quired for the prospectus. The Commission held that it had jurisdiction to discipline Kivitz under Rule 2 (e) for his participation as an attorney in such a scheme, even though the prospective client did not accept Kivitz's proposed retainer agreement and Kivitz never made any filings in its behalf.

Recognizing the need for expeditious disqualification procedures in appropriate cases, the Commission further amended Rule 2 (e) of its Rules of Practice 61 to provide for the suspension from appearing or practicing before it of any attorney, accountant or other expert who by name (1) has been permanently enjoined by any court of competent jurisdiction by reason of his misconduct in an action brought by the Commission from violating or aiding and abetting the violation of any provision of the federal securities laws, or (2) has been found by any court in an action brought by the Commission to which he is a party, or by the Commission in any administrative proceeding to which such person is a party, to have violated or to have aided and abetted the violation of any provision of the federal securities laws, unless the violation was expressly found not to have been willful.62 Under the amendment, such a person may be temporarily suspended by the Commission, the suspension becoming permanent after thirty days unless a petition for hearing is filed within that time. Upon petition, the Commission may lift the suspension or, after prompt opportunity for hearing, may censure or discipline the practitioner. In any hearing, after the Commission's staff has demonstrated that an injunction has been entered or that findings of violation have been made, the burden will be upon the practitioner to show why he should not be disciplined, and he will not be permitted to litigate factual questions that he litigated or, but for any consent to injunction or findings, might have litigated in the earlier proceeding upon which the disqualification proceeding is based.

61 See 36th Annual Report, pp. 131-132, for amendments of Rule 2(e) dealing with persons disbarred by other authorities or convicted of criminal violations.

PART V

REGULATION OF INVESTMENT COMPANIES

In broad terms, an investment company is any arrangement by which a group of persons invests funds in an entity that is itself engaged in investing in securities. Investment companies are important vehicles for public participation in the securities markets. They enable small as well as large investors to participate in a professionally managed and diversified portfolio of securities.

The Investment Company Act of 1940 imposes various obligations and restrictions on investment companies and persons affiliated with them and sets forth the Commission's responsibilities in protecting investors in such companies.1 It provides a comprehensive framework of regulation which, among other things, prohibits changes in the nature of an investment company's business or in its investment policies without shareholder approval, contains prohibitions against theft or conversion of assets or breaches of fiduciary duty, and provides specific controls to eliminate or mitigate inequitable capital structures. The Act also requires that an investment company disclose its financial condition and investment policies; requires that management contracts be submitted to shareholders for approval; prohibits underwriters, investment bankers, or brokers from constituting more than a minority of an investment company's board of directors; regulates the custody of investment company assets; and provides specific controls designed to protect against unfair transactions between investment companies and their affiliates.

In addition to complying with the requirements of the Investment Company Act, an investment company must comply with the Securities Act of 1933 when offering its securities, and it is subject to certain provisions of the Securities Exchange Act of 1934, including those relating to proxy and tender offer solicitations and insider trading and reporting.

1 For a discussion of the Investment Company Amendments Act of 1970, enacted during the fiscal year, which amended the 1940 Act in various significant respects, see Part I of this report.

COMPANIES REGISTERED UNDER THE ACT

As of June 30, 1971, there were 1,351 investment companies registered under the Act, with assets having an aggregate market value of approximately $78 billion. Compared with corresponding totals at June 30, 1970, these figures represent an increase of 23, or only 1.7 percent, in the number of registered companies, but an increase of approximately $22 billion, or about 39 percent, in the market value of assets. The $78 billion represents the highest market value of assets of active companies as of the end of any fiscal year since the Act was passed.

The following table shows the numbers and categories of registered companies and the approximate market value of the assets in each category as of June 30, 1971.

Companies Registered Under the Investment Company Act of 1940 as of

"Inactive" refers to registered companies which as of June 30, 1971, were in the process of being liquidated or merged, or have filed an application pursuant to Section 8(f) of the Act for deregistration, or which have otherwise gone out of existence and remain registered only until such time as the Commission issues orders under Section 8 (f) terminating their registrations.

The approximately $9.5 billion of assets of the registered unit investment trusts includes approximately $8.1 billion of assets

registered investment companies, substantially all of them mutual funds.

The graph below shows the number of registered investment companies, broken down into the various categories, over a 5-year period.

The following table on page 144 shows the number of investment companies which became registered during the fiscal year and the number of registrations terminated.

As the table shows, 12, or approximately 10 percent, of the newly registered companies were variable annuity separate accounts of insurance companies.2 Including these companies, there were 78 active variable annuity separate accounts registered at June 30, 1971, consisting of 31 unit investment trusts and 47 management open-end investment companies. A significant part of

2 Typically, a variable annuity contract provides payments for life commencing on a selected date with the amounts of the payments varying with the investment performance of equity securities which are set apart by the insurance company in a separate account which is registered with the Commission as an investment company. The separate accounts now registered are either open-end management companies or unit investment trusts.