpatmq In the President 5 Executive Exchange Program and Will return to the Commission In Oc

IObeT 1980

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Regional and Branch Offices

Regional Offices and AdministratorsRegion 1. New York, New Jersey.-Stephen L. Hammerman, 26 Federal Plaza,

New York, New York 10007.Region 2. Massachusetts, Connecticut, Rhode Island, Vermont, New Hampshire,

Maine.-Willis H. Riccio, 150 Causeway si., Boston, Massachusetts 02114.Region 3. Tennessee, Virgin Islands, Puerto Rico, North Carolina, South Carolina,

Georgia, Alabama, Mississippi, Florida, part of Louisiana.-Jule B. Greene,Suite 788, 1375 Peachtree St., N.E., Atlanta, Georgia 30309.

Region 4. Illinois, Indiana, Iowa, Kansas City (Kansas), Kentucky, Michigan, Min.nesota, Missol1ri, Ohio, Wisconsin.-William D. Goldsberry, Room 1204, Ever-ett McKinley Dirksen Bldg., 219 S. Dearborn St., Chicago, Illinois 60604.

Region 5. Oklahoma, Arkansas, Texas, part of Louisiana, Kansas (except KansasCity).-Michael J. Stewart, 8th Floor, 411 West Seventh St., Forth Worth,Texas 76102.

Region 6. North Dakota, South Dakota, Wyoming, Nebraska, Colorado, New Mex.ico, Utah.-Robert H. Davenport, Suite 700, 410 Seventeenth St., Denver, Col.orado 80202.

Region 7. California, Nevada, Arizona, Hawaii, Guam.-Leonard H. Rossen, Suite1710, 10960 Wilshire Boulevard, Los Angeles, California 90024.

Region 8. Washington, Oregon, Idaho, Montana, Alaska.-Jack H. Bookey, 3040Federal Building, 915 Second Ave., Seattle, Washington 98174.

Region 9. Pennsylvania, Maryland, Virginia, West Virginia, Delaware, District ofColumbia.-Paul F. Leonard, Room 300, Ballston Center Tower No.3, 4015Wilson Boulevard, Arlington, Virginia 22203.

Branch OfficesDetroit, Michigan 48226.-231 Lafayette St., 1044 Federal Bldg.Houston, Texas 77002.-Room 5615, Federal Office & Courts Bldg., 515 Rusk

Ave.Miami, Florida 33131.-Suite 1114, DuPont Plaza Center, 300 Biscayne Boule.

vardWay.Philadelphia, Pennsylvania 19106.-Federal Bldg., Room 2204, 600 Arch St.Salt Lake City, Utah 84111.-Suite 810, Boston Bldg., One Exchange Place.San Francisco, California 94102.-450 Golden Gate Ave., Box 36042.

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Biographies of Commissioners

Harold M. Williams, ChairmanChairman Williams was born on January 5, 1928, in Philadelphia, Pennsylvania.

He received his B.A. from UCLA in 1946, graduating Phi Beta Kappa at the age of18. Three years later he was awarded his J.D. degree from Harvard University LawSchool. He joined a Los Angeles law firm in 1949 where he specialized in tax andcorporation law and remained until 1955 except for an interruption to serve as aU.S. Army legal officer during the Korean emergency. He joined Hunt Foods andIndustries, lnc., in 1955 as Associate Tax Counsel. He subsequently became TaxCounsel, Vice President-Finance and Executive Vice President. In 1964, he be-came President of Hunt-Wesson Foods, Inc. In 1968, he was elected President ofHunt Foods and Industries, Inc., and with the formation of Norton Simon, Inc.,later that year-resulting from consolidation of Canada Dry Corporation, HuntFoods and Industries, Inc., and McCall Corporation-he was named Chairman ofthe new company's Finance Committee. In 1969, he assumed the additional postof Chairman of the Board of Norton Simon, Inc. In July of 1970, Mr. Williamsbecame Dean and Professor of Management of the UCLA Graduate School of Man-agement. During his administration, the School achieved national ranking, includ-ing recognition as the leading graduate business school in a public university. Dur-ing the 1973 energy crisis, Mr. Williams took leave to serve as full-time EnergyCoordinator for the City of Los Angeles. While at UCLA, Mr. Williams also servedas Director of Norton Simon, lnc., Phillips Petroleum Company, ARA Services,lnc., CNA Financial Corporation, Signal Companies, Inc., and Montgomery StreetIncome Securities, and as a Trustee of the Aerospace Corporation. In his service tothe community, Mr. Williams acted as Co-Chairman for the Public Commission onLos Angeles County Government, a subcommittee chairman of the Mayor's ad hocCommittee on Los Angeles City Revenues, a member of the State of CaliforniaCommission for Economic Development and of the California Citizens Commis-sion on Tort Reform, and a member of the SEC Advisory Committee on CorporateDisclosure.

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Philip A. Loomis, Jr.Commissioner Loomis was born in Colorado Springs Colorado, on June 11,

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

John R. EvansCommissioner Evans was born in Bisbee, Arizona, on June I, 1932. He received

his B.S. degree in Economics in 1957, and his M.S. degree in Economics in 1959from the University of Utah. He was a Research Assistant and later a Research Ana-lyst at the Bureau of Economics and Business Research at the University of Utah,where he was also an instructor of Economics during 1962 and 1963. He came toWashington in February 1963, as Economics Assistant to Senator Wallace F. Ben-nett of Utah. From July 1964 through June 1971 Commissioner Evans was minor-ity staff director of the U.S. Senate Committee on Banking, Housing and Urban Af-fairs and served as a member of the professional staff from June 1971 to March1973. He took office as a member of the Securities and Exchange Commission onMarch 3, 1973, and is now serving for the term expiring June 5, 1983.

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Irving M. PollackCommissioner Pollack was born in Brooklyn, New York, on April 8, 1918. He

received a B.A. degree, cum laude, from Brooklyn College in 1938 and an LL.B.degree, magna cum laude, from Brooklyn Law School in 1942. Prior to joiningthe Commission's staff he engaged in the practice of law in New York City afterserving nearly four years in the United States Army, where he gained the rank ofCaptain. Mr. Pollack joined the staff of the Commission's General Counsel in Oc-tober 1946. He was promoted from time to time to progressively more responsiblepositions in that office and in 1956 became an Assistant General Counsel. A careeremployee, Mr. Pollack became Director of the Division of Enforcement in August1972 when the SEC's divisions were reorganized. He had been Director of theDivision of Trading and Markets since August 1965, and previously served as As-sociate Director since October 1961. In 1967 Mr. Pollack was awarded the SECDistinguished Service Award for Outstanding Career Service, and in 1968 he wasa co-recipient of the Rockefeller Public Service Award in the field of law, legisla-tion and regulation. Mr. Pollack took the oath of office on February 13,1974 as amember of the Securities and Exchange Commission, and is now serving for theterm expiring .June 5, 1980.

Roberta S. KarmelCommissioner Karmel was born May 4,1937, in Chicago, Illinois. She received

a B.A. from Radcliffe College in 1959 and an LL.B. from New York UniversitySchool of Law in 1962. From 1962 to 1969, Mrs. Karmel worked in the New YorkRegional Office of the Securities and Exchange Commission as an attorney, thenattorney branch chief, then assistant regional administrator. From 1969 to 1972she was an associate with Willkie, Farr & Gallagher in New York. Mrs Karmel wasa partner in Rogers & Wells from 1972 through September 1977, and an adjunctprofessor at Brooklyn Law School from 1973 through 1977. She has been a memober of the American Bar Association Federal Regulation of Securities Committeesince 1973. She has also served on the Association of the Bar of the City of NewYork Committee on Securities Regulation, Committee on Administrative Law, andCommittee on Professional Responsibility. She is the author of numerous articlesin legal journals. Mrs. Karmel took the oath of office as a member of the Securitiesand Exchange Commission on September 30, 1977, for a term expiring on June5, 1981.

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Table of Contents

Chairman's Transmittal Letter viiiCommission and Principal Staff Officers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . ixRegional and Branch Offices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xiBiographies of Commissioners. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xiii

Regulation of the Securities Markets .Securities Markets, Facilities and Trading .

National Market System .National System for Clearance and Settlement of Securities Trans-

actions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4Options Trading. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5Market Inventory Funds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6Trading by Exchange Members. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6Effects of the Absence of Fixed Commission Rates. . . . . . . . . . . . . 7Regulation of Tender and Exchange Offers by Issuers. . . . . . . . . . . 8Resale of Restricted Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Regulation of Brokers, Dealers and Municipal Securities Dealers . . . . . 9Regulatory Burdens on Small Brokers and Dealers. . . . . . . . . . . . . 9Lost and Stolen Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9Securities Confirmations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9Uniform Dispute Resolution Procedures for Investors. . . . . . . . . . . 10Arbitration Clauses in Broker-Dealer Customer Agreements. . . . . 10Municipal Securities Dealers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11Broker-Dealer Financial Responsibility Requirements . . . . . . . . . . 11Securities Investor Protection Corporation ..... . . . . . . . . . . . . . . 11

Oversight of Self-Regulatory Organizations. . . . . . . . . . . . . . . . . . . . . . . 12Securities Exchanges. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12National Association of Securities Dealers. . . . . . . . . . . . . . . . . . . . 13Municipal Securities Rulemaking Board. . . . . . . . . . . . . . . . . . . . . . 14Clearing Agencies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14Arbitration Facilities of Self-Regulatory Organizations. . . . . . . . . . 15Procedures for Filing Proposed Rule Changes. . . . . . . . . . . . . . . . . 15Inspections of Self-Regulatory Organizations. . . . . . . . . . . . . . . . . . 15Revenues and Expenses of Self-Regulatory Organizations . . . . . . . 17

The Disclosure System. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19New Developments in Disclosure Policy. . . . . . . . . . . . . . . . . . . . . . . . . . 19

Projections of Future Economic Performance. . . . . . . . . . . . . . . . . 19Disclosure Revisions 19

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Corporate Accountability; Management Background and Re-muneration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Monitoring of Existing Guidelines. . . . . . . . . . . . . . . . . . . . . . . . . . . 21Small Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Long Range Studies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23Tender Offer Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23Going Private and Sale of Asset Transactions. . . . . . . . . . . . . . . . . . . . . 25Oversight of the Accounting Profession. . . . . . . . . . . . . . . . . . . . . . . . . . 25

Report on the Accounting Profession and the Commission's Over-sight Role. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

Management Advisory Services 26Accounting Standards for Oil and Gas Producers 28FASB Conceptual Framework Project .... . . . . . . . . . . . . . . . . . . . 28Accounting for the Effects of Changing Prices. . . . . . . . . . . . . . . . . 29Reporting on Internal Accounting Control . . . . . . . . . . . . . . . . . . . . 30Unaudited Interim Financial Information . . . . . . . . . . . . . . . . . . . . . 31

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

Enforcement Program 37Sanctions and Remedies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37Energy Related Cases. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38Questionable Payments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39Government and Municipal Securities 41

Industrial Development Revenue Bonds. . . . . . . . . . . . . . . . . . . . . . 43Options, Corporate Takeovers and Tender Offers. . . . . . . . . . . . . . . . . . 43

Options. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44Tender Offers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44Insider Trading. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

Other Significant Enforcement Matters. . . . . . . . . . . . . . . . . . . . . . . . . . 46

Programmatic Litigation and Legal Work. . . . . . . . . . . . . . . . . . . . . . . . 51Significant Court Actions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51Other Significant Projects. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

Implied Rights of Action. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55ALI Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

Public Utility Holding Companies. . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . 57Composition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57Fuel Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57Service Company Operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58

xviii

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Corporate Reorganizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

Administration and Management 61General Management and Program Developments. . . . . . . . . . . . . . . . . 61Information Systems Management. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62

Facilities Improvement 62Major System Enhancements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62Systems Administration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

Market Oversight Surveillance System. . . . . . . . . . . . . . . . . . . . . . . . . . . 64Financial Management 64Personnel Management. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65

Senior Executive Service. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65Performance Appraisal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66Other Accomplishments under the CSRA. . . . . . . . . . . . . . . . . . . . . 66On-qoinq Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66Equal Employment Opportunity. . . . . . . . . . . . . . . . . . . . . . . . . . . . 67

Activity Under The Freedom of Information Act . . . . . . . . . . . . . . . . . . . 68Space Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68

Footnotes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71

Appendix 71The Securities Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79

Income, Expenses and Selected Balance Sheet Items. . . . . . . . . . . 79Table I-Financial Information For Broker-Dealers 1975-1978. . . 80Historical Financial Information of Broker-Dealers with Securities

Related Revenue of $500,000 or More. . . . . . . . . . . . .. 80Table 2-Historical Consolidated Revenue and Expenses of

Broker-Dealers with Securities Related Revenue of $500,000 orMore :. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81

Table 3-Historical Balance Sheet for Broker-Dealers with Securi-ties Related Revenue of $500,000 or More. . . . . . . . . . . . . . . . . . 82

Securities Industry Dollar: 1978 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82Chart-Securities Industry Dollar: 1978. . . . . . . . . . . . . .. 83Broker-Dealers, Branch Offices, Employees. . . . . . . . . . . . . . . . . . . 84Chart-Broker-Dealers and Branch Offices. . . . . . . . . . . . . . . . . . . 85Table 4-Brokers and Dealers Registered Under the Securities Act

of 1934. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86Table 5-Principal Business of SECO Broker-Dealers. . . . . . . . . . . 87Table 6-Applications and Registrations of Brokers and Dealers-

Fiscal Year 1979 , 88Table 7-Applications and Registrations of Municipal Securities

Dealers and Transfer Agents-Fiscal Year 1979 ... . . . . . . . . . . 89Self-Regulatory Organizations-Revenues and Expenses. . . . . . . . 90Table 8-Revenues and Expenses of Self-Regulatory Organiza-

tions: 1973-1979. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. 93Table 9-Detailed Revenues and Expenses for each Self-Regula-

tory Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94

xix

xx

Table 10-Sources of Self-Regulatory Organization Revenue:1973-1978. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96

Table II-Self-Regulatory Organizations-Clearing AgenciesRevenues and Expenses-Fiscal Year 1978 98

Table 12-Revenue and Expenses of Municipal Securities Rule-making Board. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99

Exemptions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99Section 12(h) Exemptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99Exemptions for Foreign Private Issuers 99Other Exemptions 100

Financial Institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100Stock Transactions of Selected Financial Institutions . . . . . . . . . . . 100Table 13-Common Stock Transactions and Activity Rates of Se-

lected Financial Institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101Stockholdings of Institutional Investors and Others . . . . . . . . . . . . . . . . 102

Table 14-Market Value of Stockholdings of Institutional Inves-tors and Others. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102

Table IS-Companies Registered Under the Investment CompanyAct of 1940 as of September 30, 1979. . . . . . . . . . . . . . . . . . . . . . 103

Table 16-Companies Registered Under the Investment CompanyAct of 1940 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103

Table 17-New Investment Company Registrations.. 104Table 18-lnvestment Company Registrations Terminated. . . . . . 104Private Noninsured Pension Funds: Assets. . . . . . . . . . . . . . . . . . . . 104Table 19A-Assets of Private Noninsured Pension Funds-Book

Value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105Table 19B-Assets of Private Noninsured Pension Funds-Market

Value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105Securities on Exchanges. . . . . . . . . . . . .. 105

Exchange Volume. .. . . . . . . . . . . . .. 105Table 20-Market Value and Volume of Sales on Registered and

Exempted Securities Exchanges. . . . . . . . . . . . . . . . . . . . . . . . . . 106Chart-Market Value of Securities Traded On All U.S. Stock Ex-

changes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107NASDAQ Volume. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106Share and Dollar Volume by Exchange. 106Table 21A-Share Volume by Exchanges 108Table 21B-Dollar Volume by Exchanges , . . . . . . . . 108Special Block Distributions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109Table 22-Special Block Distributions Reported by Exchanges. . . 109Value and Number of Securities Listed on Exchanges. . . . . . . . . . . 110Table 23-Securities Listed on Exchanges-December 31, 1978. 110Table 24-Value of Stocks Listed on Exchanges. . . . . . . . . . . ... 111Securities on Exchanges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111Table 25-Securities Traded on Exchanges. . . . . . . . . . . . . . . . . . . 112Table 26-Unduplicated Count of Securities on Exchanges (Sep-

tember 30, 1979). . . . . . . . . . . . . .. 1121933 Act Registrations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112

Effective Registration Statements Filed. . . . . . . . . . . . . . . . . . . . . . 112

Table 27-Effective Registrations. 113Chart-Securities Effectively Registered With S.E.C. 1935-1979. . 114Purpose of Registration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115Table 28-Effective Registration by Purpose and Type of Security:

Fiscal Year 1979 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115Chart-Effective Registrations Cash Sale For Account of Issuers

1935-1979 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116Regulation A Offerings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117Table 29-0fferingsUnder Regulation A 117

Enforcement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117Types of Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117Table 30- Types of Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . 118Table 31-lnvestigations Of Possible Violations of the Acts Ad-

ministered by the Commission 121Table 32-Administrative Proceedings Instituted During Fiscal

Year Ending September 30, 1979 . . . . . . . . . . . . . . . . . . . . . . . . . 121Injunctive Actions 1978-1979 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122Table 33-lnjunctiveActions. 122Criminal Proceedings. . . .. . .. . . . . . . . . .. . . . . . . . . . . . . . . . . . . . 122Table 34-Criminal Cases. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122Trading Suspensions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123Foreign Restricted List. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123

Public Utility Holding Companies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125System Companies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125Table 35-Public Utility Holding Company Systems. . . . . . . . . . . . 125Table 36-Key Financial Statistics of Registered Public Utility

Holding Company Systems. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126Table 37-Public Financing of Holding Company Systems (Fiscal

1979) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127Fuel Programs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127Table 38-Regulated Fuel Expenditures of Holding Company Sys-

tems (Fiscal 1979). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128Corporate Reorganizations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128

Table 39-Reorganization Proceedings Under Chapter X of theBankruptcy Act in Which the Commission Participated (FiscalYear 1979). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129

SEC Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131Chart-Appropriated Funds vs Fees Collected 132Table 40-Budget Estimates and Appropriation. . . . . . . . . . . . . . . 133

xxi

Regulation of the Securities Markets

Securities Markets, Facilitiesand Trading

National Market System-The pastfiscal year saw marked acceleration inprogress toward the development of anational market system.

On October 20, 1978, the Commis-sion published for comment two pro-posalsdesigned to refine the operationof the consolidated transaction report-Ing and quotation systems. The first ofthese proposals, Rule 11Acl-2 underthe Securities Exchange Act of 1934(Exchange Act), would, if adopted, im-pose comprehensive mirurnurn reoquirements regulating the manner inwhich securities information vendorsdisplay transaction and quotation in-formation.' The second proposal, theamendment of existing Rule 17a.15,would, if adopted, (a) redesignate Rule17a-15as Rule 11Aa3-1 under the Act;(b) eliminate, subject to certain condi-tions, the existing prohibition on re-transmission of last sale data for pur-poses of creating a moving tickerdisplay; and (c) set forth procedures foramending transactions reporting plansfiled pursuant to the rules? TheCommission received many valuablecomments from self-regulatory orga-nizations and vendors of market infor-mation and at year end both proposalswere awaiting further action.

On March 22, 1979, the Commissionissued a Status Report which, amongother things, set forth the Commis-sion's views as to the next steps to betaken toward development of a na-tional market system.! These steps in-cluded: achievement of nationwide

price protection for all public limit or.ders; refinement of pilot market link-age facilities: improvement of thetimeliness and reliability of quotationinformation; development of broker tomarket center order-routing facilities;consideration of a rulemaking pro-ceeding to preclude the application ofremaining off-board trading restric-tions to securities not previously sub-ject to those restrictions; and initiationof a rulemaking proceeding to con.sider procedures by which securitieswould be designated as qualified fortrading in a national market system.

In the Status Report, the Commis-sion indicated that its first prioritywould be the achievement of nation.wide protection for public limit ordersagainst executions at inferior prices.The Commission expressed its beliefthat nationwide price protection,whereby any appropriately displayedpublic limit order for a qualified secu-rity would be assured of receiving anexecution prior to any execution by abroker or dealer at an inferior price,should be a basic characteristic of anational market system. Furthermore,the Commission stated that, in addi-tion to price protection for public limitorders, it may ultimately be desirableto afford price protection to all dis-played orders at the market, whetherpublic or professional, so that any dis.played quotation would be entitled toprice protection up to the quotationsize indicated. As an initial step in thisdirection, the Commission indicatedthat the proponents of the IntermarketTrading System (ITS) should be af-

forded the opportunity to experimentwith and further enhance that systemas a means of providing intermarketprice protection for public limit orders.

The Commission indicated that twotypes of initiatives would be necessaryto achieve nationwide price protectionfor displayed public limit orders bymeans of the ITS. The first would re-quire the self-regulatory organizationsand the securities industry to resolvecollectively the various practical andtechnical problems associated with (a)disseminating and displaying publiclimit order information from each mar-ket center and (b) promptly enhancingthe ITS so that it may serve as a meansby which price protection for publiclimit orders can be afforded on an in-termarket basis. To this end, the Com-mission requested that the affectedself-regulatory organizations committhemselves to develop in concert andto submit to the Commission a plan bywhich the mechanisms to provide priceprotection for all public limit orderswould be developed and implemented,at least on a pilot basis, not later thanthe end of calendar year 1980. The sec-ond initiative would involve the pro-posal by the Commission of a rule re-quiring price protection for displayedpublic limit orders.

On April 26, 1979, the Commissionproposed for comment Rule lIAc1-3under the Exchange Act which, ifadopted, would prohibit any broker ordealer from executing any order to buyor sell a qualified security at a price in-ferior to the price of any public limitorder displayed at the time of execu-tion unless the broker or dealer assuresthat those limit orders are satisfled.sThe following month, the Commissionreceived a commitment from each re-porting self-regulatory organization todevelop a joint plan for protection ofpublic limit orders. In September1979, the ITS participants submitted apreliminary plan for the protection of

2

public limit orders and a commitmentto submit a definitive plan before theend of calendar year 1979. At the endof the fiscal year, the Commission wasanalyzing the preliminary plan andcomments received in response to pro-posed Rule lIAc1-3.

In furtherance of development ofcomprehensive market linkage sys-tems, the Commission, on September21, 1979, issued an order extendingapproval for operation of the ITS untilJanuary 31, 1983.\ At the end of thefiscal year, all reporting self-regulatoryorganizations other than the CincinnatiStock Exchange (CSE) and the Na-tional Association of Securities Deal-ers (NASD) were participating in theITS. The Commission expects the CSEand NASD will commence participa-tion in the ITS in the near future.

During the fiscal year, the number ofsecurities traded in the ITS increasedfrom approximately 100 to 600. Thatnumber is expected to continue to ex-pand at the rate of approximately 40securities per month. With expansionin the number of securities traded inthe system, there has been a substan-tial increase in ITS volume. Further-more, average response times with re-spect to ITS commitments to tradereceived by participating market cen-ters have been reduced, and as a resultof continuing technical enhancementsto the system, the Commission expectsthat response times will be further re-duced during fiscal year 1980.

On December 15, 1978, the Com-mission approved a rule change of theCSE extending the operation of theCincinnati multiple-dealer trading fa-cility (CSE System) for one year, andon September 21, 1979, the Commis-sion further extended its approval untilJanuary 31, 1983.6 While CSE Systemvolume has thus far been limited, sev-eral additional broker-dealers com-menced participation in the CSE Sys-tem during the past fiscal year. The

three-year extension and increasedbroker-dealer participation should fa-cilitate the Commission's ability toevaluate the effects of trading in thistype of system.

In the Status Report, the Commis-sion indicated its belief that, both forpurposes of enhancing brokers' abilityto seek out the best execution of theircustomers' orders and for purposes ofassuring fair competition among mar-kets, some type of neutral order-rout-ing system is a necessary element of anational market system. To assureprogress toward this objective, theCommission requested the New YorkStock Exchange (NYSE) and the Amer-ican Stock Exchange (Amex) to makeavailable their jointly-owned commonmessage switch to other market cen-ters; other self-regulatory organiza-tions were asked to inform the Com-mission of their interest in obtainingsuch a linkage.

Since the Status Report, the NYSEhasengaged in continuing discussionswith several self-regulatory organiza-tions with respect to use of the NYSE-Amex message switch. In addition, theNASD has proposed enhancements toits NASDAQ inter-dealer quotationsystem which would, among otherthings, create an order-routing switchin NASDAQ that could be linked to theNYSE-Amex message switch and tothe ITS. The Commission will continueto monitor and to encourage progressin these areas.

On April 26, 1979, the Commissionannounced commencement of a pro-ceeding to consider proposed Rule19c-3 under the Exchange Act, which,if adopted, would limit extension of off-board trading restrictions to additionalsecurities. The rule would preclude ap-plication of such restrictions to certainsecurities that were not traded on anexchange on April 26, 1979, or thatwere traded on an exchange on April26, 1979, but failed to remain so there-

after." In its release proposing Rule19c-3, the Commission mdicated itsconcern that, as companies continueto list their securities on exchangesthat have rules precluding their mem-bers from making over-the-countermarkets in securities listed on thoseexchanges, competition between theover-the-counter market and the ex-changes will be effectively foreclosedin an increasing number of securities.In addition, the Commission indicatedthat the rule could provide it and thesecurities industry with an opportunityto gain valuable experience as to thedynamics of competition between ex-change-oriented trading and dealer-oriented trading. The Commissionstated that the rule would also allowevaluation of whether existing anddeveloping national market system fa-cilities are sufficient to ensure an ap-propriate integration of trading in dis-parate locations.

During June and July 1979, theCommission held hearings with re-spect to proposed Rule 19c-3 and re-ceived extensive comments and testi-mony both supporting and opposingadoption of the rule. At the end of thefiscal year, the Commission was con-sidering further regulatory action withrespect to the rule.

Finally, on June 15,1979, the Com-mission proposed for comment Rulel1Aa2-1 under the Exchange Actwhich, if adopted, would provide pro.cedures whereby securities would bedesignated for trading in a nationalmarket system." The proposed rulesets forth two quantitatively differentsets of standards to be employed indetermining whether any equity secu-rity should be designated a nationalmarket system security. The proposedrule would require that any equity se-curity meeting certain minimum stan-dards contained in the rule (tier 1securities) be automatically designateda national market system security. If an

3

equity security did not meet the stan-dards applicable to tier 1 securities,but substantially met certain broaderstandards (tier 2 securities), it wouldremain eligible for designation as a na-tional market security pursuant to theprocedures set forth in a designationplan required to be filed with the Com-mission by the various self-regulatoryorganizations.

The standards applicable to tier 1and tier 2 securities would cover bothsecurities traded on an exchange andsecurities traded exclusively in theover-the-counter market. However,while the proposal provides that therule will become operational uponadoption with respect to all tier 1 se-curities and those tier 2 securitieswhich are traded on an exchange, therule will not become applicable to tier2 over-the-counter securities until theCommission engages in further rule-making.

National System for Clearance andSettlement of Securities Transactions-During the fiscal year, substantialprogress was made in the Commis-sion's effort to foster development ofa national system for clearance andsettlement of securities transactions.

On September 19, 1978, the UnitedStates Court of Appeals for the Districtof Columbia Circuit affirmed theCommission's January 13, 1977 ordergranting the appllcatron of NationalSecurities Clearing Corporation(NSCC) for registration as a clearingagency.? The Commission views theregistration of NSCC as a key step inachieving the national clearance andsettlement system envisioned by theCongress in Section 17A of the Ex-change Act. Although the court did notdisturb NSCC's registration, it did re-mand two issues to the Commissionfor further consideration: (a) NSCC'sselection of Securities Industry Auto-mation Corporation as the facilitiesmanager of its consolidated system

4

without competitive bidding; and (b)NSCC's use of geographic price mu-tualization (GPM). GPM is the practiceof charging all participants the samefees regardless of whether the partici-pants deal with the clearing agency atits main facility or through a branchoffice.

The Commission subsequently re-quested that NSCC submit reports onthe two issues remanded by the courtand that interested persons commenton NSCC's reports and on the GPMand competitive bidding issues gener-ally. 10 By the end of the fiscal year, theCommission to date had received 11letters in response to its request forcomments, including letters from allbut three of the registered clearingagencies. In preparation for respond-ing to the court's remand, the Com-mission was reviewing those commentletters and the testimony and state-ments given at the Commission'sMarch and April 1979 hearings into thedevelopment of a national clearanceand settlement system.

On March 14, 1979, the Commissionremoved its restriction on NSCC'sprocessing of transactions in securitieslisted on exchanges through its branchofflces.» The removal of that restric-tion permitted NSCC's participants toprocess through NSCC'sbranch officesfor the first time both transactions insecurities listed on exchanges andtransactions in securities traded in theover-the-counter market. The Cornmis-sion indicated, however, that until ithad responded to the remand of theGPM issue, NSCC could not use GPMfor services relating to the processingof transactions in securities listed onexchanges.

The Commission continued its re-view of the transaction completionrules of the securities exchanges andof the NASD pursuant to Section 31(b)of the Securities Acts Amendments of1975 (the 1975 Amendments). Some

of those rules unnecessarily restrictedcompetition among clearing agencies.Others failed to comply with the Ex-change Act for other reasons. As a re-sult of this review, over 120 exchangeand NASD rules now have beenamended or deleted. This step re-moved many impediments to the de-velopment of a national clearance andsettlement system. The Commission iscontinuing to discuss the amendmentor deletion of other transaction com-pletion rules with the exchanges andthe NASD.

Progress toward a national systemalso was evident in other areas.The continued expansion of interfacesamong depositories has further im-mobilized securities certificates andallowed depository participants to usebook entry transfers to make deliveriesthroughout the country. This reducesthe need to physically move stock cer-tificates to settle securities trensac-trons among depository participants.In addition, The Depository Trust Com.pany included certain types of rnunic-rpal securities in its book entry system,thus bringing municipal securities intoa book entry environment for the firsttime. These developments have reoduced costs and accelerated the settle-ment process.

Options Trading-As previously re-ported,» since July 1977, there has ex-isted, at the Commission's request, avoluntary moratorium on expansion ofthe standardized options markets,pending (a) the completion of the Com.mission's Special Study of the OptionsMarket (Options Study); (b) the evalu-ation of its findings; and (c) the reso-lution of the Commission's concernsregarding the adequacy of the regula-tory framework within which standard-ized options trading occurs.n

The Report of the Options Study wasreleased by the Commission in Febru-ary 1979.'4 In general, the Study foundthat, to those who understand them,

options may offer an alternative toshort-term stock trading having lowercommission costs and a smaller com-mitment of capital. They also may pro-vide a means of shifting the risks ofunfavorable short-term stock pricemovements from owners of stock whodo not wish to bear those risks to thosewho are willing to assume such risks inanticipation of possible rewards fromfavorable price movements. IS The Op-tions Study stated, however, that thepurchase and sale of standardized op-tions involves a high degree of finan-cial risk and that only investors whounderstand those risks and who areable to sustain the costs and financiallosses associated with options tradingshould participate in the standardizedoptions markets.

The Study found that, too often,public investors have been encouragedto use standardized options Without re-gard to the suitability of options fortheir investment needs.» It also foundregulatory inadequacies in the optionsmarkets and, accordingly, recom-mended certam steps that the broker.age community, the self-regulatory or.ganizations and the Commissionshould take to Improve the self-regu-latory framework within which listedoptions trading occurs and to increaseprotection of investors.

On February 22, 1979, the Commis-sion issued a release that set forth Itsplan for implementing the OptionsStudy recommendations and for ter-minating the options rnoratorturn.»The Commission stated that, before itwould permit any further expansion ofthe options markets, certain recom-mendations of the Study must be im-plemented by the self-r equlatoryorganizations and the brokerage com-munity. Implementation of these rec-ommendations generally would re-quire the adoption of self-regulatoryorganization rules, and modificationsand improvements in the self-regula.

5

tory organizations' surveillance andcompliance systems and procedures,as well as improved regulatory con-trols by brokerage firms. At the end ofthe fiscal year, the Commission had re-ceived rule proposals from the five ex-changes trading options to implementsome of the Options Study recommen-datlons.«

On April 24, 1979, the Commissionapproved the combination of the Mid-west Stock Exchange (MSE) optionsmarket with that of the Chicago BoardOptions Exchange (CBOE), to be effec-tive upon termination of the optionsmoratorium. Upon consummation ofthe combination, the MSE will nolonger provide a market for listed op-tions, and the CBOE will provide amarket for those options then listed onthe MSE. Upon listing the MSE optionsclasses, the CBOE will assume full re-sponsibility for floor operations, sur-veillance and enforcement regardingtrading in those options classes.»

As reported previously.w on October18, 1978, the Commission approved afour-month experiment by the optionsexchanges to extend trading hours un-til 4:10 p.m. New York time and to sus-pend dally closing rotations." On April27, 1979, the Commission approveduniform rule proposals by the optionsexchanges to permit, on a permanentbasis, options transactions to be ef-fected on the exchanges until 4: 10p.m. New York time and to providethat one trading rotation in any classof options may be completed wheretrading in the underlying securityopens or reopens after 3:45 p.m. NewYork time, even though completion ofthe rotation may occur after 4:10 p.m.New York tlrne.s On July II, 1979, theCommission approved a second excep-tion to the 4: 10 p.m. closing timewhich provides that, if a trading rota-tion is commenced near the close oftrading because of unusual marketconditions, such as a heavy influx of

6

orders, an options exchange can per-mit the rotation to be completed after4:10 p.m. New York time if notice ofthe rotation is publicly disseminatedno later than the commencement ofthe rotation or 4:00 p.m. New Yorktime, whichever is earlier.» The Com.mission has deferred further consider-ation of certain related rule proposalsuntil additional experience is gainedrespecting the 4:10 p.m. closing hourand the exceptions described above.

Market Inventory Funds-In October1978, the Chairman submitted to Sen-ator Harrison A. Williams, Jr. a staffreport on market inventory funds,which are part of master trusts estab-lished by companies to fund and ad-minister employee benefit plans. Mar-ket inventory funds have been usedsolely in connection with plans of in-dividual companies rather than in con-nection with pooled benefit plans ofseparate companies. The staff foundno clear indication that these funds, asthey had been operated up to thattime, had had an adverse impact uponthe securities markets. The report con-cluded, however, that such funds coulddevelop a broad appeal in the futureand that it would be appropriate for theCommission and its staff to continueto evaluate the operation of market in-ventory funds and their impact on thesecurities markets.

Tradingby ExchangeMembers-Sec-tion 11(a)(1) of the Exchange Act, asamended in 1975, prohibits, with spec-ified exceptions, any member of ana.tional securities exchange from effect-ing any transaction on that exchangefor its own account, the account of anassociated person, or an account withrespect to which it or any of its asso-ciated persons exercises investmentdiscretion. Under this section, theCommission has authority to fashioneither more flexible or more restrictivestandards in light of changing circum-stances. Section II(a) became effec-

tive as to all exchange members onFebruary 1, 1979.

In January 1979, the Commissionannounced the adoption of (a) a tem-porary rule permitting exchange mem-bers to effect certain bona fide hedgetransactions for their own accounts orthe accounts of their associated per-sons; (b) interpretations concerningthe application of the section to trans-actions effected through the use of sev-eral automated tacilities operated bynational securities exchanges; and (c)interpretations concerning certain ex-emptions for specified types of pro-prietary transactions effected by ex-change rnernbers.» Also in January1979, in connection with its continuingreview of its regulatory program underSection 11(a), the Commission com-menced two surveys designed to elicitdata concerning (a) the effect of thesection on exchange members thatprovide money management and bro-kerage services to discretionary insti-tutional accounts, and (b) market mak-ing activities by certain exchangemembers.

In July 1979, the Commission alsoapproved a nine-month extension, un-til April 30, 1980, of programs de-signed by the NYSE and the Amex tosupplement the market making ca-pacity of specialists by establishingclasses of registered market makerswhose transactions are exempted fromthe prohibitions of the section.» Dur-109 the nine-month period, the Com-rrussion will continue its review of theactivities of those registered marketmakers to determine whether theirtransactions should continue to qualifyfor an exemption.

Effects of the Absence of Fixed Com-mission Rates-In May 1975, the Com-mission prohibited the national secu-rities exchanges from prescribing fixedminimum commission rates to becharged by their members. Later thatyear, the Congress enacted a similar

prohibition as part of the 1975 Amend-ments. Pursuant to that legislation, theCommission submitted to the Con-gress five reports covering the first 20months of commission price competi-tion (through December 31, 1976), de-scribing the effects of the unfixing ofcommission rates on the maintenanceof fair and orderly markets and on thedevelopment of a national market sys-tem for securities.

Analysis of commission rates is nowintegrated into the Commission's on-going monitoring of the financial con-dition of the industry. In that connec-tion, the Commission's Directorate ofEconomic and Policy Research re-leased to the public on July 26, 1979,a "Staff Report on the Securities Indus-try in 1978" (Staff Report), which de-tailed the results of its commissionrate survey in the context of a wide-ranging analysis of the basic economicdynamics of the securities industry.This Staff Report is the second in acontinuing series of annual reports de-signed to provide the Commission withan economic basis for anticipating theimpact of regulatory changes upon thesecurities industry, investors and thebroader economy. Beginning with the1978 Staff Report, the Directorategreatly expanded the scope of its studyof the securities industry to examinefundamental industry trends and rela-tionships in addition to the impact ofnegotiable commission rates. The1978 Staff Report analyzed, for exam-ple, the profitability of New York StockExchange member firms, the sourcesof and trends in revenues of thesefirms, firm expensesand balance sheetdata, the trend toward and causes ofincreased concentration in the securi-ties industry, the increasing diversifi-cation among the larger broker-deal-ers, the notable growth of discountbroker-dealers, the financial experi-ence of exchange specialists, the eco-nomic performance of self-regulatory

7

organizations, and, of course, the eco-nomic effects of unfixed brokeragecommission rates.

In general, the reports to the Con-gress and the two Staff Reports con-cluded that competitively determinedcommission rates do not appear tohave adversely affected the mainte-nance of fair and orderly markets.Some of the more specific findings inregard to commission rates are as fol-lows.

From May 1, 1975 to the end of June1979, individual investors' effectivecommission rates, when measured asa percent of principal value, declined19.7 percent. Institutional customers,because of their larger average ordersize and greater bargaining power,have negotiated discounts averaging53.6 percent from the pre-May 1975exchange-prescribed minimum rates.When commission rates are measuredin cents per share, the declines wereeight percent for individuals and 53.8percent for institutions. Individualspaid an average of 27.6 cents per shareon their June 1979 orders, which av-eraged 400 shares in size. Institutionalorders averaged 2,034 shares in sizeand commissions on these orders av-eraged 12.0 cents per share. Individualorders of 1,000 shares or more showedcommission rate discounts compara-ble to similarly sized institutional or-ders

Broker-dealers were affected by theelimination of fixed minimum com-mission rates largely depending uponthe extent to which they served insti-tutional investors. Some firms whichdid a large portion of their total busi-ness with Institutions have mergedwith more diversified firms or havegone out of business, and a new groupof discount broker-dealers have en.tered the industry. On the whole, thesechanges now offer investors a broaderspectrum of services with a corre-spondingly broader range of cornrnls-sion rates.

8

Regulation of Tender and ExchangeOffers by Issuers-On August 16,1979, the Commission announced theadoption of a new Rule 13e-4 and re-lated Schedule 13E-4 under the Ex-change Act, effective September 21,1979, to regulate the increasing num-ber of cash tender and exchange offersby certain issuers for their own secu-rities.26Rule 13e-4 and Schedule 13E-4 had been proposed for public com-ment on December 4, 1977.27

Rule 13e-4 requires that (a) issuerswith a class of equity securities regis-tered under Section 12 of the Ex-change Act; (b) issuers required to fileperiodic reports pursuant to Section15(d) of the Exchange Act; and (c)closed-end investment companies reg-istered under the Investment CompanyAct of 1940 comply with certain dis-closure requirements and other provi-sions governing the manner in whichcash tender and exchange offers maybe made. The requirements of the ruleare patterned substantially on the reg-ulatory scheme established by Section14(d)of the Exchange Act and existingrules thereunder which are applicablein the context of third party tender of-fers. The information required to bedisclosed in Schedule 13E-4 is sub-stantially the same type of informationwhich is required by Schedule 14D-1.The Commission adopted Rule 13e-4and Schedule 13E-4 to insure that is-suer tender offers are conducted in amanner free of deception, manipula-tion or fraud

Resale of Restricted Securities-OnAugust 2, 1979, the Commission au-thorized the issuance of a release» set-ting forth the staffs views concerningcertain issues raised by the resale ofrestricted and other securities In com-pliance with Rule 144 under the Secu-rities Act of 1933 (Securities Act). Therelease responded to interpretive ques-tions raised by the amendments to thatrule adopted by the Commission inSeptember 1978,29 which, among

other matters, permit sales under therule to be made directly to a marketmaker and liberalize restrictions on theamount of securities which may be re-sold under the rule.

Regulation of Brokers, Dealersand Municipal Securities Dealers

Regulatory Burdens on Small Brokersand Dealers-The Commission isaware of the need to evaluate the costsand competitive impact of its regula-tions on brokers and dealers. Accord-ingly, in adopting regulatory require-ments, the Commission weighs thebenefits to investor protection andother statutory goals against possiblecompliance and competitive burdens.In addition, the Commission endeavorsto tailor regulatory requirements toparticular business practices so as toavoid imposing unnecessary regula-tory burdens. This effort can particu-larly benefit smaller, more specializedbrokerage firms.

Lost and Stolen Securities-Duringfiscal 1979, several significant devel-opments occurred in the Commission'sLost and Stolen Securities Program.On November I, 1978, the Commis-sion announced the redesignation ofSecurities Information Center, Inc.(SIC) as the Commission's designee tomaintain and operate the data base ofmissing, lost, counterfeit and stolensecurities for a two-year term com-mencing January 1, 1979.30 In addi-tion, the Commission, on March 29,1979, published for public commentvarious proposed amendments to theCommission rule governing the pro-gram."

In response to comments received,the Commission, on May 23, 1979,adopted amendments to the rule32

which, among other things: (a) estab-lished registration requirements for allinstitutions subject to the rule(reporting institution) with certain ex-ceptions; (b) required that losses and

315-805 0 - 80 - 3

thefts of securities of the United StatesGovernment and its agencies be re-ported to SIC, instead of the FederalReserveBanks, in an identical manneras lost, stolen or counterfeit corporateand municipal securities; (c) incorpo-rated into the rule the temporary pilotperiod exemptions from reporting andinquiry; (d) established a new exemp-tion from required inquiry for bearersecurities received by a reporting in-stitution directly from a known cus-tomer to whom it had previously soldthe securities; and (e) required report-ing institutions to report suspect coun-terfeit securities to a transfer agent forthe issue.

The rule also incorporated two staffinterpretations which exempt from re-quired inquiry (a) securities receivedby a reporting mstitution directly froma "drop" that is affiliated with anotherreporting institution for the purposesof receiving and delivering certifrcateson behalf of such institution; and (b)securities received from a Federal Re-serve Bank or Branch. At the end ofAugust 1979, approximately 395,000reports of missing, lost, counterfeit orstolen securities, with an aggregatemarket value of nearly $2.1 billion,had been received by SIC since the in-ception of the program on October 3,1977.

Securities Confirmations-On De-cember 18, 1978, the Commission'snew rule prescribing delivery and dis-closure requirements for securitiestransaction confirmations sent by bro-kers and dealers to customers becamegenerally effective." The confirmationis an important disclosure documentthat provides an investor with infor-mation pertinent to each securitiestransaction. For example, the disclo-sures required in the confirmation pro-vide investors with a basis for compar-ing transaction costs offered bycompeting broker-dealers and for mea-suring those costs against the qualityof brokerage services provided.

9

In October 1978, before the effectivedate of the rule, the Commissionadopted amendrnentss- requiring dis-closures relating to odd-lot differen-tials, remuneration received in "risk-less" principal transactions in equitysecurities, and market making activi-ties. Also, in October 1978, the Com-mission announced proposals toamend the confirmation rule furtherand to adopt a new rule extending totransactions in debt securities the re-quired disclosures of remuneration re-ceived in riskless principal transac-tlons.» At the end of fiscal year, theCommission was evaluating the publiccomments received in response tothose proposals to determine whetherthe additional disclosure requirementsare appropriate.

Uniform Dispute Resolution Proce-dures for Investors-A program to im-plement uniform, fair and efficient dis-pute resolution procedures forinvestors was undertaken by the Com-mission in May 1976, in connectionwith its establishment of an Office ofConsumer Affairs. The Securities In-dustry Conference on Arbitration(SICA), a voluntary group of securitiesindustry and public representatives,submitted proposals for a uniform dis-pute resolution system contemplatingutilization of existing arbitration facil-ities. Self-regulatory organizationsadopted a series of rules based onSICA proposals providing proceduresfor small claims arbitration which wereapproved by the Commission duringthe fiscal year 1978. The Commissionreviews the operation of arbitration fa-cilities as part of its general oversightresponsibilities with respect to self-reg-ulatory organizations.

On December 28, 1978, SICA sub-mitted further proposals for a uniformarbitration code for investor-brokerdisputes. The uniform code includesprovisions that are intended to im-prove the efficiency and fairness of

10

arbitration procedures provided byself-regulatory organizations. For ex-ample, a record of the proceedingswould be kept upon request, the ma-jority of arbitrators on each panelwould not be associated with the se-curities industry and peremptory chal-lenge of arbitrators by either partywould be allowed. In addition, partieswould be directed to cooperate in thevoluntary exchange of documentaryevidences and would be permitted toforward documents to the arbitratorsprior to the hearing in order to expe-dite the proceedings.

Arbitration Clauses in Broker-DealerCustomer Agreements-Despite itssupport for arbitration, the Commis-sion became concerned during the fls-cal year about the fact that many cus-tomer agreement forms used bybroker-dealers contain clauses pur.porting to require arbitration of all fu-ture disputes that might arise betweenthe securities professional and the cus-tomer. In general, broker-dealers didnot inform customers that a number ofcourt decisions have held such ad-vance agreements to be unenforceablewith respect to causesof action arisingunder the Federal securities laws.Without such information, customersmight be led to believe that they hadprospectively waived any right to a ju-dicial forum for the resolution of dis-putes related to securities transac-tions.

In July 1979, the Commission pub-lished a release» giving notice to bro-ker-dealers that the use of pre-disputearbitration clauses in customer agree-ment forms, without specifying themeaning, effect and enforceabilitythereof, is inconsistent with just andequitable principles of trade and mayraise serious questions of compliancewith the antifraud provisions of theFederal securities laws. The Commis-sion emphasized its support for arbi-tration as a means of resolving dis-

putes between investors and securitiesprofessionals, but stated that prioragreements to arbitrate must reflectcurrent applicable judicial decisions.

Municipal Securities Dealers-OnJuly 11, 1979, the Commission pub-lished for comment proposed amend-ments to Rule 15bl0-12 under the Ex-change Act, allowing an exemption forcertain municipal securities brokersand municipal securities dealers fromthe requirements of the Commission'sSECO (Securities and Exchange Com-mission Only) proqrarn.» The pro-posed amendments are designed toeliminate the current dual regulationof municipal securities transactions ef-fected by SECO brokers and dealerswhich conduct business in both munic-ipal and corporate securities.

During the fiscal year, the Commis-sion, pursuant to Section 17(b) of theExchange Act, conducted one Joint ex-amination of a bank municipal securi-ties dealer.

Broker-Dealer Financial Responsibil-ity Requirements-Many broker-deal-ers subject to the Commission's uni-form net capital rule are alsoregistered with the Commodity Fu-tures Trading Commission (CFTC) asfutures commission merchants(FCMs).An FCM is, generally, a personwho engages in soliciting or in accept-ing orders for the purchase or sale ofany commodity for future delivery onor subject to the rules of any contractrnarket.» The CFTC hasjurisdiction toimpose minimum financial require-ments on FCMs. On September 1,1978, the CFTC substantially revisedits minimum financial and related re-porting requirements imposed uponregistered FCMs, which became effec-tive on December 20, 1978.39 Althoughthe CFTC's amendments apply only toFCMs, about half of all commoditycustomer business in the futures in-dustry is done by FCMs that are also

registered with the Commission as se-curities broker-dealers and are there-fore subject to the Commission's uni-form net capital rule.

In the interest of minimizing dupli-cative regulation, the CFTC generallyincorporated into Its minimum finan-cial responsibility rules provisionscomparable to the Commission's netcapital requirements applicable to thesecurities business of an FCM TheCFTC agreed to accept Part II of theFinancial and Operational CombinedUniform Single (FOCUS) Report, aquarterly report filed by broker-dealerswith the Commission, provided it wasamended to incorporate the CFTC'sSchedule of Seqr eqation Require-ments and Funds on Deposit in Seg-regation.

On June 5, 1979, the Commissiongenerally incorporated into its net cap-ital rule the CFTC's minimum financialrequirements applicable to the com-modities business of an FCM.40It alsoincorporated the CFTC's segregationschedule into its FOCUS Report.v Thejoint efforts of the two agencies havegenerally provided uniform net capitalrequirements for entities involved inboth the securities and commoditiesbusinesses and will eliminate duplica-tive reporting requirements.

Securities Investor Protection Corpo-ration- The Securities Investor Protec-tion Act of 1970 (SIPA)42provides cer-tain protection to customers of brokersand dealers that fail to meet their ob-ligations to their customers SIPA ISadministered principally by the Secu-rities Investor Protection Corporation(SIPC), a nonprofit membership cor-poration, the members of which are allregistered brokers and dealers withlimited exceptions. SIPC is fundedthrough assessments on its members,although it may borrow up to $1 billionfrom the United States Treasury undercertain emergency conditions. Section

11

3(e) of SIPA requires that SIPCfile pro-posed rule and bylaw changes with theCommission. Proposed rule changesmust be approved by the Commissionbefore they become effective, whileproposed bylaw changes take effectafter a prescribed period unless theCommission disapproves the bylawchanges.

On September 20, 1978, SIPC sub-mitted proposed bylaw changes re-garding the indemnification of SIPCdirectors, and requiring SIPC membersto display the SIPC symbol at their of-fices and to make reference to theirSIPC membership in certain advertise-ments. The Commission consideredthese proposals on November 8, 1978and did not disapprove them.

In June 1978, SIPCadopted and sub-mitted to the Commission three sets ofrules under SIPA. The Series 100 rulesand the Series 200 rules establish var-ious capacities in which a customermay have separate securities accountswith a single broker-dealer and be pro-tected by SIPC on each account. TheSeries 300 rules set forth requirementsfor the closeout and completion ofopen contractual commitments be-tween a SIPC member undergoing liq-uidation and other broker-dealers. InOctober 1978, the Commission ap-proved the Series 100 and 200 rules.vSubsequently, in March 1979, theCommission approved the Series 300rules.w The Series 300 rules replacedsimilar Commission rules that werepromulgated before the passage ofthe Securities Investor Protection ActAmendments of 1978 which gaveSIPC, rather than the Commission, theauthority to adopt such rules.

Because SIPC rules approved by theCommission have the same force andeffect as Commission rules, the Com-mission has published those rules in aseparate section of the Code of FederalRegulations.4'

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Oversight of Self-RegulatoryOrganizations

Securities Exchanges-As of Sep-tember 30, 1979, ten exchanges wereregistered with the Commission as na-tional securities exchanges pursuantto Section 6 of the Exchange Act:American Stock Exchange (Amex);Boston Stock Exchange (BSE); Chi-cago Board Options Exchange(CBOE); Cincinnati Stock Exchange(CSE); Intermountain Stock Exchange(ISE); Midwest Stock Exchange (MSE);New York Stock Exchange (NYSE); Pa-cific Stock Exchange (PSE); Phila-delphia Stock Exchange (Phlx); andSpokane Stock Exchange (SSE). Noexchange is currently operating underan exemption from registration as anational securities exchange.

In connection with the Cornmis-sion's oversight of the delisting of se-curities traded on national securitiesexchanges, the Commission, duringthe fiscal year, granted applications byexchanges to strike 96 equity issuesand 56 debt issues from listing andregistration. The Commission alsogranted applications, submitted by is-suers, requesting withdrawal from list-ing and registration for 24 equity is-sues and four debt issues.

During the fiscal year, the Commis-sion neared completion of its review ofits policies with respect to granting ap-plications for unlisted trading privi-leges. The Commission's review is de-signed to develop standards which itwill apply in considering whether anextension of unlisted trading privilegesis consistent with the maintenance offair and orderly markets and the pro-tection of investors under Section12(f)(2) of the Exchange Act. Whilethat review continues, the Commis-sion generally has not granted appli-cations for unlisted trading privileges.In .Junew and again in Auqust-? of the

fiscal year, however, the Commissionapproved applications by the MSE forunlisted odd lot trading privileges incertain securities which had becomelisted on the NYSE subsequent to thedate of a previous Commission orderextending unlisted odd lot trading priv-ileges to the MSE in 865 NYSE-listedsecuritles.w

During the fiscal year, the nationalsecurities exchanges reported to theCommission, pursuant to Section19(dXl) of the Exchange Act, approx-imately 200 disciplinary actions im-posing a variety of sanctions uponmember firms and their employees. Inaddition, the Commission receivedfrom the national securities exchanges154 filings pursuant to Rule 19b-4 un-der the Exchange Act, including 98proposed rule changes and 56 noticesof a stated policy, practice or interpre-tation not constituting a rule change.Among the significant rule filings ap-proved by the Commission during thefiscal year were: (a) a proposal by theNYSE to establish, on a two-year pilotbasis, a non-disciplinary procedure forthe reallocation of securities amongspecialist units who fail to meet cer-tain minimum performance standardsbased upon the results of a perform-ance evaluation questionnairess; (b) acomplete revision of the rules of theCSElO; (c) amendments to the AmexlIsting standards, expanding the uni-verse of foreign and domestic issuerswhose securities may qualify for listingon the Amex»: (d) a nine-month exten-sion of the respective NYSE and Amexrules regarding supplemental marketmakers in equity securities"; and (e) apricing formula amendment to thePSE's automated execution system(COMEX), to provide that orders exe-cuted at the best bid or best offer asdetermined by quotes received fromall participants in the IntermarketTrading Systern.v

National Association of Securities

Dealers-The NASD is the only secu-rities association registered with theCommission. At the close of the fiscalyear, 2800 brokers and dealers wereNASD members.

During the past fiscal year, theNASD reported to the Commission thefinal disposition of 289 disciplinarycomplaints. In those disciplinary ac-tions, 143 member firms and 332 in-dividuals were named as respondents.At the beginning of fiscal 1979, threeproceedings for review of NASD dis.ciplinary decisions were pending be-fore the Commission, and during theyear 27 additional cases were broughtup for review. The Cornrrussion re-viewed 14 of these cases and reducedthe sanctions to be imposed in somecases.

The Commission also reviewed 39NASD applications to admit a brokeror dealer to membership or to permita person to become associated WIth amember where the broker or dealer orperson is subject to a statutory dis-qualification. The Commission hastaken no adverse action WIth respect to15 notices. Five notices were with-drawn, and at the end of the fiscal year,19 notices were pending before theCommission.

During the year, the Commissioncontinued to review an NASD pro-posed rule submitted in fiscal 1978 toprohibit its members from giving dis-counts to customers in distributions ofsecurities offered at a fixed price. Theproposal was written in response to a1976 judicial decision, Papilsky uBerndt,» which held that such dis-counts were unlawful in some CIrcum-stances, absent a contrary Commis-sion or NASD ruling. In September1979, the Commission commencedpublic hearings to consider the issuespresented by the proposed rule.

During the fiscal year, the Commis-sion also worked with self-regulatoryorganizations to simplify and eliminate

13

duplication in the self. regulatory sys-tem for brokers and dealers. The Com-mission extended until January I,1980, its provisional approval of fourplans proposed by self-regulatory or-ganizations for allocating their respon-sibilities to perform various regulatoryfunctions for brokers and dealerswhich belong to more than one self.regulatory organization. The plans rep-resent agreements reached betweenthe NASD and four exchanges: theBSE, CSE, MSE and PSE. The plansassign to the NASD much of the re-sponsibility for conducting onsite ex-amination of dual members and forprocessing various applications.

Municipal Securities RulemakingBoard- As in the case of national se-curities exchanges and the NASD, theCommission reviews proposed rulechanges of the Municipal SecuritiesRulemaking Board (MSRB). During thefiscal year, the MSRB filed 14 rule pro.posals. The Commission considered anumber of those proposals and otherswhich were pending from the previousfiscal year.

The Commission approved a com-prehensive arbitration code for the mu-nicipal securities industry." The codeis designed to provide a means for reosolving disputes on an expedited andrelatively inexpensive basis. It includesboth special procedures for settlingdisputes relating to customer smallclaims and more general procedureswhich can be used for claims of anysize.

The Commission also approved arule relating to the advertising of mu-nicipal securltles.» The rule prohibitsa municipal securities professionalfrom publishing or causing to be pub.lished an advertisement concerningmunicipal securities that such profes-sional knows or has reason to know isfalse and misleading. It also requiresall advertisements concerning munici-pal securities to be approved in writing

14

by appropriate supervisory personnel.In addition to consideration of MSRB

rule proposals, the Commission pro-posed a rule to provide the MSRB withinformation for use in its rulemakingactivities. On May 30, 1979, the Com-mission published for comment pro.posed Rule 15Bc7 -1 under the Ex-change Act to make available to theMSRB information concerning cornpli-ance examinations of municipal secu-rities brokers and municipal securitiesdealers." The proposed rule is de-signed to establish a mechanism forfurnishing to the MSRB reports of com-pliance examinations, or informationfrom such examinations, made by orfurnished to the Commission, theNASD and the three Federal bank reg-ulatory agencies. (In October 1979,this rule was adopted by the Commis-sion.»)

Clearing Agencies-The Commis-sion has granted temporary registra-tion to 12 clearing agencies pendingthe development of standards for fullregistration of clearing agencies. TheCommission also received applicationsfor temporary registration as a clearingagency from the Philadelphia Deposi-tory Trust Company (Philadep) and theFixed Income Clearing Corporatlon.»

The Commission, at year end, wasconsidering the numerous commentletters which were received on the reovised proposed standards for clearingagency registration which were pub-lished in the previous fiscal year.w TheCommission expects to announce thestandards for full registration withinthe next fiscal year.

The Commission has established aBranch of Securities Processing In-spections whose primary responsibilityis to inspect registered clearing agen-cies. The branch has embarked on aprogram of inspecting each clearingagency and is developing formal pro-cedures for the inspection of clearingagencies. On July 10-13, 1979, the

branch conducted an extensive inspec-tion of the Philadep as part of the Com-mission's consideration of whether togrant temporary registration as a clear-ing agency to that applicant. At theend of the fiscal year, the Commis-sion's staff was continuing to analyzedata gathered in the course of this in-spection. After completion of thiswork, the findings of this inspectionwill be discussed with Philadep. (Sub-sequent to the close of the fiscal year,on October 24, 1979, the Commissionannounced its order granting tempo-rary registration to Philadep.»)

Arbitrsuon Facilities of Self-Regula-tory Organizations-During fiscalyear 1978, the Commission's staff in-spected arbitration facilities of theNASD, Amex, and CBOE. The staffalso completed its analysis of infor-mation obtained during an inspectionof the NYSE on September 27-28,1978. The purpose of these inspec-tions was to determine the efficiencyand fairness of the procedures of theseorganizations for the resolution of dis-putes between investors and broker-dealers. The inspections focused onthe organizational structure of the ar-bitration departments, the composi-tion of arbitration panels, the time nec-essary to resolve disputes, the volumeof cases and the range of awards.

As a result of these inspections, thestaff recommended that the self-regu-latory organizations prepare materialsto inform investors about the enforce-ability of agreements to arbitrate fu-ture disputes with broker-dealers andabout those issues for which a judicialforum might be available. The staffalso made certain comments and rec-ommendations regarding the opera-tion of the arbitration programs.

The staff suggested that the NYSEpermit arbitrators, through the arbitra-tion department staff, to refer to dis-ciplinary authorities any apparent vio-lations of applicable rules or laws

discovered in the course of arbitrationproceedings. The staff also suggestedthat the NASD attempt to reduce thetime between filing and resolution ofclaims and to select public arbitratorswith a greater diversity of experience.

Procedures for Filing Proposed RuleChanges-Section 19(b) of the Ex-change Act, as amended by the 1975Amendments, requires self-regulatoryorganizations to file all proposed rulechanges with the Commission. Shortlyafter Section 19(b) became effective,the Commission adopted Section 19b.4 and related Form 19b.4A estab-lishing procedures for self-regulatoryorganizations to file proposed rulechanges and designating the types ofproposed rule changes that may be-come effective upon filing.

In May 1979, the Commission pro.posed for public comment amend-ments to Rule 19b.4 and related Form19b-4A.62 Developed in light of theCommission's experience in adrnims-tering Section 19(b), the proposedamendments are intended to improveand simplify the procedures for filingproposed rule changes, thereby expe-diting the rule review process. TheCommission's proposals include (a) anamendment to Rule 19b-4 to designatea new category of rules that may be-come effective upon filing and (b)amendments to Form 19b-4A to spec-ify, in greater detail the information re-quired by that form.

Inspections of Self-Regulatory Orga-nizations-During the fiscal year, theCommission reorganized its programfor oversight inspections of the activi-ties of self-regulatory organizations.This new program has entailed morefrequent and more intensive onsite in-quiries into the market surveillanceand compliance systems of the variousnational securities exchanges and theNASD.

In February 1979, the Commissionstaff conducted an inspection of the

15

stock market surveillance program ofthe Phlx. This inspection disclosed sig-nificant inadequacies in the marketsurveillance systems of the Phlx.

In April 1979, the Commission staff,in response to a recommendation ofthe Options Study, conducted an in-spection of the operations and listedoptions market surveillance programof the MSE. This inspection disclosedthat the MSE program was inadequatefor the detection of certain commonoptions trading violations.

In June 1979, the Commission staff,in connection with a pending pilottrading program, conducted an inspec-tion of the NYSE program for surveil-lance of the activities of RegisteredCompetitive Market Makers (RCMMs)and Registered Competitive Traders(RCTs). This inspection also includeda review of the exchange's enforce-ment program for RCMM members.This inspection disclosed deficienciesin certain of the techniques employedby NYSE staff to detect rule violationsby RCMMs and RCTs and other weak-nessesin casefile documentation prac-tices. Also discovered was a failure totake the formal disciplinary action nee-essary to enforce RCMM rules effec-tively.

In April 1979, the Commission staffinspected the options operations andmarket surveillance programs of thePSE. This inspection disclosed cer-tain inadequacies in some of the ex-change's systems which monitor com-pliance by market professionals withtrading rules and with credit regula-tions.

In June 1979, the Commission staffconducted an inspection of the optionsoperations and market surveillancesystems of the Phlx. This inspectiondisclosed significant deficiencies in thePhlx system to detect options tradingviolations and deficiencies in the en-forcement of certain Phlx rules.

16

In June 1979, the Commission staffconducted an inspection of the Secu-rities Qualification Section in theNASD's NASDAQ Operations Depart-ment. The major findings of this in-spection were that the NASD hadmade marked improvements in themanner in which it monitors periodicfilings of issuers for compliance withsecurities qualification criteria, thatthere were shortcomings in the sec-tion's administration of the listing ex-ception process and that there wereambiguities in the NASD rules govern-ing this process.

Between February and July 1979,the Commission staff conducted in-spections of the operations of NASDdistrict offices located in Philadelphia,Washington, D.C., New Orleans, Kan-sas City and Chicago, as well as theoperations of the unit at NASD head-quarters assigned to manage and co-ordinate NASD district office activi-ties. These inspections focused on theadministration of the NASD's programof examinations and monitoring ofmember firms. These Inspections dis-closed a number of strengths andweaknessesin the.requlatory programsof individual offices as well as sev-eral significant weaknesses which ap-peared to be national in scope. This lat-ter class of weaknesses included (a)shortcomings in the work paper re-quirements and document mainte-nance practices of NASD examiners,especially with regard to sales prac-tices; (b) the failure of some examinersto follow procedures prescribed by theNASD to detect sales practice viola-tions during routine examinations ofmember firms; and (c) inadequatestaffing of the district offices of bothexaminers and supervisory personnel.

During July 1979, the Commissionstaff inspected the operations and mar-ket surveillance and enforcement pro-gram of the CBOE. The inspectionteam found inadequacies in the man-

ner in which the CBOE seeks to detectcertain trading violations.

During August 1979, the Commis-sion staff inspected the options oper-ations and market surveillance and en-forcement program of the Amex. Thisinspection disclosed certain deficien-cies in the market surveillance systemsof the exchange and a failure to en-force certain exchange rules. In addi-tion, the inspection team found a pat-tern of failure to prosecute certaincases of apparent rule violations byfloor members.

During February 1979, the Cornrnis-sion staff conducted an examination ofthe complaint processing unit of theAmex. Complaint processing is a func-tion of the Department of Rulings andInquiries, Legal and Regulatory PolicyDivision, which is also responsible forissuing interpretations of Amex rules.The purpose of the inspection was todetermine the responsiveness, effi-ciency and timeliness of the Amexcomplaint handling system. The staffwill continue to monitor that systemand to recommend changes where nec-essary.

In May 1979, the Commission staffexamined the complaint processingfunction of the CBOE. The CBOETrading Regulation Department re-sponds to complaints and inquirieswhich are floor-related, and the Officeof Inquiries and Complaints handlesmatters related to broker-dealer sales

practices. The staff will continue tomonitor the responsiveness of theCBOE to Investor concerns.

After each of the foregoing inspec-tions, the Commission notified the ap-propriate self-regulatory organizationof its findings and asked that remedialaction be taken. The Commission isplanning a series of follow-up inspec-tions to ensure that appropriate reme-dial action has been taken.

Revenues and Expenses of Self-Reg-ulatory Organizations-The regulatoryfunctions of the various exchangesandthe NASD with regard to their broker-dealer members are financed throughvarious fees and dues, such as listingfees and transaction charges. The na-ture of some of these revenue sourcesmakes the financial condition of self-regulatory organizations dependentupon price fluctuations and tradingvolume.

Furthermore, the various self-regu-latory organizations are quite differentIn the extent of their dependence onparticular sources of revenue. Somesources of revenue, such as transac-tion, clearing and depository fees,change directly with changes in sharevolume. Others are relatively fixed,such as listing fees and membershipdues. Additional analysis and statisti-cal detail on share volume, revenuesand expenses of each self-regulatoryorganization are presented In the Ap-pendix of this report.

17

The Disclosure System

New Developments in DisclosurePolicy

The "full disclosure" system admin-istered by the Commission is designedto assure that the securities marketsoperate in an environment in which fulland accurate material informationabout publicly traded companies IS

available to all interested investors.During the fiscal year, the Commissionpursued a program designed to en-hance the effectiveness of required in-formation, while reducing attendantburdens to the extent possible. Fivemajor objectives have been stressed toattain that goal: (1) Integration of dis-closures required by the Securities Actof 1933 (Securities Act) and the Secu-rities Exchange Act of 1934 (ExchangeAct); (2) narrowing of the differencesbetween information supplied by reg-istrants to the Commission in formalfilings and to various segments of thepublic through informal means; (3) im-provement of disclosure requirements;(4) development of guidance for spe-cial situations outside the normal sys-tem of continual disclosure; (5) refo-cusing of the staff review process; and(6) implementation of a program re-view of existing rules to delete oramend unnecessary or outmoded pro-visions.

Projections of Future Economic Per-formance-In furtherance of its newpolicy of encouraging the disclosure ofearnings forecasts and other forward-looking information by registrants, theCommission issued a release on June25, 1979, which announced the adop-tion of Rule 175 providing "safe har-

bor" from the liability provisions of theFederal securities laws for enumeratedforward-Iookinq information that isreasonably based and made in goodfaith.63 The Commission's initiatives involuntary projection disclosure are ex-perimental in nature and a task forcehas been set up to assure that the newpolicies embodied in the rule do notyield results inconsistent with investorprotection.

Disclosure Revisions-The Commis-sion has taken a number of steps to im-prove the format of disclosure, deleteunnecessary requirements, add new re-quirements, and, generally, make dis-closure more effective and flexible. Inone such action, the Commissionadopted amendments to provide relieffrom certain portions of the reportingrequirements of the annual and quar-terly reports filed with it by registrantswhose equity securities are ownedeither directly or indirectly by a singleperson which itself is a reporting en-tity under the Exchange Act.64 TheAmendments are part of the Commis-sion's continuing effort to reduce re-porting burdens and paperwork bymore precisely tailoring the reportingrequirements to the characteristics ofparticular registrants and to the needsof their investors.

On September 6, 1979, the Com-mission proposed the amendment ofRule 12b-25 and its related form whichwould result in the elimination of ex-tensions of time to file reports underthe Exchange Act and, in lieu thereof,proposed the institution of a systemrequiring notification of a registrant'sor reporting person's inability to timely

19

file reports or portions thereof.» Byeliminating the review requirement forextension of time requests, the Com-mission hopes to be able to place in-creased emphasis on the review of allExchange Act filings. In this manner,the Commission will attempt to imple-ment a recommendation of the Advi-sory Committee on Corporate Disclo-sure which noted that a substantivereview of periodic reports, consistentwith the quality of information soughtin registration statements, is essentialto the end product of a high qualitydisclosure docurnent.w

The Commission also concurrentlyproposed for comment a new Rule 12b-26 which would require registrants toprominently disclose, on the coverpages of periodic reports filed pur-suant to Sections 13 or 15(d), any re-quired portion omitted from thosereports. It is believed that thisrequirement will assist the investingpublic and the Commission in the re-view of Exchange Act reports.

Corporate Accountabiltty; Manage-ment Background and Remuneration-Responding to numerous events thatraised questions about the adequacy ofcorporate accountability mechanisms,the Commission established a taskforce in 1977 to undertake a broadreexamination of its rules related toshareholders communications, share-holder participation in the corporateelectoral process and corporate gov.ernance generally.67The Commissiondetermined to address in stages, thecomplex issues raised during the en.suing public hearings. In December1978, the Commission adopted finalrule, form and schedule amendmentsdesigned to provide shareholders withadditional information about the mat-ters on which their vote is solicited.wGenerally, these amendments requiredisclosure of: (1) The existence andfunctioning of audit, nominatmq andcompensation committees; (2) attend-

20

ance of directors at board and com-mittee meetings; (3) certain economicand personal relationships between di-rectors or nominees and an issuer or itsmanagement; and (4) resignations ofdirectors.

On August 13, 1979, the Commis-sion proposed a second set of rules re-lated to corporate accountablltty.w Theproposals would require that share-holders be provided with a proxy cardwhich: (1) Indicates whether the proxy issolicited by the board of directors; (2)provides a means to vote for directornominees individually; and (3) re-moves discretionary authority to voteunmarked proxies. The proposedamendments also would require dis-closure of prior year election results incertain circumstances and would ex-pand the types of communications ex.empt from the proxy rules. (On No-vember 20, 1979, the Commissionadopted a version of these rules mod-ified to reflect certain comments re-ceived.)»

The Task Force on Corporate Ac-countability was, at the close of the fis-cal year, engaged in preparing a com.prehensive report on the corporategovernance proceeding. The staff mon-itored governance disclosure appear.ing in the proxy statements of 1,200representative issuers during the 1979proxy season. In addition to analyzingthe results of the disclosure survey, thereport is expected to address such is-sues as the functions of the board ofdirectors and its committees; sollcita-tions of beneficial owners of stock heldin street and nominee name; disclo-sure of corporate activities having botheconomic and social impacts; and therespective roles of private sector, insti-tutional shareholders, self-regulatoryorganizations, the states, the Commis-sion and Congress in corporate ac-countability. After review of the staffreport, the Commission will considerwhat further action, if any, is appropri-

ate and will determine whether to pub-lish additional rulemaking proposalsor to recommend or support new leg-islation affecting corporate accounta-bility.

In a release dated December 4,1978, the Commission amended cer-tain disclosure forms and regulationsto standardize and improve the disclo-sure requirements relating to manage-ment remuneratton.» The Amend-ments revised the management remu-neration disclosure provisions incertain registration statements, peri-odic reports and proxy and informationstatements filed with the Commissionto require tabular and other forms ofdisclosures as to all remuneration re-ceived from the corporation and its sub-sidiaries for services during the latestfiscal year by certain specified direc-tors, executive officers and officers.Subsequent to the adoption of theserequirements, the Commission author-ized the Division of Corporation Fi-nance (the Division) to issue its in-terpretive views regarding- certainaspects of the amendments in order togive guidance to reqlstrants."-

MOnitoring of EXisting Guidelines-Asa means of accomplishing its stateddisclosure program goals, the staff ofthe Division has undertaken a compre-hensive revisitation and review of thedisclosure requirements of the Securi-ties Act and Exchange Act. On June25, 1979, the Commission issued, forpublic comment, comprehensive pro-posed staff guidelines for the disclo-sure in registration statements andreports by electric and gas utilitycompanies.n It is anticipated thatthese guidelines will improve the use-fulness to investors of the various doc-uments involved by specifying thetypes of data which such documentsshould disclose. It is also believed thatthe guidelines will benefit companiesby increasing the uniformity of disclo-sure within the industry and eliminat-

ing disclosure requirements which arenot meaningful to that industry. Thecomment period closed on September24, 1979, and the staff began analyz-ing the comments received.

In August of 1979, the Commmis-sion issued a release requesting com-ments on the quality and desirability ofthe disclosure made under the existingguidelines for "Statistical DIsclosureby Bank Holding Companies."> Theseparticular guidelines have been in op-eration since 1976. The request is partof the Commission's effort to monitorthe effect and value of its disclosurerules and guides with a view to amend-ing or rescinding those rules or guideswhich do not yield the expected bene-fits.

On September 6, 1979, the Com-mission requested comments on theoperation and efficacy of certain of itsrecently adopted proxy statement dis-closure requirements as well as certainother disclosure requirements relatingto the structure, functioning, and com-position of boards of directors.»

On September 27, 1979, the Com-mission published an interpretive re-lease76 focusing attention on existingrequirements under the Securines Actand the Exchange Act concerning en-vironmental disclosure to assist regis-trants in complying with those require-ments and to alert them that theCommission will continue, in appro-priate cases, to take enforcement ac-tion in instances of non-compliance.The release, in particular, addressedthese issues: (1) the need to disclosetotal estimated expenditures for envi-ronmental compliance beyond twoyears in the future; (2) the obligation todisclose particular types of environ-mental proceedings; and (3) the cir-cumstances under which companiesmust disclose their policies or ap-proaches concerning environmentalcompliance. The Commission reviewedits policies with respect to environ men-

21

tal disclosure in an administrative pro.ceedinq'" (which is discussed in the "En-forcement" section of this report).

Small BusinessWhile it should be recognized that

many of the problems which face smallbusiness today result from factorsrooted in the broad economic environ-ment rather than the Federal securitieslaws, the Commission is aware that therather costly and complicated processof distributing securities in compliancewith these laws is felt by some toimpede unnecessarily capital forma-tion by small businesses. The Commis-sion has vigorously addressed itself tothese problems by focusing primarilyon its existing rules and regulationsand on the general problem areas un-der those rules which have been of thegreatest interest to small businesses.

During April and May of 1978, theCommission held public hearings con-cerning the effects of its rules and reg-ulations on the ability of small busi-nessesto raise capital and the impact onsmall businesses of the disclosure re-quirements under the Securities Act.The Commission subsequentlyadopted revisions to its rules during fis-cal 1978 and has continued to imple-ment the policy of easing the regulatoryburden on small businesses, consistentwith the protection of investors, duringfiscal 1979.

In June 1979, the Office of SmallBusiness Policy was established withinthe Division. The Office: (a) serves asthe focal point of the Commission'ssmall business rulemaking initiatives;(b) reviews and comments upon the im-pact of rule proposals on small busi-nesses; and (c) acts as liaison withCongressional committees, govern.ment agencies and other groups con-cerned with small business. The Officeis responsible for monitoring the qual-ity of disclosure included in offerings

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registered on Form S-18, which is de-scribed below. Since the Form wasadopted on an experimental basis, theOffice will make recommendations asto the continued use of or appropriateamendments to the Form.

The Commission has also adoptedcertain revisions to Rule 144 and Reg-ulation A. On March 5, 1979, Rule 144was amended to allow non-affiliates todisregard the Rule's volume restric-tions under certain ctrcumstences.>To qualify, the seller must have beena non-affiliate for three months andmust have held the securities: (a) forthree years if they are listed on ana.tional securities exchange or quotedon the NASDAQ, or (b) for four yearsif the securities are not so listed orquoted and the issuer files reportspursuant to the Exchange Act. OnJune 1, 1979, the Commissionadopted amendments which permitthe use of a pre-effective selling docu-ment in Regulation A offerings, pro.vided that the securities are sold by un-derwriter(s) who are broker-dealersregistered under the Exchange Act,79

On March 29, 1979, the Commissionadopted Form S-18 and related amend.ments concerning simplified reqlstra-tion and reporting requirements forsmall issuers.80 The Form is available tocertain domestic or Canadian corporateissuers for offerings of up to $5 million,of which up to $1.5 million may besales by existing security holders. TheForm calls for narrative disclosuresomewhat less extensive than thatpresently required by Form S-l andaudited financial statements preparedin accordance with generally acceptedaccounting principles rather than in ac-cordance with Regulation S.X. A corre-sponding amendment wasalso adoptedwhich allows issuers to include the nar-rative and financial disclosure format ofthe Form S-18 in its initial Form 10-Kreport.» Issuers also have the option offiling the registration statement at the

appropriate regional office or at theHeadquarters Office.

On September 11, 1979, the Com-mission proposed Rule 242 which ex-pands the availability of Section 3(b) ofthe Securities Act to allow issuers tosell up to $2 million worth of securi-ties, subject to provisions of integra-tion delineated in the Rule, withoutregistration or compliance with themore burdensome requirements foundin other exemptions from registra-tion.82 The two major conceptualchanges embodied in the Rule are,first, the unregistered sale of securitiesto an unlimited number of institutionalinvestors with no mandated informa-tion requirements (relying on the abil-ity of such persons to obtain materialinformation from the issuer) and, sec-ond, the unregistered sale of securitiesto a limited number of individuals (35)with no sophistication test which mustbe met, but with an information re-quirement similar to that found inForm S-18. (On January 10, 1980, theCommission adopted Rule 242.)

(On October 10, 1979, the Commis-sion authorized the issuance of a re-lease indicating that it will not takeenforcement action against issuersutilizing Form S-18 to offer $1,500,000or less of debt securities for public salepursuant to the Securities Act withoutfiling and qualifying the trust indentureunder the Trust Indenture Act of 1939.The proposed no-action position wouldbe taken when it appears that suchcompliance would be inconsistent withboth the Commission's ongoing effortto facilitate small businesses in thecapital formation process and theCommission's view that qualification isnot required for Regulation A offeringsof debt securitles.)»

Long Range Studies-Policy researchby the Commission's Directorate ofEconomic and Policy Research regard-ing the ability of small firms to raisecapital increased substantially in 1979.

Phase I of the Experimental Technol-ogy Incentive Program (ETIP) wascompleted in conjunction with the U.S.Department of Commerce. In this ini-tial effort several policy questions re-garding the capital markets confront-ing small, high technology corpora-tions were addressed. Phase II, now inprogress, implements this system andexpands the scope beyond the capitalraising process to include accountmgdisclosure, tender offers and otherpolicy concerns relevant to small, in-novative enterprises. This effort will besupplemented in fiscal year 1980 withan exarmnatron also conducted by theDirectorate of Economic and PolicyResearch, of the role regional broker-age firms play in raising capital for is-suers through initial public offerings.

Tender Offer ProposalIn February 1979, the Commission

withdrew certain proposed rules withrespect to tender offers which hadbeen published in 1976, and publishedfor comment a new proposal and a re-lated schedule.« This action was partof the Commission's ongoing programto establish a comprehensive regula-tory framework with respect to tenderoffers.

The proposal would require TenderOffer Statements on Schedule 140-1to be filed by the bidder with the Com-mission, and sent to certain interestedpersons, predicated on the date ofcommencement of a tender offer. Aninitial filing with the Commission priorto the date the tender offer is first pub-lished, sent or given to security holderswould not be required. Rather than es-tablish a specific time for such filings,the proposal generally would permit afiling to be made as soon as practice-ble on the date of commencement or,with respect to amendments, on thedate the material change or additionaltender offer material is first published,sent or given to security holders. This

23

filing standard is designed to create anefficient system in conformity with theWilliams Act which will not unduly bur-den bidders. In addition, the proposal,which would provide the prompt com-munication of information regardingtender offers to trading markets, is in-tended to assist national securities ex-changes and the National Associationof Securities Dealers, in carrying outtheir self-regulatory resonsibilities un-der the Federal securities laws.

In addition to establishing compre-hensive disclosure requirements appli-cable to any tender offer subject toSection 14(d) of the Exchange Act, theproposal would also provide a frame-work for disseminating cash tender of-fers, and amendments, to securityholders. The proposed rules would addcontent and clarity to the term "pub-lished, sent or given" to security hold-ers and are intended to afford a greaternumber of shareholders the opportu-nity to receive, consider and evaluatetender offer materials. Three non-man-datory methods of disseminating cashtender offers would be provided: long-form publication; summary publica-tion; and the use of stockholder listsand security position listings. To en-sure the efficient operation of the lattermethod, a procedure would be estab-lished under which the bidder's tenderoffer materials would be sent to secu-rity holders either by the bidder who isfurnished with stockholder lists, or bythe subject company. The choice as tothe method used would be the optionof the subject company.

To further ensure that investors havean adequate opportunity to considercommunications from the bidder, aswell as the subject company, in decid-ing whether to tender to the bidder,sell into the market, or hold part or allof their securities, the Commissionalso proposed rules that would requireall tender offers to remain open for atleast 30 business days and for at least

24

ten business days after any increasesby the bidder in the offered consider-ation; provide withdrawal rights forshares deposited by investors duringthe first 15 business days of an offerand an additional ten business days inthe event of a competing offer; andpermit bidders to extend pro rata ac-ceptance rights for periods in excess ofthose required by Section 14(d)(6).

Other proposed rules would requireprompt status reports whenever thelength of a tender offer is extended andpayment for or return of deposited se-curities as soon as reasonably practi-cable after the tender offer's termina-tion.

The proposal would also revise thepresent disclosure requirements relat-ing to subject companies and otherpersons making a solicitation or rec-ommendation in connection with atender offer subject to Section 14(d).Thus, proposed Rule 14d-10 and pro-posed Schedule 14D-10 would replacecurrent Rule 14d-4 and Schedule 14D,respectively. While the proposed rulewould require broader disclosure, anarrower class of persons would besubject to its requirements than is cur-rently the case. The limitation on thetypes of persons who must file a pro-posed Schedule 14D-1O represents aneffort by the Commission to avoid un-necessary regulation in the context oftender offers.

While not applying to a bidder, pro-posed Rule 14e-2(a) would affirm aduty of disclosure on any other personwho trades on non-public material in-formation obtained directly from a bid-der or indirectly from a bidder, such asfrom persons involved or consulted bythe bidder in the precommencementplanning and preparation stages of atender offer. The Commission believesthat an affirmative duty of disclosureis necessary for the protection of inves-tors because of past abuses, the vitalimportance of such market informa-

tion and the extraordinary nature oftender offers.

(On November 20, 1979, the Com-mission adopted a modified version ofthese tender offer proposals.)»

Going Private and Sale of AssetTransactions

On August 2, 1979, the Commissionadopted a new rule and schedule relat-ing to going private transactions bypublic companies or their affiliates.86

This was in response to the continuedoccurrence of going private transac-tions, the variety of methods employedin such transactions, and the need fordisclosure to investors confronted withthese transactions. The rule and sched-ule are intended to augment and imple-ment the present statutory provisionsby prohibiting fraudulent, deceptiveand manipulative acts or practices inconnection with going private transac-tions and by prescribing new filing, dis-closure and dissemination require-ments as a means reasonably designedto prevent such acts and practices.

During the year, several proxy state-ments involving novel, multi-step saleof asset transactions were filed with theCommission. Typically, the subjecttransaction involved a cash sale of sub-stantially all of the assets of a publiccompany to another company, often aprivate company not otherwise en-gaged in a trade or business. The pur-chasing company expects to continuethe business of the public sellingcompany under the public company'sname and hires substantially all of theseller's managers under long-term em-ployment arrangements to manage thebusiness. A significant percentage ofthe purchase price may be borrowedby the purchaser and, if so, the assetspurchased are usually directly or indi-rectly pledged to secure repayment ofthe loan. In some cases, the sale of as-sets, if approved, will be followed by an

315-80~O - 80 - 4

issuer tender offer by the public com-pany to repurchase its shares for cashout of the proceeds received from thesale. In addition, the public companyproposes, as part of the transaction, toamend its certificate of incorporationto change its business to that of aninvestment company. In view of con-cerns that were expressed by inter-ested shareholders regarding theadequacy of disclosure; difficulties en.countered in the administrative reviewprocess; and enforcement actionswhich had been taken as a result of fail-ure to comply with the disclosure re-quirements of the Exchange Act, theCommission authorized the Division ofCorporation Finance to provide infor-mation to the public about currentpractices and guidance to issuers infulfilling their disclosure obligations.&7

Oversight of the AccountingProfession

Report on the Accountmg Professionand the Commission 5 Oversight Role-In July 1979, the Commission submit-ted to Congress its second Report onthe Accounting Profession and theCommission's Oversight Role. Thiswas in accordance with the Coirnmis-sion's undertaking, during the June1977 hearings held on the accountingprofession by the Subcommittee onReports, Accounting and Managementof the Senate Committee on Govern-mental Affairs, to report periodicallyon the accounting profession's reosponse to the challenges which Con-gress and others have placed before itand on related Commission initiatives.

The questions raised concerning theaccounting profession and its futurehave centered principally on the profes-sion's capability, absent direct govern-ment regulation, to regulate and disci-pline its members, to assure theirindependence, and to set auditing andaccounting standards. The Report con-tained the views of the Commission and

25

the staff on the major issues confront-ing the accounting profession, and ana-lyzed in detail the recent progressmade by the profession and the Com-mission, in dealing with them.

In its July 1979 Report, the Com-mission concluded that progress hasbeen sufficient to merit continued op-portunity for the accounting profes-sion to pursue its efforts at self-regu-lation. Consequently, the Commissiondid not recommend, at the time, leg-islation to supersede or control theregulation of accountants. Further, theCommission continues to believe thatit is too early to reach any definite con-clusions with respect to possible futureregulatory action or legislation. If, forexample, the profession's initiativesare not successful, a legislative alter-native might well be required. Addi-tionally, the Commission remains un-convinced that comprehensive directgovernmental regulation of account-ing or accountants would afford thepublic either increased protection or amore meaningful basis for confidencein the work of public accountants.

During the past year, the Commis-sion has worked with the accountingprofession to define the objectives ofthe self-regulatory program, to assurethat the profession's proposed imple-mentation is consistent with those ob-jectives, and to suggest ways in whichto achieve the objectives without im-posing specific methods. In addition,the Commission has been active dur-ing the past year in overseeing theprofession's initiatives concerning theindependence of auditors and the ac-counting and auditing standard-settingprocesses. In this respect, the Com-mission has given specific attention tomaintaining the momentum for prog-ress in such areas as reporting on in-ternal accounting control, scope ofservices performed by auditors, andthe work of the Financial AccountingStandards Board (FASB) and of the

26

AICPA. The Commission has criticizedthe profession where necessary, com-plimented it, when deserved, and ingeneral, has offered its views and in.sights concerning the self-regulationeffort on which the profession has em-barked.

With respect to the accounting stan-dard-setting process, the Commissionbelieves that the initiative for estab-lishing and improving accounting stan-dards should remain in the private sec.tor, subject to Commission oversight.However, to retain that prerogative, theFASB must continue its efforts to pro-vide leadership and take necessary ac-tion in controversial areas. Also, themembers of the accounting professionand the corporate community must en-courage the FASB to provide that lead.ership, support the FASB's decisionsand join more actively in the standard.setting process. This next year will bea critical period in assessing the abilityof the private sector to demonstrate itsability to move responsibly in address-ing the complex, yet essential, issueswith which it is confronted.

The process of demonstrating thataccountants themselves, rather thangovernment, should (1) retain primaryauthority to regulate the profession; (2)ensure and instill confidence in profes-sionalism and objectivity; (3) maintaincontrol over the quality of the work ofthe profession's members and disci-pline those who fail to adhere to itsstandards; and (4) formulate appropri-ate accounting and auditing standards,is one which will demand the profes-sion's and the Commission's continuedcommitment. The need for leadershipregarding these essential issues isgreater than ever. Whether it will beeffectively provided by the private sec-tor and, if so, by whom, is not yet cer-tain. The Commission stands ready toconsider any reasonable alternatives toachieve the essential objectives.

Management Advisory Services

(MAS)- The issue of the appropriatescope of services to be provided byindependent public accountants totheir audit clients and the effect of suchservices on their independence hasbeen the subject of much discussion.The problem has been addressed invarious fora-by the accountingprofession, scholars, the Commission,the Congress, and most recently by thePublic Oversight Board (POB) of theSEC Practice Section of the Division ofCPA Firms of the AICPA."

In June 1978, the Commission, inAccounting Series Release No. 250(ASR No. 250), adopted a rule requir-ing disclosure in proxy statements ofservices provided by the registrant'sprincipal independent accountants anddisclosure of whether the board of di-rectors or its audit or similar commit-tee had approved each service andconsidered its possible effect on inde-pendence. In ASR No. 250, the Com-mission also indicated that it had notyet determined whether it should pro-pose rules to prohibit public account-ants from rendering certain types ofservices to their publicly-held auditclients. The Commission noted thatthe SEC Practice Section had askedthe POB to consider the matter andstated that the POB should be given anopportunity to present its conclusionsbefore the Commission acted.

On March 9, 1979, the POB submit-ted its report, "Scope of Services byCPA Firms," to the Executive Com-mittee of the Section. In its report, thePOB concluded that proscriptive solu-tions to the scope of services issue arenot necessary at this time.

The Commission reviewed the re-port of the POB and concluded that itdid not adequately sensitize the profes-sion and its clients to the potentialeffects on the independence of ac-countants of performance of nonauditservices for audit clients. Accordingly,in June 1979, the Commission issued

Accounting Series Release No. 264(ASR No. 264)89in which it stated itsviews concerning certain factors whichaccountants should consider in assess-ing the possible effects upon their in-dependence of the performance ofnonaudit services for publicly-held au-dit clients. In addition, because of theimpact which any impairment of theauditor's independence, either in factor in appearance, could have on thecredibility and usefulness of the auditreport, the Commission also set forthcertain factors which audit commit-tees, boards of directors, and manage-ments should consider in determiningwhether to engage their independentaccountants to perform nonaudit serv-ices.

The possible effect upon audit in-dependence of performing nonauditservices for audit clients is a complexissue. The Commission, in identifyingthe factors set forth in ASR No. 264,was neither proposing to proscribe par-ticular nonaudit services regardless ofthe surrounding circumstances, norseeking to deprecate the very real ben-efits which may accrue from certainauditor MAS engagements. Rather, theCommission's objective was to re-en-force the sensitivity of interested par-ties to the considerations involved injudging whether particular nonauditservices should be rendered by a par-ticular registrant's auditor. In eachcase, the ultimate issue is one of in-formed professional judgment; no setof factors or criteria can substitute forthe careful, case-by-case evaluationwhich the exercise of that judgmententails.

ASR No. 264 did not end examina-tion of the scope of services issue. TheCommission has the responsibility un-der the securities laws to assure thataccountants who practice before it areindependent. and will continue its ov-ersight of this area.

The Commission recognizes that the

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question of indep.endent auditor MASactivity is both difficult and controver-sial. If future events indicate that fur-ther action is necessary. the Commis-sion stands ready to reconsider thisissue in order to assure the confidenceof investors in the financial reportingof publicly-held companies.

Accounting Standards for Oiland GasProducers-During the fiscal year theCommission, aided by an AdvisoryCommittee on Oil and Gas Account-ing. continued its efforts to implementits August 1978 decision to consider anew method of accounting-reserverecognition accounting (RRA)-for oiland gas producers. The Commission'sdecision resulted from an extensivepublic proceeding conducted pursuantto both the Federal securities laws andthe Energy Policy and ConservationAct of 1975. which requires that theCommission assure the developmentand observance of uniform accountingpractices for the oil and gas industry.

Because the feasibility of such anaccounting method was not assured,the Commission outlined a series ofsteps for the development and imple-mentation of RRA. As an initial step.the Commission required that regis-trants disclose certain oil and gas re-serve information beginning in fiscalyears ending after December 25, 1978.Specifically, on December 19, 1978.the Commission adopted amendmentsto certain forms and regulations tostandardize and improve its disclosurerequirements relating to oil and gas re-serves and operetions.w The amend-ments incorporated into Regulation S-K requirements for disclosure of: (1)The present value of future net reve-nues from estimated production ofproved oil and gas reserves; (2) any fa-vorable or adverse event since the endof the most recent fiscal year which isbelieved to have caused a significantchange in the proved reserves; (3) theaverage sale price and average produc-

28

tion cost per unit of oil and gas pro.duced; and (4) historical informationconcerning the number of productiveand dry wells drilled. The amendmentsexpanded the disclosure of the netquantities of proved reserves from "asof a reasonably current date" to ape.riod of five years, and expanded thetypes of companies which are requiredto disclose information concerning theestimated availability of oil and gasfrom principal sources. An exemptionfrom these disclosure requirementswas provided for registrants whose oiland gas activities do not exceed spec-ified criteria.

In September 1979. the Commissionadopted a requirement for oil and gasproducers to include in their financialstatements for fiscal years ending afterDecember 25, 1979. a supplementalsummary of oil and gas producing ac-tivities prepared on the basis of RRA.The information generated and the ex-perience gained from the presentationof this supplemental summary will pro-vide much of the basis for an eventualdecision by the Commission as towhether RRA should be required as theaccounting method for the primary fi-nancial statements of oil and gas pro-ducers.

FASB Conceptual Framework Proj-ect-The FASB project to develop aconceptual framework as a basis for ad-dressing emerging accounting prob-lems is the most important financialreporting matter confronting the pro-fession. The Commission continues tosupport the efforts of the FASB in thisarea.

The conceptual framework projectcontinues to be given a high priority bythe FASB. The most notable actionsduring the last year were the issuanceof: (1) Statement of Financial Account-ing Concepts No.1 (FAC No.1), "Ob-jectives of Financial Reporting by Busi-ness Enterprises" (November 1978).which establishes the objectives of

general purpose external financial re-porting by business enterprises; and (2)Statement of Financial AccountingStandards No. 33 (FAS-33), "FinancialReporting and Changing Prices" (Sep-tember 1979), which requires certainlarge, publicly-held enterprises to dis-close supplementary information abouthow inflation and changing prices affecttheir businesses.

The FASS has made importantstrides in dealing with some of the fun-damental issues inherent in the stan-dard-setting process. FAC No. I,for ex-ample, does not limit the scope offinancial reporting objectives to finan-cial statements, but rather sets forththose objectives in terms of financialreporting in general. In addition, its fo-cus on users of financial informationand their interest in evaluating futureperformance, including earnings, is asignificant and worthwhile step. TheCommission is optimistic that a con-sequence of that focus will be morethought, experimentation, and timelyaction in achieving improvements infinancial reporting.

A major element of the conceptualframework should be to rethink the ob-jectives of the primary financial state-ments-and, therefore, to rethink whattype of information should be includedand what information should be pre-sented outside the financial state-ments. Ideally, the most relevant infor-mation would be a projection of cashflows for future periods. However, suchinformation may be highly uncertainand surrogates may have to be used.The decision as to what that relevantinformation is and whether it should beincluded in the primary financial state-ments will be influenced by its meas-urability. The August 9,1979 exposuredraft of the FASS on qualitative char-acteristics, "Qualitative Characteris-tics: Criteria for Selecting and Evaluat-Ing Financial Accounting andReporting Policies," addresses this is-

sue. The factors involved in the trade-off between reliability and relevance arethe key to developing guidelines for thetype of information that should be in-cluded in financial statements. Furtherclarification of this issue is necessarybefore display issues, such as the re-porting of earnings, can finally be re-solved. Additionally, the developmentof the recognition criteria phase of theconceptual framework project will becritical to the FASS in its search for adefinition of "earnings." It is expectedthat the FASS will give appropriate at-tention and priority to these importantissues.

The current status of financial re-porting of oil and gas producing com-panies reflects the nature of these is-sues. The Commission's efforts todevelop a more useful method of ac-counting would benefit from the exist-ence of a conceptual framework. Itshould be recognized that in develop-ing the concept of reserve recognitionaccounting, the Commission, will, ofnecessity, have to deal with issues re-lating to the conceptual framework ifthey have not, by then, been resolved.

Accounting For the Effects of Chang-ing Prices-The Commission believesthat the FASS's requirement thatlarge, publicly-held enterprises dis-close certain effects of general infla-tion and of price changes in specificgoods and services is a positive devel-opment in providing useful informa-tion. Accounting for the effects of in-flation and changing prices is one ofthe most important issues facing theFASS, the profession, the businesscommunity and the general public.Conflicting reports of record profits onthe one hand and inadequate earningsto maintain and expand capacity onthe other, serve only to confuse the is-sue. Further, they raise questionsabout the integrity of financial report-ing. The basic question in a period ofinflation and changing prices is how

29

best to report the effects of all eco-nomic events, and not only the effectsof transactions with outside parties. Ifthe objective is to measure only thegeneral impact of inflation on businessentities, then a general purchasingpower or constant dollar approachmight suffice. However, that approachmay not, and often does not, ade-quately portray the specific effects ofprice changes on companies or indus-tries. Therefore, it does not adequatelyassist investors in assessingor project-ing future cash flows or dividend pay-ing capacity-important objectives offinancial reporting as set forth in FACNo.1. The Commission remains fullycommitted to ensuring that users re-ceive adequate information about theimpact of changing prices on corpo-rate earnings and assets.

The Commission recognizes that theeffectiveness of the FASB's new stan-dard will depend, in large part, on theefforts of the accounting professionand the corporate community in apply-ing the standard, and evaluating andproviding additional disclosures whichmay help users assess the impact ofchanging prices on particular businessentities and industries. With respectthereto, the new standard should beviewed as a requirement for the mini-mum information to be presented toinvestors-an area where the corpo-rate community must make a positivecontribution to the standard settingprocess by volunteering additional in-formation necessary to make the re-porting more useful and meaningful inthe particular corporate circumstan-ces.

Last year, the Commission deter-mined to delay reexamination and ex-pansion of its replacement cost rule,adopted In Accounting Series ReleaseNo. 190, so as not to conflict with theFASB's consideration of these issues.Based on its evaluation of the FASBstatement, the Commission staff in-

30

tends to recommend that the Commis-sion take action to delete the require-ment for reporting replacement costinformation once the disclosure re-quirements of the FASB statement arefully effective. (On October 24, 1979,the Commission adopted the staffsrecommendation and determined todelete the disclosure required by ASR190 once the requirements of FAS 33become fully effective.)

Reporting on Internal AccountingControl-Since the disclosure in the1970's of widespread questionable orillegal corporate payments and enact-ment of the Foreign Corrupt PracticesAct of 1977, there has been increasingattention to, and interest in, the effec-tiveness of internal accounting con-trols. The accounting profession, bothinstitutionally through the AICPA'sSpecial Advisory Committee on Inter-nal Accounting Control and individ-ually by many accounting firms, hasresponded to the need for guidance inevaluating systems of internal ac-counting control, and the AICPA'sAuditing Standards Board is develop-ing standards for public reporting oninternal accounting control.

In April 1979, the Commission pro-posed for comment rules which wouldrequire inclusion of a statement bymanagement on internal accountingcontrol in annual reports on Form 10-K filed with the Commission under theExchange Act, and in annual reports tosecurity holders furnished pursuant tothe proxy rules. The rules, if adopted,would also require that such statementof management be examined and re-ported on by an independent publicaccountant. The Commission believesthat information regarding the effec-tiveness of an issuer's system of inter-nal accounting control may be neces-sary to enable investors to betterevaluate management's performanceof its stewardship responsibilities andthe reliability of interim financial state-

ments and other unaudited financialinformation generated from the ac-counting system.

At the close of the fiscal year, theCommission was reviewing the largenumber of comments received on theproposed rules.

Unaudited Interim Financial Informa-tion-Since the issuance of Statementof Auditing Standards No. 24 (SAS No.24) by the Auditing Standards Board ofThe American Institute of CertifiedPublic Accountants (AICPA) in March1979, several reports by independentaccountants on Interim unaudited fi-nancial information have been in-cluded in Securities Act filings onForm S-16 or S-14. Such filings haveraised a question as to whether ac-countants could be liable under Sec-tion 11(a) of the Securities Act (whichimposes liability on every accountant

"who has with his consent been namedas having prepared ... any report") insuch circumstances. On September20, 1979, the Commission proposedfor comment two alternative rules»either of which, if adopted, would havethe effect of excluding accountants is-suing such reports from Section 11(a)liability. In encouraging reviews byauditors of interim financial informa-tion, the Commission has noted that"the involvement of independent ac-counts will add the expertise of profes-sional accountants with wide experi-ence in reporting problems .... Thisshould improve individual companyreporting and direct greater profes-sional attention to the general prob-lems of interim reporting."92 (On De-cember 28, 1979, the Commissionadopted a rule having the effect of ex-cluding accountants issuing SAS No.24 reports from Section 11(a) liability.)

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Investment Companies and Advisors

The Investment Company ActStudy

The Investment Company Act spe-cial study group which was establishedat the end of the last fiscal year by theDivision of Investment Management(the Division), continued its compre-hensive review of the Investment Com-pany Act of 1940 and the rules, regu-lations and administrative practicesunder it with the aim of simplifying, tothe extent practicable, the regulation ofinvestment companies, especially byeliminating unreasonably burdensomeregulations. The guiding principal ofthis effort is that whenever possible,and subject to safeguards necessaryfor the protection of investors, invest-ment companies and their managersshould have responsibility for manage-ment decisions. Accordingly, the In-vestment Company Act Study (theStudy) has sought to lessen the in-stances in which the staff of the Com-mission need participate in the deci-sion-making process by (1) replacingadministrative review of proposed in-vestment company activities with rulesestablishing general criteria underwhich the activities are permissible;and (2) refining the Investment Com-pany Act's sometimes sweeping statu-tory prohibitions so as to permit activ-ity not originally contemplated asbeing within a provision's technicalscopeor underlying purpose.

The linchpin of the program isenhancement of the authority and re-sponsibility of investment companydirectors, particularly disinterested di-rectors, as primary overseers of man-

agement decisions. This greater reli-ance on directors, in many instances,permits the withdrawal of the staff asanactive participant in certain manage-ment decisions while enabling the Com-mission to preserve, through its com-pliance and enforcement program anactive oversight capability.

Consistent with the goal of greaterdirector responsibility and reducedstaff participation in management de-cisions, the Commission, during thefiscal year, adopted several rules whichpermit certain transactions between aninvestment company and its affiliatedperson with regard to: (l) joint pur-chase of liability insurance pollcles:»(2) the receipt of cash or securities pur-suant to a portfolio company's plan ofreorganization;94 (3) the purchase of se-curities from an affiliated underwritingsyndlcate:» (4) certain purchase, saleor lending transactions between affili-ated perties.w and (5) the receipt ofstock exchange commissions by affili-ated brokers.w During that period, theCommission also adopted rules (l) pro-viding unit investment trusts with start-up exemptions from the InvestmentCompany Act's requirements regard-ing minimum net worth, frequency ofcapital gains distribution, and forwardpricing; 98 and (2) providing increasedflexibility in determining when an in-vestment company must price an in-vestment company's redeemable se-curltres.» The Commission also pro-posed rules to ease problems arisingwhen certain contracts for investmentadvisory or principal underwritingservices are terminated. 100

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In addition, for several years theCommission has been consideringwhether mutual funds (open.end man.agement investment companies)should be permitted to finance distri-bution of their own shares. The Com-mission has been reluctant to permitfunds to incur distribution expensesbecause of doubts about (1) whetherfunds benefit from salesof their shares;(2) whether funds' investment advisers'conflicts of interest could be regulatedadequately; and (3) whether it would befair to existing shareholders for funds toundertake such expenses. After recon-sidering the matter in light of the objec-tives of the Study, the Commission onSeptember 7, 1979, published for com-ment Rule 12b-1 under the InvestmentCompany Act and certain relatedrules.v» If adopted, Rule 12b.1 wouldpermit use of fund assets for distribu-tion if approved by shareholders, theboard of directors as a whole, and thedisinterested directors. The proposedrule contains conditions intended to in-crease the independence of the disin-terested directors and ensure that thedirectors permit such a use of fund as-sets only after considering all pertinentfacts and concluding that financial dis-tribution would be likely to benefit thefund and its shareholders.

Disclosure StudyIn addition to the foregoing review

of the investment company regulatorysystem, the Division established an-other study group to undertake a thor-ough review of investment companydisclosure requirements under the Se-curities Act of 1933 (Securities Act)and the Investment Company Act. Thenew disclosure study will explore waysto reduce unnecessary burdens onboth the industry and the staff whichresult from present disclosure require-ments. Initially, the study group willundertake two major projects: a review

34

of current procedures for processingpost-effective amendments to registra-tion statements, which form the bulkof the Division's workload in the dis-closure area; and a review of ways toeliminate duplicative reporting re-quirements in documents transmittedto investment company shareholders.

Investment Company AdvertisingDuring the fiscal year, the Commis-

sion took several actions to reduce re-strictions applicable to the promotionand sale of investment company shareswithout diminishing essential investorprotections. On March 8, 1979, theCommission withdrew its Statement ofPolicy on Investment Company SalesLlterature.w- The Statement of Policy,which had been in effect since 1950,wasa lengthy document detailing typesof representations which would orwould not be considered misleading ininvestment company sales literature.By its specificity, the Statement of Pol-icy tended to induce conformity to pre-scribed formats. The result may havebeen to limit innovations unduly and,at the same time, insulate sales litera-ture, which complied mechanicallywith the Statement of Policy, but wasused in a misleading way. At the sametime that it withdrew the Statement ofPolicy, the Commission proposed forcomment Rule 156 under the Securi-ties Act, an interpretive rule whichbriefly and in relatively general termshighlighted what experience has sug-gested are problem areas in invest-ment company sales Htereture.ws(Subsequent to the end of the fiscalyear on October 24, 1979, the Com-mission adopted Rule 156 asrevised.104)

On August 31, 1979, the Commis-sion adopted Rule 434d under the Se-curities ActIO' which, in effect, permitsinvestment companies to include farmore information in mass media adver-tisements. In the past, investment com-

panies, like other issuers, have been re-stricted to so-called "tombstone ads"which may contain only relatively lim-ited information about the security andthe issuer. However, Rule 434d permitsadvertisements to include any infor-mation which is taken from or whichfairly summarizes the full statutoryprospectus. The rule should permit in-vestment companies to more effec-tively communicate important facts,such as performance data, to investors.At the same time, in order to protectinvestors from misleading statements,Rule 434d advertisements would besubject to some of the liability provi-sions of the Securities Act applicableto prospectuses.

Institutional Disclosure ProgramBeginning on February 14, 1979,

more than 650 major institutional in-vestment managers began filing quar-terly reports on Form 13F reporting tothe Commission on their significantequity holdings pursuant to Rule 13f-1under Section 13(f) of the SecuritiesExchange Act of 1934. These reportsare transferred to the Commission'sPublic Reference Room as promptly asreasonably possible after filing, andare normally available to the publicwithin a day to two after they are filed.

The tabulations of the data on Forms13F, required by Section 13(f)(3), aredone by an independent contractor se-lected through the competitive biddingprocess. The contractor is required tomake a variety of specified tabulationsavailable to the public at reasonableprices within 10 days after receipt ofthe reports. Since the contractor pro-vides its services without charge to theCommission, the only material costs tothe Commission of administrating theprogram are in staff time. The Com-mission's various responsibilities arecarried out in several different officesand Divisions, making it difficult to becertain how much staff time is devoted

to the program, but it is probably onthe order of two to four man years.

Because the program is in its firstyear of operation and the Commissionhas only limited resources to devote toits operation, the staff and the Com-mission have, so far, been concernedwith resolving technical problems withForm 13F, interpretive questions, andcollateral issues such as confidentialtreatment. No attempt has yet beenmade to analyze or otherwise use theinformation which has been filed. Afterreceiving public comment, the Com-mission decided that it would be un-duly burdensome to require reports inmachine readable form since man-agers use a variety of computer sys-tems and some compile reports man-ually. The independent contractordoes prepare a magnetic tape of whichmay be obtained from either the Com-mission or the contractor.

Office of Investment AdviserRegulation

The Office was established withinthe Division of Investment Manage-ment in October 1978. The Office wascreated in recognition of the need toreevaluate the Commission's advisoryregulatory program in light of the dra-matic growth in the advisory industryand the developments in the kinds ofadvisory services provided by invest-ment advisers.

The Commission, in January 1979,adopted new investment adviser re-quirements concerning disclosure, re-cordkeeping, applications for registra-tion and annual filings.'06 These re-quirements include: (1) adoption of anew disclosure rule (Brochure Rule) un-der the Investment Advisers Act of 1940(Investment Advisers Act) (2) amend-ment of two rules under the InvestmentAdvisers Act relating to recordkeepingand amendments to the investment ad-viser registration form; (3) adoption ofa new annual report form for invest-

35

ment advisers; (4) revision of certainschedules used by investment advisersand broker-dealers in connection withthe respective registration forms forsuch persons. Concurrently with theadoption of the above rules and forms,the Commission amended a rule andcertain forms to require disclosure ofbrokerage placement practices.w? Asimilar disclosure requirement is im-posed on investment advisers as partof the Brochure Rule. Taken together,these actions will result in the Com-mission and the public being apprisedof a great deal of material informationabout investment advisers which wasnot previously disclosed in any system-atic way.

In other significant rulemakings, inJuly 1979, the Commission adoptednew requirements under the Invest-ment Advisers Act governing the pay-ment of cash referral fees by invest-ment advisers.ws The adoption of the

36

new rule makes it unlawful, except un-der specified circumstances and sub-ject to certain conditions, for an in-vestment adviser to make a cashpayment to a person ("solicitor") whodirectly or indirectly solicits any clientfor, or refers any client to, an invest-ment adviser. In addition, in June1979, the Commission issued for publiccomment a proposed rule under the In-vestment Advisers Act which wouldpermit certain registered investmentadvisers to business development com-panies (asdefined in the rule) to be com-pensated on the basis of a share of netcapital gains upon, or net capital appre-ciation of, the funds, or any portion ofthe funds of the business developmentcompany. 109 Such means of compensa-tion is currently prohibited by the In-vestment Advisers Act. At the close ofthe fiscal year, the staff was reconsi-dering the proposed rule in light of thecomments received.

Enforcement Program

The Commission's enforcement pro-gram is designed to secure as broad aregulatory impact as possible with thelimited resources available. To thisend, the Commission relies heavilyupon private civil damage actions,Federal securities laws, and upon selfregulatory and state and local law en-forcement agencies. With respect tothose agencies, the Commission de-votes substantial efforts towards pro-moting the effective coordination ofenforcement activities. In this manner,the Commission seeks to make maxi-mum effective use of available re-sources in order to obtain an increasedenforcement presence concerningmatters within its jurisdiction.

The cases described here reflect thebreadth of the Commission's respon-sibilities and its enforcement re-sponses, and the continued vigor andeffectiveness of the enforcement pro-gram.

Sanctions and RemediesThe Federal securities laws provide

administrative, civil and criminal rem-edies for violations of those laws.Sanc-tions in administrative proceedings forthose subject to the Commission's reg-ulatory jurisdiction may range fromthe imposition of a censure to the bar-ring of a securities professional fromthe profession. The civil court remedyusually available to the Commission iscourt entry of an injunction barring fur-ther violations. The courts often enterorders providing for appropriate addi-tional relief. Criminal sanctions pro-

vided by the Federal securities laws in-clude fines and imprisonment.

The Federal securities laws are pri-marily remedial in nature. In recogni-tion of that purpose, in the litigationand settlement of its proceedings theCommission makes every attempt toprevent a recurrence of violative activ-ity and to rectify the result of past vi-olations. The Commission has beenparticularly successful in securing ap-propriate relief in injunctive actionsand during fiscal year 1979 such reliefincluded, in one case, an order requir-ing the defendant to return $30 millionalleged to have been wrongfully ob-tainedllo; the appointment of individu-als or committees for the purpose ofconducting further investigations andreporting publicly the results'»: the ap-pointment to boards of directors ofpersons previously unaffiliated withthe corporatlonu-: restrictions on thefuture employment of defendants asofficers or directors of publicly-heldcornpaniesus: limitations upon the vot-ing of securitles->: the return to pub-licly-held corporations of monies im-properly obtained by insldersr»: andthe appointment of an independentmaster to oversee the operations of acorporatlon'>.

In the majority of its cases, the Com-mission is able to settle with respond-ents or defendants on terms which se-cure the necessary remedial relief.Generally, respondents or defendantswho consent to such settlements withthe Commission do so without admit-ting or denying the factual allegationscontained in the Commission's com-

37

plaint or order for proceedings. Thus,unless otherwise noted, in the discus-sion of cases which follows, it shouldbe assumed that settlements achievedwere upon that basis.

Energy-Related CasesDue to the tax consequences of in-

vestments in certain energy-relatedproducts, particularly oil and gas, andthe inherent attraction of such invest-ments to investors, the Commissionhas long had to devote enforcementresources to the control of fraudulentofferings in this field. With the adventof the nation's energy crisis, fraudulentofferings (and the Commission's re-sponse to them) have intensified.

Investors in these offerings are ofteninitially contacted as part of a nation-wide, long-distance telephone solicita-tion campaign by salesmen.u? Thesecampaigns are typified by offeringswhich fail to comply with the regis-tration requirements of the SecuritiesAct of 1933 (Securities Act) and by themaking fraudulent statements toinvestors to induce them to invest inthe offering. Investors are often per-suaded to make their investments onthe basis of false statements or omis-sions concerning, among other things,the funding of the entity in which theinvestment is made and the use of theinvestors' funds derived from the offer-ingliS; the risks associated with the in-vestrnentus: the experience of the is-suers' pr incipalsw'; and the use ofspecial accounts in which investors'funds would, purportedly, be placedfor protectionw, One of the major in-ducements to investors is the pur-ported availability of special tax bene-fits. 122

SEC v. Atlas 011Exploration. Inc. 123_

On July 12, 1979, the Commission fileda civil injunctive action against AtlasOil Exploration, Inc. (Atlas) and a num-ber of other entities and individuals re-

38

lated to it. The Commission's com-plaint alleged that, in connection withthe offer and sale of approximately $3million in unregistered fractional un-divided working interests in oil and gasleases, the defendants made a numberof untrue statements of material factsconcerning, among other things: (1)the use of "special escrow" or "trust"acounts for the protection of investors;(2) that investors could recover theirinvestments in 1-'/2-2 years; (3) the ex-perience of the driller of oil wells; (4)that state securities commissionerswere receptive to Atlas' "openness andfull disclosure"; and (5) that wellsdrilled would produce on the averageof ten barrels of oil a day per well. Thecomplaint also alleged that the defend-ants omitted to state material factsconcerning, among other matters: (1)the entry of cease and desist orders inseven states prohibiting the sale of At-las securities; (2) the misuse of at least$275,000 of the proceeds of the offer-ings; (3) that wells in the field wherethe subject wells were to be drilledwere averaging less than one barrel ofoil per day per well; (4) that, basedupon the experience with productionof initial wells drilled by Atlas, inves-tors could not recover their investmentin less than eight years; and, (5) that,prior to their involvement with Atlas,the oil well driller had drilled only 12wells and the experience of the presi-dent and controlling shareholder ofAtlas was as a salesman with a com.pany that had been enjoined in an ac-tion previously brought by the Com-mission. Additionally, in connectionwith one of the offerings involved, thecomplaint alleged the failure to dis-close (1) contingencies in securitiesgas pipeline connections; (2) that theproceeds of the offering would be com-mingled; and (3) that 22 percent of thetotal proceeds of the offering would bepaid to the president and a vice presi-dent of a related corporation.

Several of the issuers named as de-fendants in the Commission's actionconsented to the entry of final judg-ments of permanent injunction. The de-fendants were enjoined from further vi-olations of the registration andantifraud provisions of the SecuritiesAct and the antifraud provisions of theSecurities Exchange Act of 1934 (Ex-change Act). Individual defendantsconsented to the entry of permanent in-junctions enjoining them from furtherviolations of the antifraud provisionsof the Federal securities laws. Addi-tionally, another corporation and itsprincipal officers and directors wereenjoined from further violations of theantifraud provisions of the Federal se-curities laws and the defendant offi-cers and directors were ordered to filewith the court an accounting settingforth the receipts and disbursementsof five of the corporation's offerings.

SEC v. Advanced Fuel Systems,Inc.124-On December 6, 1978, theCommission filed a complaint againstAdvanced Fuel Systems, Inc. (AFSI)and an individual. The complaint al-leged violations of the registration pro-visions of the Securities Act and cer-tain of the antifraud provisions of theFederal securities laws based on un-true statements of material fact andomissions to state material facts toinvestors including: (1) that $1 millionhad been committed to AFSI for re-search and development of a fuel sys-tem when in fact less than $145,000was available; (2) information that an"international financier" was backingthe corporation with "unlimited funds"when no such backing existed; (3)omitting to disclose to investors thedilution effect of previous stock splitsbenefiting insiders; (4) failure to followgenerally accepted accounting princi-ples when valuing a licensing agree-ment in financial statements. resultingin an over evaluation of the agreementby about 500 percent; (5) claiming the

availability of special tax benefits whennot available; (6) representations thatthe fuel system would yield 100 milesper gallon for automobiles when it wasknown that that was not true; (7) omit-ting to disclose that claims of 66.8miles per gallon in certain tests werebased on unsophisticated, nonscien-tific, nonverifiable and widely varyingtest results; (8) representations regard-ing the cost of the finished productwhen no facts were available to sup-port any cost prediction; and, (9) omis-sions to disclose that funds from thesecurities sales would be paid to theindividual.

The defendants consented to the en-try of judgments of permanent injunc-tion enjoining them from further vio-lations of the registration and antifraucprovisions of the Federal securitieslaws. The order of the court also re-quires the defendants to provide acopy of the ascertainable investors inAFSI.

Questionable PaymentsThe Foreign Corrupt Practices Act of

1977 [Sections 13(b)(2), 30A and 31(c)of the Exchange Act] (Foreign CorruptPractices Act) was signed into law inDecember 1977. That Act prohibits is-suers from, among other things, cor-ruptly making payments to officials offoreign governments in order to inducesuch officials to use either their au-thority or influence to obtain businessfor the issuer in that country. Amongother things, the Act also requires cor-porations to maintain systems of inter-nal accounting controls which providereasonable assurance that certain ob-jectives are met.

Disclosures of unethical and illegalcorporate activity resulting in partfrom the Commission's enforcementactivities contributed to Congress' en-actment of the Foreign Corrupt Prac-tices Act. During the past year, theCommission's enforcement interests in

39

this area continued and three of the im-portant cases brought are described inthe following summaries.

SEC v. Hospital Corporation of Amer-ica (HCA)12l-The Commission's com-plaint in the HCA case alleged viola-tions of the antifraud provisions of theSecurities Act and the antifraud, reoporting, and proxy provisions of theExchange Act in connection with dis-closures regarding a contract for themanagement of a hospital in SaudiArabia. The complaint alleged that,prior to entering into the contract,HCA was informed of facts which in-dicated that payments to persons ofpower and influence in Saudi Arabiawould have to be made by HCA in con-nection with the contract. The com-plaint further alleged that a Liechten-stein entity which received a total of$3.393 million from HCA, purportedlyfor consulting and other services, wasmerely a conduit for the improper pay-ments. The Commission's complaintalso alleged that HCA made false andmisleading statements in registrationstatements, proxy statements, andother public documents filed with theCommission and in connection withstatements made to the staff of theCommission during an informal in-quiry.

HCA consented to the entry of a finaljudgment of permanent injunctionfrom violations of the antifraud provi-sions of the Securities Act and the anti-fraud, reporting, and proxy provisionsof the Exchange Act. In addition to theinjunctive relief the terms of the settle-ment provide that HCA's audit com-mittee, acting with the assistance of itscounsel and its independent auditors,will conduct a review of prior investi-gations by HCA of (1) direct or indirectpayments, if any, to agents, employ-ees, or officials of foreign and domes-tic governments and of foreign domes-tic customers during a five year periodand (2) of the accuracy of HCA's books

40

and records as to the foregoing. HCA'saudit committee will prepare a writtenreport containing its findings and rec-ommendations and any action takenby HCA in response to the report willbe described in a current report filedwith the Commission.

SEC v. Schenley Industries, Inc.(Schenley)126- This case involved al-legations that Schenley had expendedat least $6 million by granting illegaldiscounts, in the form of cash, credit,free merchandise or other things ofvalue to selected purchasers of Schen-ley's products in violation of state liquorregulations. As a result, the complaintalleged, Schenley had jeopardized its li-censes to do business in the 35 states ofthe United States in which Schenley op-erated as a producer, importer andseller of alcoholic beverages. The Com.mission's complaint alleged violationsof the antifraud provisions of the secu-rities laws.

The defendants consented to the en-try of final judgments of permanent in-junction. As part of its consent, Schen-ley agreed to, among other things, theappointment of a Special Agent to con-duct an investigation of Schenley andits subsidiaries and render a report tothe Court and to the Commission de.tailing: (1) illegal political contrlbu-tions made by Schenley and its subsi-diaries; (2) illegal foreign paymentsmade by Schenley and its subsidiariesfor the purpose of influencing any for-eign government or official thereof orevading the laws of a foreign sover-eign; (3) illegal kickbacks, rebates, dis-counts, refunds, allowances , or otherexpenditures made by Schenley and itssubsidiaries to induce the purchase ofSchenley products, and the approxi-mate dollar amount expended to theextent that these facts have not beenpreviously disclosed; and (4) pendinginvestigations by state or Federal gov-ernmental authorities regulating the

liquor industry which may result in thecommencement of legal proceedings.

In addition, Rapid-American agreedto file with the Commission a currentreport: (a) within 30 days after the en-try of the final judgments, setting forthall facts, known as of that date, con-cerning Schenley's practice of grantingillegal discounts to induce and pro-mote the purchase of Schenley prod-ucts; and (b) upon the filing of the Spe-cial Agent's report, setting forth allmaterial facts contained therein.

SEC v. International Systems andControls Corporetionm-s-uv this action,the Commission filed a complaintagainst International Systems andControls Corporation (ISC) and certainofficers and directors seeking injunc-tive relief, appointment of a receiverand other equitable relief.

The complaint alleged violations ofthe antifraud, reporting and proxy pro-visions of the Federal securities lawsaswell as violations of the accountingprovisions of the Foreign Corrupt Prac-tices Act. According to the complaintthe corporation made false and mis-leading disclosures or failed to dis-close its commitments to pay a total of$33 million, its payment of approxi-mately $23 million in connection withthe securing or solicitation of businessin several foreign countries, its over-statement of its assets, earnings andshareholders' equity. The complaintfurther alleged that the corporationfailed to disclose that certain officerswere the prime beneficiaries of a de-ferred compensation plan and that cor-porate funds were used to purchase,furnish and maintain a summer resi-dence for the Chairman of the Boardof the firm.

The Commission simultaneouslyfiled with the complaint a motion fora preliminary injunction against ISCand for the appointment of a SpecialAgent of the Court to take custody andcontrol of all assets of ISC; to oversee

the business activities of ISC to assurethat they are carried out for legitimatepurposes of ISC and not for the per.sonal benefit of any control person,officer, director or employee of ISC; todetermine whether ISC entered intoany transactions involving expenditureof substantial funds or assetswhich ap-pear not to have been engaged in forlegitimate business or are not ade-quately explained on ISC's books andrecords; to recover any funds or assetsor enforce any liability to ISC; to over-see ISC's filings with the Commission;and to authorize the agent to report hisfindings to the Court within 60 days.

Government and MunicipalSecurities

As indicated in last year's annual re-port.w the trading of government andmunicipal securities has increased sig-nificantly in recent years. Due to thecontinuation of questionable issuingand trading practices in this area, theCommission's enforcement interesthas also continued.

In February 1979, the Commissiontransmitted to Congress its Final Re-port In the Matter of Transactions in theSecurities of the City of New York, andsimultaneously announced its conclu-sion of the investigation in that mat-ter.129 The investigation, one of thelargest of most complex in the Com-mission's history, dealt with events oc-curring during the period from Octo-ber 1974 to April 1975 when the Cityfaced a fiscal crisis and issued largeamounts of short-term securities. TheCommission had previously issued adetailed Staff Report which describedthe events leading to the City's fiscalcrisis. no

The Final Report issued in Februarycalled for legislative action to solve thedeficiencies in the issuance and mar.keting of municipal securities and con-cluded that the Commission should de-

41

vote its efforts to support such leg-islative solutions. The Final Reportalso stated the Commission's conclu-sion that no enforcement proceedingsshould be instituted in the matter.

Among the factors cited in the FinalReport for the Commission's decisionwere the issuance of the comprehen-sive Staff Report-»: the change in theCity's administration since the issu-ance of the Staff Report; various re-medial actions taken by those whowere mentioned in the Staff Report,most particularly by the City itself;Congressional and state actions withrespect to New York City's financialdifficulties, including the Federal leg-islation enacted in August 1978 whichimposes certain financial controls overthe City and requires, among otherthings, that the City's financial state-ments be audited; and, finally, theCommission's determination that en-forcement action would have limitedadditional remedial value and wouldrequire the commitment of substantialadditional resources which, in light ofthe above, could otherwise be usedmore efficiently in discharging theCommission's responsibilities.

The Final Report focused attentionon the area of municipal accountingand financial reporting and stated:

"The Commission believes that leg-islation designed to standardize themethods used in the preparation ofmunicipal accounts and the form andcontent of municipalities' financialstatements should be accorded thehighest legislative authority."132

The University of Houston case-TheCommission continues to note in-stances of questionable practices inconnection with United States Govern-ment securities and related securities.In this connection, of particular impor-tance during fiscal year 1979 was theCommission's so-called "University ofHouston" case.t» The case involved agroup consisting of an employee of the

42

University who was its government se-curities trader and various individualsand securities firms. Securities in-volved in the case were governmentsecurities (including so-called GinnieMae's) and reverse repurchase agree-ments (a pledge of securities whichtakes the form of a sale and buy-backobligation).

The Commission alleged in its com-plaint that the University's employeechannelled securities transactionsthrough the securities firms and individ-uals who were defendants in the action,to their benefit and to the University'sdetriment. The complaint also allegedthat one of the securities firms involvedcharged excessive fees to the Universityand charged commissions to both sidesof transactions while purportedly actingas a broker for the University. That firmalso allegedly agreed to execute trans-actions for the University at pricesaway from the market and to "park"government securities with the Univer-sity. The complaint alleged that in theevent that the market price for securi-ties increased, the securities were to besold back to the firm at the originalprice. In addition, the complaint al-leged that the firm, acting as a brokeror principal in trades with the Univer-sity, engaged in trades covering ap-proximately $318 million in securitiesupon which the firm made profits orcommissions of approximately$590,000.

The complaint also charged that an-other firm had defrauded the Universityby charging excessive fees and by inter-positioning with respect to $35 millionin government securities transactionsby the University. Over $130,000 incommissions were generated by thesetransactions.

Finally, the complaint alleged thatanother firm was needlessly interposi-tioned with respect to the University'strades in government securities to thefinancial detriment of the University

and that excessive fees were chargedto the University in connection with re-verse repurchase transactions. Thesetransactions were, allegedly, employedby the University's employee as part ofan investment strategy whereby gov-ernment securities were pledged inconnection with cash loans. The loanswere used in turn to purchase addi-tional government securities. The firmacted as a broker for the University intrades involving about $1 billion in re-verse repurchases and about $73 mil-lion in government securities transac-tions. The case resulted in the issuanceof injunctions against the principal de-fendants as well as a criminal proceed-ing in which they were found guilty andsentenced to four years in prlson.i»

Industrial Development RevenueBonds-A persistent concern of theCommission in the area of governmentsecurities has been abuses in the offerand sale of industrial development rev-enue bonds. These securities generallyare issued by municipalities to obtainfunds to erect industrial facilities whichare then leased to private corporationsfor business use. Principal and intereston the bonds is paid only with revenuesof the private corporation.

Industrial revenue bonds, thoughsubject to the antifraud provisions ofthe Federal securities laws, are exemptfrom the registration requirements ofthose laws.

The Commission's Staff Report OnTransactions In the Marine Protein Cor-poration Industrial Development Reve-nue Bonds is illustrative of the types ofconcerns arising in this area.m Thestaff report details an unusually in-structive situation involving a corpo-ration which had sold stock to the pub-lic in an offering registered with theCommission and, shortly thereafter,also participated in an offering of in-dustrial revenue bonds which were is-sued for the purpose of providingfunds to construct facilities for the cor-

poration. The staff report discusseddisclosures made in the prosepctus forthe registered stock offering and com-pared them with disclosures in connec-tion with the industrial developmentrevenue bond offering. The staff reportconcluded:

'", [T]hat risk factors and otherimportant information relating to thespeculative nature of an investment inMarine that were included in the com-mon stock prospectus are absent fromthe bond 'offering prospectus' and thatdocument contains considerable bul-lish promotional information that is in-appropriate in a prospectus used to sellsecurities."136

Other areas of questionable activi-ties in connection with industrial rev-enue bonds which were the subject ofCommission action this year includedalleged situations where bonds weresold prior to issuance, but after col-lecting the money from purchasers,the promised bonds were not issued tocustomers and, instead, the customers'funds were converted to the promoter'suser»: nearly worthless bonds weresold to investors at 94-98 percent offace value138; principal and interestpayments were made from proceeds ofbond sales to conceal the fact that theprivate corporation was not a goingconcernus: and misleading quotationswere placed in interdealer quotationsrnedia'w

Options, Corporate Takeoversand Tender Offers

During the fiscal year, the Commis-sion brought a number of cases in sit-uations where the investing public washarmed as a result of practices by mar-ket professionals and others in connec-tion with trading in options. Addition-ally, as the Commission noted in lastyear's annual reportwr, the recent in-crease in the number of corporatetakeovers and tender offers has led toan increasing number of Commission

43

"

enforcement actions in this area. Inthis connection, the Commission hasbrought an increasing number of casesalleging insider trading based uponmaterial information regarding cor-porte takeovers and tender offers.

Options- The Commission's optioncases involved allegations that materialmisstatements and omissions weremade to customers concerning, amongother things, the risks inherent in op-tion trading strategiesl42; the potentialprofits and rates of return involved inoptions tradingI4'; and the suitability oftradings strategies used for lnvestorsw.

In the Matter of Bear Stearns &Co. 14'_ This case is illustrative of thetypes of trading practices which theCommission uncovered during thecourse of its investigations this year. Inthis case, the Commission's Order In-stituting Proceedings and ImposingRemedial Sanctions alleged that trans-actions executed in accounts as towhich discretionary authority existedwere excessive in size and frequency inlight of the financial resources andcharacter of the accounts and that, inconnection with options trading, maoterial misstatements were made con-cerning the existence of margin ac-counts, the meaning and purpose ofmargin call notices sent to customers,the significance of the large number ofconfirmations slips received by cus-tomers and the meaning and purposeof correspondence sent to a customerwith regard to activity in the cus-tomer's account. Additionally, the Or-der alleged that transactions in cus-tomer accounts were effected whichwere not authorized by the customersincluding trading in the options mar-ket, trading on a principal basis, andtrading in a margin account. Finally,the Order alleged that transactions incustomer accounts were effected inunseasoned and speculative securitiesin disregard of or without inquiry re-garding the suitability of the securities

44

to individual customer needs, circum-stances or objectives.

SEC v. Santangelo & Co., 146_ Thiswas another significant action by theCommission in the options area duringthis year. The case involved fictitiousreports of options transactions on theNew York Stock Exchange (NYSE) andthe American Stock Exchange (Amex).Specifically, the Commission's com.plaint alleged that in varying periodsin 1974, 1975, and 1976, hundreds oftransactions in options were printed onthe stock and options tape of the Amexwhen in fact no transactions had oc-curred. Additionally, the complaint al-leged that during 1976 transactions instocks which should have been re-ported on the tape of the NYSE as sin-gle transactions were reported as sev-eral transactions. The complaintfurther alleged that various of the de-fendants, either as specialists on thesubject exchanges or otherwise, eithercaused a substantial number of sucherroneous reports or had reason toknow that those reports were beingprinted and failed to take reasonableand appropriate steps to prevent suchreports from being made.

Tender Offers-The Commission'sactions in the area of tender offers dur-ing the past year involved situationswhere the Commission alleged that ma-terially false and misleading statementswere made to investors concerning,among other matters, the purposes ofthe tender offer-v: financing arrange-ments with respect to the tenderofferl48, and the intentions of the tenderofferorl49

The defendants, two broker-dealersregistered with the Commission andpartners of each firm, consented to theentry of judgments of permanent in.junction enjoining them from violatingthe antifraud provision of the ExchangeAct.

SEC v. BOC International Limitedvw-«This was one of the more significant

•

Commission actions brought in thetender offer areaduring the past year. Inthis case, the Commission filed a com-plaint seeking injunctive relief againstaoc International Limited (SOC) aUnited Kingdom corporation and itswholly-owned subsidiary, SOC Finan-cial Corporation (SOCF), a Delawarecorporation. The complaint allegedthat the defendants violated the tenderoffer and reporting provisions of the Ex-change Act in connection with SOC'stender offer for shares of Airco Inc.(Airco).

According to the Commission'scomplaint, SOC and Airco entered intoa series of agreements governing po-tential tender offers by one firm for thesecurities of the other. Pursuant tothese agreements, SOC acquired a 34percent interest in Airco and subse-quently increased that interest to 49percent. The latter tender offer wasoversubscribed. SOC subsequently an-nounced a tender offer for all Aircoshares at the same price as the pre-vious offer. Pursuant to their agree-ment, Airco disapproved the tenderoffer for the remaining outstandingshares based upon the inadequacy ofthe price and sued SOC to rescind theoffer. SOC withdrew the offer for alloutstanding shares but pursuant to aprior agreement purchased an addi-tional 6 percent of Airco. The latterpurchases were designed to frustrateany competing offers for Airco and toavoid entering a bidding contest forAirco. Subsequently, Airco announcedan agreement in principle for a take-over of Airco by a third company at$50 per share. Shortly after this an-nouncement, SOC and Airco an-nounced a settlement of their action,pursuant to which aoc offered an ad-ditional $7 to all those who tenderedtheir shares in the offer that resulted inSOC's obtaining the additional 15 per-cent of Airco, and agreed to make a

$50 offer for all remaining Aircoshares.

The Commission, in its complaint,charged that SOC Ltd. violated theantifraud provisions of the secuntieslaws in that the tender offer materialsfailed to disclose that in obtaining aloan for the second tender offer, SOCsought sufficient funds to acquire ad-ditional shares, that SOC's agreementwith its investment banker Included anadditional $1.5 million fee if SOC ac-quired 100 percent of Airco, and thatAirco's investment banker had formedan opinion that a fair price for Aircoshares was $50-$55 per share. Thecomplaint also charged that SOCfailed to amend its statement filed withthe Commission with respect to itsholding of Airco shares on a timely ba-sis and, when it did so, failed to dis-close the purpose of its acquisitionsand subsequent action.

SOC consented to the entry of an in-

junction requiring compliance with thetender offer and reporting provisionsof the Federal securities laws. SOCalso agreed to pay $2.75 million to cer-tain individuals who tendered Aircostock and to keep open the $7 offer toAirco shareholders who tendered theirstock

SEC v. Sun Company, Inc.-In lastyear's annual report, the Commissionnoted the Sun case as one of its im-portant actions in the tender offerarea.!» That case involved, amongother things, a Commission allegationthat the acquisition of approximately34 percent of the outstanding commonstock of a publicly-held corporation bymeans of an offer to certain institu-tional investors which was not madeavailable to the general public never-theless constituted a tender offer. OnJuly 9, 1979 the United States DistrictCourt for the Southern District of NewYork rendered an opinion which foundthat, indeed, that acquisition consti-

45

tuted a tender offer and was, accord-ingly, made in violation of the tenderoffer provisions of the ExchangeAct.'"

Insider Trading-Among the Com-mission's actions in the insider tradingarea during the last year, one of themore important was In the Matter ofOppenheimer [; Co. 1B The Commissioninstituted proceedings in this matter todetermine whether Oppenheimer &Co., Inc. (Oppenheimer), a registeredbroker-dealer, failed to supervise Ira J.Hechler (Hechler), a person subject toits supervision with a view to prevent.ing violations of the antifraud provi-sions of the Exchange Act.

Accordlnq to the Commission's Or-der Instituting Proceedings Hechlerwas retained by Oppenheimer asa con.sultant for special acquisitions. Hech-ler occupied offices at Oppenheimerand utilized their facilities. Transac-tions proposed and the companies rec-ommended by Hechler as potentialsubjects for special acquisitions werereviewed by senior principals of Op-penheimer.

In his capacity as a consultantfor special acquisitions, Hechler re-searched and investigated publicly-held companies for sale of assets trans-actions and often engaged in the ne-gotiations involved in such transac-tions. As result of these activities,Hechler obtained material non-publicinformation concerning the companiesinvolved in such transactions as well asthe likelihood that the sale of assetstransactions would be consummated.Specifically, Hechler knew that if thetransactions were consummated acompany involved in the transactionwould make a tender offer at substan-tial premiums above then prevailingmarket prices.

The Commission determined thatOppenheimer failed to reasonably su-pervise Hechler and thereby preventviolations of the antifraud provisions.

46

Pursuant to an offer of settlement, Op-penheimer was censured and agreed tocomply with certain undertakings. Theundertakings included among otherthings, (1) that Oppenheimer wouldobtain a written agreement from Hech-ler that neither he nor members of hisimmediate household will maintainany accounts with any other broker-dealer, (2) that as long as he is asso-ciated with Oppenheimer neither henor his immediate family will trade inthe stock of any company he is consid-ering asa potential participant in a saleof assets transaction without obtainingprior written approval which Oppen-heimer will not give unless the tradingis not based upon non-public informa-tion, and (3) that as long as Hechleris associated with Oppenheimer he willmake all disclosures and reports thatOppenheimer's employees are re-quired to make in accordance with Op-penheimer's regular compliance pro-cedures.

Other Significant EnforcementMatters

In the Matter of United States SteelCorporetioniw-« The Commission insti-tuted proceedings in this matter to de-termine whether certain of the filingsof United States Steel Corporation(USSC) made with the Commissionwere deficient with respect to USSC'spolicy concerning environmental reg-ulation, its capital expenditure forcompliance with environmental con-trol and its involvement in legal pro-ceedings arising from its compliancewith environmental regulation.

In 1971, in recognition that environ-mental laws could have a material eco-nomic impact on corporations subjectto such environmental regulation, theCommission issued a release inform-ing registrants that disclosure of ma-terial environmental information i~-c1uding environmental litigation andthe capital expenditure, earning pow-

ers, and business charge efforts inconnection with compliance with en-vironmental laws was required byCommission rules.i» In 1973, theCommission adopted specific environ-mental rules which required disclosureof material effects that compliancewith environmental regulation mighthave upon a Registrant's economic po-sition and disclosure of any adminis-trative or judicial proceedings knownto be contemplated by governmentalauthorities concerning violations ofenvironmental requlatlons.vs Subse-quently, the Commission adopted arule requiring registrants to disclosecertain material estimated capital ex-penditures for environmental controlfacilities.m

According to the Commission's Or-der Instituting Proceedings, USSCwasaware that compliance with environ-mental regulations would require sub.stantial expenditures. USSC preparedits own estimates as to the cost of com-pliance as regulations were proposedand adopted. USSC, in its filings, setforth amounts spent or authorized forcertain periods without disclosing thatit had developed estimates of costs foradditional years, which costs would in-volve material capital expenditures.USSC disclosed pending judicial pro-ceedings, but failed to disclose exist.ing administrative proceedings. Addi-tionally, USSC stated in its filings thatit intended to resolve its environmentalproblems. In fact, USSC pursued anenvironmental policy of actively re-sisting environmental requirementswhich it maintained were unreason-able. While the Commission's rules donot require a disclosure of a generalcorporate policy with respect to envi-ronmental regulation, if such a disclo-sure is made it must be accurate andthe disclosing corporation must makeany additional disclosures necessarytorender the voluntary disclosure notmisleading. Also, if a corporation has

a policy toward compliance with envi-ronmental regulations which is reason-ably likely to result in substantial po-tential fines or penalties, or othersignificant effects on the corporation,it may be necessary for the registrantto disclose the magnitude of suchfines, penalties and other material off.sets in order to prevent from beingmisleading with regard to required dis.closures concerning such matters asdescriptions or disclosures relating tothe corporation's business, financialstatements, capital expenditures forenvironmental compliance or legalproceedings. USSC did not make suchadditional, necessary disclosures.

The Commission determined thatUSSC's reports filed with the Commis-sion for the years and interim periods1973 to 1977 failed to comply with thedisclosure requirements of Section 13of the Act and the applicable rules reolating to disclosures of environmentalmatters. USSC submitted an Offer ofSettlement which the Commission de-termined to accept. The Commission'sOrder required USSC to comply withthe undertakings set forth in its offerof settlement which include, amongother things, that USSCwill, by variousmeans, provide notice to its stockhold-ers of the existence of these proceed-ings and the Commission's Order, thatUSSCwill amend its past filing with theCommission concerning envlronrnen-tal matters and that USSCwill retain aconsultant to conduct a study for thepurpose of estimating potential coststo USSC of complying with environ-mental regulations.

SEC v. Rapid American Corpora-tioniw-« The Commission filed a civilinjunctive action against Rapid Ameri-can Corporation (Rapid), its subsidiaryMcCrory Corporation (McCrory), Ken-ton Corporation (Kenton) and Meshu-lam Riklis (Riklis), Rapid's Chairman ofthe Board, alleging violations of thereporting provisions of the Federal se-

47

curities laws. The complaint also al-leges that Rapid, McCrory and Riklisviolated the proxy provisions and thatRiklis and Kenton violated the benefi-cial ownership reporting provisions ofthe Federal securities laws.

According to the Commission's com-plaint, Rapid, McCrory and Kentonfailed to disclose that they entered intoagreements with and paid fees to per-sonswho were either personal creditorsof Riklis or persons who had a personalbusiness relationship with Riklis. Theagreements and transactions in ques-tion were allegedly either negotiatedor approved by Riklis at a time whenhe was in serious financial difficulty.The complaint also alleged that Rikliswas in a conflict of interest position innegotiating and approving transac-tions with persons with whom he hadpersonal business dealings and thatthese conflicts were not disclosed tothe Boards of Directors of Rapid,McCrory, Kenton, security holders orthe public.

The defendants consented to the en-try of final judgments of permanent in-junction enjoining them from violatingthe provisions of the Federal securitieslaws charged in the complaint. In ad-dition to consenting to the entry of aninjunction, Rapid agreed to appointfour persons who had no previous af-filiation with Rapid to its board of di-rectors, and to form and maintain forfive years a Transaction Review Com-mittee, composed of the four new di-rectors, to review transactions betweenRapid and its officers, directors andcontrol persons. McCrory agreed toabide by the undertakings of Rapid,while Kenton agreed to adopt similarpolicies. Riklis agreed to abide bythe undertakings instituted by Rapid,McCrory and Kenton.

SEC v. The Fundpeck, Inc. u9_ln thiscase the Commission sought injunc-tive relief against a mutual fund com-plex, the- investment adviser to the

48

funds and its broker-dealer subsidi-aries, and certain directors, officersand employees of these entities. TheCommission's complaint alleged vio-lations of the antifraud, registration,reporting, proxy and fiduciary obliga-tion provisions of the Federal securi-ties laws.

The complaint alleged that the in-vestment adviser, in disregard of theinterests of the mutual funds and theirshareholders and in order to increaseprofits to the adviser, promoted aninvestment arrangement known asswitching. The switching program per-mitted and encouraged the funds'shareholders to transfer their invest-ments among the funds immediatelyupon the placing of a telephone order.This program resulted in frequent fluc-tuations in the assets of the funds and,accordingly, an extremely high port-folio turnover with an attendant in-crease in brokerage expenses most ofwhich were rebated to the investmentadviser.

The complaint also alleged that eachof the directors of the Fundpack, Inc.(Fundpack), in breach of his fiduciaryduty involving personal misconduct,favored the management of the fundsby acquiescing in this conduct and byrenewing the investment advisory con-tract. The complaint further allegedthat the directors failed to conduct in-quiries and consider information nec-essary for them to evaluate the switch-ing program and the self-dealingtransactions by the investment adviser.

The mutual funds consented to theentry of an order directing the appoint-ment of independent directors andspecial counsel. This order concludesthe Commission's action against thefunds; the action against other corpo-rate and individual defendants contin-ues.

Pursuant to the Final Order, theFunds are required to appoint andthereafter nominate and recommend

for election to their respective boardsof directors four individuals satlsfac-tory to the Commission, and the fundsmust maintain, until at least one yearafter the next meeting of their share-holders, boards of directors not lessthan 80 percent of whose members aresatisfactory to the Commission. Thenewly constituted boards are requiredto call meetings of the Funds' share-holders within six months, at whichtime they must recommend to share-holders the election of the requiredproportion of directors satisfactory tothe Commission and recommend ar-rangements for the future manage-ment and disposition of the funds.

In addition, the Final Order requiresthat the Funds retain a Special Counselto advise them until after the afore-mentioned shareholders' meetings.The Special Counsel must amongother things, (1) supervise the fil-ing and dissemination of registrationstatements, prospectuses, annual andperiodic reports and sales literature,receipts and disbursements by theFunds, portfolio transactions andproxy solicitations; (2) consult with andreport to the Commission and theCourt; and (3) advise the Funds' boardsin their consideration of arrangementsfor the future management and dispo-sition of the Funds. After the perform.ance of all of his duties, the SpecialCounsel must submit a final report tothe Commission and the Court.

The Final Order also requires thatwithin 20 days, the Funds must reportto shareholders concerning the Com-mission's Complaint, the history of thislitigation, and the actions taken and tobe taken pursuant to the Final Orderand any other consents, undertakings,agreements or orders entered in theaction.

SEC v. Starr Broadcasting Group,Inc.l60-ln February 1979, the Com-mission announced the filing of a com-plaint in the United States District of

Columbia against The Starr Broadcast.ing Group, Inc. (SSG); William F. Buck.ley Jr. (Buckley), formerly Chariman ofthe Board of SBG; Peter H. Starr (PeterStarr), formerly President and a direc-tor of SBG; Michael F. Starr (MichaelStarr), formerly Vice-President and adirector of SBG; Gordon M. Ryan(Ryan), formerly General Counsel anda director of SBG; Glenn E. Burrus(Burrus), formerly a director of SBG;Maurice L. McGill (McGill), formerly adirector of SBG; Mack H. Hannah, Jr.(Hannah), a director of SBG; and Co-lumbia Union National Bank & TrustCompany (Columbia Union), one ofSBG's lenders.

The Commission's complaint al-leged that certain of SBG's officersdirectors, and others engaged in a five.year course of business ultimately re-sulting in the purchase. by SBG of sev-enteen theatre properties (the Sitcotransaction) from Sitco, Ltd. (a part-nership whose members were BuckleyPeter Starr, Michael Starr and Ryan) forthe purpose of extricating Buckley, Pe-ter Starr, Michael Starr and Ryan froma financial situation which would haveresulted in their personal bankruptcy;that various filings of SBG failed to dis-close or contained misleading disclo-sures with respect to the Sitco trans-action: that SBG's outside directors,after acting on behalf of SBG in ap-proving the Sitco transaction, failed toinsure the accuracy of SBG's disclo-sures relating to this transaction; thatBurrus, as Columbia Union's seniorloan officer responsible for loans toboth SBG and Sitco, Ltd., was actingin a manner which benefitted Colum-bia Union, to the detriment of SBG, byapproving the Sitco transaction, andalso failed to insure accurate disclo-sure of these matters.

Pursuant to the consents of the de-fendants, the Court enjoined SGB fromfurther violations of the reporting,proxy, ownership reporting and margin

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requirements provisions of the Federalsecurities laws. Buckley, Michael Starr,Peter Starr, Ryan, and Burrus, were en.joined from violating the antifraud, reoporting, proxy, ownership reporting,and margin requirement provisions ofthe Federal securities laws. ColumbiaUnion was enjoined from violations ofthe reporting provisions of the Federalsecurities laws. Smith, McGill, Francisand Hannah were enjoined from fur.ther violations of the reporting,ownership reporting and margin reoquirement provisions of the Federalsecurities laws.

In addition to the entry of the in.junctions, certain other equitable reliefwas ordered by the Court or under.taken by the defendants, including anorder to make disgorgement and anorder compelling Buckley, MichaelStarr, Ryan and Burrus to comply withtheir undertakings that none will seekemployment asan officer or director ofa publicly-traded corporation respon-sible for filings with the Commissionfor a period of years.

SEC v. American Financial Corpora.tion161 The Commission filed a com.plaint seeking injunctive relief andother equitable relief against AmericanFinancial Corporation (AFC), Carl H.Lindner (Lindner), President, Chairmanof the Board and controlling share.holder of AFC, Charles H. Keating Jr.(Keating) former Executive Vice-Presi-dent and Director of AFC, and DonaldP. Klekamp (Klekamp) a former direc-tor of a subsidiary of AFC. Thecomplaint alleged that the defendantsviolated the antifraud, proxy and reoporting provisions of the Federal se-curities laws.

According to the Commission's com.plaint, Lindner and Keating caused, au-thorized or permitted a bank subsidiary

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of AFC to extend substantial loans onpreferential terms to officers and dlrec-tors of AFC and to other persons asso-ciated with AFC, its subsidiaries, Lind.ner or Keating. The complaint furtheralleged that as the financial conditionof the borrowers deteriorated from1973 through 1976 demands on theprior loans were not made and newloans were extended enabling the bor-rowers to pay interest on the priorloans and service loans from other.

The complaint also alleged thatLindner and Keating caused a subsldi-ary of AFC to advance funds to Kle-karnp for the purchase of AFC stock onthe open market. The subsidiary failedto disclose these loans in a registrationstatement filed with the Commission.While the subsidiary did disclose theextension of such loans in its annualreport filed with the Commission, itfailed to disclose relevant facts and clr-cumstances concerning the loans. AFCand its subsidiary also made false reoports in filings with the Commissionconcerning loans to Klekamp. Thecomplaint alleged numerous other vi.olations concerning the extension ofloans by AFC subsidiaries.

The defendants consented to the en.try of final judgments of permanent in-junction enjoining them from furtherviolations of the antifraud, reportingand proxy violations. Additionally, theorder consented to by the defendantsrequired AFC to establish and main-tain an audit committee of its board ofdirectors consisting of at least two di-rectors not having any previous busi-ness affiliations with AFC or its subsi-diaries and to amend and correct itsprior filings with the Commission withrespect to matters alleged in the com.plaint.

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Programmatic Litigation and Legal Work

The Commission, through its Officeof the General Counsel, participates asa party and as amicus in a substantialamount of litigation in addition to itsenforcement actions. The results inthese suits often affect existing inter-pretations of the Federal securitieslaws and/or the scope of the Commis-sion's authority. The Office of the Gen-eral Counsel is also involved in impor-tant non-Iitigatory work. The followingis a summary of some of the importantactions which were litigated in the pastyear, and the status of other projectsof significance to the Commission andthe public.

Significant Court ActionsTouche Ross & Co., et al v. SEC-

Touche Ross raised questions aboutthe Commission's power to regulatethe conduct of accountants and otherprofessionals who practice before it.Rule 2(e) of the Commission's rules ofpractice, first promulgated over 40years ago, authorizes the Commissionto censure, suspend, or bar from Com-mission practice, professionals foundto have engaged in various unethicalor unlawful conduct. The rule reflectsthe Commission's need to rely heavilyon the integrity of accountants andother professionals who prepare andcertify the accuracy of corporate filingsvital to investors.

Pursuant to Rule 2(e), the Commis-sion had instituted proceedingsagainst Touche Ross and three of itsformer partners. The order for pro-ceedings alleged that in examining twopublic companies, the accountants had

failed to follow generally accepted ac-counting standards and had no reason-able basis for their opinions regardingthe financial statements of these com.panies. The respondents filed a districtcourt action attempting to halt the pro-ceedings. They alleged that the Com-mission was without authority topromulgate Rule 2(e), and had acted"without authority of law" In institutingthe proceedings. On a motion from theCommission, the district court dis-missed the Touche Ross action, hold-ing that the plantiffs had failed to ex-haust their administrative remedies.

On appeal, the United States Courtof Appeals for the Second Circuit up-held the Commission's power to prom-ulgate Rule 2(e). The Court first heldthat the traditional exhaustion doctrinedid not apply where plaintiffs had chal-lenged the agency's very authority topromulgate the rule. In such cases, ju-dicial review would not be enhancedsignificantly by allowing the agency tofirst develop the facts or apply its ex-pertise. And, although the agencycould theoretically hold its own rule in-valid, such a result was unlikely.

Turning to the merits, the Court heldthat, the promulgation of Rule 2(e) wasvalid as a "legitimate, reasonable anddirect adjunct to the Commission's ex-plicit statutory power." The Court rea-soned that a central purpose of the se-curities laws was the protection ofinvestors through the requirement thatissuing companies disclose fully to thepublic information material to invest-ment decision-making. The Commis-sion, with its small staff, could not pos-

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sibly review in detail each company'sfinancial statements; necessarily, then,the Commission had to rely heavily onboth legal and accounting profession-als to perform their tasks diligentlyand responsibly. The Court concludedthat Rule 2(e) represents an attempt bythe Commission to protect the integ-rity of its most important processes,and is therefore a valid exercise ofthe Commission's general rulemakingpower.

SEC v. Aaron: SEC v. Coven-TheAaron and Coven cases raised the im-portant issue of whether the Commis-sion must prove scienter in injunctiveactions brought under the antifraudprovisions of the Securities Act of1933 (Securities Act) and the Securi-ties Exchange Act of 1934 (ExchangeAct). In both cases, the United StatesCourt of Appeals for the Second Cir-cuit held that scienter need not beproved in such an action.

The Court of Appeals' holding inCoven involved proceedings broughtunder Section 17(a) of the SecuritiesAct. The Court noted that the languageof Section 17(a) does not indicate thatliability must be predicated in an intentto manipulate, deceive or defraud, andthus concluded that scienter is not anelement of a violation of that section.The Court also stated that even negli-gent conduct is sufficient to impose li-ability upon an alleged aider and abet-tor who "should be able to concludethat his act was likely to be used in is-suance of the illegal activity ...... TheSupreme Court thereafter declined toreview the Court's decision in Coven.

In Aaron, the Court's holding in-volved injunctive proceedings underboth Section 17(a)of the Securities Actand Section 1O(b)of the Exchange Act,and Rule 10b.5 thereunder. Based onits analysis of the language of SectionlO(b), the legislative history of the Ex-change Act, the relationship betweenSection 1O(b) and the express private

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remedy provisrons of the securitieslaws, and the effect of scienter stan-dards on the overall enforcementscheme contemplated by those stat-utes, the United States Court of Ap-peals for the Second Circuit rejectedMr. Aaron's contention that the Su-preme Court's decision in Emst & Emstv. Hochfelder, 425 U.S. 185 (1976) inwhich it was held that scienter is neces-sary in a private damage action underSection 100b),compels the same resultin a Commission injunctive action. TheCourt also rejected a scienter require-ment for Commission injunctive ac-tions brought under Section 17(a),relying on its prior decision in Coven.Mr. Aaron subsequently filed a petitionfor certiorari in the Supreme Court.

The imposition of a scienter require-ment in all Commission proceedingsbrought to prevent recurrence of con-duct that operates as fraud or deceit onpublic investors, and the resulting dif-ficulty in providing a defendant's stateof mind, would erode significantly theCommission's ability to enforce theFederal securities laws and depriveinvestors of needed protections. More-over, the question of whether scienteris required in an injunctive proceedingof Section 17(a) and Section 19(b) hasbeen and continues to be the subjectof substantial litigation. With respectto Section lO(b), there has been greatuncertainty in the courts of appealsand the district courts as to whetherscienter is an element.

Recognizing these factors, the Com-mission, in responding to Mr. Aaron'spetition for certiorari, has urged theSupreme Court to grant the petition inorder to bring certainty to the admin-istration of the Federal securities lawsand to conserve the resources nowbeing expended by courts and parties,including the Commission, in litigat-ing these issues. (The petition for cer-tiorari was granted by the SupremeCourt on October 15. 1979.)

Burks v. Lasker-The issue raised inBurks involved the extent to whichFederal policy, as articulated in the In-vestment Company Act of 1940 (In-vestment Company Act), limits thepower of directors of an investmentcompany to terminate derivative liti-gation brought by its shareholders.Shareholders of an investment com-pany registered under the InvestmentCompany Act sued the company's di-rectors and its registered investmentadviser. The plaintiffs alleged that thedefendants had violated their dutiesunder the Investment Company Actand the Investment Advisers Act inconnection with a purchase by thecompany of Penn Central commercialpaper. The investment company's dis.interested directors concluded that thesuit was contrary to the best interestsof the company and its shareholdersand moved the district court to dismissthe action, which motion was granted.

The United States Court of Appealsfor the Second Circuit held that the In-vestment Company Act deprives inde-pendent directors of an investmentcompany of authority to terminatenonfrivolous derivative litigation. TheCommission appeared amicus beforethe Supreme Court, contending thatthe Investment Company Act does per-mit investment company directors toterminate such litigation, but only ifthey are independent, fully informed,and their decision is reasonable. TheCommission's primary purpose in par-ticipating was to persuade the Courtthat consideration of State and Federallaw must be balanced and that Federallaw imposes a minimum standard ondirectors' decisions to terminate deriv-ative litigation, notwithstanding anylesser standard of State law.

The Supreme Court held that Statelaw governing the authority of inde-pendent directors to discontinue deriv-ative suits should be applied to the ex-tent State law is consistent with the

policies of the Investment Companyand Investment Advisers Acts. TheCourt reasoned:

"Although [a] state statute cannot beconsidered 'inconsistent' with federallaw merely because the statute causesthe plaintiff to lose the litigation ... ,federal courts must be ever vigilant toinsure that application of state lawposes no significant threat to any iden-tifiable federal policy or interest. ...

"And, of course, this means that un-reasonable ... or specific abberant orhostile state rules ... will not be ap-plied .... The consistency test guar-antees that [n]othing that the state cando will be allowed to destroy the fed-eral right ... , and yet relieves federalcourts of the necessity to fashion anentire body of federal corporate lawout of whole cloth."

Accordingly, the Court remandedthe case so that the Court of Appealscould determine the scope of directors'authority under State law to terminatederivative litigation, and determinewhether State law is consistent with thepolicies of the Investment CompanyAct and the Investment Advisers Act.With respect to this latter inquiry, theSupreme Court observed that theremay well be "situations in which theindependent directors could reason-ably believe that the best interests ofthe shareholders call for a decision notto sue .... " The implication of thislanguage is that it would be inconsist-ent with Federal policies to give effectto a board of directors' decision whichis unreasonable-a pnnciple urged bythe Commission.

Ludlow Corporation v. SEC-In Lud-low, the United States Court of Ap-peals for the District of ColumbiaCircuit affirmed the order of theCommission approving the applicationof the Boston Stock Exchange (BSE)for unlisted trading privileges in thecommon stock of Ludlow Corporation(Ludlow). Ludlow raised the issue of

53

whether an exchange, in applying forunlisted trading privileges in a stock,must demonstrate that active tradingin the stock will take place in Its mar-ket. In approving the BSE's unlistedtrading application, the Commissionrejected such a requirement, in keep-ing with the Commission's long-stand-ing policy, endorsed by Congress, ofliberally granting unlisted trading priv-ileges as a means of promoting com-petition among the nations securitiesmarkets.

In affirming the Commission's order,the Court of Appeals emphasized theimportance which Congress attachedto the liberal grant of unlisted tradingprivileges as a means to foster com-petition among exchanges, and therole which unlisted trading must playin achieving the objectives of a na-tional market system. In specific, theCourt also clarified that the Commis-sion's grant of unlisted trading privi-leges does not require a determinationthat an active market will develop onthe applicant exchange. Rather, an ap-plicant need only show that if an activetrading should develop, it will proceedin a fair and orderly manner. As a re-sult of Ludlow, the Commission has re-ceived renewedsupport to pursue a lib-eral approach in granting unlistedtrading privileges, thereby enhancingthe Commission's ability to facilitateintermarket competition in a nationalmarket system.

Belenke v. SEC-In Belenke, theUnited States Court of Appeals for theSeventh Circuit affirmed the Commis-sion's order approving a proposed rulechange of the Chicago Board OptionsExchange (CBOE) to improve theCBOE's system for handling and exe-cuting "limit" orders of public cus-tomers. "Limit" orders are those whichspecify a minimum price at which acustomer is willing to sell, or alterna-tively, a maximum price at which acustomer is willing to buy a particular

54

security. Prior to the Commission's ap-proval of the CBOE rule, members ofthe CBOE were given exclusive ap-pointments as board brokers to acceptlimit orders in particular options fromother brokers on the floor, to storethose orders in limit order books, andto assure timely execution of those or-ders when, and if, the prevailing mar-ket price matched the specified limitorder price. The CBOE rule eliminatesthe system of exclusive appointment ofboard brokers, and instead permits theCBOE directly to provide limit orderbook services through employeesknown as "order book officials."

In its order approving the CBOE rulepursuant to Section 19(b) of the Ex-change Act, the Commission foundthat the rule would further severalpurposes of the Act-by improving theefficiency of the CBOE's market, en-hancing the floor surveillance capabil-ities of the CBOE, and fostering com-petition between the CBOE and otheroptions exchanges. The Court of Ap-peals, in affirming the Commission'sorder in all respects, stressed that theCommission's findings were predic-tive, policy-oriented decisions, andhence judicial deference to the Com-mission's expertise was particularly ap-propriate. Applying a limited scope ofreview, the Court of Appeals found thatthe Commission's substantive findingswere not arbitrary or capricious. TheCourt also found that the informal no-tice and comment procedures followedby the Commission comported withthe requirements of the Exchange Act.The Court thus rejected petitioners' ar-gument that the more elaborate pro-cedures of Section 6(e) of the Ex-change Act were inapplicable, sincethe fees fer limit order services underthe CBOE rule were not fees "chargedby members," but rather were feescharged by the CBOE itself.

The Belenke decision is of impor-tance both to national securities ex-

changes and the Commission as judi-cial recognition of an exchange'sability to improve the operational effi-ciency of its market, consistent withthe purposes of the Exchange Act. TheCourt of Appeals' decision reaffirmsthat judicial deference should be ac-corded to the decisions of the Com-mission in exercising regulatory oroversight authority over the opera-tions of the nation's securities mar-kets. Finally, this case gives effect toCongress' intent that the Commissionhave considerable flexibility in fash-ioning its administrative procedureswhere the Commission acts throughinformal, legislative-type proceedings.

Other Significant ProjectsImplied Rights of Action-A number

of caseswere decided by the SupremeCourt in the past term concerning im-plied rights of action, which have asubstantial impact with regard to theFederal securities laws. In Touche Ross& Company, Inc. v. Redington, theCourt refused to imply a private causeof action for violation of the books andrecordkeeping provision of the Ex-change Act, because that provision, inthe Court's view, neither conferred spe-cial rights on particular parties nor pro-hibited certain conduct as unlawful.Because the Court believed that theprovision was intended by Congress toact as an early warning system-sothat the Commission could pursue itsenforcement obligations after review-ing the filings required to be made-implied actions have by no meansbeen denied entirely.

The Court ordered that reargumentbe held in Lewis v. Transamenca Mort-gage Advisers, Inc., where the sole is-sue was whether private cause of ac-tion was implied for violations of theantifraud provision of the InvestmentAdvisers Act. The Court had recog-nized the existence of private actionunder the comparable antifraud provi-

sion of the Exchange Act, in Superin-tendent of Insurance v. Bankers Cas-ualty & Life. While the Lewis case hasnot yet been decided, the Court's opin-ion in non-securities cases, as well asTouche Ross, bear on the continued in-ability of private actions for the viola-tions of some of the statutory provi-sions of the Federal securities laws.

ALI Code-Over the past ten years,the American Law Institute has spon-sored the drafting of a Federal Secu-rities Code, under the direction of Pro-fessor Louis Loss of the Harvard LawSchool. In May 1978, the Institute'smembership approved a 766-page"Proposed Official Draft" of the Code,which is designed to replace the sixseparate Federal statutes administeredby the Commission with a single com-prehensive and unified piece of legis-lation.

The Commission and its staff spenta great deal of time and effort duringthe fiscal year analyzing and studyingthe proposed Code in preparation forits expected introduction in Congress.The task of evaluating the benefits theCode would offer and the possible dif-ficulties it might create, in terms ofmaintaining an effective scheme ofinvestor protection, is exceedinglycomplex. While in many respects theALI draft seeks simply to codify exrst-ing law, it would make significant sub-stantive changes in many other re-spects.

For example, the Code would re-place the current emphasis on registra-tion of individual offerings of securitieswith a "continuous disclosure" systembased on issuer registration, and pro-viding for less stringent filing and dis-closure requirements in connectionwith certain distributions of the secu-rities of "one-year registrants" (i.e., is-suers that have been registered for oneyear). In addition, certain changeswould be made in tender offer regula-tion, including a ten-day preacquisi-

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tion notice and publicity requirement,along with express preemption of Statetender offer legislation. Also, invest-ment advisers would be subject for thefirst time to qualification and financialresponsibility requirements, and theCommission would be given rulernak-ing authority over the unethical con-duct of securities professionals. In thearea of civil liability, there would bemany new express rights of action cre-ated, along with a grant of authority tothe courts to imply private rights of ac-tion in certain circumstances. Theseare but a few of the literally hundredsof modifications that the Code wouldmake as compared with current law.

During the initial review of the pro-posed Code, members of the Comrnis-

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sion staff held a series of meetings withProfessor Loss and his group of advis-ers to discuss concerns about bothsubstantive positions taken in theCode and the drafting of various Codeprovisions. In response, Professor Losshas made a substantial number of tech-nical amendments to the Code. In Sep-tember 1979, the Commission itselfbegan meeting with Professor Loss, insessions open to the public, to discussthe issues raised by the staff. As theCode nears the beginning of Congres-sional consideration, the Commissionwill be drawing together the results ofits review to help it determine what for-mal position to take before Congresswith respect to the Code.

POBLIC OTILITYHOLDING COMPANIES

CompositionUnder the Public Utility Holding

Company Act of 1935 (Holding Com-pany Act), the Commission regulatesinterstate public utility holding com-pany systems engaged in the electricutility business or in the retail distri-bution of gas. The Commission's juris-diction also covers natural gas pipelinecompanies and nonutility companieswhich are subsidiary companies of reg-istered holding companies.

There are presently 14 registeredholding company systems with aggre-gate assets, as of June 30, 1979, of$47.5 billion. Total holding companysystem assets increased by over $1.1billion in fiscal 1979, even with the lossof Ohio Edison Company who wasgranted a Section 3(aX2) exemptionfrom the Holding Company Act inApril 1979. Total operating revenues,as of June 30, 1979, were $17.9 bil-lion, a $700 million increase over theprevious year. In the 14 systems thereare 60 electric and/or gas utility sub-sidiaries, 70 nonutility subsidiaries,and 20 inactive companies, or a totalof 168 system companies, includingthe top parent and subholding com-panies. Table 35 in the Appendix liststhe systems and Table 36 lists their ag-gregate assets and operating reve-nues.

FinancingDuring fiscal year 1979, approxi-

mately $2.7 billion of senior securitiesand common stock financing of the 14registered systems was approved by

315-805 0 - 80 - 6

the Commission. Of this amount, ap-proximately $1.6 billion was long-termdebt financing, and over $1 billion wasfor equity financing. These amountsrepresent a 24 percent decrease inlong-term debt financing over fiscalyear 1978 and a 19 percent increase inthe sale of common and preferredstock. In addition, the Commission ap-proved over $3.5 billion of short-termdebt financing and $291 million of pol-lution control financing for the 14 reg-istered holding company systems. Ta-ble 37 in the Appendix presents theamount and types of securities issuedunder the Holding Company Act bythese holding company systems.

Fuel ProgramsDuring fiscal year 1979, the Com-

mission authorized $460.6 million offuel exploration and development cap-ital expenditures for the holding com-pany systems. These expenditurescover annual fuel programs subject toregulation under the Holding CompanyAct defined on geographical and func-tional terms. Table 38 in the Appendixlists the authorization by holding com-pany system for each fuel program.

Largely as a result of the energy cri-sis, holding companies have embarkedon major and expensive new commit-ments to acquire substantial additionalcapital. Generally, the arrangementsinvolve formation of several new sub-sidiaries for producing, transportingand financing fuel supplies or the in-vestment of capital for the explorationof and development drilling for min-erai reserves with a right to production

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accruing to such investment. Since1971, the Commission has authorizedexpenditures of over $2.6 billion forfuel programs of holding companies.

Service Company OperationsAt the end of calendar year 1978,

there were 11 subsidiary service com-panies providing managerial, account-ing, administrative and engineeringservices to 11 of the 14 holding com-panies registered under the HoldingCompany Att. The billings for servicesrendered to the holding company sys-tems amount to $423 million or 2.37percent of the total revenues generatedby the electric and gas operating utili-ties of the holding company systems.All services are rendered at cost to theoperating utilities, with several sys-tems including a return on capital in-

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vested by the parent holding company.Because the subsidiary service com-panies are service oriented, they areheavily labor intensive having 11,061employees and assets of over $229million. During February 1979, theCommission approved a proposedamendment to the Uniform System ofAccounts for public utility servicecompanies. The revised system of ac-counts will (1) provide for closer coor-dination with the Federal Energy Reg-ulatory Commission's Uniform Systemof Accounts for electric and gas publicutilities, (2) facilities for conduct of au-dit and account inspection programs,and (3) Improve reports filed by servicecompanies subject to the Act. The re-vised system of accounts is effectiveJanuary 1, 1980, for the 11 subsidiaryservice companies.

CORPORATE REORGANIZATIONS

The Commission's role under Chap-ter X of the Bankruptcy Act, which pro-vides a procedure for reorganizing cor-porations in the United States districtcourts, differs from that under the var-ious other statutes which it adminis-ters. The Commission does not intiateChapter X proceedings or hold its ownhearings, and it has no authority to de.termine any of the issues in such pro-ceedings. The Commission partici-pates in proceedings under Chapter Xto provide independent, expert assist.ance to the courts, participants, andinvestors in a highly complex area ofcorporate law and finance. It pays spe-cial attention to the interests of publicsecurity holders who may not other-wise be represented effectively.

Where the scheduled indebtednessof a debtor corporation exceeds $3million, Section 172 of Chapter X re-quires the court, before approving anyplan of reorganization, to submit it tothe Commission for its examinationand report. If the indebtedness doesnot exceed $3 million, the court may,if it deems it advisable to do so, submitthe plan to the Commission before de-ciding whether to approve it. When theCommission files a report, copies orsummaries must be sent to all securityholders and creditors when they areasked to vote on the plan. The Com-mission has no authority to veto a planof reorganization or to require itsadoption.

The Commission has not consideredit necessary or appropriate to partici-pate in every Chapter X case. Apartfrom the excessive administrative bur-

den, many of the cases involve onlytrade or bank creditors and few publicinvestors. The Commission seeks toparticipate principally in those pro-ceedings in which a substantial publicinvestor interest is involved. However,the Commission may also participatebecause an unfair plan has been or isabout to be proposed, public securityholders are not represented ade-quately, the reorganization proceed-ings are being conducted in violationof important provisions of the Act, thefacts indicate that the Commission canperform a useful service, or the courtrequests the Commission's participa-tion.

The Commission in its Chapter X ac-tivities has divided the country intofive geographical areas. The New York,Chicago, Los Angeles and Seattle reogional offices of the Commission eachhave responsibility for one of theseareas. Supervision and review of theregional offices' Chapter X work is theresponsibility of the Division of Cor.porate Regulation of the Commissionwhich, through its Branch of Reorga-nization, also serves as a field office forthe southeastern area of the UnitedStates.

During the fiscal year, the Commis-sion entered three new Chapter X pro-ceedings involving companies with ag-gregate stated assets of approximately$69.9 million and aggregate indebt-edness of approximately $93.6 million.Including the new proceedings, theCommission was a party in a total of97 reorganization proceedings duringthe fiscal year (a list of these proceed-

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ings appears in Table 39 in the Appen-dix of this report). The stated assets ofthe companies involved in these pro-ceedings totaled approximately $4.9billion and their indebtedness about$4.5 billion.

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During the fiscal year nine proceed-ings were closed, leaving 88 in whichthe Commission was a party at yearend.

ADMINISTRATION ANDMANAGEMENT

During the fiscal year 1979, theCommission stressed, more than everbefore, its commitment to improvingmanagement information systems andstrengthening internal managementcapabilities. This heightened emphasison enhanced administrative and man-agerial support is a direct reflection ofincreased recognition of potential ben-efits that can flow to the public frombetter systems, procedures, plans, andorganization structures. It is intendedthat the initiatives of 1979 will emergein the form of operational economies,increased effectiveness and greater re-sponsiveness in the 1980's.

General Management andProgram Developments

The Commission undertook severalprojects during the fiscal year whichresulted in management improve-ments and program efficiencies.

A management study conducted bythe Executive Director's Office in fiscalyear 1978 was the catalyst for organi-zational changes in the Division of Cor-poration Finance that will be imple-mented during the next fiscal year.Major recommendations for the studyconcerned development of a reviewstrategy for disclosure filings and theneed to restructure the division's work-load by industry groupings so as to al-low Commission staff an opportunityto develop expertise concerning pecu-liar industry patterns and trends, andto allow more informed review of prior-ity filings. During 1979, a CorporationFinance task force studied these rec-

ommendations to assesstheir feasibil-ity and to propose a plan for imple-mentation. Based on the findings ofthe task force, a plan for such a restruc-turing wasaccepted and is intended forimplementation during fiscal 1980. Atthe close of the fiscal year, negotia-tions were underway, with faculty fromthe Harvard Business School, to pro-vide expertise and assistance in imple-menting industry specialization, a newand cost effective filings review strat-egy, and a quality control program.

An intensive workload/cost analysisof the Chicago Regional Office re-sulted in decisions to close the Cleve-land and St. Louis Branch Offices andto consolidate these operations withthose of the parent office In Chicago.This decision was based on a changingdispersion of activities due to theemergence of options markets in Chi-cago, a reduction of enforcement ac-tivity in the branches and developmentof specialized units in Chrcaqo, Apartfrom major operational improvements,it was also concluded that there weresome cost benefits to be derived fromtaking advantage of the economies ofscale available through consolidationof activities at the principal office.

An organizational analysis of the Of-fice of Public Affairs led to a decisionto split the legislative and public infor-mation functions. A new Office of Leg-islative Affairs was created within theOffice of the Chairman and given re-sponsibility for handling matters relat-ing to legislation and legislative liai-son. The Office of Public Affairs willcontinue to handle general public in-

61

formation and press relations func-tions.

The Office of the Executive Directorconducted a major management re-view of the Division of Market Regu-lation. The study report to the directorand management staff of the divisionresulted in significant changes in bothinternal procedures and organizationalstructure. The study also served as abasis for an increased focus, within thedivision, on such issues as communi-cation, project management, training,recruitment, and financial recordkeep-ing and controls.

Information Systems Manage-ment

In fiscal year 1979 the Commissionmade vast progress toward improvingits information handling processes.Detailed specifications regarding com-puter processing capabilities that willbe required to meet the agency's dataprocessing needs over the next five toeight years were completed, and aformal request for delegated procure-ment authority was presented to theGeneral Services Administration(GSA). In anticipation of GSA ap-proval, steps were taken to develop so-licitation documents that will result inthe installation of a new computer sys-tem by the end of fiscal year 1980.

Fectlities Improvement-While muchwas accomplished in fiscal year 1979toward meeting its long-term infor-mation processing needs, the Commis-sion continued to make more efficientand effective use of the existing IBM360-65 computer installed in 1978. Inthis regard, the memory capacity ofthe central processing unit was in-creased and several components wereadded to expand our on-line storagecapability-two actions that enabledthe Commission to process an im-mensely increased workload withoutany degradation in system perform-

62

ance. Other steps taken to improveprocessing activities included conver-sion to a more efficient operating sys-tem control program and utilization ofon-line programming and file mainte-nance techniques. As a result of theseimprovements the Commission hasbeen able to continue to make signifi-cant progress in the development andimplementation of new informationsystems while concurrently expandingthe use of the teleprocessing networkto include all of the Commission's re-gional offices. The network was sched-uled to be further extended to includefour of the largest branch offices dur-ing the first quarter of fiscal 1980, withthe remaining branches scheduled tocome on line later in the year.

Major System Enhancements-Majorinformation systems implemented dur-ing 1979 included two systems forwhich developmental work was initi-ated in 1978. The first was a compre-hensive records management systemwhich, utilizing microfilm and tele-processmg techniques, provides thestaff with the capability for directly en-tering and retrieving information relat-ing to the receipt and disposition ofvarious reports filed with the Commis-sion. As part of this project, on feb-ruary 5, 1979, the Commission offi-cially adopted microfilm as a substi-tute record for many of the paper filespreviously maintained. Under thismode of operation, microfiche copiesof filings can be easily and quicklyreproduced and distributed to all re-questers, thus ensuring the highestpossible level of integrity as the officialfile is centrally retained at all times.Expansion of the micrographics pro-gram to include additional Commis-sion files was scheduled for the firstand second quarter in fiscal 1980.

The second system involves an ex-pansion of the Commission's Nameand Relationship Search system. Thenew process provides the staff with a

facility for immediate terminal accessto an index of name and associateddata on companies and individualshaving a direct or indirect relationshipwith the Commission, and replaces asystem of manual requests which veryoften required several days to process.A third system initiated in 1978, forwhich extensive development workwas accomplished in 1979, is the Com.mission's Case Activity Tracking Sys-tem (CATS). Scheduled for operationaltesting early in fiscal year 1980 and lrn-plementation in the second quarter,this system will promote better man.agement by providing the Commissionwith an efficient means of monitoringcurrent events and status of all activeinvestigations and litigation.

Other important systems work pur-sued in 1979 included the initiative ofa prototype correspondence trackingsystem to more effectively control thethousands of pieces of correspondenceflowing through the Office of theChairman, refinement and enhance-ment of various internal personnel,position management, and cost ac-counting systems; expansion of thecomplaint processing system to allowfor the experimental preparation of let.ters and notices by means of auto-mated electronic techniques; develop.ment of a series of statistical programsfor use by the Commission's staff in itsspecial study of the options market;expansion of the broker dealer/invest-ment adviser data baseto produce var-ious statistics incidental to a corporategovernance study being conducted bythe Division of Corporation Finance;and development of a system for main-taining and reporting data filed pur.suant to Section 4(2), Rule 146, of theSecurities Act of 1933 (Securities Act).

Developmental work on severalother information systems was also in.itiated during fiscal year 1979, manyof which will be implemented by fiscalyear 1980. These included establish-

ment of a generalized, user-orientedinformation retrieval capability thatwill operate through teleprocessingand data base management tech.niques; expansion of an existing sys-tem for analyzing data contained in In-vestment Company Annual Reports,Form N-1R; creation of an on-line sys-tem for retrieving index informationrelating to releases published in theSEC Docket; and development of a se-ries of computer programs for produc-ing a variety of reports from data filedby certain institutional investors andinvestment managers under Rules 13d,13f, and 13g.

Systems Administration-In additionto these enhancements of agency in-formation systems and automatedprocessing techniques, several othermeasures were taken in fiscal year1979 to enhance the internal manage-ment and administration of the Com-mission's data processing activity. Animportant event was the reorgnizationof the Office of Data Processing de-signed to make it more adaptable andresponsive to the changing nature ofthe Commission's automated dataprocessing (ADP) needs. A second un-dertaking involved an intensive pro-gram to enhance interrelationship be-tween the ADP staff and the users ofADP services. This was accomplishedthrough the adoption of a formal pro.cedure for identifying and requestingADP support, the creation of a Com.mission-wide ADP liaison group, andthe establishment of more effectivecommunication procedures to insurethat critical information waseffectivelyrelayed to and from ADP personnel.Another step taken to increase ADPefficiency was the elimination of inter.nal cardpunching and transfer of thisfunction to a commercial concern. Inaddition to substantial dollar savings,this action has provided the Commis-sion with much more flexibility in reo

63

sponding to changing data entry re-quirements.

One final issue receiving much em-phasis dunnq 1979 was ADP security.Recognizing that an expanded ADPprogram would require much tightercontrol and protection of ADP reosources, the Commission has takenseveral actions toward bolstering itsADP security program. These includedthe establishment of a full-time posi-tion of ADP security officer, the con-duct of an ADP risk assessment (to becompleted early in fiscal year 1980),formalization of an interagericy agree-ment for back-up computer processingtime, and establishment of a personnelscreening program for ADP staff, asmandated by the Office of PersonnelManagement (OPM).

Market Oversight SurveillanceSystem

The Office of the Executive Director,in cooperation with the DIvisions ofEnforcement and Market Regulationand utilizing the services of an inde-pendent systems consultant, has beenengaged in the study and design of amarket oversiqht and surveillance sys-tem during the past year. That projecthas resulted in a proposed design,which is presently being reviewed bythe Commission staff. In addition, theCommission is undertaking to imple-ment a pilot of the proposed design inorder to test the design and evaluate itspotential for enhancing the Commis-sion's oversight and surveillance func-tions. Budgetary approval by the Of-fice of Management and Budget (OMB)and Congress and procurement ap-proval by GSA will be required beforeany portion of the larger overall systemcan be implemented. By mid spring1980 the Commission is hopeful thata determination will have been madeas to the scope and timetable for im-plementation of a larger system.

64

The proposed system would monitorall securities markets activities andseek to identify possible market irreg-ulanties or violations of self-regulatoryorganization rules and the Federal se-curities laws. It would thus enhance ex-isting Commission facilities in areassuch as market surveillance and in-spections of self-regulatory organiza-tions and broker-dealers. Such a sys-tem will neither diminish nor supplantthe efforts of self-regulatory organiza-tions to regulate their market placesand market professionals; rather it isintended to provide the Commissionwith a greater capability to detect andfollow-up on abberrant tradinq prac-tices, particularly when subjects out-side the jurisdiction of the self-regula.tory organizations are involved. Byproviding the Commission with en-hanced Information analyzed for par-ticular trading patterns, the system willplace the Commission in a better po-sition to coordinate, with each self-reg-ulatory organization, the Investigationand follow-up of particular matters.

If the proposed system receives theapproval of the requisite governmentalbodies, implementation is expected torequire at least five years. Implemen-tation will be geared to advancementsin the securities industry and to devel-opments in the evolving national mar.ket system.

Financial ManagementThe Commission collects fees for

the registration of securities, securitiestransactions on national securities ex-changes, and miscellaneous filings, re-ports and applications. In fiscal year'1979, the Commission collected a rec-ord $33 million dollars in fees, rep-resenting approximately 47 percent ofthe total funds appropriated by theCongress for Commission operations.These figures are up from $26 million,representing 42 percent of funds ap-propriated in fiscal year 1978. Nearly

$4 million of the increase in collec-tions was attributed to Securities Actregistration fees resulting from bothhigher volumes and larger offerings,while higher stock exchange volumesaccounted for $2.3 million of the in-crease.

In 1979, the Office of the Comptrol-ler initiated implementation of an au-tomated integrated financial manage-ment system. By the end of the fiscalyear, the system was producing com-prehensive accounting and budget ex.ecution reports which provide timelyinformation for budgetary review andpolicy planning both Commission-wide and by organizational unit.

Fiscal year 1979 also saw partial im-plementation of"a budget formulationsystem. Reports generated by this sys-tem present budgetary alternatives atvarious levels of staffing and funding,and are of considerable benefit in ana-lyzing different zero base budget pos-sibilities.

A position tracking system, devel-oped in fiscal year 1979, has been im-plemented and will be fully operationalin the first quarter of fiscal year 1980.

Other current initiatives intended toimprove financial management or con.serve resources include completion ofa budget handbook, continued auto-mation of payroll, fee collection andbudget call procedures, and establish-ment of uniform agency policies on theuse of overtime and the employmentof temporaries. These projects will allbe carried over into fiscal year 1980.

Personnel ManagementAt the close of the fiscal year, the

Commission's total strength was ap-proximately 2,020. About two-thirds ofthese personnel were employed in theagency headquarters in Washington,D.C.; the remaining one-third were lo-cated in the nine regional and sixbranch offices located in major finan-

cial centers throughout the UnitedStates.

Although relatively small by Federalagency standards, the Commissionrecognizes the importance of person-nel management as an internal part ofoverall management effectiveness. Ithas, therefore, initiated innovative pro-grams leading to both more effectiveuse of personnel resources and the in-tegration of personnel managementinto general decision-making. Enact-ment of the Civil Service Reform Actof 1978 (CSRA) has encouraged andaccelerated these Commission initia-tives. The intent of the CSRA is toplace greater stress on performance, togive managers the tools needed tocarry out their assignments and to holdmanagers accountable for the effec-tiveness of their units. As a result, avery substantial investment of stafftime and funds has been devoted to theimplementation of the Act, and aneven greater commitment will be re-quired in fiscal year 1980. Althoughthe full benefit of this investment willnot be realized for several years, sig-nificant accomplishments are alreadynoticeable durmq the first year of theCSRA's existence.

Senior. Executive SerUlce- The Com-mission was alloted 46 senior execu-tive positions in the initial Senior Ex-ecutive Service (SES) allocation, 44 ofwhich were filled by incumbents, asprovided by the new law.

Extensive training was given to sen-ior executives regarding the objectivesand policies of the senior executiveservice. This training included in-depthbriefings by officials for OPM, workingseminars of senior executives con-ducted by the Chairman and the Ex-ecutive Director, and training sessionspresented by personnel consultants.This training program had as its pur-pose education of key Commission of-ficials as to the f1exibilities and oppor-tunities offered by the CSRA for

65

increased effectiveness in personnelmanagement.

Based on a careful review of the liter-ature, interviews and personnel special-ists from academia and from the privatesector, and a review of programs inother agencies, a performance ap-praisal system has been developed andimplemented for the members of theSES. This system, which will be used asa basis for determining assignmentsand compensation, will be monitoredclosely to identify necessary refine-ments and to ensure that it continues tomeet all of the objectives prescribed bythe CSRA_ Finally, an Executive Re-source Board and a Performance Re-view Board have been established tooversee and coordinate manpowerplanning, recruiting, performance ap-praisals and other aspects of executivepersonnel management.

Performance Appraisal-A great dealof research and planning has gone intothe development of performance ap-praisal systems at the Commission. Acomprehensive promotion appraisalprogram being conducted by OPM (andreported in the 1978 Annual Report) iscontinuing. When completed, this pro-gram is expected to replace fairly sub-jective judgments with valid iI1tlicatorsof successful performance in attorneypositions. In addition to achieving ahigher degree of equity in awarding pro-motions, it is hoped that the new systemwill enable Commission managers topredict success in specific positionswith a higher degree of accuracy.

This effort is complemented by asep-arate study being undertaken by a pri-vate consultant and an anticipated con.tract with other consultants from OPM.When these studies are completed, it isexpected that they will provide the basisfor a comprehensive, valid and equita-ble appraisal system for managers, su-pervisors, professional staff membersand clerical personnel.

Other Accomplishments Under the

66

CSRA-Procedures have been devel-oped and implemented for the estab-lishment of a probationary period fornewly appointed managers and super-visors, as provided in Title III of theCSRA. This program enables divisiondirectors and office heads to promotequalified technicians and specialistsinto supervisory positions, with the un-derstanding that they can revert backto prior positions after six months ifthey do not give evidence of supervi-sory effectiveness. Planning is cur-rently under way for the merit pay pro-gram required by Title V of the CSRA,under which supervisors and middlemanagers would be compensated onthe basis of accomplishments and or-ganizational performance, rather thanon the basis of length of service.

On-going Programs-Title III of theCSRA authorizes acceptance of volun-teer services where they provide edu-cational experiences for students. TheCommission is making extensive useof this provision of the CSRA throughits student observer program, underwhich law students work for the Com-mission for up to 20 hours a week. Thestudents receive course credits in lieuof salary, as well as a first hand ac-quaintance with Federal employment.A number of student observers havealready become permanent staff mem-bers following graduation from lawschool.

Despite the heavy investment oftime devoted to implementation of theCSRA, the Commission continued tostress and initiate improvements inother traditional areas of human re-source management.

The Commission has continued torefine its attorney recruitment system,with the dual goal of attracting top cal-iber applicants and ensuring that per-sons employed represent a cross sec-tion of all segments of Americansociety. One notable achievement infiscal year 1979 was the Commission's

special effort to attract minority lawgraduates. This was accomplished bymeans of an enormously successful"job fair" to which 129 law studentswere invited. The students heard pre-sentations from the Chairman, severalCommissioners, the Executive Direc-tor and the heads of all major offices,resulting in the permanent employ-ment of 11 minority attorneys andsummer job opportunities for four sec-ond year students. Another program,carried out under the sponsorship ofthe Office of General Counsel, resultedin the hiring of four outstanding gradu-ates who had served as law clerks todistrict and appellate court judges.

The highly successful upward mobil-ity program instituted in fiscal year1978 was continued and expanded.Ten additional upward mobility posi-tions were established, bringing the to-tal number of positions under this pro-gram to 22. This number, however,only partially reflects the Commis-sion's progress in upward mobility. Asa direct result of early successes withthis program, a number of entry-levelpositions were established outside theformal program; this will further assistthe agency in using the capabilities ofits existing staff, while at the sametime providing other bonafide ad.vancement opportunities for lowergrade employees.

The Commission continued to em.phasize staff training in fiscal year1979. Approximately 850 of the Com-mission's 2,000 staff members at-tended formal training or developmentprograms during the year, an approxi-mate 10 percent increase over 1978.

In particular, more staff time andfunds were allocated to managerialand executive development than in anyprevious year. The Commission wasrepresented at the Federal ExecutiveInstitute's (FEI) seven week Senior Ex-ecutive Education Program for the firsttime, while five other senior managers

participated in FEl's three week lead-ership program. In addition, other keystaff members attended the Programfor Senior Managers at Harvard Busi-ness School, Managerial Grid, teambuilding programs and a programsponsored by the National Institute ofTrial Advocacy at the University of Col-orado. This emphasis reflects recogni-tion of the increased attention to exe-cutive development that is required bythe CSRA, and will be further ex-panded in fiscal year 1980.

The employee counseling programbegun in fiscal year 1978 was ex-panded in an effort to be more respon-sive to the needs of employees, and toenhance the role of the Commissionas a responsible and concerned em-ployer. A discrete Employee Relationsunit was established in the Office ofPersonnel, and its accomplishmentsnumbered among them expanded re-tirement counseling, counseling on fi-nancial planning, and more cornpre-hensive counseling on insurance plans.

The Commission conducted an ag-gressive Vietnam Veterans Week pro-gram, consistent with the spirit of theCongressional resolution on this sub-ject. The thrust of the program was tosensitize the staff to the particularneeds of the Vietnam veteran, to pro-mote the hiring and professional de-velopment of these veterans, and torecognize their post-service as well asservice accomplishments.

The Commission also continues toemphasize its highly successful pro-gram for the recruitment of handi-capped persons. This effort reflects acommitment to remove artificial bar.riers-both architectural and attitudi-nal-to the employment of full utili-zation of individuals who, despitehandicapping conditions, are able tomake a meaningful contribution toCommission objectives.

Equal Employment Opportunity-Inresponse to Title III of the CSRA, the

67

Commission has undertaken extensiveefforts to identify underrepresentationof minorities and women on the staff,both by grade level and by occupa-tion. Strategies are being implementedto correct the underrepresentationthrough enhanced recruiting efforts di-rected to schools with large minorityand female enrollment, maintenanceof equal opportunity recruitment files,expansion of the upward mobility pro-gram, activation of individual trainingand development plans, and coopera-tion with OPM in eliminating many ofthe complex procedures and require-ments which have raised barriers to therecruitment and hiring of minoritiesand women. These procedural effortswill be combined with seminars formanagers and supervisors designed tostress recognition of EEO responslbil-ities and provide instructions in thestrategies which may be employed toeliminate underrepresentation.

In part because of these efforts, thetotal number of women attorneys inthe work force at the Commission con-tinues to increase. Since 1977, 63women attorneys obtained employ-ment at the Commission, bringingtheir total representation to 168 as ofthe end of fiscal 1979. This increaserepresents a 60 percent rise in femaleattorney employment during the twoyear span.

Correspondent to the rise in thenumber of women attorneys, there hasbeen an overall increase in their totalpercent of the Commission's attorneywork force. In 1977, women attorneysrepresented 16.4 percent of the totalwork force, whereas 22.5 percent ofattorney positions were held by womenin 1979.

Minority attorney employment rosea healthy 21.4 percent during the pe-riod between 1977 and 1979. At theend of fiscal year 1979, there were 51minority attorneys employed at theCommission as compared to 42 in

68

1977, 33 in 1975, and 11 in 1973.Minorities generally registered

across the board gains in key profes-sional and middle management posi-tions (GS-13-15)' between fiscal years1977 and 1979. At the close of fiscalyear 1977, there were only 37 minori-ties occupying positions in thesegrades in contrast to 49 at the end offiscal year 1979, for a 32.4 percent in-creaseduring the two year period. Sim-i1arly, women also showed an increaseduring this period-holding 82 GS-13through 15 positions, up from 56 in1977.

Activity Onder The Freedom OfInformation Act

Commission rules implementing theFreedom of Information Act providethat the public may inspect or obtaincopies of records maintained by theCommission, with the exception of cer-tain specified categories of informa-tion. During 1979, the Commission reoceived 1,318 requests for information;up 5 percent from 1978.

Space ManagementProblems stemming from inade-

quate and poorly planned space con-tinue to present some of the Com.mission's most serious operationaldifficulties. Headquarters personnelare scattered among three locations,requiring costly, time consuming andinefficient movement of equipment,personnel and files. Some $150,000 isspent on alterations each year in anattempt to accommodate changingstaff requirements. In fiscal year 1979,documentation for a consol ida tedHeadquarters building was again pre-pared and submitted to GSA.

In the meantime, the Office of Ad-ministrative Services and the Divisionof Corporation Finance have contin-ued to work with GSA in connection

with the refurnishing and alterationsnecessary to allow for the eventualmovement of Commission personnel

from the sixth and seventh floors of theold Federal Home Loan Bank Boardbuilding to the third and fourth floors.

69

'Securities Exchange Act Release No.15251 (October 20, 1978), 15 SEC Docket1370.

'Securities Exchange Act Release No.15250 (October 20, 1978), 15 SEC Docket1355.

'SecurIties Exchange Act Release No.15671 (March 22, 1979), 17 SEC Docket 24.

'Securities Exchange Act Release No.15770 (April 26, 1979), 17 SEC Docket369.

'Securities Exchange Act Release No.16214 (September 21, 1979), 18 SECDocket 467.

"SecurIties Exchange Act Release Nos.15413 (December 15, 1978) and 16215(September 21, 1979), 16 SEC Docket 510and 18 SEC Docket 475.

'Securities Exchange Act Release No.15769 (April 26, 1979), 17 SEC Docket361.

Securrties Exchange Act Release No.15926 (June 15, 1979),17 SEC Docket 950.

9Bradford National Clearing Corporation etal. v. Securities and Exchange Comrmssronet sl , 590 F.2d 1085 (D.C. Cir 1978).

IOSecurities Exchange Act Release No.15640 (March 14, 1979), 16 SEC Docket1318.

Illd."44th Annual Report at 6."Securities Exchange Act Release Nos.

13760 (June 18, 1977), 12 SEC Docket1275; 14056 (October 17, 1977), 13 SECDocket 366; 14057 (October 17, 1977), 13SEC Docket 375; 14878 (June 22, 1978), 15SEC Docket 98; 15026 (August 3, 1978), 15SEC Docket 494; and 14991 (July 25,1978), 15 SEC Docket 359.

"House Comm. on Interstate and ForeignCommerce, 96th Cong., 1st Sess , Report ofthe Special Study of the Options Markets tothe Securities and Exchange Commlssion(Comm. Print 1978).

»ta. at 1.'"Id.

FOOTNOTES

"Securities Exchange Act Release No.15575 (February 22,1979),16 SEC Docket1163.

"Securities and Exchange Commissionfile Nos. SR-Amex-79-11, Securities Ex-change Act Release No. 16145 (August 29,1979),18 SEC Docket 195, SR-CBOE-79.9,Securities Exchange Act Release No 16127(August 21, 1979), 18 SEC Docket 162; SR.MSE.79.18, Securities Exchange Act Re-lease No 16254 (October 5,1979),18 SECDocket 612; SR-Phlx-79.7, Securities Ex-change Act Release No. 16253 (October 5,1979), 18 SEC Docket 611; and SR.PSE. 79-13, Securitres Exchange Act Release No16234 (October 2, 1979), 18 SEC Docket561.

19Securities Exchange Act Release No.15762 (April 24, 1979), 17 SEC Docket356.

'044th Annual Report at 13."Securlties Exchange Act Release No.

15241 (October 18, 1978), 15 SEC Docket1319.

"Securities Exchange Act Release No.15765 (April 27, 1979), 17 SEC Docket416.

"Securities Exchange Act Release No16017 (July 11, 1979), 17 SEC Docket1243.

"Securities Exchange Act Release No15533 (January 29, 1979), 16 SEC Docket854.

"SecuritIes Exchange Act Release No.16049 (July 27, 1979), 17 SEC Docket1475.

"Securities Exchange Act Release No.16112 (August 16, 1979), 18 SEC Docket67.

"Securities Exchange Act Release No.14234 (December 14, 1977). 13 SECDocket 999.

'.Securities Act Release No 6099 (Au-gust2, 1979), 17 SEC Docket 1422

71

•

"Securities Act Release No 5979 (Sep-tember 19.1978).15 SEC Docket 1109

'.Securltles Exchange Act Release No.15289. (November 1. 1978). 16 SEC Docket12.

"Securities Exchange Act Release No.15683 (March 29. 1979). 17 SEC Docket92

"SecuritIes Exchange Act Release No.15867 (May 23. 1979). 17 SEC Docket 698

HExchange Act RuIe 1Ob-lO.Certain par-agraphs of the rule became effective onJune 1. 1977. Securities Exchange Act Re-lease Nos. 13508 (May 5. 1977). 12 SECDocket 299; and 14942 (July 7. 1978). 15SEC Docket 245

"SecuritIes Exchange Act Release No.15219 (October 6. 1978), 15 SEC Docket1245.

"Securities Exchange Act Release No.15220 (October 6. 1978), 15 SEC Docket1260.

'6Securitles Exchange Act Release No.15984 (July 2, 1979), 17 SEC Docket 1167

"SecuritIes Exchange Act Release No16018 (July 11, 1979). 17 SEC Docket1244.

38Commodlty Exchange Act, 7 U.S.c. ~2(1977)

"43 FR 39956 (September 8, 1978).'.SeCUrltles Exchange Act Release No

15898 (June 5.1979),17 SEC Docket 810"Securlties Exchange Act Release No.

15899 (June 5, 1979), 17 SEC Docket 819.4215 U.S.C. ~78aaa.7811l, as amended by

the Securities Investor Protection ActAmendments of 1978. Pub. L No. 95-283.92 Stat. 249

"Securities Investor Protection Act Re-lease No 78 (October 20. 1978), 15 SECDocket 1438.

"'Securlties Investor Protection Act Re-lease No. 86 (March 30. 1979), 17 SECDocket 235.

"17 C F.R. 300100 et seq"Securities Exchange Act Release No.

15906 (June 8,1979).17 SEC Docket 891."Securlties Exchange Act Release No.

16156 (August 31. 1979). 18 SEC Docket237

'.Securitles Exchange Act Release No.14800 (May 25. 1978). 14 SEC Docket1178.

"Securities Exchange Act Release No.15827 (May 15. 1979). 17 SEC Docket 589.

72

'.Securitles Exchange Act Release No.15998 (July 5. 1979), 17 SEC Docket 1176.

"Securities Exchange Act Release No.15376 (December 1. 1978). 16 SEC Docket333.

>2Securlties Exchange Act Release No.16049 (July 27, 1979). 17 SEC Docket1475.

»Securlnes Exchange Act Release No.15812 (May 11. 1979). 17 SEC Docket 582

"[1976-1977 Transfer Binder] Fed. Sec.L. Rep. (CCH) '95.627 (S D.N.Y. 1976).

"Securities Exchange Act Release No.15411 (December 13, 1978) 16 SECDocket 435.

'6Securities Exchange Act Release No.15936 (June 19, 1979), 17 SEC Docket 985

l1Securities Exchange Act Release No.15885 (May 30, 1979), 17 SEC Docket 754.

'.Securlties Exchange Act Release No.16282 (October 16. 1979). 18 SEC Docket673.

"Securitles Exchange Act Release No.15860 (May 23. 1979). 17 SEC Docket 695;Securities Exchange Act Release No. 16208(September 18. 1979), 18 SEC Docket 403

"Securities Exchange Act Release No.14531 (March 6, 1978).14 SEC Docket 356.

6'Securlties Exchange Act Release No.16294 (October 24, 1979), 18 SEC Docket728.

"Securlties Exchange Act Release No.15838 (May 18. 1979), 17 SEC Docket 678

6'Securities Act Release No. 6084 (June25. 1979), 17 SEC Docket 1048.

"Securities Exchange Act Release No16226 (September 27, 1979). 18 SECDocket 509.

6'Securities Exchange Act Release No.16162 (September 6. 1979). 18 SEC Docket241.

66Report of the Advisory Committee onCorporate Disclosure, Chapter XIV. Page427 (1977).

61Securlties Exchange Act Release No.13482 (April 28. 1977). 12 SEC Docket239. Securities Exchange Act Release No.13901 (August 29. 1977). 12 SEC Docket1630.

"Securities Exchange Act Release No.15384 (December 6. 1978), 16 SEC Docket348.

6'Securities Exchange Act Release No.16104 (August 13. 1979), 18 SEC Docket91.

1°Securities Exchange Act Release No.16356 (November 21, 1979) 18 SECDocket 997

"Securities Act Release No. 6003 (De.cember 4, 1978), 16 SEC Docket 320.

"Securities Act Release No. 6027 (Febru-ary 2, 1979), 16 SEC Docket 1138.

13Secunties Act Release No. 6085 (June25, 1979), 17 SEC Docket 1057.

"Securities Act Release No. 6115 (Au-gust 30, 1979), 18 SEC Docket 220.

"Secunties Exchange Act Release No.16163 (September 6, 1979), 18 SEC Docket248.

1.Securities Act Release No. 6130 (Sep-tember 27, 1979), 18 SEC Docket 453.

17lnthe Matter of Umted States Steel Cor-poration, Secunties Exchange Act ReleaseNo. 16223 (September 27, 1979), 18 SECDocket 497.

18Securities Act Release No. 6032 (March5, 1979), 16 SEC Docket 1261

19Secuntles Act Release No. 6075 (JuneI, 1979), 17 SEC Docket 798.

8°Securities Act Release No. 6049 (April3,1979),17 SEC Docket 153.

»ta.8'Securities Act Release No. 6121 (Sep-

tember II, 1979), 18 SEC Docket 287."'SecuritIes Act Release No. 6136 (Octo-

ber 16, 1979), 18 SEC Docket 662.84Securitles Act Release No. 6022 (Febru-

ary 15, 1979), 16 SEC Docket 973.8'Secuntles Act Release No 6158 (No-

vember 29, 1979), 18 SEC Docket 1053;Securities Act Release No_6159 (November29, 1979), 18 SEC Docket 1092; and Se-curitres Act Release No. 6160 (November29, 1979), 18 SEC Docket 1111.

8.Securities Act Release No 6100 (Au-gust 2, 1979), 17 SEC Docket 1449.

81Securitles Exchange Act Release No.15572 (February 15,1979),16 SEC Docket1155.

"44th Annual Report at 21.89Securities Exchange Act Release No.

15920 (June 14, 1979), 17 SEC Docket 877."Securities Act Release No. 6006 (De-

cember 19, 1978), 16 SEC Docket 477; Se-curities Act Release No. 6007 (December19, 1978), 16 SEC Docket 492; SecuritiesAct Release No. 6008 (December 19, 1978),16 SEC Docket 498.

91Secunties Act Release No. 6127 (Sep-tember 20, 1979), 18 SEC Docket 384.

315-805 0 - 80 - 7

9'Accounting Series Release No. 177(September 10, 1975).

"Investment Company Act Release No.10891 (October 4, 1979), 18 SEC Docket637.

"Investment Company Act Release No.10890 (October 4, 1979), 18 SEC Docket635.

9'lnvestment Company Act Release No.10736 (June 14, 1979), 17 SEC Docket 937.

96lnvestment Company Act Release No.10828 (August 13, 1979), 18 SEC Docket122

911nvestment Company Act Release No.10740 (June 20, 1979), 17 SEC Docket1021.

981nvestment Company Act Release No.10690 (May 15, 1979), 17 SEC Docket 611.

99lnvestment Company Act Release No.10827 (August 13, 1979), 18 SEC Docket120.

'OOlnvestmentCompany Act Release No.10809 (August 6, 1979), 18 SEC Docket 25

IOllnvestment Company Act Release No.10862 (September 7, 1979), 18 SEC Docket271.

IO'Securities Act Release No. 6034 (March8, 1979), 16 SEC Docket 1267.

IO'ld.I04SecuritiesAct Release No. 6140 (Octo-

ber 26, 1979), 18 SEC Docket 801.!O'Securities Act Release No 6116 (Au-

gust 31, 1979), 18 SEC Docket 222.106lnvestment Advisers Act Release No.

664 (January 30, 1979), 16 SEC Docket901

!01Securities Act Release No. 6019(January 30,1979), 16 SEC Docket 837.

108lnvestment Advisers Act Release No.680 (June 19, 1979), 17 SEC Docket 1029.

109lnvestment Advisers Act Release No.688 (July 12, 1979), 17 SEC Docket 1293.

l1°SEC v. Lurnmis, Civ. Act. No. 75-1089AJ2 (N.D. CaL), Litigation Release No.8650 (January 19, 1979), 16 SEC Docket833.

11IE.g., SEC v. lntemetionel Telephone {;Telegraph Corporation, Civ Act. No 78-0807 (D D.C.), Litigation Release No. 8834(August 8, 1979), 18 SEC Docket 145.

I12E.g., SEC v. Rapid-American Corpora-tion, CIV.Act. No. 79-2128, (D.D.C., filed Au-gust 16, 1979), litigation Release No. 8841(August 16, 1979), 18 SEC Docket 149.

mE.g., SEC v. The Starr Broadcasting

73

Group, lnc., CIV. Act. No. 79-0357 (D.D.C.,filed February 7, 1979), Litigation ReleaseNos. 8667 (February 7, 1979), 16 SECDocket 1084, 8702 (March 26, 1979), 17SEC Docket 147,8713 (April 9, 1979), 11SEC Docket 286, and 8792 (June 22, 1979),17 SEC Docket 1137.

114E.g., SEC v Amencan Ftnenciel Cor-poration, Civ. Act. No. 79.1701 (D.D.C.,filed July 2, 1979), litigation Release No.8806 (July 2,1979),17 SEC Docket 1219.

"'SEC v. Marlene Industries Corp., Civ.Act No 79-1959 (S.D.N.Y., filed April 26,1979), Litigation Release No. 8733 (April26, 1979), 17 SEC Docket 406.

116SECv. The Fundpeck, lnc., Civ. Act.No. 79.0859 (D.D.C., filed March 21, 1979),Litigation Release No. 8698 (March 22,1979), 17 SEC Docket 72.

117SECv. Production 011 Corporation, Civ.Act. No. 135R (D. Miss.), Litigation ReleaseNo. 8765 (May 24, 1979), 17 SEC Docket792.

l1°SEC v. Advanced Fuel Systems, lnc.,Civ. Act. No. 78-759M (W.D. Wash., filedDecember 6, 1978), Litigation Release No.8621 (December 21, 1978), 11 SEC Docket581: In the Matter of Asset Secunties, lnc.,Securities Exchange Act Release No. 16189(September 12, 1979), 18 SEC Docket 317.

119SECv. Atlas Oil Exploration, lnc., Civ.Act. No. S-79.0259(r) (S.D. Miss., flied July13, 1979), Litigation Release No. 8835(August 13, 1979), 18 SEC Docket 146;SEC v. High Valley Investments, lnc., Civ.Act. No. 76-39.M (D. Mont.), Litigation Re-lease No. 8846 (August 21,1979),18 SECDocket 179; U.S. v. Carter, Crrrn. No. SA-78-CR-015 (W.D. Tex.), Litigation ReleaseNo. 8641 (January 11, 1979), 16 SECDocket 801; SEC v. Martin, Civ. Action No.78-918 PHX CAM (D. Arlz., filed December1, 1978), 16 SEC Docket 582.

'''''SEC v. Atlas Oil Exploration, lnc., supranote 10; U.S. v Jones, Crim. Act. No. 78-30019 (W.D. La., Indictment filed Septern-ber 30, 1978), Litigation Release No. 8566(October 19, 1978) 15 SEC Docket 1349.

I2lSEC v. Atlas Oil Exploration, lnc., supranote 10.

122SECv. Advanced Fuel Systems, lnc.,supra note 9; U.S. v. Trahan, Crim. Act. No.79.50008.01 (W.D. La., filed April 13,1979), Litigation Release No. 8760 (May 17,1979), 17 SEC Docket 652.

74

mSEC v. Atlas Exploration, lnc., supranote 10.

124SECv. Advanced Fuel Systems, lnc.,supra note 9.

I2lSEC v. Hospuei Corporation of America,CIV. Act. No. 78.2027 (D.D.C., filed October27, 1978), Litigation Release No., 8586(October 27, 1978), 16 SEC Docket 72.

'26SEC v. Schenley Industries, lnc., Civ.Act. No. 79-0855 (S.D.N.Y., filed February26, 1979), Litigation Release No. 8679(February 26, 1979), 16 SEC Docket 1256

I27SECv. Intemational Systems & ControlsCorporetion, Civ. Act. No. 79.1760 (D.D.C.,filed July 9, 1979), Litigation Release No.8815 (July 9, 1979), 17 SEC Docket 1302.

128SECAnnual Report 1978, at 34.129Securities Act Release No. 6021

(February 5, 1979), 16 SEC Docket 951.130Securities and Exchange Cornrnrssron

Staff Report on Transactions in Securities ofthe City of New York, October 1977.

1311bld.mSecurities Act Release No. 6021

(February 5, 1979), 16 SEC Docket 951,959.

mSECv. Harwell, Civ. Act. No. H-78-1916(S.D. Tex., filed October 5, 1978), LitigationRelease No. 8559 (October 5, 1978), 15SEC Docket 1242; see also Litigation Re-lease Nos. 8417 (May 24, 1978), 14 SECDocket 1216, 8541 (September 20, 1978),15 SEC Docket 1150, 8600 (November 21,1978), 16 SEC Docket 261 and 8690(March 13, 1979), 16 SEC Docket 1355.

134UnitedStates v. Harwell, Crim. Act. No.787.H.78-87 (S.D. Tex.), Litigation ReleaseNo. 8600 (November 21, 1978), 16 SECDocket 261.

I3lSecurities Exchange Act Release No.15719 (April 11, 1979), 17 SEC Docket257.

136Ibld.at 259.mU.S. v. Speer. Crim. Act. Nos. 77-

10034-01 and 10062-01 (D. Kan., filedMarch 15, 1977), Litigation Release Nos.8758 (May 17, 1979), 17 SEC Docket 651and 8800 (June 27, 1979), 17 SEC Docket1142.

13°SECv. Roberts, Civ. Act. No. 78-809(W.D. Mo., filed October 16, 1978), Lltlqa-tion Release Nos. 8564 (October 17, 1978),15 SEC Docket 1347, and 8595 (November6, 1978), 16 SEC Docket 139.

139Ibid.'40lbid.14lSECAnnual Report 1978, at 31.lOIn the Matter of E.F. Hutton & Company,

lnc., Securities Exchange Act Release No.15537 (January 30, 1979), 16 SEC Docket871; SEC u. Fred Blumenstein, 78 Civ. Act.No. 4805 (S.D.N.Y., filed October 13,1978),Litigation Release No. 8569 (October 19,1978), 15 SEC Docket 1350; In the Matterof Robert T. ODonnell, Secunties ExchangeAct Release No. 15868 (May 24,1979), 17SEC Docket 743.

wln the Matter of E.F. Hutton & Company,lric., supra note 34; SEC u. Blumenstein, suopre note 34; In the Matter of Robert T.O'Donnell, supra note 34.

'"In the Matter of E.F. Hutton & Company,lnc., supra note 34; In the Matter of RobertT. O'Donnell, supra note 34.

'''Securities Exchange Act Release Nos.16023 and 16025 (July 16,1979),17 SECDocket 1313.15.

146SECo. Santangelo & Co., Civ. Act. No.79.2097 (S.D.N. V., filed April 23, 1979), Lit.igation Release No. 8729 (April 23, 1979),17 SEC Docket 404.

,oSEC u. Telco Marketing Services, lnc.,(D.D.C., filed July 13, 1979), Litigation Re-lease No. 8821 (July 13, 1979), 17 SECDocket 1362.

'48SEC e. Fuqua Industries, lnc., Civ. Act.No. 79.2204 (D.D.C., filed August 21,1979), Litigation Release No. 8847 (August

21, 1979), 18 SEC Docket 180; SEC u. BOCInternational Limned, Civ. Act. No. 79.0888(S.D.N.V., rIled February 24, 1979), LItiga-tion Release No. 8673 (February 21, 1979),16 SEC Docket 1193.

'49SEC v. Telco Marketing Services, lnc.,supra note 39; SEC v. Unued TechnologiesCorporetion, Civ. Act. No 79.1648 (D.D.C.,filed June 25, 1979), Litiqatlon Release No.8793 (June 25, 1979), 17 SEC Docket 1137.

'''Supra note 40."'SEC Annual Report 1978, at 32.152Litigation Release No. 8816 (July 10,

1979), 17 SEC Docket 1303'''Securities Exchange Act Release No.

15994 (July 5, 1979), 16 SEC Docket 1172.154Securities Exchange Act Release No.

16223 (September 27, 1979), 18 SECDocket 497.

"'Securities Act Release No. 5170 (July19,1971).

156SecuritiesAct Release No. 5386 (April20, 1973), 1 SEC Docket No. 12, p. 1.

Il7Securitles Act Release No. 5704 (May6, 1976), 9 SEC Docket 540.

"'SEC v Repid-Amencen Corporation, su-pra note 3.

'''SEC u. The Fundpack, lnc., supra note7.

'60SEC v. The Starr Broadcasting Group,Inc., supra note 4.

161SEC u. Amencan Fmancial Corporeuon,supra note 5.

75

Appendix

THE SEC(JRITIES IND(JSTRY

Income, Expenses and SelectedBalance Sheet Items

Registered broker-dealers recordedtotal revenue of $11.2 billion in 1978,25 percent above the level of 1977.Securities commissions increased 34percent in 1978, inflecting the surge intrading volume, and represented 40percent of total revenue. Trading prof-its were 18 percent higher in 1978 and

also represented 18 percent of reve-nue. Underwriting revenue declined$42 million in 1978, after a similar $44million decline in 1977 and represents8 percent of total revenue.

Pre-tax income increased $46 mil-lion, or 8 percent, in 1978 because in-creased expenses nearly matched thegrowth in revenues. Ownership equityat the end of 1977 was $4,659 billion,reflecting an increase of $544 millionor 13 percent during the year.

79

Table 1FINANCIAL INFORMATION FOR BIlOI(ER.DElliRS

1975-1978(11111_ of DalIan1

1975 1976 1977R 1978P

A. .....

1 Secunties CommISSIOns $ 3,378 $ 3,657 $ 3,334 $ 4,4802 Gain (Loss) In Trading 1,202 1,828 1,691 1,9933 G3In (Loss) In In>estments 132 269 353 3914 Profrt (Loss) From Undefwntlng and Seiling Groups 930 1,035 991 9495 Revenue from Sale of Investment Company Secunhes 140 165 161 1626 Marlin Interest Income 476 557 782 1,2237 Other Revenue Related to Securrt .. s BUSiness 897 1,168 1,055 1,6968 Revenue from All Other Sources 218 236 564 3039 Total Revenue $ 7,373 $ 8,915 $ 8,931 $11,197

I.Elpooses

10 Registered Represenlahves' Compensation $ 1,284 $ 1,575 $ 1,541 $ 1,945II Employee Compensalion and Benefits 1,413 1,664 1769 2,14312 Iornmrsstcns and Clearance Paid to Other Brokers 524 535 585 79313 Interest Expense 668 900 1,246 1.96414 Communications and Data Processing 488 590 708 78015 Occupancy and EqUipment m 485 m 43916 Promotion 159 203 203 21817 Regulatory Fees and Expenses 76 81 69 7218 Compensation to Partners and Voting Stockholder Officers 488 572 553 60819 All Other Operating Expenses 681 805 1,255 1,59820 Total Expenses $ 6,253 $ 7,410 $ 8,340 $10,56021 Pre-Tax Income $ 1,120 s 1,505 $ 591 $ 637

C. Assets, lJaIxl_ and CoprtJl

22 Total Assets $31,851 $48,983 $54,670 $66,47023 liabilities

a Total liabilities (excluding subordinated debt) 26,352 42842 48,794 59,500b Subordmated debl 836 858 948 1,181c Total liabilities (230 + 23b) $27,188 $43,700 $49743 $60,681

24 Ownership EQurly $ 4,663 $ 5,283 $ 4,927 s 5,78925 Total lrabllrtles and Ownership EQUity $31,851 $48,983 $54,670 $66,470

Number of Firms 4,079 4,315 4,484 4,998

R R.. isedP PreliminarySources Form X-17A-10 and FOCUS Reports

Office 01 Secunties Industry and Sell-Regulatory EconomicsDIrectorate of Economic and Policy Research

Historical Financial Informationof Broker-Dealers with SecuritiesRelated Revenue of $500,000 orMore

Brokerage firm revenue increased23 percent in 1978 on share volumewhich increased 37 percent over 1977.Commission revenue and trading prof-its each increased, while underwritingrevenue declined somewhat from 1977levels. Investment profits, interest in-come, commodity and other revenue

80

related to the securities business eachrose from the previous year. Pre-tax in-come increased 38 percent with this 23percent rise in revenue.

Firms that reported securities-re-lated revenue of $500,000 or moreheld approximately 89 percent of theindustry's assets and reported 90 per-cent of all revenue in 1978. Balancesheet data for the most recent twoyears are not comparable with earlieryears because of changes made in thebrokerage firm reporting system.

= =

Table 2HISTORICAL CONSOLIDATED REVENUE AND EXPENSES Of BRDKER.DEALERS

WITH SECURITIES RELATED REVENUE OF $500,000 OR MORE111011_ 01 DoIIonl

1970 1971 1972 1973 1974 1975 1976 1977R 1978P

1_•• 1 Securrtles CommiSSIons $2,267 $3,287 $3404 $2816 $2438 $3,220 $3516 $2984 $39642 Gam (loss) on FirmSecuntles Tradingand Investment

Accountsa Gain (loss) In trading 824 1,056 994 590 m 1143 1757 1,512 1773b Gam (loss) In meestrnents 75 243 209 -3 55 131 253 326 356c Ictal I'ln (los<) 898 1299 1203 587 777 1274 2010 1838 2129

Proht (loss) from Underwriting and Seiling Groups 601 957 914 494 496 914 1021 929 838Revenue from Sale of Investment Company Secunnes 184 196 151 149 79 120 146 138 138Margin Interest Income 379 364 527 621 622 466 550 734 1107Fees for Account Supemsmn. Investment AdviSOry,and AdministratIve Services 64 82 99 83 85 156 207 176 232Commodity Revenue 88 98 175 178 168 187 236 266 350Other Revenue Related to Secunties BUSiness N/A N/A N/A N/A N/A 509 691 689 960Revenue from All Other Sources 266 300 306 323 400 167 201 478 410

10 Total Revenue $4 747 $6583 $6,729 $5250 $5,065 $7013 $8,577 $8232 $10 128

lfI_11 Registered Representatives' Compensatlon s 778 $1.139 $1.198 $ 937 $ 949 $1278 $1576 $1428 $ 171412 Employee Compensat,on and Benefrts 1,086 1300 1392 1,184 1,097 1376 1,668 1593 1,92513 CommiSSions Paid to Other Brokers' 128 182 186 188 151 209 168 530 70714 Interest Expense 540 520 634 796 750 582 839 1 149 178715 Communications and Data Processing 370 434 488 461 463 482 590 649 69416 Occupancy and Equipment 349 413 460 433 440 464 486 372 38117 Promollon 157 188 214 186 172 157 202 186 1%18 All Other Operatlnl Expenses 606 787 794 686 634 1,416 1633 1639 1,776

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

C. .. 111 Income20 Pre-Tax Income 734 $1621 $1365 s 378 410 $1,050 $1415 686 947

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

'Includes clearance paid to others beginning In 1977R Re~sedP PreliminarySources Form X.17A.10 and FOCUS Reports

Office of Secunties Industry and Self.Regulatory EconomicsDirectorate of Eccnomrc and Policy Research

81

"

= =

r.ble 3HISTORICAL BALANCE SHEET FOR BROKER-DEALERS WITHSECURITIES RELATED REVENUE Of $500,000 OR MORE

(11'1_ 01Dolllrtl

1970 1911 1972 1973 197( 1975 1976 1977 1978

A. AaoIs1 Cash, c1ea"ng funds and other deposits $ 1,162 $ I.221 $ 1,281 $ 1,139 $ 9(0 $ 925 $ U35 $ 979 $ UOS2 Recel .. bles from other bro,",r.dealers

a Secuntles failed to deliver 2,319 2,230 2,568 1.8« 1.220 1,«6 2,215 2,375 2,mb Secunnes bofrowed 865 1,022 1,3M 1,096 889 1,366 2,091 2,307 2,819c Other recelY3b1es 198 295 382 330 905 1.011 1,093 682 899

RecetYables from customers 7,077 9,6« 13,373 9,056 7,(50 8,(M 12,80( 13,728 15,(31Market value or fair value of long positions," se-cuntres and commodities 10,261 11,667 11,870 9,722 10.789 12,901 21,392 28,521 33,061

5 Exchange membenhlps at market .. Iue 210 200 208 123 101 118 1(2 117 2776 Other assets 1,392 I.M6 1.70( 1.879 1.(93 (,535 7,203 3,038 3,211

7 Total assets $23,W $27,925 $32,750 $25,189 $23.787 $30,826 $(8,075 $51,W $59,219

B.1JIbof_8 Money borrowed $ 8,99( $11.286 $1(,398 s 9,878 $10,m $ H88 $11,802 $26,503 $27,5659 Payables to other broker.dealers

a Secunnes failed to receIVe 2,706 H2O 2,732 1.72( 1,281 1,(16 2,152 2,598 2,(50b Secunues borrowed 836 98( 1,28( 8(7 579 1.Q6( 1.61( 1,770 2.1(3c Other payables 198 3(5 35( 365 1,059 1.088 1,019 1.092 888

10 Payables to customers (,m V36 5,228 (,978 3,986 (,696 6,m 5.158 7,69111 Short posmons In seeusnes and ccmrnodities 707 907 1,525 1.158 1.038 U65 2,555 (,83( 7,09712 Subordmated borroWings Ml 728 m M2 m 767 799 8(0 97313 Other "abilitIes 2,3(3 2,859 2,505 2,550 2,099 7,203 17,118 (,837 5,753

1( Total "abl"tleS 20,667 2UM 28,802 22,1(2 21,056 26,887 (3,293 (7,632 5(,560

C. Ow...... , EqallJ15 Ownership equrty 2,818 3,661 3,9(8 3,0(7 2,731 3,939 V82 H15 (,659

16 Total "abl"tles and capital $23,(8( $27,925 132.750 $25,189 $23,787 $30,826 $48,075 $51.W $59,219

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

IThe balance sheet for 1977 IS not comparable WIth preY'Ous years' data because of changes the reportlOg formSources Form X.I1A-I0 and FOCUS Reports

Office of secu"tleS Indust/} and self RegulatO/} EconomICSDIrectorate of EconomiC and PolIcy Research

Securities Industry Dollar: 1978Securities commissions represented

39.1 cents of each dollar of securitiesindustry revenue. Another 17.5 centsof each dollar came from trading activ-ities and underwriting revenue contrib-uted 8.3 cents. Together, these threeactivities accounted for 64.9 cents ofeach revenue dollar.

The largest portion of this revenue

82

dollar-35.9 cents-went to pay reg-istered representatives and supportpersonnel (clerical and administrativeemployees). Another 10.7 cents wasspent on communications, occupancyand equipment. General partners andvoting stockholder officers' compen-sation amounted to 5.0 cents of eachdollar, with 9.3 cents remaining forpre-tax income. This margin was 11percent above the 1977 figure.

'

'"

w::EoozX<tI-wa:a..CZ<tenwenzwa..Xw

w::lZw>wa:u..oenwoII:::loen

eelo e.~"'"0)-". e 0<0:1 ...Eo..E:ll0<000

iiieosEoIt

83

~

Broker-Dealers, Branch Offices,Employees

The number of broker-dealers in-creased from 4,484 in 1977 to 4,998 in1978. Following the upward trend ofbroker-dealers, the number of branchoffices increased to 6,706.

84

There were approximately 36,500full-time registered representatives as-sociated with members of the NewYork Stock Exchange at the end of1977.

Broker-Dealers and Branch Officeso 3000 6000 9000

1972

1973

1974

1975

1976

1977

1978

T T I~~:~~~~~~~~~~~~~~~:I~.:....:~:~tlli~\~\;\~{(~::.:.:t~~~\~j~j~j\j~jt~:r.:;;./:~i~j~l4255

I 7334

I I.;:~::~.'~~:::':::::::~:~:~:~~~~~~I'..:;:~:I~~~~~~I"".. :./\nt?~ 4088

I 7223

I I'~1~1t:~:':'::i:1::~::;':.::.t~:1t:r~:r;::'::':~:i:i:~:;::1~;~1~1;:1r::::'i:::i:\J~~~~\~14081

I 6301

II~~::::::~:r:::~::~;:;}.:.:..../i.:~::t:::~:~::ti~~~.;.:;;:~:;;~;1:~i{~:::~~\i:i:::.;.;:;~:;:t~14113

I 626 7

I1i:i:ii;1:i:::l1:::::::1;~\;:~:::~;ii1}~(}:~::;::.::.t(1t~:?:~::i:.::::t:{~:.:'J4315

I 6290

I It=t::::: ..:::., ::/ij?i:i i;;:":::.:.:::.t~/?:::::"':'::~:':'fb1{\;: :-,::.j~H 4484

I 6498

II:::~~t\::.:.:.:.:.:.r;:~t~~~":~:.b"-,:::.(:tIt.: .~)~~~f:::'.(\t~.'''14998P.::::.. . ....

I 6706t

. 1 I ,

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

Rr Revised Er Esttrnate

SOURCE X-17A-l0 AND FOCUS REPORTS

85

~

'

Tlble 4BROKERS AND DEALERSREGISTERED UNDER THE SECURInES ACT OF 1934-EFFECTIVE REGISmnONS AS OF

SEPTEMBER 30, 1979 ClASSIFIED BY TYPE OF ORGANIZATION AND BY LOCAnON OF PRINCIPAL OFFICE

Number of PropndlllS,Number of Registrants p.rt ners, OffIl:.... etc

locatIOn of Pnnelpll OffiCes Sole SolePro- p.rt. Cor. Pro- p.rt. Co<

ToIIl pr> nero poq. ToIIl ,,> nero p0ll-et". ships bons etor. shiPS tKIIISships shiPS

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

Total (excludlOg NY Crty) 4.714 1.832 404 2,478 18.588 1,832 2.349 14.407New York City 1.512 593 269 650 9.045 593 2119 6.333

Subtotal 6,226 2.425 673 3,128 27.633 2.421 4.468 20,740For"gn 20 0 2 18 138 0 9 129

Grand Total 6.246 2.425 675 3.146 27,771 2.m 4.417 20.869

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

86

~

Table 5PRINCIPAL BUSINESS OF SECO BROKER.DEALERS

Exchange member pflmanly engaged In exchange ccmmesien businessExchange member pnmanly engaged In floor activitiesBroker or dealer In general secunbes businessMutual fund underwrlter*Mutual fund distributor.Broker or dealer seiling vanable annuity contractsSolicitor of saVings and loan accountsReal estate syndicator and mortgage broker and bankerReal estate condormmurn Interests.limited partnership interests"Broker or dealer seiling 011and gas InterestsPut and call broker or dealer Of option writer (non-exchange options)Broker Of dealer seiling secunnes of only one Issuer or essocrated ISSUers (other than mutual funds)Broker or dealer sellmg church secuntiesGovernment bond dealer (other than mUOIcipaQBroker or dealer In rnumopal bonds"8foker or dealer In other secunties businessNo secunnes busmess

Totals

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

••• Based on data prtmded by 305 of the 387 broker-dealers

Fiscal year~nd

1977 1978 1979

18 15 611 18 861 65 339 11 75 4 1

10 11 85 6 5

33 35 313 5 1

13 15 7111 10 193 5 4

11 13 3310 11 91 3 05 5 4

46 18 3811 15 15

309 316" 305'"

87

T,bI.6APPUCATIONS AND REGISTRATIONS Of BROIlERS AND DEAL£RS

F/SCIIv.... 1979

8IOItEB-DDI.EB APPUCATIOIIS

ApplicatIOns pendIRg at close of precedIRg yearApplicatIOns recerred dUring I/SCII 1979

TollIl appllcallons for dlsposrlJonllosposrllon of ApplicatIOns

Accepted to< filingReturnedWrthdrawnDenied

Total applications dISposed of

ApphcatlOns pendIRg as of September 30 1979

BIOIEI-DDI.EB BEGISTBATIOIIS

Effectr .. registratIOns at close of precedIRg yearRegrstratlons effectIVe dUring fiscal 1979

Total registrationsRegistrations termmated dunng fiscal 1979

WithdrawnRewkedCancelled

Total registrations terminated

Total registratIOns at end of fiscal 1979

INVESTllEIIT AD¥ISlB APPUCAnOIlS

ApphcatlOns pendIRg at close of precedIRg yearApplicatIOns received dunng fiscal 1979

Total apphcanons for dlSposr!lonDISposition of applicatIOns

Accepted for filingReturnedWithdrawnDenied

Total apphcatons drsposed of

Apphcatlons pendIRg as of September 30, 1979

INVESTllEIIT AD¥ISlB BEGISTBAnONS

EffectIVe registrations at close of preceding yearRegIstrations effectl" dUring fIScal 1979

Total registrationsReglstrallons terminated dUring fiscal 1979

WrthdrawnRewkedCancelled

Total reglstratKJnS termmated

Total regIstratIOns at end 01 fiscal 1979

88

ess1,379

2,2«

1,025328

00

l.353

891

6.0071,025

7,032

78402

786

6,246

9261,291

2,217

688480

00

1.168

1.049

5,205688

5,893

22900

229

5,664

Table 7APPUCATIONS AND REGISTRATIONS OF MUNICIPAL SECURITIES

DEALERS AIID TRANSFER AGENTSf"Cal Y.. r 1979

IIl111lC1~ALSECUlmES DEAl£1S APPUCAT1011S

APllhcatoons pend,ng It dose of precedlnl ,..rAPllhcatoons receNOd dunnl f,seal 1979

ToIIl IpphcatlOllS for dlSj)OSlbonDlsposrIlOn of Apphcabons

Accepted lor "lInlReturnedWrthdrawnDenied

ToIIl IPllhcabons dISposed of

Appllcat,ons pendlnl as of Septembe, 30, 1979

IIUIICI~AL SECUlmES DEAl£1S IfGISTUTIOIIS

Effect"" re&.stratIOnS It dose of precedlnl ,..,R"IIslratlOns effect"" dunnl fiseal 1979

ToIIl 'er.strat,onsHOIIstrabons term,nated dunnl fiscal 1979

WithdrawnCancelledSuspended

Toul 'erlstritoons term,nated

Total rer,stratlons It end of f'SClI 1979

TlMSftI AGENTS APPUCAT1011S

ApplicatIOns pendlnl It close of precedlnl ,..rAppllcat,ons 'ecetwed dunnl "seal 1979

Toul apphcatons for dlSpo$lt.onIlrsposrt,on of appllcahons

Accepted for f,lInlReturnedWithdrawnDen'ed

Total appllclllOns dISposed of

ApplicatIons pendmg as of September 30, 1979

TlMSftI AGENTS IEGISTUT1011S

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

Total registratIOnsRer,st,at,ons terminated dunnl "seal 1979

WdhdrawnCancelledSuspended

Toul 'erlstrabons term,nated

Total reglstratrons at end of fiscal 1979

315-805 0 - 80 - 8

101oo

323oo

2111

32

11

21

33610

346

346

1934

53

35

18

86132

893

891

89

Self-Regulatory OrganizationRevenue and Expenses

Self-regulatory organizations re-ceive approximately 70 percent oftheir revenue from four sources: trans-action charges, listing fees, communi-cation fees and depository fees. Thenature of these revenue sources makesthe financial condition of self-regula-tory organizations highly dependenton trading volume.

Total share volume of securitiestraded on all national securities ex-changes and over-the-counter in-creased 37 percent between calendaryear 1977 and 1978, bringing 1978share volume to 12.6 billion. As a re-sult of this increased trading activity,combined self-regulatory organizationrevenue increased to $261 million, up$24 million from the 1977 total.

Changes in major revenue compo-nents between 1977 and 1978 were asfollows:

Revenue from transaction fees in-creased to $52 million, from $37 mil-lion;

Revenue from communicationfees decreased $1 million to $41 mil.lion;

Revenue from listing fees in-creased $800,000 to $43 million; and

Revenue from depository fees in-creased $8.7 million, to $47 million.

The expenses of the self-regulatoryorganizations are concentrated in twoareas, employee costs and communi-cations and data processing costs.These costs accounted for 74 percentof the $232 million in self-regulatoryorganization expenditures for 1978.

The individual organizations arequite different in their dependence onparticular sources of revenue. Somesources of revenue, such as transac-tion, clearing and depository feeschange directly with changes in sharevolume. Others are relatively fixed,such as listing fees and membership

90

dues. The substantial growth in tradingvolume during 1978 provides an op-portunity to examine how changes involume affect each organization's fi-nancial results. The revenue increasewhich accompanied the growth inshare volume was not as dramatic-l0percent above 1977. Since operatingcosts are largely fixed, however, thegrowth in revenue yielded dramaticallyimproved pre-tax income. In 1978 thenet income of self-regulatory organi-zations was nearly $30 million, morethan the net income of the previoustwo years combined.

The New York Stock Exchange(NYSE) derived 44 percent of its reve-nue from its volume-related transactionand depository fees in 1978. Relativelyfixed sources of revenue, such as listingfees paid by corporations and commu-nications fees and memberships duespaid by brokers, generated another 42percent of revenue, and miscellaneoussources accounted for the remaining 14percent. Pre-tax income in 1978, at$18.8 million, was 75 percent higherthan in 1977.

The American Stock Exchange(AMEX) generated only 23 percent of its1978 revenue from volume-relatedtransaction fees. Its listing and com-munication fees and membershipsdues, however, each generated revenueat a higher annual rate in 1978 than1977. Pre-tax income for 1978 wasmore than twice the 1977 figure.

Over-the-counter trading of listedand unlisted issues in 1978 was 36 per-cent above the 1977 level. NASD rev-enue, however, is derived from sourceswhich do not vary with trading volume.Registration, corporate finance andlisting fees, together with membershipdues, provided 87 percent of revenue.Revenue in 1978, consequently, wasonly three percent above 1977 annualrevenue, and pre-tax income slipped55 percent.

The Midwest Stock Exchange's 1978

•

•

•

•

revenue was substantially reduced asa result of the discontinuance of theexchange's broker service bureau.Nearly 72 percent of revenue, however,is still volume-related, and the com-bined effects of the discontinuedlosses and the growth in trading vol-ume resulted in pre-tax income of$720 thousand in 1978. Pre-tax losseswere over $1 million in 1977....,The Pacific, Philadelphia and BostonExchanges also depend on volume-re-lated fees for most of their revenue.Sixty-five percent of Pacific's, 81 per-cent of Philadelphia's and 80 percentof Boston's revenue comes from suchsources. The record trading volume in1978 raised Pacific's 1978 pre-tax in-come to a level nearly 12 times as highas the 1977 figure. Philadelphia expe-rienced a seven-fold increase, and Bos-ton's pre-tax income figure in 1978 was10 times higher than in 1977.

The Chicago Board Options Ex-change, which is also highly dependenton volume-related sources of revenue,had a pre-tax profit of nearly $2.6 mil-lion in 1978, compared with a pre-taxloss of $500 thousand in 1977. TheCincinnati Exchange, which began anelectronic trading experiment in 1978,now receives less in floor usage reve-nue and more in communications fees.While its 1978 revenues were higherthan the previous year, 1978 operatinglosses were $7 thousand, versus $20thousand in pre-tax income in 1977.

The MSRB income of $590,960 dur-ing fiscal year 1979 (See Table 12) wasderived primarily from three fees es-tablished by rules adopted under theExchange Act. Municipal securitiesbrokers and municipal securities deal-ers are assessed (1) an initial fee of$100, (2) an underwriting assessmentfee equal to .001 percent of the facevalue of all municipal securities theypurchase from an issuer as part of anew issue which has a final stated ma-turity of not less than two years from

the date of the securities, and (3) anannual fee of $100 which, for this fiscalyear, it continued to be possible to off-set by underwriting fees paid within thecalendar year. The underwriting as-sessment fee accounted for 70 percentof the MSRB income during the fiscalyear 1979. The balance of MSRB in-come was from other fees and interestincome .

During fiscal year 1979, the MSRBhad total expenses of $866,323. Themajor expense items were staff salariesand employee benefits, includingMSRB contribution to an employee re-tirement plan established in 1978 (41percent); meetings and travel (26.8percent); and mailing list, rule manual,postage and other printing (14.9 per-cent). Expenses exceeded income by$275,363, due, in part, to a significantreduction in assessment fees received.As of September 3D, 1979, the MSRBhas a surplus of $632,823.

Aggregate clearing agency revenuesincreased approximately $16 millionin 1978 to approximately $119 million.Aggregate clearing agency expensesincreased approximately $12 millionin 1978 to approximately $112 million.

The 1978 increases in aggregateclearing agency revenues and ex-penses of 16 percent and 12 percentrespectively represent a significant netimprovement over 1977 when the re-spective increases were 10 percent and12 percent. The 37 percent increase intrading volume for 1978 over 1977discussed supra is the fundamentalreason for clearing agency revenues in-creasing at a greater rate than ex-penses. The 1978 aggregate revenueincrease of 16 percent is net of re-funds, discounted fees or rebates(collectively, refunds) of unneeded rev-enue made by some clearing agenciesto their participants. These refunds,which have the effect of reducing feescharged, totaled approximately $12

91

million in 1978 as compared to ap-proximately $6 million in 1977.

The 1978 net excess of revenuesover expenses provided some clearingagencies with an opportunity to replen-ish their retained earnings which had

92

declined during the previous severalyears when expenses increased at agreater rate than revenues. Expensesexceeded revenues for only one clear-ing agency in 1978 compared with fivein 1977.

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y.bIt 12REVENUE AND EXPENSES OF MUNICIPAL SECURITIES RULEMAKING BOARD

Vea, ended September 30

1979 1978...- $ 513,708Assessment fees. $413,841Annuollees 95,554 96,301Inlballees 17.600 16,800Inlefesl,n<:ome 62.328 51.667Other 1,637

590,960 678.476

355,721 376,839Satanes and employee benelrlsMeebnlS and travel 232,738 212.467MIlIonl lost, Board manual and o!Iler pnnbnl and postale 129,667 132.870Rent telephone and other occupancy costs 65.939 62.385Prof.... o.. 1and otIler sennces. 42.436 32.886Payroillaxes 17.620 18,163Depreciation and amortlzabon 13,669 13,624Other 8,533 5,469

866.323 854.703

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

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

EXEMPTIONS

Section 12(h) ExemptionsSection 12(h) of the Exchange Act

authorizes the Commission to grant acomplete or partial exemption fromthe registration provisions of Section12(g) or from other disclosure and in-sider trading provisions of the actwhen such granting is not contrary tothe public interest or the protection ofinvestors.

For the year beginning October 1,1978, 43 applications were still pend-ing and 176 applications were filedduring the year. Of these 219 applica-tions, 156 were granted, 9 were with-drawn and 2 were denied. Fifty-two ap-plications were pending at the close ofthe year, of which 26 had been pub-lished for notice.

On September 17, 1979 the Com-mission adopted Rule 12h-4 which au-tomatically suspends an issuer's dutyto file Section 13(a) reports as to aclass of securities pursuant to Section15(d) of the Exchange Act for thebalance of the issuer's fiscal year if theregistration of such securities is ter-

minated under Section 12(d) or12(g)(4) of the Exchange Act.i At thestart of the next and each succeedingfiscal year, if the class of securities isheld by less than 300 shareholders ofrecord, this suspension of the duty tofile would continue under Section15(d). The resulting reduction in 12(h)applications from issuers who termi-nate under Section 12(d) or 12 (g)(4) isexpected to reduce the processingtime for other 12(h) applications.

Exemptions for Foreign PrivateIssuers

Rule 12g3-2 provides various ex-emptions from the registration provi-sions of Section 12(g) of the ExchangeAct for the securities of foreign privateissuers. Perhaps the most important ofthese is that contained in subpara-graph (b) thereof which provides an ex-emption for certain foreign issuerswhich submit on a current basis ma-terial specified in the rule. Such ma-

'Securtties Exchange Act Release No.16211 (September 17. 1979), 18 SECDocket 413.

99

~

terial includes that information aboutwhich investors ought reasonably to beinformed and which the issuer: (1) hasmade public pursuant to the law of thecountry of domicile or in which it is In-corporated or organized; (2) has filedwith a foreign stock exchange onwhich its securities are traded andwhich was made public by such ex-change, and/or (3) has distributed toIts security holders. Perlodically, theCommission publishes a list of thoseforeign issuers which appear to be cur-rent under the exemptive provision.The most current list is as of August31, 1979 and contains a total of 161foreign Issuers?

Other ExemptionsThe Commission received and

granted two requests for exemptionfrom the broker-dealer registration re-quirernent of Section 15(a) of the Ex-change Act. Exemptions were grantedto the the National Association of In-vestment Clubs In connection with Itsstock purchase program and to MortexInc. In connection with Its automatedmortgage tradinq facility. The Com-rnissron determined In each case thatan exemption would be consistent withthe pubhc interest and the protectionof Investors.

Exchange Act Rule 10b.6 imposescertain prohibitions upon trading in se-cunties by persons interested in a dis-tribution of such securitres. During thefiscal year, the Commission grantedapproximately 600 exemptions pur-suant to paragraph (f) of Rule lOb-6under circumstances indicating thatproposed purchase transactions did

2Securlties Exchange Act Release No16212 (September 21, 1979), 18 SECDocket 462

100

not appear to constitute manipulativeor deceptive devices or contrivancescomprehended within the purposes ofthe rule. In addition, Rule 1Ob-13underthe Exchange Act prohibits purchasesof certain securities by persons makinga tender offer or exchange offer fromthe time the offer is publicly an-nounced until the termination of theoffer. One exemption from Rule lOb-13 was granted to permit an issuer toeffect concurrent tender and exchangeoffers inasmuch as the transaction didnot appear to constitute a manipula-tive or deceptive device or contrivancecomprehended within the purposes ofthe rule.

The Commission also granted to oneindividual a temporary waiver of therequirement in MSRB rule G-3 that aperson acting as a financral and oper-ations principal take and pass theMSRB Financial Operations PrincipalQualification Examination.

FINANCIAL INSTITUTIONS

Stock Transactions of SelectedFinancial Institutions

During 1978, prrva te noninsuredpension funds, open-end investmentcompanies, life insurance companies,and property-liability insurance com-panies purchased $47.7 billion of com-mon stock and sold $42.7 billion, re-sulting in net purchases of $5.0 billion.In 1977 purchases were $36.9 billion,sales $34.5 billion, and net purchases$2.4 billion. Their 1978 common stockactivity rate was 26.2 percent as com-pared to 20.6 percent one year earlier.

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STOCKHOLDINGS OFINSTITUTIONAL INVESTORSAND OTHERS

At year-end 1978, the eleven in-stitutional groups listed below held$358.0 billion of total corporate stockoutstanding (both common and pre-ferred). In comparison, they accountedfor $342.2 billion of the stock held ayear earlier. The resulting 4.6 percentincrease in the value of the stockhold-ings of these institutions was the same

as the 4.6 percent upswing in the ag-gregate market value of all stock out-standing. Thus, the share of total stockoutstanding that was held by these in-stitutions was 34.4 percent at year-end1978 the same as it was a year earlier.During 1978, the shares held by otherdomestic investors, which consist ofindividuals, broker-dealers and insti-tutions not listed, dropped to 59.4 per-cent from 60.0 percent. Foreign inves-tors share of stockholdings increasedto 6.2 percent.

Table 14MARKET VALUE OF STOCKHOlDlNGS OF INSTITUTIONAL INVESTORS AND OTHERS

(Billions .f 0011.1... End of Yur)

1971 1971 1973 1974 1975 1976 1977 1978

I Pnvate Nomnsured Pension Funds 887 1I52 905 633R 886 1097 1019 10792 Open End Investment Companies 526 580 433 303 387 430 362 3413 Other Investment Compames 69 74 66 47 53 59

3~ ~R27

4 life Insurance Companies 206 268 259 219 281 342 3555 Property-liability Insurance Companies] 166 218 197 128 142 169 173R 1976 Personal Trust Funds2 941 1I0 2 947 677 810 930 90 s: 9317 Common Trust Funds1 58 74 66 43 59 78 NA NA8 Mutual Saangs Banks 35 45 42 37 44 44 48 489 State and local Retirement Funds 154 222 202 203 243 301 300 333

10 Foundations 250 285 245 184 227 271 261 2701I Educatronal Endowments 90 107 96 67 88 104 98 102

12 Subtotal 3382 4127 3458 2541R 3220 3825 3527R 368313 Less Institutional Holdings of Investment

CompanyShares 58 65 67 65 86 100 105 103

14 Total lnstrtuuunal Investors 3324 4062 3391 2476R 3134 372 5 3422R 358015 ForeIgn Investors3 329 413 370 284 526 639 601 64716 Other DomesticInvestors' 6384 6906 5253 3657R 4835 6233 5930 6186

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

R ... reused'Excludes holdings of insurance company stock'Data for years through 1976 exclude common trust fund holdings which were separately available Common trust data were not separately available after 1976

and personal trust fund data therefore Include assets held In these cormngled fundsJlncludes estimate of stock held as dnect InvestmentlComputed as tesrdual (line 16 =17 -14 -15) lnctudes both mdmduals and institutional groups not listed above51ncludes both common and preferred stock Excludes Investment company shares but Includes foreign Issues outstanding In the U S

102

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

Number of Registered Campa",es ApprOlumateMarket Value

Inactive!01 Assets of

Act". Total ActiveCompanies(Millions)

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

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

UnIt Investment trust 368 23 391 17.oo8bVanable annuIty-separate accounts 69 I 70 1.067All other unit mvestment trusts 299 22 311 15941

Faee-amount certificate companies 33

Tot.1 1.371 136 1.507 108.572

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

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

Table 16COMPANIES REGISTERED UNDER tHE INVESTMENT COMPANY ACT OF 1940

ApprOXimatemarket value

Frscal year ended Registered Registered Registration Registered 01 assetsSeptember 30 at begmnlng durmg teennated at end 01 01 active

of year year dunng year year CQrnpanles(millions)

1941 0 450 14 436 1.5001941 436 17 46 407 2.4001943 407 14 31 390 1.3001944 390 18 27 371 1.2001945 371 14 19 366 32501946 366 13 18 361 3,7501947 361 11 21 351 3.6001948 351 18 11 359 3,8151949 359 12 13 358 3,7001950 358 26 18 366 4,7001951 366 11 10 368 5.6001952 368 13 14 367 68001953 367 17 15 369 70001954 369 20 5 384 87001955 384 37 34 387 11.0001956 387 46 34 399 14.0001957 399 49 16 431 15.0001958 432 42 21 453 17,0001959 453 70 11 512 10.0001960 512 67 9 570 13.5001961 570 118 25 663 19,0001962 663 97 33 727 17.3001963 717 48 48 717 36.0001964 717 52 48 731 416001965 731 50 54 727 44.6001966 717 78 30 775 498001967 755 108 41 842 58.1971968 841 167 41 967 69,7311969 967 222 12 1.167 71,4651970 1.167 187 16 1.318 56.3371971 1.318 111 98 1.351 78.1091972 1.351 91 108 1.334 80,8161973 1.334 91 64 1.361 73.1491974 1.361 106 90 1.377 612871975 1.377 88 66 1.399 74.1911976 1.399 63 86 1,376 80,5641977' 1.403 91 57 1.437 76.9041978 1.437 98 64 1471 939211979 1.471 83 47 1.507 108572

, Began Fiscal Year Endmg September 30. 1977

103

Table 17NEW INVESTMENT COMPANY REIGSTRATIONS

1979

Management open-endNo-loadsVanable anmntiesAll others

Sub-total

Management closed-endSBIC'sAll others

Sub-total

Unit mvestment trustVariable annumesAll others

Sub-total

Face amount certificates

Total Registered

Management open-endNo-loadsVanable anmntresAll others

Sub-total

Management closed-endSBIC'sAll others

Sub-total

Unit mvestment trustVanable annuitiesAll others

Sub-total

Face amount cernncates

Total terminated

Table 18INVESTMENT COMPANY REGISTRATIONS TERMINATED

71

42

50

112

13

416

20

83

1979

51

30

36

47

Private Noninsured PensionFunds: Assets

The assets of private noninsuredpension funds totaled $202.2 billion atbook value and $201.5 billion at mar-ket value on December 31, 1978. Ayear earlier their comparable asset to-tals were $181.5 billion and $181.6 bil-

104

lion. The book value of common stockholdings increased to $100.4 billion atyear-end 1978 from $97.0 billion theprevious year. Valued at market, thoseholdings also increased to $106.7 bll-lion, or 53.0 percent of total assets, atthe end of 1978 from $100.9 billion, or55.6 percent of total assets, one yearearlier.

Table 19AASSETS OF PRIVATE NON INSURED PENSION FUNDS

Book Value, End of Year(Millions of Dollars)

1971 1972 1973 1974 1975 1976 1977 1978

Ca,h and DePOSIt, 1641 1857 2,336 4,286 2962 2199 3721 8110US Government Secunties 2732 3,689 4404 5533 10764 14713 20138 19695Corporate and Other Bonds 29013 28207 30,334 35029 37809 39,070 45580 53824Preferred Stock 1,767 1481 1258 1129 1 188 1250 1168 1274Common Stock 62780 74585 80,593 79319 83654 93359 96984 100 424

Own Company 3,608 3868 4,098 4588 5075 NA NA NAOther Compames 59172 70717 76495 74,731 78,579 NA NA NA

Mortgages 3,660 2,728 2377 2,372 2383 2,369 2497 2789Other Assets 4826 4,933 5,229 6063 6406 7454 11 421 16121

Total Assets 106419 117 530 126531 133731 145166 160414 181509 202237

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

Table 19B

ASSETS OF PRIVATE NON INSURED PENSION FUNDS

Markel Value, End of Year(Millions of Dollars)

1971 1972 1973 1974 1975 1976 1977 1978

Ca,h and DePOSIts 1,641 1,857 2,336 4286 2962 2199 3721 8110U S Government Securities 2772 3700 4474 5582 11 097 14,918 20017 18767Corporate and Other Bonds 26,111 26,232 27,664 30815 34519 37858 41,754 48633Preferred Stock 2014 1,869 985 703 892 1212 1009 1162Common Stock 86636 113 369 89,538 62582 87669 108483 100863 106732

Own Company 7691 8750 6947 5230 6,958 NA NA NAOther Iompames 78,945 104,619 82591 57352 80711 NA NA NA

Mortgages 3184 2427 2108 2063 2139 2160 2362 2554Other Assets 4560 4,908 5,140 5681 6341 7073 10,838 15585

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

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

SECURITIES ON EXCHANGES

Exchange VolumeDollar volume of all equity securities

transactions on registered exchangestotaled $268.5 billion in 1978. Of thistotal, $249.3 billion or 92.8 percentrepresented stock trading, $18.9 bil-lion or 7.0 percent, option trading, andthe balance, trading in rights and war-rants. The value of New York StockExchange transactions was $210.6 bil-lion in 1978. NYSE share volume in-creased 35.7 percent from the 1977 to.tal. On the American Stock Exchange,value of shares traded increased 78.2percent to $15.2 billion. The AMEX

315-805 0 - 80 - 9

volume of 922.2 million shares was up41.5 percent from the 1977 figure.Share volume on regional exchangesincreased 30.9 percent from the 1977figure to 992.2 million shares, valuedat $23.6 billion.

The Chicago Board Options Ex-change contract volume for 1978 was33.7 million, up 35.9 percent from24.8 million in 1977. The value was$13.7 billion, an increase of 71.6 per-cent from $8.0 billion in 1977. TheAmerican Stock Exchange Option vol-ume was 17.6 million contracts in1978, an increase of 74.3 percent fromthe 10.1 million contracts in 1978, anincrease of 74.3 percent from the 10.1

105

million contracts in 1977. The value ofAMEX options trading in 1978 was$3.5 billion. Philadelphia Stock Ex-change option volume was 2.9 millionin 1978 up 43.9 percent from the 1977volume with a value of $472 million in

1978. Pacific Stock Exchange contractvolume in 1978 was 3.1 million with avalue of $766 million. The MidwestStock Exchange contract volume was2.3 million contracts with a value of$419 million in 1978.

Table 20MARKET VAWE AND VOWME OF SALES ON REGISTERED AND EXEMPTED SECURmES EXCHANGES'

(All data are In thousands)

Total Stocks' Options} Warrants RlihtsMarket Market Number Market Number Market Humber Market NumberValue Value of Value of Value of Value of

(Dollars) (Dollars) Shares (Dollars) Contracts (Dollars) Units (Dollars) Units

All Reilstered E,changes for past SIX years

Calendar Year1973 187.158.618 177.879.464 5723.424 448.498 1.119 973.076 124,740 11.082 51.5151974 125.285.044 118434721 4.846492 1,660222 5.683 389.251 67.174 4.301 37.1671975 166.901.078 157.260586 6.231.516 6.423.469 14.428 285.859 97225 9024 52.9281976 206959.037 194.969.057 7035,755 11,734.222 31.425 248.124 53.603 7.634 35.8431977 198.292.217 187.202.855 7.023.165 10.899.135 39.622 184.435 67.841 5,792 43.9401978 268.508724 249.257.272 9482.710 18.953204 59847 343,723 68.064 2.323 13.889

Breakdown of 1978 Data by RegIStered [,chanie

All RegIStered Exchanies-American Stock Exchange 18.943.355 15.204.973 992.179 3.525.010 17.619 212966 35.468 407 568'Boston Stock E,change 1,535923 1.535.839 57.665 0 0 81 43 2 235.Cmcmnatl Stock Exchange 433.287 433.287 15.127 0 0 0 0 0 0Midwest Stock E,change 10.880.316 10.461,239 343.185 419.077 2.288 0 0 0 0

'New York Stock Exchange 210550436 210426.412 7.617.958 0 0 122.589 28.988 1,435 12,796PaCIfic Stock Exchange 7.872.090 7.099.249 297.904 766.462 3.063 5,900 3,018 479 289

'Ph,ladelph" Stock Exchanie 4,560,103 4.085.804 142,687 519.910 3166 2,189 547 0 0Intermountam Stock Exchange 815 815 2.281 0 0 0 0 0 0Spokane Stock E,change 9.655 9,655 13.723 0 0 0 0 0 0

'Chicago Board Options 13722,745 0 0 13,722,745 33712 0 0 0 0

All Exempted Exchanges for past SIX years

Calendar Year1973 1,899 1.897 260 0 0 0 01974 1174 1.174 149 0 0 0 01975 524 524 69 0 0 0 01976 383 383 94 0 0 0 01977 298 298 64 0 0 0 01978 0 0 0 0 0 0 0

-Reports of those exchanges marked WIth an asterisk cover transactions cleared durmg the calender month, clearances occur for the most part on the fifth dayafter that on which the trade actually was effected Reports for other e,changes cover transactions effected on trade dates of calendar month

'Data on the value and volume of secunhes sales are reported In connection With fees pard under Section 31 of the Secunnes Exchange Act of 1934 Theymclude all secuntres sales effected on exchanges except sales of bonds of the UnIted States Government ehrch are not subject to the fee The data cover odd-Jot as well as round-lot transacnons

llncludes voting trust certifIcates, cernfrcates of depoSIt for stocks, and Amencan Deposltary Receipts for stocks but excludes rights and warrantslExerclses are not mcluded In these totals.

NASDAQ VolumeNASDAQ share volume and price in-

formation for over-the-counter tradinghas been reported on a daily basissince November 1, 1971. At the end of1978, there were 2,582 issues in theNASDAQ system, an increase of 0.3percent from 2,575 in 1977. Volumefor 1978 was 2.8 billion shares, up 47.0percent from 1.9 billion in 1977. This

106

trading volume reflects the numberof shares bought and sold by marketmakers plus their net inventorychanges.

Share and Dollar Volume byExchange

Share volume of all stocks, rightsand warrents totaled 9.6 billion, a 34.1percent increase from 7.1 billion in

Market Value Of Securities Traded OnAll (I.S. Stock Exchanges

Dollars Billions

280

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

OptIons

,~,.

160 fe.J' '; -:.

'p' ,.i . :../" )...... ....

" ,.",

240

200

120

80

o"

::r ...... '9"

, ,

18.9

1968 69 70 71 72 73 74 75 76 77 1978

107

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~ " " " "'

"

/

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

Dollar volume of all stocks, rights 6.18 and 4.19 percent of the total.

Table 21ASHARE VOLUME BY EXCHANGES'

Total Share In PercentageYear Volume

(thousands) NYSE AMEX MIDW PSE PHIE BOSE CNSE Other

1935 68t 97t 7313 1242 191 269 110 096 003 7761940 377 897 7544 1310 211 278 133 119 008 3871945 769,018 6587 2131 177 298 106 066 005 6301950 893320 7632 1354 216 311 097 065 009 3161955 1.311401 6885 1919 209 308 085 048 005 5411960 1428552 6908 2246 222 314 089 039 004 1411961 2121050 6565 2584 224 345 080 030 004 1331962 1699346 7t 84 2026 236 297 087 031 004 0951963 1,874,718 7317 1889 233 283 083 029 004 1101964 2118326 72 81 1942 243 265 093 029 003 0861965 1663495 7010 2259 263 234 082 026 005 0641966 3,306386 6954 2289 257 268 086 040 005 0511967 4,641215 6468 2845 236 246 087 043 002 0571968 5406582 6200 2974 263 265 089 078 001 0951969 5,133498 6317 2761 284 347 122 051 000 1001970 4835222 7t 27 1901 316 368 163 051 002 057197t 6,172,668 7t 34 1842 352 372 191 043 003 0«1972 6518132 7047 1821 371 413 221 059 003 0451973 5899678 7492 1375 409 368 219 07t 004 0391974 4950,833 7847 1027 439 348 182 086 004 0441975 6371545 8105 897 406 310 154 085 013 0151976 7125201 8003 935 387 393 141 078 044 0171977 7,134882 7954 973 395 37t 149 066 064 0281978 9364,763 8008 1075 359 315 150 061 016 016

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

Table 21BDOLLAR VOLUME BY EXCHANGES'

Total Dollar In PercentageYear Volume

(thousands) NYSE AMEX MIDW PSE PHIE BOSE CNSE Other'

1935 15396139 8664 783 132 139 088 134 004 0561940 8419772 8517 768 207 152 III 191 009 0451945 16284552 8275 1081 200 178 096 116 006 0481950 21 808284 8591 685 235 219 103 112 011 0441955 38039107 8631 698 244 190 103 078 009 0471960 45276616 8386 935 272 195 104 060 007 0031961 64,032,924 8248 10 71 275 199 103 049 007 0051962 54823 153 8637 681 275 200 105 046 007 0041963 64403991 8523 752 272 239 106 042 006 0041964 72415297 8354 846 315 248 114 042 006 0041965 89498711 8182 991 344 243 112 042 008 0031966 123643475 7981 11 84 314 285 110 056 007 0021967 162136,387 77 31 1448 308 279 113 067 003 0031968 197061776 7357 1800 312 266 113 104 001 0081969 176,343 146 7350 17 60 339 312 143 067 001 0121970 131707946 7844 1111 376 381 199 067 003 004197t 186375 130 7907 998 400 379 229 058 005 0031972 205956263 7777 1037 429 394 256 075 005 0051973 178863621 8207 606 454 355 245 100 006 0011974 118828272 8362 439 489 350 202 123 006 0011975 157555360 8504 366 482 325 172 I 18 017 0001976 195,224 815 8435 388 476 383 169 094 053 0001977 187393082 8396 460 479 353 162 074 075 0011918 249603320 84 35 618 419 285 164 062 017 000

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

108

Z

Special Block DistributionsIn 1978, the total number of special

block distributions decreased by 31.7percent. The value of these distri-butions increased 117.0 percent to$610.0 million from $280.9 billion in1977.

Secondary distributions accountedfor 86.0 percent of the total number ofspecial block distributions in 1978 and93.4 percent of the total value of thesedistributions.

The special offering method wasem-

ployed 3 times, accounting for 7.0 per-cent of the total number of specialblock distributions in 1978, but, withan aggregate value of $36.2 million,these offerings accounted for only 5.9percent of the value of all special blockdistributions.

The exchange distribution methodwas employed 3 times in 1978. Thevalue of exchange distributions was$4.3 million, representing less than 1percent of the value of all special blockdistributions.

Table 22

SPECIAL BLOCK DISTRIBUTIONS REPORTED BY EXCHANGES(Value In thousands)

Secondary dtstnbuhons Exchange drstnbuuons Special offerings

Year Number Shares Value Number Shares Value Number Shares Valuesold sold sold

1942 116 2397454 82840 0 0 0 79 812390 226941943 81 4270580 127462 0 0 0 80 1097338 310541944 94 4097298 13\ 760 0 0 0 87 1053667 324541945 115 9457358 191961 0 0 0 79 947231 298781946 100 6481 291 232398 0 0 0 23 308134 110021947 73 3961572 124671 0 0 0 14 31417U 91331948 95 7302,410 17\ 991 0 0 0 21 238879 54661949 86 3737249 104061 0 0 0 31 500211 10 9561950 77 4180681 88743 0 0 0 10 150308 49401951 88 5193756 146459 0 0 0 17 313 013 107511951 76 4123158 149117 0 0 0 11 357897 99311953 68 6906017 108119 0 0 0 17 380680 104861954 84 s 738 359 218490 \7 705781 24664 14 189772 66701955 116 6756767 344871 19 258348 10111 9 161850 71231956 146 II 696 174 510966 17 156481 4645 8 131755 45571957 99 9314599 339062 33 390831 15855 5 63408 18451958 111 9508505 361886 38 610876 19454 5 88151 318619\9 148 17330941 811336 18 545038 16491 3 33500 37301960 91 11439065 414688 20 441644 11 108 3 63663 54391961 130 19910013 926514 33 1126266 58071 2 35000 15041961 \9 11143656 658780 41 1345076 65459 1 48100 5881963 100 18937935 814984 71 1891233 107498 0 0 01964 110 19462343 909811 68 2553237 97711 0 0 01965 141 31 153319 1603107 57 2334177 86479 0 0 01966 126 29045038 1523373 \2 3042 \99 118349 0 0 01967 143 30783604 1 154479 51 3452856 115404 0 0 01968 174 36110489 1571600 35 1669938 93518 1 33\1 631969 141 38114799 1144186 31 1706571 51198 0 0 01970 71 17,830008 504561 35 1066590 48118 0 0 01971 104 71801,143 1007517 30 1595 104 65765 0 0 01971 119 82365749 3116116 16 1469666 30156 0 0 01973 120 30825890 1 151087 19 802311 9140 91 6661111 798891974 45 7511200 133838 4 82100 6836 33 1911755 168051975 51 34149069 1409933 14 483846 8300 14 1251915 115111976 57 24089636 581560 16 751600 13 613 11 1475841 184591977 39 9848986 261157 6 295264 5241 18 1074190 145191978 37 15233141 \69478 3 79000 4321 3 130675 36209

109

Value and Number of SecuritiesListed on Exchanges

The market value of stocks andbonds listed on U.S. Stock Exchangesat year-end 1978 was $1,335 billion, anincrease 3.4 percent from the previousyear-end figure of $1,291 billion. Thetotal was composed of $865 billion instocks and $470 billion in bonds. Thevalue of listed stocks increased 5.8percent in 1978 and the value of listedbonds decreased less than 1 percent.Stocks with primary listing on the NewYork Stock Exchange were valued at$823 billion and represented 95.1 per-cent of the common and preferredstock listed on all U.S. exchanges. Thevalue of NYSE listed stocks increasedfrom their 1977 year-end total by $46

billion or 5.9 percent. Stocks with pri-mary listing on the AMEX accountedfor 4.5 percent of the total and werevalued at $39 billion. The value ofAMEX stocks increased $2 billion or4.3 percent in 1978. Stocks with pri-mary listing on all other exchangeswere valued at $2.9 billion, a decreaseof 12.1 percent from the 1977 total.

The net number of stocks and bondslisted on exchanges increased 176 is-sues or 21.4 percent in 1978. The NewYork and Pacific Stock Exchangeslisted 291 and 4 additional securities,respectively. Spokane showed nochange while all other exchangesshowed a drop in the number of list-ings. Honolulu Stock Exchange ceasedoperations December 31, 1977.

Table 23SECURITIES LISTED ON EXCHANGESI

December 31. 1978

Common Preferred Bonds Total Secunties

Market Market Market MarketNumber Value Number Value Number Value Number Value

(Million) (Million) (Million) (Million)

RegisteredAmencan 964 $ 37097 100 $ 2145 193 $ 3,886Boston

I,m $ 43,128

Cincinnati64 247 2 1 1 1 67 249

Midwest6 31 3 8 5 42 14 81

New York16 256 5 58 0 0 21 314

Pacific1,552 798,764 642 23,971 2,895 464,895 5,089 1,287,630

Philadelphia39 861 9 180 24 540 72 1581

Intermountain21 122 91 1.072 20 1,124 132 2318

Spokane27 50 0 0 0 0 27 5024 6 0 0 0 0 24 6

Total 2,713 $837,434 852 $27,435 3.138 $470,488 6,703 $1,335,357

Includes the followingforeign stocks.

RegisteredNew York 36 $ 23,117 1 81 169 $ 8,061American

206 31,259

Pacific66 13,521 0 0 8 NA. 74 13,521

3 $ 139 0 0 0 $ 0 3 139

Total 105 s 36,777 81 I77 $ 8,061 283 «,919

~x:~f~ss:'~r~leshwhich w~ suspended from trading at the end of the year. and secunnes which because of maetrvrty had no available quotesU U DC xc ange eea operations on December 31 1977

+less than 05 million, but greater than zero

110

Table 24VALUE OF STOCKS LISTED ON EXCHANGES

(Oollars m billions)

Nl!W York American ExclusIvelyDec 31 Stock Stock On Other Total

Exchange Exchange Exchanges

1936 599 148 7471937 389 101 4911938 475 108 5831939 465 101 5661940 419 86 5051941 358 74 4311941 388 78 4661943 476 99 57519« 555 111 6671945 738 144 8811946 686 131 8181947 683 111 8041948 670 119 30 8191949 763 111 31 9161950 938 139 33 11101951 1095 165 31 11911951 1105 169 31 14051953 1173 153 18 13541954 1691 111 36 19481955 1077 171 40 13881956 2192 310 38 15401957 1956 255 31 11421958 1767 317 43 31171959 3077 154 41 33731960 3070 142 41 33531961 3878 330 53 42611962 3458 144 40 37411963 411 3 261 43 44171964 4743 282 43 50681965 5375 309 47 57311966 4315 179 40 51441967 6058 430 39 65171968 6923 612 60 75951969 6295 477 54 68161970 6364 395 48 68071971 7418 491 47 79561971 8715 556 56 93271973 721 0 387 41 76381974 511 1 233 29 53731975 6851 193 43 718 71976 8583 360 41 89851977 776 7 376 41 81851978 8117 391 19 8648

Securities on ExchangesAs of September 30, 1979, a total of

6,783 securities, representing 3,129 is-suers, were admitted to trading on se-curities exchanges in the UnitedStates. This compares with 6,777 is-sues, involving 3,179 issuers, a yearearlier. Over 5,000 issues were listed

and registered on the New York StockExchange, accounting for 60.5 percentof the stock issues and 90.2 percent ofthe bond issues Data below on "Se-curities Traded on Exchanges" in-volves some duplication since it in-cludes both solely and dually listedsecurities.

111

Table 25SECURITIES TRADED ON EXCHAJIGES

Issuers Stocks Bondsl

TemJlonm~Reflstered exempted Unlisted Total

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

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

Table 26UNDUPUCATED COUNT OF SECURITIES ON EXCHANGES

(September 30, 1979)

RegiSlered exch.nges

Registered and listedTemporarily exempted from registrationAdmitted to unlisted trading Jln~leges

Tot.1

Stocks Bonds Tota'Inwlved

3,638 3,090 6.7283 2 5

36 !( 50

3,677 3,106 6.783

3,0992

28

3.129

1933 ACT REGISTRATIONSEffective RegistrationStatements Filed

During the fiscal year ending Sep-tember 30, 1979, 3,112 registrationstatements valued at $77 billion be-came effective. The number of effec-tive registrations in fiscal 1979 rose2.5 percent from fiscal 1978. The valueof registration statements increased18.5 percent in 1979 from $65 billionin fiscal 1978. With the adoption of

112

Rule 24f-2 (l7CFR270.24f-2) effectiveNovember 3, 1977, the dollar value ofinvestment company registrations areno longer available.

Among the registration statementseffective, there were 684 first-time reg-istrants in fiscal 1979 as comparedwith 647 in fiscal 1978.

The number of registration state-ments filed rose 0.8 percent to 3,229in fiscal 1979 from 3,204 in the pre-vious fiscal year.

Table 27EFFECTIVE REGISTRATIONS

(DoIIIrslftll,U-J

Tot.1 Cash Sale for Account of Issuers

Fiscal year Number Bondsof V.lue Common Debentures Preferred Ictal

St.tements Stock and Notes Stock

Fiscal Year ended June 3019351 284 913 168 490 28 6861936 689 4,835 531 3,153 252 3,9361937 840 4,851 802 2,426 406 3,6341938 412 2,101 474 666 209 13491939 344 2,579 318 1,593 109 2,0201940 306 1,787 210 1,112 110 1,4321941 313 2,611 196 1721 164 20811942 193 2,003 263 1,041 162 14661943 123 659 137 316 32 4851944 221 1,760 272 732 343 1,3471945 340 3,225 456 1351 407 27141946 651 7,073 1,331 3,102 991 54241947 493 6,732 1,150 2,937 787 4,8741948 435 6,405 1,678 2,817 537 5,0321949 429 5,333 1,083 2795 326 4,2041950 487 5,307 1,786 2,127 468 43811951 487 6,459 1,904 2,838 427 5,1691952 635 9,500 3,332 3346 851 7,5291953 593 7,507 2,808 3,093 424 6,3251954 631 9,174 2,610 4,240 531 7,3811955 779 10,960 3,864 3951 462 82771956 906 13,096 4,544 4,123 539 9,2061957 876 14,624 5,858 5,689 472 12,0191958 813 16,490 5,998 6,857 427 132821959 1,070 15,657 6,387 5,265 443 12,0951960 1,426 14,367 7,260 4,224 253 11,7371961 1,550 19,070 9,850 6162 248 162601962 1,844 19,547 11,521 4,512 253 162361963 1,157 14790 7,227 4372 270 11,8691964 1,121 16,860 10,006 4554 224 14,7841965 1,266 19,437 10,638 3,710 307 14,6551966 1,523 30,109 18,218 7,061 444 257231967 1,649 34,218 15,083 12309 558 27,9501968 2,417 54,076 22092 14036 1,140 37,2681969 3,645 86,810 39,614 11,674 751 520391970 3,389 59,137 28,939 18,436 823 48,1931971 2,989 69,562 27,455 27,637 3,360 584521972 3,712 62,487 26,518 20,127 3,237 49,8821973 3,285 59,310 26,615 14,841 2,578 44,0341974 2,890 56,924 19,811 20,997 2,274 43,0821975 2,780 77 457 30 502 37557 2201 702601976 2,813 87,733 37,115 29,373 3013 69501Jransrtmn Qu.rter July-September 1976 639 15,010 6,767 5,066 413 12246

Frscal year ended September 301977(r) 2,915 92580 47,116 28,026 2,426 77,5681978 3,037 65,043' 25330' 23,251 2,128 50,7091979 3,112 77,375 22697 28,894 1,714 53305

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

r revised'For 10 months ended June 30 1935'The adoption of Rule 24f.2 (17 CFR270 24f 2) effeel"e November 3, 1977 made rt Impossible to report the dollar value of secunnes registered b, ,"vestment

companiesNote The Total Cash Sale differs from earlier presentations due to changes," rounding procedures

113

=

Purpose of RegistrationEffective registrations for cash sale

for the account of corporate issuersamounted to $34 billion! in fiscal 1979as compared to $29 billion in fiscal1978. With respect to distribution ofthese registrations between equity anddebt offerings, equity offerings in-creased from $10.0 billion in fiscal1978 to $10.1 billion-a 1 percent in-crease. Corporate debt offerings in-creased from $19.0 billion to $24.2 bil-lion-a 27.4 percent increase.

Among the securities registered forcash sale in fiscal 1979, nearly all debtissues were for immediate offerings,whereas 41.2 percent of the equity

!The adoption of Rule 24f-2 (17 CFR270.24f.2) effective November 3, 1977.made it impossible to report the dollarvalueof securitiesregistered.

registrations were for immediate offer-ings. Registrations of extended offer-ings totaled $14.3 billion with em-ployee plan offerings accounting for$10.8 billion.

Securities registered for the accountof the issuer for other than cash saletotaled $23.0 billion, $14.7 billion ofwhich was common stock. The bulkof these registrations were commonstock issues relating to exchange of-fers, mergers and consolidations. Infiscal 1979 common stock effectivelyregistered for this purpose totaled $9.8billion, an increase of 58.1 percentfrom fiscal 1978.

Registrations for the purpose of sec-ondary offerings (proceeds going toselling security holders) typically con-cern sales of common stock. In fiscal1979 these registrations amounted to$1.1 billion, or a 7.7 percent declinefrom fiscal 1978.

Table 28

EFFECTIVE REGISTRATIONS BY PURPOSE AND TYPE OF SECURITY: FISCAL YEAR: 1979(Doll... In lIo1loan.1

Type of secUrity

Purpose of registratIOnsBond, Preferred

Total debentures Stockand notes

All reglstratoons (estimated value) $77.375 $33,135 $5,784For account of Issuer for cash sale 53,303 18,894 1,711

Immediate offermg 38,963 18,894 1,661Corporate 34,167 14,198 1,661

Offered toGenefal Public 33,411 14,169 1,659SecUrity Holders 856 19 3

Foreign Governments 4,696 4696 0Extended cash sale and other ISSUes 14339 0 50

For account of Issuer for other than cash sale 13,011 4138 4,057Secundary Offerings 1,061 3 15

Cash Sale 457 0 4Other 605 3 11

CommonStock

$384561169784088,408

7,584814

o14,18914,715

1044453591

115

Effective RegistrationsCash Sale For Account Of Issuers

1935-1979Dollars. BillIon,,"

50

I,1,1,I

d, IJ I, l, I

75 * 7970

IIIIII

65

Common Stock

55 60(F,sca'Vears)

Preferr~d Stock ...: •••••••••• :.' •••••• .............................................

504540o

1935

10

30

40

20

116 *BEGINNING IN 1977. FISCAL YEARS END IN SEPTEllBER RATHER THAN JUNE.

~

Regulation A OfferingsDuring fiscal year 1979, 347 notifi-

cations were filed for proposed offer-ings under Regulation A. Issues be-tween $500,000-$1,500,000 in size

predominated. It should be noted, thatthe ceiling for Regulation A was raisedto $1.5 million on September II,1978.

Table 29OFFERINGS UNDER REGULATION A

Frscal Fiscal Fiscal1979 1978 1977

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

Total 347 242 218

UnderwritersUsed 98 55 52Not Used 249 187 166

Total 347 242 218

OfferOfsISSUIng Companies 331 223 205Stockholders 3 5 7Issuers and Stockholders 10lntly 13 14 6

Total 347 242 218

ENFORCEMENTTypes of Proceedings

As the table below reflects, the se-curities laws provide for a wide rangeof enforcement actions by the Com-mission. The most common types ofactions are injunctive proceedings in-stituted in the Federal district courts toenjoin continued or threatened secu-

rities law VIolators, and administrativeproceedings pertaining to broker-dealer firms and/or individuals associ-ated with such firms which may lead tovarious remedial sanctions as requiredin the public interest. When an injunc-tion is entered by a court, violation ofthe court's decree is a basis for crimi-nal contempt action against the viola-tor.

117

Table 30

TYPES OF PROCEEDINGSADMINISTRATIVE PROCEEDINGS

Persons Subject to Acts Ionsnrutmgand Basrs for Enforcement ActIOn

Broker dealer I muftlcrpJI securrtlesdealer, Investment achlser orISSO<Ilted pe_

Willful nolatmn of secunhes acts prnnsmn or rule aldmg or abetting suchnotetron failure reasonably to SUpervise others Willful misstatement or onus.von en filing With the Iomrnrssron conviction of or injunction against certaincnmes or conduct

Repered securrbes ISSOCIItKM'l

Organization or rules not conforming to statutory requirements

ViolatIOn of Of mabllity to comply With the 1934 Act rules thereunder or Its

own rules unjustrfred tenure to enforce compliance WIth the foregomg orWIth rules of the Muntclpal Securities Rutemaung Board by a member orperson associated With a member

Member of revstered secUritiesassociation, Of assoaatedpenon

Being subject to Iammrssren order pursuant to 1934 Act S 15{b) WillfulViolation of or effecting transaction for other person With reason to believethat person was VIOlating secunnes acts pronsions rules thereunder or rulesof Municipal Secuntres Rulemaung Board

NatlOMl secuntles exchange

OrganIZatIOn or rules not conferrrung to statutory requirements

VIOlatIOn of or inability to comply WIth 1934 Act rules thereunder or ItS ownrules umustmed failure to enforce compliance With the foregOing by a member or person associated WIth a member

Member of natKMIal securrtIesezchlnrt. 01 iSSOClated persons

Being subject to tomnussron order pursuant to 1934 Act S 15(b) WillfulVIOlation of or effecting trensacnen for other person With reason to behesethat person was Violating secuntres acts pronnens or rules thereunder

RellSlered cI.. nnr 'rene,

VIOlatIOn of or inabIlity to comply With 1934 Act rules thereunder or ItS ownrules failure to enforce compliance With ItS own rules by partie.pants

PJrttclpant In rfllStered dunna'IeftCJ

Being subject to tommrsson order pursuant to 1934 Act 15(bX4) WillfulVIolation of or effecting transaction for other person WIth reason to believethat person was Violating pronsons of clearing agency rules

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

VlOlatton of or mabillty to comply With pronnons of 1934 Act or rules there-under

Transfer_t

Willful nolatron of or mabllity 10 comply With 1934 Act 17 or 17A orregulations thereunder

-., penon

Willful VIOlation of secunttes act prtmnon or rule aiding or abetting suchVlolatton WIllful misstatement In filing With Iommrsson

Sanction

Censure or umrtanon on actmttes revocation suspension or denral of regrs-tratron bar or suspension from assccranon (1934 Act 15B(cX1)-{4)15(bX4)-{6) Ad"sers Act 1D3(e)-{nJ

Suspension of registration or limitation of actmnes functions or operauons(1934 Act 19(hXl))

Suspennen or revocation of registration censure or limitation of actmnesIuncncns or operations (1934 Act 19(hXl))

Suspension or expulsion from the association bar or suspension from asso-cranon With member ot assocratron (1934 Act s~19(hX1)-{3))

Suspension of regtstrahcn or limitation of actmties functions or operanons(1934 Act 19(hXl))

Suspension or revocation of registration censure or hrrntanon of actmnestunctmns or operations (1934 Act 19(hX1l)

Suspension or erpulsron from exchange bar or suspension from assooationWith member (1934 Act 19(hX1)-{3))

Suspension or revocatIOn of registration censure or nmnanon of actmtresfunctions or operations (1934 Act 19(hXl))

Suspension or expulsron from cleanng agency (1934 Act 19(hX1))

censure or operanenal hrmtations suspension or revocation of regrstratton(1934 Act llA(bX6))

Censure or limitation of actmues demal suspension or revocation of regtstratmn (1934 Act 17A(cX3))

Temporary or permanent prohrbmon from serving 10 certam capactres forregistered Investment company (Investment Company Act 9(b))

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

118

~~ ~~ •

~

~

~

~

~~

~

~ ~

~

~~ ~

~

Table 3D-Continued

TYPES OF PROCEEDINGSADMINISTRATIVE PROCEEDINGS

Persons Subject to, Acts Constitutingand BaSIS for. Enforcement ActIOn

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

Willful nolatron of 1934 Act, rules thereunder. or the orgamzanon's own rulesWillful abuse of authority or unjustified failure to enforce compliance

PrIncIpal .1 _._

Engagmg In busmess as a broker dealer after appointment of 51PC trustee

1933 Act revstratlDll slItemont

Statement materially maccurate or Incomplete

Investment company has not attained $100,000 net worth 90 days after statement became effective

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

Material noncompliance With such provIsions

SeaJnlles ISSUe

Noncompliance by Issuer With 1934 Act or rules thereunder

Public Interest requires tradmg suspension

Ilet1stered ,"westmont compan,

Failure to file Investment Company Act registration statement OJ requtredreport, fllmg matenally Incomplete or misleading statement of report

Company has not attained $100000 net worth 90 days after 1933 Act reg-Istration statement became effective

Rttomey, lecountant, Of atherpm ..... n•• r .. pert

lack of reqursrte qualifications to represent others lackmg In character orintegrity, unethical or Improper pnfesnonal conduct. Willful VIOlation of se-cunties laws or rules or aiding and abetting such Violation

Altom., suspended Of dISbarred bJaJIIIt, .. pert's hc..... r..... d Ofsuspended; co ... t\IDII of a I....,or mlSdemeanar ImoI"nl moralturpitude

Permanent injunctIOn agamst or finding of secunnss nolatron In CommlSSlon-mstrtuted action fmdlng of secunties VIOlation by tornnussen In adrmnrs-trative proceedings

Ilember .f Il.noclpal Sec.nllesRal.... kln' BoIrd

Willful VIOlation of secunties laws rules thereunder or rules of the Board

Sanction

Removal from offICe or censure (1934 Act. 19(hX4))

Bar or suspension from bema or bemg associated wtth a broker dealer (SIPAIlJ(b))

Stop order suspending ettectneness (1933 Act 8(d))

Stop order (Investment Company Act 14{a))

Order directing compliance (1934 Act 15(cX4))

Denial, suspension of effective date suspension or revocation of regrstratmnon natienal secunties exchange (1934 Act 11(f))

Summary suspension of over the-counter or exchange trading (1934 Act.11(k)

RevocatIOn of regIstratIOn (Investment Company Act 8(e))

Resocatron or suspension of regrstratron (Investment Company Act 14(a))

Permanent or temporary demal of pnnlege to appear or practice before theCommission (17 Cf R !i 1012(eXl)

Automatic suspension from appearance or practice before the Commission (17C f R 1011(eX1))

Temporary suspensron from appearance or practice before tomrmsson (17C f R 1011(eX3)

Censure or removal from otnce (1934 Act !i 156(cX811

An, person

CIVIL PROCEEDINGS IN fEDERAL DISTRICT COURTS

Persons Subject to Acts Constltutmgand BaSISfor Enforcement Action

Sanction

Engaging m or about to engage In acts or practices VIolating secunties actsrules or orders thereunder (including rules of a registered self regulatoryorganizatIOn)

Noncompliance With prcunons of law, rule, or regulation under 1933 1934or Holding Company Acts order Issued by CommISSIOn rules of a registeredself regulatory crgamzation or undertaking 10 a registratIon statement

tnrunctron agarnst acts or practices which constrtute or would constitute VI-olations (plus other eqUitable relief under court's general equIty powers) (1933Act Sec 11J(b), 1934 Act Sec 11(d) 1935 Act Sec 18(0 Investment Com-pany Act 41(e) Ad",elS Act. 109(e) Trust Indenture Act 311)

Writ of mandamus InjunctIOn or order directing compliance (1933 Act1IJ(c), 1934 Act 11(e), Holdmg Company Act 18(g»)

119

~

~

~

~

~

~

~

~

~

~

~

~ ~ ~

~ ~ ~

Table 311-Continued

TYPES OF PROCEEOINGS

CIVil PROCEEDINGS IN FEDERAL DISTRICT COURTS

Persons Subject 10 Acts Icnstttuttngand Basts for Enforcement Action

Secuntles Innstor ProtecttOflCorporltlOfl

Refusal to commit funds or act for the pretecnon of customers

IbtMIRII securrtle5 exchange orrecrstered $Kuntle! ISSOClabon

Noncompliance by Its members and persons associated with Its members withthe 1934 Act rules and orders thereunder or rules of the exchange or as-sociation

Noncompliance by Its partropants with Its own rules

Issut!' subject to reportingrequirements

Failure 10 IIIe reports requned under 15(d) of 1934 Act

Re(lSlered IOmtment compon,affilllt.

Name of company or of sectlflty rssued by It deceptive or rmsleading

Officer director, member ofodmo" board, admor, depo$ltor,or underwriter of Investmentcompany

Engage In act or practice consntutmg breach of fidUCIary duty ,"wiVing per-sonal misconduct

An, penon hmng hdu",,, duty"'Pectlnl rOC01ptof compenslt'D11from Inmlmenl compln,

Sanction

Order directing discharge of oblIgatIOns or other appropriate relief (SIPA,lIb)~

Wrrt of mandamus mrunctron or order directing such exchange or assocrationto enlorce comphance (1934 Act 21(e))

Writ of mandamus mgmcnen or order dlrectmg cteanng agency to enforcecomphance (1934 Act 21(e»)

Forterture at $100 per d,y (1934 Act 32(b)

lnjuoctmn agamst use of name (Investment Company Act 35(d))

lmuncten against acting In certam capacities for Investment company andother approprtate rehef (Investment Company Act 93&(,))

Breach of fidUCiary duty Inlunct,on (Investmenl Comp.ny Act 3&(,)

RHfRRAl 10 ATTORNEY GENERAL FOR CRIMINAL PROSECUTION

BaSIS for Enforcement Action Sanction or Rehef

Willful violation of securities acts or rules thereunder or Willful misstatementIn any document required to be flied by secuntres laws and rules or by selfregulatory erganrzation m connection wIth an application for membershippertrcrpaton or to become associated WIth a member thereof

MaXimum penalties $10,000 tme and 5 years Imprisonment an exchangem,y be frned up to $500 ODD a pubhc-utrhtr holding compamupto $200.000(1933 Act Sees 2Il(b). 24 1934 Act Sets 21(d) 32(,) 1935 Act Sees 18(029. 1939 Act Sec 325 Investment Co Act Sees 42(e) 49, Ad"sers ActSecs 209(e) 211)

REFERRAL TO ATTORNEV GENERAL FOR CRIMINAL PROSECUTION

Persons Subject to Acts Constitutingand BaSIS for Enforcement Action

Willful Violation of secunnes acts or rules thereunder or Willful misstatementIn any document required to be filed by secuntres laws and rules or by selfregulatory organization In connection WIth an application for membershippernopatmn Of to become associated With a member thereof

An, 1SSlIfr "tllch ~oflt .. SectIOfl lOA/.! ofltIe 1934 Act.

Any officer or dlrettor of In 1SSUff, or anyshdholder KlInl on behlll of such ISSUer,who WIllfUlly .... It .. Sect10n 3OA/.! ofthe 1934 Act

Any ,,"pi.,.. or 'IOnl (subJect to th.IUnsd'etIOfI 01 the Unrted Slit'" 01., ....., found 10 hm .... .,ed SectIOfl 3O.I(.!01 the 1934 Act, "ho Wlltfu'ly "med outthe oct or proch" constrtUlJnl suchIlOl_

120

Sanction

MaXimum penalties $10000 Ime and 5 years Imprisonment an exchangem,y be lined upto $500000 a puhhc-utrhty holdrng company up to $200 000(1933 Act Sees 31l(b) 24.1934 Act Secs 21(d) 32(.) Holdrng Company ActSees 18(0 29. 1939 Act Sec 325 Investment Company Act Sees 42(e)49 Advisers Act Sees 209(e) 211)

M'Xlmum pen,lty $1000000 hne (1934 Act Sec 32(eXI))

M'Xlmum penalty $10000 frne and 5 years impnsonment (1934 Act Sec32(CX2))

MaXImum pen,lJr $10 000 frne and 5 years impnsonment (1934 Act Set32(CX3»)

l

~

~

~

~ ~

"

~

~

Table 3D-ContinuedTYPES OF PROCEEDINGS

REFERRAL TO ATIORNEY GENERAL fOR CRIMINAL PROSECUTION

~yperson

Persons Subject to Acts Constitutingand BaSIS for Enforcement ActIon

Sanction

Willful VIolation of securities acts or rules thereunder or WIllful misstatementIf! any document required to be filed by secunnes laws and rules 01 by self-regulatory organization In connection WIth an apphcetmn for mernbersfupparticipation or to become associated With a member thereof

~y ISSU.. wh'ch at .. Sed ... 30A(.) 01U1e 1934 Act (1 111 corrupt pract,ces)

Any officer 01 duector of an ISSUer, or In,stockholder .cllng on b.h.11 01 such 1SSUOf,who wlilfull, .... at .. Sectoon 30A(.) 01U1e 1934 Act

~, employee .. ogent (sub,ect to the,unsdlcl ... 01 the Un,ted Stat.. ) .f.. ISSuer lound to h....... at.d Sedoon 30A(.)of the 1934 Act, who w,lIlully earned outthe act Of prKtlCe constrtubng such.Dlat ...

Maximum penalties SIO 000 fine and 5 years unpnsonrnent an exchangemay be fined up to $500 000 a pubnc utJllty holding company up to$200000 (1933 Acl Sees 21J(b) 24 1934 Act Sees 21(d) 32(,) HoldingCompany Act Sees 18{O 29 1939 Act Sec 325 Investment Company ActSecs 42(e) 49 Ad"sers Act Sees 209(e) 217)

MaXimum penalty $1000 000 nne (1934 Act Sec 32\CX1H

MaXimum penalty $10 000 fine and 5 years rrnpnsonment 11934 Act Sec311CX111

MaXimum penalty $10 000 fme and 5 years rmpnsonment (1934 Act Sec321CX311

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

Pending September 30 1978Opened

Total for llrstnbutmnClosed

Pending September 30 1979

1356296

1651481

1171

During the fiscal year ending Sep-tember 30, 1979, 157 formal orderswere issued by the Commission upon

recommendation of the DIvision of En-forcement.

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

Broker Dealer ProceedingsInvestment AdVIser ProceedingsStop Order Reg A Suspension and Other Disclosure Cases

315-805 a - 80 - 10

422514

121

Injunctive Actions 1978-1979During fiscal 1979, 108 suits for in-

junctions and 28 miscellaneous ac-tions were Instituted in the UnitedStates district courts by the Commis-sron, and 37 district court proceedingswere brought against the Commission.During that year this office handled 11appellate cases involving petitions forreview of Cornrnissron decisions, 3 ap-

peals In reorqanizatron matters and 42appeals in injunction and miscella-neous cases. SEC participated andfiled 15 amicus curiae briefs in 15cases.

During fiscal 1979, the GeneralCounsel referred to the Department ofJustice 45 criminal reference reports.(This figure Includes 4 criminal con-tempt actions.)

Table 33INJUNCTIVE ACTIONS

Cases In/unctions DefendantsFIscal Year Instituted Ordered EnJomed

1970 III 97 4481971 140 114 4951972 119 113 5111973 178 145 6541974 148 289 6131975 174 453 7491976 158 435 7221977 166 336 7151978 135 289 6071979 108 253 511

Criminal Proceedings

During the past fiscal year 45 caseswere referred or access was granted tothe Department of Justice. (This figureincludes 4 criminal contempt actions.)As a result of these actions and thoseprior referrals, 42 indictments were re-turned against 112 defendants duringthe fiscal year. There were also 87 con-victions in 56 cases. Convictions were

affirmed in 3 cases that had been ap-pealed, and appeals were still pendingin 8 other criminal cases at the closeof the fiscal year. Of 20 defendants in14 criminal contempt cases handledduring the fiscal year, 10 defendantswere convicted, prosecution was de-clined as to 5 defendants, and 7 de-fendants in 7 cases are still pending.Three cases are pending in a SuspenseCateqory.

Table 34CRIMINAL CASES

Number of casesFIscal referred/access Number of Defendants Convictionsyear Justice Dept Indictments Indrcted

1970 35 36 102 551971 22 16 83 891972 38 28 67 751973 49 40 178 831974 67 40 169 811975 88 53 199 1161976 116 23 118 971977 100 68 230 1351978 109 50 144 1741979 45 42 112 87

122

Trading SuspensionsDuring fiscal 1979, the Commission

suspended trading in the securities of23 companies, a decrease of 73 per-cent from the 86 securities suspendedin fiscal 1978 and a 79 percent de-crease from the 111 securities sus-pended in fiscaI 1977. Of the 23 com-panies whose securities were thesubject of trading suspensions in fiscal1979, 10 were suspended because ofdelinquency in filing required reportswith the Commission. In most other in.stances, the trading suspension wasordered either because of substantialquestions as to the adequacy, accuracyor availability of public informationconcerning the company's financialcondition or business operations, orbecause transactions in the company'ssecurities suggested possible manipu-lation or other violations.

Foreign Restricted ListThe Commission maintains and pub-

lishes a Foreign Restricted List whichis designed to put broker-dealers, fi-nancial institutions, investors and oth-ers on notice of unlawful distributionof foreign securities in the UnitedStates. The list consists of names offoreign companies whose securitiesthe Commission has reason to believehave been, or are being, offered forpublic sale in the United States in vio-lation of the registration requirementsof Section 5 of the Securities Act. Theoffer and sale of unregistered securi-ties deprives investors of all the pro-tections afforded by the Securities Act,including the right to receive a pro-spectus containing the information re-quired by the Act for the purpose ofenabling the investor to determinewhether the investment is suitable forhim. While most broker-dealers refuseto effect transactions in securities is-

sued by companies on the Foreign Re-stricted List, this does not necessarilyprevent promoters from illegally offer-ing such securities directly to investorsin the United States by mail, by tele-phone, and sometimes by personal so-licitation. During the past fiscal year,there were no new corporations addedto the Foreign Restricted List. The totalnumber of corporations on the list is101.

The complete list of all foreign cor-porations and other foreign entities onthe Foreign Restricted List on Septem-ber 30, 1978, is as follows:

Aguacate Consolidated Mines, Incor-porated (Costa Rica)

Alan MacTavish, Ltd. (England)Allegheny Mining and Exploration

Company, Ltd. (Canada)Allied Fund for Capital Appreciation

(AFCA, S.A.) (Panama)Amalgamated Rare Earth Mines, Ltd.

(Canada)American Industrial Research S.A.,

also known as Investigacion Indus-trial Americana, S.A. (Mexico)

American International Mining (Ba-hamas)

American Mobile Telephone and TapeCo., Ltd. (Canada)

Antel International Corporation, Ltd.(Canada)

Antoine Silver Mines, Ltd. (Canada)ASCA Enterprises Limited (Hong

Kong)Atholl Brose (Exports) Ltd. (England)Atholl Brose, Ltd. (England)Atlantic and Pacific Bank and Trust

Co., Ltd. (Bahamas)Banco de Guadalajara (Mexico)Bank of Sark (United Kingdom)Briar Court Mines, Ltd. (Canada)British Overseas Mutual Fund Corpo-

ration Ltd. (Canada)California & Caracas Mining Corp.,

Ltd. (Canada)

123

Canterra Development Corporation,Ltd. (Canada)

Cardwell Oil Corporation, Ltd. (Can-ada)

Caribbean Empire Company, Ltd.(British Honduras)

Caye Chapel Club, Ltd. (British Hondu-ras)

Central and Southern Industries Corp.(panama)

Cerro Azul Coffee Plantation (panama)Cia. RIOBanana, S A (Costa Rica)City Bank A.S. (Denmark)Claw Lake Molybdenum Mines, Ltd.

(Canada)Claravella Corporation (Costa Rica)Compressed Air Corporation, Limited

(Bahamas)Continental and Southern Industries,

S.A. (Panama)Credito Mineroy Mercantil (Mexico)Crossroads Corporation, S.A. (Pan-

ama)Darren Exploration Company, S.A.

(Panama)Derkglen, Ltd. (England)De Veers Consolidated Minmg Corpo-

ration, S.A. (Panama)Doncannon Spirits, Ltd. (Bahamas)Durman, Ltd., formerly known as

Bankers International InvestmentCorporation (Bahamas)

Empresia Minera Caudalosa de Pan-ama, S.A. (Panama)

Ethel Copper Mines, Ltd. (Canada)Euroforeign Banking Corporation, Ltd.

(Panama)Financiera Comermex (Mexico)Financiera de Eomento Industrial

(Mexico)Financiera Metropolitana (MexICo)Finansbanken a/s (Denmark)First Liberty Fund, Ltd. (Bahamas)Global Explorations, Inc. (Panama)Global Insurance Company, Limited

(British West Indies)Globus Anlaqe-Verrnlttlunqsqesells-

chaft MBH (Germany)Golden Age Mines, Ltd. (Canada)

124

Hebilla Mining Corporation (CostaRica)

Hemisphere Land Corporation Limited(Bahamas)

Henry Ost & Son, Ltd. (England)International Communications Corpo-

ration (British West Indies)International Trade Development of

Costa Rica, S.A.Ironco Mining & Smelting Company

Ltd. (Canada)James G. Allan & Sons (Scotland)J.P. Morgan & Company, Ltd., of Lon-

don, England (not to be confusedwith J.P. Morgan & Co., lncorpo-rated, New York)

Jupiter Explorations, Ltd. (Canada)Kenilworth Mines, Ltd. (Canada)Klondike Yukon Mming Company

(Canada)Kokanee Moly Mines, Ltd. (Canada)Land Sales Corporation (Canada)Los Dos Hermanos, S.A. (Spain)Lynbar Mining Corp., Ltd. (Canada)Mercantile Bank & Trust Company,

LimitedNorart Minerals Limited (Canada)Normandie Trust Company, S.A. (Pan-

ama)Northern Survey (Canada)Northern Trust Company, S.A.

(Switzerland)Northland Minerals, Ltd. (Canada)Obsco Corporation, Ltd. (Canada)Pacific Northwest Developments, Ltd.

(Canada)Panamerican Bank & Trust Company

(Panama)Paulpic Gold Mines, Ltd. (Canada)Pyrotex Mining and Exploration Co.,

Ltd. (Canada)Radio Hill Mines Co., Ltd. (Canada)Rodney Gold Mines Limited (Canada)Royal Greyhound and Turf Holdings

Limited (South Africa)S.A. Valles & Co., Inc. (Phillipines)San Salvador Savings & Loan Co., Ltd.

(Bahamas)

-

Santack Mines Limited (Canada)

Security Capital Fiscal & GuarantyCorporation, S.A. (Panama)

Silver Stack Mines, Ltd. (Canada)

Societe Anonyme de Refinancement(Switzerland)

Strathmore Distillery Company, Ltd.(Scotland)

Strathross Blending Company Limited(England)

Swiss Caribbean Development & Fi-nance Corporation (Switzerland)

PUBLIC UTILITY HOLDINGCOMPANIES

System CompaniesAt fiscal year 1979, there were 14

holding companies registered underthe Act of which 13 are "active". In the14 registered systems, there were 60electric and/or gas utility subsidiaries,90 non-utility subsidiaries, and 20 in-active companies, or a total of 168 sys-tem companies including the top par-ent and subholding companies. Thefollowing table lists the active systems.

Table 35

PUBLIC UTILITY HOLDING COMPANY SYSTEMS

Allegheny Power System (APS)smencan Etectnc Power Company (AEP)Central and South West Corporation (CSW)

"'Colonlal Gas Energy System (CGES)Columbia Gas System (CGS)Consolidated Natural Gas Company (eNG)Eastern Utllrtles ASSOCiates (fUAlGeneral Pubhc UtilIties (GPU)M.ddle South lltthtres (MSUINational Fuel Gas Company (NfG)New England Etectuc System (NEES)Northeast lltthtres (NEUIPhiladelphia Electnc Power Co (PEP)Southern Company (SCI

Total Companies

SolelyRegistered

HntdmgCornpanies

13

RegrsteredHolding

OperatingCompanies

Electnc and/or Gaslltthty Substdrartes

o12

3285347145I5

60

NonutilitySubsidiaries

4104

t2106I52328o3

70

InactiveCompanies

20

Tot,lCompames Other

8 328 3'JO Ib171912

7 4c10 jb13

57 4c

10 4c39

168

a Beach Bottom Power Co Inc-50'1. APS

50'1. AEPOhIO Valley Elee Corp & Substndana Kentucky Elec Corp-electnc utrutr-378'1. AEP

115'1. APS49 7% B other cornpames

bArklahoma Corp-32'1. CSW

34'1. MSU34% Oklahoma Gas & £Iec

cYankee AtomIC Electric Co 30% NEES 31 5~ NEU45'1. tuAConnecticut Yankee AtomIC Power Co 15% NEES 44%NEU 45'1. EUAVermont Yankee Nuclear Power Corp 20% NEES 12%NEU 25'1. EUAMame Yankee Atorruc Power Co 20% NEES 15% NEU4'1. fUA-Statutory utility subsidranes

125

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

As of June 30 1979(000 ormttedj

Name of Company

Allegheny Power System (APS)American Hectnc Power Company Inc (AEPlCentral and South West Corporation (C&SWjColomal Gas Energy System (CGES)'Columbra Gas System Inc The (CGS)Consolidated Natural Gas Company (CNG)Eastern Utilities Associates (EUA)General Public Utllittes Corporation (GPU)Middle South lltrhttes Inc (MSUINatronaf Fuel Gas Company (NFG)New England Electric System (NEES)Northeast Utrhtres (NEU)Phrladelptna Electric Power Co (PEPISouthern Company The (SCI

'Asof July 31 1979'As01December 31 1978

126

Total Assets

s 275495683453373312473

10091834671082374954

32996248949286056223

59927218838443063662

6078910281 747

$47526 173

Operating ReYenues

$ 93388626249681374618

4444325603851745798

16399713858321669778

580114818531968683

68292980889

$17858751

Table 37

PUBLIC FINANCING OF HOLDING COMPANY SYSTEMS(Fisc.11979J

In Millions of Dollars

long term Pollution Stock ShortNotes and-or Control Term

Bonds Debentures Fmancmgs Preferred Common Debt

Allegheny Power System Inc I I 800 700Monogahela Power Co 450 150 500Potomac Edison Power Co 480West Penn PONer Co 840

American Electric Power Co 1360 1650Appalachian Power Co 1050 500 400 1000Indiana MIchigan Hectuc Co 800 100 400 1500Kentucky Power Co 350Ohio Power Co 400 1500OhIO Valley E'ectnc Co 1010

Central & South West Corp 550 1500Central PONel & LIght Co 500 1000Pubhc Semce of Oklahoma 750 900Southwestern Erectnc Po ....er Co 750West Texas Utll!tlesCo 150 350Central & South West Services 10

Celcrnal Gas Energy Co 55Lowell Gas Co 69Cape Cod Gas el1 41

Columbia Gas System 1750 450 1700Consolidated Natural Gas Co 750 100Eastern UlllltresAssocrates 115 150

Blackstone Valley Etectuc 150Eastern Edison 475

General Pubht Utilities 1500Jersey Central Power & LIght Co 500 700 1400MetropolItan Edison Co 970Pennsylvania Hectnc Co 500 1160

Middle South utumes 1415 1750Arkansas MIssouri Power Co 66Arkansas Power & light Co 600 400lOUISIana Power & Light Co 600 83 950 1300Middle South Energy 4000MISSISSiPPi Power & LIght Co 100New Orleans Pubhc Service 150

National Fuel Gas Co 400 345New England Electric System 600 150

Gramte State Electric 10Massachusetts Electric 150Narragansett Etectnc 170New England Power Co 780

Northeast Utilities 400 150Connecticut ught & Power Co 1500Hartford Electnt light Co 350Holyoke Water Power Co 60Northeast Utilities Service Co 30Western Massachusetts Electric Co 100 400

Philadelphia Hectnc Power Co 43SUSQuehanna Power Co 40

Southern Company The 1340 1000Alabama Power Co 1500Georgia Power Co 1150 44 800 500Gulf Power Co 300 100 930MISSISSiPPi Power Co 100

Connecticut Yankee AtomIC Power 150Yankee AtomiC Hectnc Co 160

Total $1181 I $3369 11913 13305 1717 5 $3513 9

Total 164811 million

Fuel ProgramsDuring fiscal year 1979, the Com-

mission authorized $460.6 million offuel exploration and development cap-ital expenditures for the holding com-pany systems. These expenditures

cover annual fuel programs subject torequlation under the Holding CompanyAct defrned on geographIcal and func-tional terms. The following table hststhe authorization by holding companysystem for each fuel program.

127

=

Holdmg Company Systems

American Electnc Power CoCentral & South West Co,pColumbia Gas System Inctonsendeteo Natural Gas CoMiddle South UuhnesNew England Hectnc SystemNortheast UtilitiesSouthern Company

Table 38

REGULATED EXPENDITURES OF HOLDING COMPANY SYSTEMS(Flsc,11979)

(In Millions of Dollars)

Coal lignite FuelGas and/or Exploration & lhamum Nuclear Fuel Co,I Transportation

all Exploration Development Exptoratron Procurement Gasification &Stolage

s $1150 $ $ 780 s 5266 91 13 658

18540

174 33 69 427250

300156

$690 $1274 $82 $1507 $225 $828

Iotal $4606 rrnluon

FUEL PROGRAMSDUring fiscal year 1979 the Commission autbonzec $460 6 million of fuel explotatrons and development capital expenditures for the holding company systems Of

thrs amount $1964 million was for fossIl fuel exptoratrcn and development llranurrn exploration and teasing of nuclear fuel amounted to $158 9 million Approxlmately S82 million of fuel transportancn and storage was for coal hopper cars and mamtenance equipment These expenditures cover annual fuel programs subject toregulanon under the Hotdrng Company Act defined on geographical and functional terms

CORPORATE REORGANIZA nONS

In the fiscal year, the Commissionentered three new Chapter X proceed-ings involving companies with aggre.gate stated assets of approximately$69.9 million and aggregate indebt.edness of approximately $93.6 million.Including the new proceedings, theCommission was a party in a total of97 reorganization proceedings during

128

the fiscal year. The stated assets of thecompanies involved in these proceed-ings totaled approximately $4.9 billionand their indebtedness about $4.5 bil-lion.

During the fiscal year, nine proceed-ings were closed, leaving 88 in whichthe Commission was a party at yearend.

=

Table 39REORGANIZATION PROCEEDINGS UNDER CHAPTER X OF THE BANKRUPTCY ACT

IN WHICH THE COMMISSION PARTICIPATED(Fa 'ur 1979)

SEC Notice otDebtor Dlstnct PetitIon Appearance

Court Filed Filed

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

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

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

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

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

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

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

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

Gullco lnrestment Corp WO Okla March 12, 1974 March 28 1974Gult llmon Corp M 0 La Aug 19 1974 No, 5 1974Harmony loan Inc EO Ky Jan 31 1973 Jan 31 1973HawaII Corp D Hawan March 17 1977 March 17, 1977Hawkeye Land, ltd' SO Iowa Oec 19 1973 Jan 21 1974

Home-Stake Producllon Co NO Okla Sept 20 1973 Oct 1973Houston Educational Foundatmn Inc 1 SO Texas Feb 16 1971 March 1971Impeflal-Amencan Resources Fund Inc o Colo Feb 15 1971 March 1972lmpenal '400 National, Inc 2 n N J Feb 18 1966 Feb 23 1966lnduna BUSiness & Investment Trust2 SO Ind Oct 10 1966 No, 4, 1966

Interstate Stores, Inc' SON Y June 13, 1974 June 13 1974Investors Associated Inc l W 0 Wash March 3 1965 March 17 1965Investors Fundmg Corp of New York SON Y Oct 21 1974 Oct 21 1974J 0 Jewell, Inc J NO Ga Oct 20 1971 No, 7 1972King Resources Co l o Colo Aug 16 197I Oct 19, 1971

Lake Wmnebago Development Co Inc WO Mo Oct 14 1970 Oct 16 1970lusk Corp o Am Oct 28 1965 No, 15 1965Dolly Madison Industries Inc l EO Pa June 13 1970 July 6 1970Mid-City Baptist Church' EO La July 30 1968 Oct 23 1968Mount Everest Corp l EO Pa May 19 1974 June 18 1974

See footnotes at end 01 table

129

Table 39--eontinued

REORGANIZATION PROCEEDINGS UNDER CHAPTER X OF THE BANKRUPTCY ACTIN WHICH THE COMMISSION PARTICIPATED

(rlSCll Yu, 19791

SEC Nottce ofDebtor District Petmen of Appearance

Court Filed Filed

NatlOnal Telephone Co. Inc Conn July 10 1975 May 17 1976Nevada Industrial Guaranty Co o Nev May 7 1963 July 1 1963North Amencan Acceptance Corp NO Ga March 5 1974 March 18 1974North Western Mortgage Investors Corp 3 W 0 Wash Dec 111973 Dec 11 1973Omega-Alpha Inc 3 NO Texas Jan 10 1975 Jan 10 1975

Pactflc Homes CD Cal Dec 9 1977 Feb 1, 1978Pan Amencan hnencral Corp D Hawau Oct 2 1972 Jan 9, 1973Parkvlew Gem Inc W 0 Mo Dec 18 1973 Dec 18 1973Pocono Downs Inc M 0 Pa Aug 10 1975 Aug 10, 1975John Rich Enterprises Inc 1 o Utah Jan 16 1970 Feb 6 1970

Reliance lndustnes Inc o Hawau May 14 1976 Aug 10 1976RIker Delaware Corp o N J April 11 1967 May 13 1967Royal Inns of Amenca Inc SO Cal April 14 1975 June 14 1975Scranton Corp 1 M 0 Pa April 3 1959 April 15 1959Sierra Iradmg Corp J o Colo July 7 1970 July 11 1970

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

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

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

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

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

'Comrmssron filed notices of appearance 10 fiscal year 19792ReorgaOlzatlOn proceedrngs closed during fiscal year 1979'Plan has been substantially consummated but no final decree has been entered because of pendrng matters

130

j

j

SEC OPERAnONSThe Commission collects fees for

the registration of securities, securitiestransactions on national securities ex-changes, and miscellaneous filings, re-ports and applications. In fiscal year1979, the Commission collected a re-cord $33 million dollars in fees, rep-resenting approximately 47 percent ofthe total funds appropriated by theCongress for Commission operations.

These figures are up from $26 million,representing 42 percent of funds ap-propriated in fiscal year 1978. Nearly$4 million of the increase in collec-tions was attributed to Securities Actregistration fees resulting from bothhigher volumes and larger offerings,while higher stock exchange volumesaccounted for $2.3 million of the in-crease.

131

Appropriated Funds vs Fees CollectedDollars Millions

70

60

50

40

30

20

10

o1971

....!I Es umoced

132

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133

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

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