fund. He could later repurchase these shares with the proceeds of his prior withdrawal, at the then market value, without the payment of any additional brokerage commission. Both the NASD and the Commission decided that this speculative activity was detrimental to the interest of nonspeculating shareholders in the underlying funds, since it diluted their shares, and to the funds themselves, since it imposed liquidity problems arising out of the necessity to maintain relatively large cash positions to meet requests for redemptions. The district court granted the defendants' motions for summary judgment, and the plaintiffs appealed to the Court of Appeals for the Fifth Circuit.12 The Commission filed a brief with the court of appeals, amicus curiae, in which it urged that the district court properly determined that the NASD interpretation was clearly within the power granted the NASD under the Exchange Act; that the promulgation of such interpretation did not violate due process of law; and that, since the interpretation was promulgated under close supervision of the Commission, it did not constitute a violation of the antitrust laws. The appeal was pending at the close of the fiscal year. NASD RULE ABROGATION PROCEEDING In April 1970 the Commission instituted a proceeding, pursuant to Section 15A (k) of the Exchange Act, to determine whether, as alleged by the Commission staff, the NASD had in specific situations improperly construed or applied the authority granted to it under Section 15A (i) of the Exchange Act and Article III, Section 25 of its Rules of Fair Practice. Section 15A (i) authorizes the NASD to provide in its rules that no member may deal with. a nonmember broker-dealer except at the same prices and on the same terms as it accords to the general public. Section 25 of the NASD rules provides in pertinent part that NASD members may not (1) grant to nonmember broker-dealers any selling concession, discount or other allowance not accorded to the general public, or (2) join with any nonmember broker-dealer in the distribution of an issue of securities to the public. The principal issue in the proceeding relates to whether the latter provision and the statute permit the Association to prohibit its members from joining in a distribution of securities with a nonmember broker-dealer where the concession or other special price discount flows from the nonmember to the member. A petition filed by Aetna Life and Casualty Company and its subsidiaries, Aetna Financial Services, Inc. and Participating An nuity Life Insurance Company, had raised similar issues with respect to the NASD's authority to restrict its members' dealings with nonmember broker-dealers, and the Aetna companies were admitted as parties to the proceeding. During fiscal year 1971 an evidentiary hearing was held before a hearing examiner. The examiner rendered an initial decision in May 1971. Thereafter the Commission granted petitions for review of the initial decision filed by the NASD, the Commission staff and the Aetna companies, and at the end of the fiscal year the matter was pending before the Commission. INSPECTIONS OF THE NASD Under the regulatory scheme of the Exchange Act the Commission, as noted, is charged with general oversight of national securities associations in the performance of their self-regulatory activities. With a view to insuring that the NASD is meeting its responsibilities, the Commission's staff conducts periodic inspections of various phases of NASD activity. During the past fiscal year, the staff inspected the overall operations of the Association's district office in Boston, and reviewed the New York district office's programs and procedures with respect to the monitoring of the financial and operating conditions of NASD member firms. OVER-THE-COUNTER TRADING IN COMMON STOCKS LISTED ON THE NEW YORK STOCK EXCHANGE During the calendar year 1970, total over-the-counter sales of common stocks listed on the New York Stock Exchange (the soOver-the-Counter Volume in Common Stocks Listed on the New York 8,020,839 103,063,237 7.8 called "third market") continued to increase both in share and dollar volume as they have in every year since 1965, when reports to the Commission regarding such transactions were first required. Third market sales in 1970 amounted to 210 million shares, valued at $8,021 million. The increase in dollar volume of third market sales contrasts with a decrease in dollar volume on the NYSE in 1970. As a result, the value of trading over the counter in NYSE comon stocks in relation to the value of all stock trading on the Exchange reached a new high ratio of 7.8 percent. In the first half of 1971, third market volume and NYSE volume both increased sharply. Third market volume, in terms of dollars, grew at a faster rate, however, reaching the equivalent of 8.1 percent of NYSE dollar volume. REGULATION OF BROKER-DEALERS AND INVESTMENT ADVISERS REGISTRATION The Securities Exchange Act requires brokers and dealers who use the mails or the means of interstate commerce in the conduct of an over-the-counter securities business to register with the Commission. Investment advisers must register under the Investment Advisers Act of 1940, which establishes a pattern of regula tion comparable to that established by the Exchange Act with respect to brokers and dealers. Applicants for registration which are subject to a statutory disqualification may be denied registration, and misconduct following registration may result in suspension or revocation of the registration.13 As of June 30, 1971, 4,940 broker-dealers and 3,485 investment advisers were registered. The number of broker-dealers represented a decrease of 284 from the total a year earlier, attributable principally to the withdrawal of a large number of registrations. However, the number of investment advisers increased by 425 over that at the end of fiscal year 1970. The following tabulation reflects various data with respect to registrations of brokers and dealers and investment advisers during the 1971 fiscal year: Broker-Dealers Effective registrations at close of preceding year Registration suspended, pending final determination of proceed- 5,224 1 13 For a discussion of the various types of disqualifications and of enforcement and remedial actions taken by the Commission and the self-regulatory agencies with respect to broker-dealers and investment advisers, see Part IV Rule 17a-5 under the Exchange Act requires registered brokerdealers to file annual reports of financial condition with the Commission. These reports must be certified by a certified public accountant or public accountant who is in fact independent, with certain limited exemptions applicable to situations where certification does not appear necessary for customer protection. During the fiscal year 4,481 reports were filed with the Commission. These reports enable the Commission and the public to determine the financial position of broker-dealers. They provide one means by which the staff of the Commission can determine whether a broker-dealer is in compliance with the net capital rule. Failure to file required reports may result in the institution of administrative proceedings to determine whether the public interest requires remedial action against the registrant, as well as possible injunctive or criminal action. BROKER-DEALER INCOME AND EXPENSE REPORTS In order to obtain improved financial information concerning Rule 17a-10 under the Securities Exchange Act, effective January 1, 1969.14 This rule requires registered broker-dealers and exchange members to file income and expense reports for each calendar year with the Commission or with a registered selfregulatory organization [an exchange or the National Association of Securities Dealers, Inc. (NASD)] which has qualified a plan pursuant to the rule. The self-regulatory organization is to transmit copies of such reports to the Commission. All reports are submitted to the Commission on a confidential basis. The Commission has approved the plans of the NASD, and the American, Midwest, and Philadelphia-Baltimore-Washington Stock Exchanges.15 In summary, these plans provide that the self-regulatory organization will (1) adopt and implement appropriate internal procedures for review of the reports submitted by members, (2) review all reports filed for reasonableness and accuracy, (3) transmit edited reports to the Commission (excluding the names and addresses of the respective firms), and (4) undertake certain other obligations. The reports covering calendar year 1970 of SECO brokerdealers 16 and non-NASD members of those exchanges which have not qualified a plan have been received and reviewed by the Commission. The 1970 reports of all NASD members and of non-NASD members of those exchanges which have qualified a plan have been received by the Commission from the respective self-regulatory organizations. The Commission will analyze the reports, and it anticipates that it will publish aggregate information based on them for the calendar years 1969 and 1970. REGULATION OF BROKER-DEALERS WHO ARE NOT MEMBERS OF A REGISTERED SECURITIES ASSOCIATION Under the Exchange Act, as amended in 1964, the Commission has the responsibility for establishing and administering rules relating to qualification standards and business conduct of broker 14 Securities Exchange Act Release No. 8347 (June 28, 1968); also see 34th Annual Report, pp. 14–15. 15 Securities Exchange Act Releases Nos. 8876 (April 30, 1970); 8896 (May 28, 1970); 8946 (July 28, 1970); and 8954 (August 11, 1970). The NASD plan was amended on March 30, 1971 to make it clear that all NASD members will continue indefinitely to file annual income and expense reports with the NASD and to delete a provision as to the deadline date for filing which was only applicable to the 1969 reports. See Securities Exchange Act Release No. 9130. 16 Those registered broker-dealers which are not members of the NASD are |