A tabular summary with respect to the trading investigations conducted during the past 3 fiscal years follows: 1 Includes references of cases to the Department of Justice and to various national securities exchanges. 2. Regulation of the over-the-counter markets.-There are two general fields of application in the regulation of the over-the-counter markets; i. e., the registration of brokers and dealers and the supervision over certain of their activities; and the regulation of securities associations under the Maloney Act. BROKERS AND DEALERS The following table indicates the flow of work in connection with applications for the registration of brokers and dealers transacting business on over-thecounter markets: Applications for registration of brokers and dealers The scope of the problem of supervision of over-the-counter brokers and dealers is to some extent reflected in the fact that as of the close of the past fiscal year there were 6,065 such firms registered with the Commission. During the past fiscal year the Commission received reports from its various regional offices on 1,083 inspections of the books and records of broker-dealer firms. In about one-fourth of these inspections questions of compliance with provisions of the statute required consideration. In 66 inspections, for instance, the question of extension of credit in possible noncompliance with regulation T presented itself and in all such cases the firms promptly took steps to bring accounts into full compliance. In a large number of inspections in this 25 percent segment conditions and practices were discovered which, to say the least, appeared in varying degress to be inimical to the interests of customers, and in numerous instances actual violations of law were involved. There were 24 inspections in which evidence of dangerous practices relating to hypothecation and commingling of customers' securities in the possession of the firm was discovered but where no evidence of insolvency or of violation of minimum capital requirements under section 8 (b) of the act was found. Eighteen of these cases antedated the Commission's rules under section 8 (c) relating to commingling and hypothecation, which became effective February 24, 1941. These firms, however, acknowledged that the practice of subjecting customers' securities to risks of which customers were unaware was not in conformity with good business practice and took prompt corrective measures. Since the effective date of the hypothecation and commingling rules only six inspections have reported practices in nonconformity with the rules and appropriate action has been taken in each. A far more serious situation was found in 69 other firms whose financial condition was found to be either precarious or definitely unsound. Some of these firms were insolvent. Others, though solvent, had aggregate indebtedness_in excess of 2,000 percent of their net capital, contrary to section 8 (b) of the Exchange Act. Some of these firms had borrowed against customers' securities more than customers owed the firm on such securities. When such conditions and practices are discovered, the firm is generally given a reasonable time within which to remedy the situation; inability or failure to do so, however, results in prompt action by the Commission. Twenty-six among the sixty-nine in this category have discontinued business. During the 1941 fiscal year the Commission expanded this inspection work in 1940 there were 461 inspections made as compared with 1083 in 1941). The Commission feels that, within the limits of available funds, this work should be further expanded in 1942 and 1943. REGULATION OF SECURITIES ASSOCIATIONS UNDER THE MALONEY ACT The National Association of Securities Dealers, Inc., remains the only association registered with the Commission under the Maloney Act. It has a membership of about 3,000 sole proprietors, partnerships, and corporations which transact business in over-the-counter securities. The association has been active, under the cooperative supervision of the Commission, in seeking to raise the standards of business practice in the over-the-counter field through disciplinary proceedings handled by many of its local business conduct committees; through the promulgation of certain new rules; the compilation of a uniform practice code; and through educational work carried on both independently by its various committees and jointly with the staff of the Commission. During the last fiscal year the Commission developed facts in and referred a large number of cases to the association in pursuance of its policy of submitting to the association information indicating nonobservance of the high standards of commercial honor not involving transactions which would justify institution of proceedings by the Commission. The Commission, through its staff in Washington and the regional offices, is almost continuously in touch with representatives of the National Association of Securities Dealers, Inc., with a view of obtaining the cooperative regulation Contemplated by the Maloney Act. 3. Miscellaneous duties.-There are many incidental duties performed by the staff of the Commission in the administration and enforcement of this act. For example, statistical and other studies are made; the employees assigned to the various regional offices render interpretative and advisory assistance to the interested public; and it is necessary to conduct hearings and investigations in connection with many phases of the work. PROJECT NO. 3. ADMINISTRATION AND ENFORCEMENT OF THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935 The Public Utility Holding Company Act of 1935 deals with holding companies having subsidiaries which are electric utility companies or which are engaged in the retail distribution of natural or manufactured gas. It is designed to eliminate abuses and to provide a greater degree of protection for investors and consumers in the field of public utility holding company finance and operation. In addition to requiring full and fair disclosure of financial transactions, the act provides for Commission supervision of certain transactions by holding companies and their subsidiaries and calls for the simplification of uneconomic holding company structures. The Commission does not have the power to regulate public utility rates. As of June 30, 1941, there were registered with the Commission 147 public utility holding companies, the total consolidated assets of which amount to over $15,000,000,000. These 147 registered holding companies constitute 53 public utility holding company systems, which include 1,457 holding, subholding, and operating companies. When effectively registered with the Commission, holding companies and their subsidiaries become subject to regulation by the Commission with respect to their intercorporate dealings; the issuance and sale of securities; the acquisition of property or securities; the making of intercompany loans; the payment of dividends; the making of service, sales, and construction coutracts; the formation of mutual or subsidiary service companies; and certain other matters. Control of accounting methods of holding companies is also provided for and the Commission must pass upon all plans for the reorganization of registered holding companies or their subsidiaries. It is the duty of the Commission to require the geographic integration and corporate simplification of public utility holding company systems. With respect to some of these powers, the Commission acts in collaboration with state regulatory agencies and the Federal Power Commission. The Commission's work incident to the administration and enforcement of this act may be described under the four general headings indicated below: 1. Examination of documents filed by holding companies and their subsidiaries to compel full and fair disclosure of their financial transactions and corporate structure. 2. Supervision of specified transactions by holding companies and their subsidiaries. 3. Enforcement of corporate simplification and geographic integration of holding company systems. 4. Miscellaneous duties and studies. 1. Examination of documents filed by holding companies and their subsidiaries to compel full and fair disclosure of their financial transactions and corporate structure. The examination of documents filed with the Commission under this act is a continuing function and one of great importance insofar as the protection of investors and consumers is concerned. As the work of examining registration statements submitted by public utility holding companies is practically completed, this function now involves the examination of (1) applications for exemption from various provisions of the act; (2) annual reports filed by public utility holding companies as separate legal entities; (3) annual supplements filed by public utility holding company systems which bring up to date all of the information contained in the original registration statement; (4) annual reports of mutual and subsidiary service companies; (5) security ownership reports of officers and directors of public utility holding companies and their subsidiaries relative to transactions in securities of their own companies; and (6) certain related documents. The tabulation set forth below indicates the volume of such filings for the past 3 fiscal years: Documents requiring examination by the staff of the Commission (Public Utility Holding Company Act) Fiscal year 1941 1940 1939 Notification of registration.. Registration statements Applications for exemption under secs. 2 and 3 (requiring Commission order) Exemption statements and notifications filed pursuant to certain rules of the Commission (secs. 3, 6, 9, 13, and 14). Annual reports and supplements. Statements of compensation paid individuals by holding companies as required by sec. 12 (i). Security ownership reports of officers and directors 2. Supervision of specified transactions by holding companies and their subsidiaries. Under the act the Commission is required to supervise various activities or transactions of holding companies and their subsidiaries. This includes (1) the issuance and sale of securities; (2) the acquisition of securities, assets, and other interests in business; (3) payment of dividends out of capital or unearned surplus; (3) solicitation of proxies, consents, and authorizations; (5) the making of intercompany loans; and (6) the making of and performance of service, sales, and construction contracts. The following table indicates the number of applica Fatti nup cy Act, the facts underlying every proceeding Tyzed. The act requires the clerks of the it to the Commission copies of every ud chapter X, as well as copies of other speci 111 (1 in the pqon of the Commission in corporate reorganization provides that the Commission shall become a chanter X if requested by the judge, and may do 1. Ce approves. The Commission has not considered na ticipate in every chapter X case. The adminisout 300 cases are instituted each year) would be passage of the act, the Commission has appeared out of every 10 proceedings instituted under ow in tietes, by fiscal years, the number of proceedings pared since June 22, 1938 (the date on which Act became effective), to June 30, 1941; the number at period; and the number of cases pending on to indicate that a final decree had been entered, or that the proceeding had statuted by theted on that reorganization was so near completion that active participa Town The foregoing table that each year the Commission has been mutabernaclings than are being closed and that the The parlor thin reorganization cases is increasing at a plans of reorganization.-The act rean of reorganization, that the judge and feasible." The consumma1, of course, the ultimate objective ision's primary function under this objective. In March 1940 the Commission instituted section 11 proceedings against 9 of the largest holding-company systems and since that time the number of proceedings in which the Commission is involved has progressively increased. As it will be noted from the above table, 23 proceedings were pending at the close of the fiscal year. These 23 proceedings involve 15 major public utility holding company systems with aggregate consolidated assets of approximately $10,219,000,000, constituting a little over 67 percent of the total consolidated assets of all the holding-company systems registered under the act. Since the close of the fiscal year, the Commission has instituted two additional proceedings which increases the number of proceedings that are now pending to 25, which involve aggregate consolidated assets of $11,495,000,000, constituting over 75 percent of the total consolidated assets of all systems registered under the act. Under section 11 (e) the Commission is authorized to approve voluntary plans of reorganization submitted by registered holding companies and their subsidiaries, provided that the plans meet the geographic and corporate simplification requirements set forth in the act. The following table indicates the number of such plans received and disposed of by the Commission during the past 3 fiscal years: Voluntary plans of reorganization submitted by public utility holding companies These voluntary plans of reorganization are to be distinguished from the proceedings instituted by the Commission under section 11 (b). Such voluntary plans, as have been submitted to date, involve only minor phases of the integration and simplification problems facing the Commission. 4. Miscellaneous duties and studies. During the past fiscal year, the Commission completely revised the text of the rules under the Public Utility Holding Company Act. Before these revised rules were adopted, they were distributed to the industry in draft form and comments invited, a number of which were received and incorporated in the rules. PROJECT NO. 4. ADMINISTRATION OF THE DUTIES AND FUNCTIONS IMPOSED Upon THE SECURITIES AND EXCHANGE COMMISSION BY CHAPTER X OF THE BANKRUPTCY ACT Chapter X of the Bankruptcy Act, as amended by the act of June 22, 1938, affords appropriate machinery for the reorganization of corporations (other than railroads) in the Federal courts. In general terms, the Commission's duties under chapter X are, first, at the request or with the approval of the court, to act as a participant in proceedings thereunder in order to provide, for the court and investors, independent expert assistance on matters arising in such proceedings, and second, to prepare, for the benefit of the courts and investors, formal advisory reports on plans of reorganization submitted to it by the courts in such proceedings. These duties may be further divided into four functional groups, viz: (a) Preliminary examination, analysis, and investigation of the underlying facts involved in all reorganization proceedings instituted under this chapter to determine the necessity of participation by the Commission; (b) Appearance and participation of the Commission in corporate reorganization proceedings as a party; (c) The preparation of advisory reports on plans of reorganization; and (d) Certain miscellaneous activities incidental to functions mentioned under (a), (b), and (c). (a) Preliminary examination, analysis, and investigation of the underlying facts involved in all reorganization proceedings instituted under this chapter to determine the necessity of participation by the Commission.—In order to determine whether the Commission should participate in reorganization proceedings instituted under |