Perhaps the outstanding development in the Commission's Chapter X work during the fiscal year has been the increased importance and difficulty of problems of feasibility including such questions as the adequacy of working capital, the relationship of funded debt or capital structure to property values, the adequacy of corporate earning power in relation to interest and dividend charges, the effect of proposed new capitalization. upon the company's prospective credit, and the desirable objective that new securities shall not by their terms or otherwise be deceptive to subsequent purchasers. Parties are inclined to gear their proposed capital structures to inflated war earnings, either because they do not recognize the extent to which the earnings are inflated or because they hope that the abnormal earnings will continue long enough to permit scaling down of debt to manageable proportions. The element of tax liability is an added force in the direction of excessive debt structures which provide interest deductions and sometimes other tax advantages which assume added importance in a period of high tax rates. Although security holders' representatives frequently regard the fairness of the plan as their principal concern, the full protection of their interests requires also that the plan be feasible so that it will not hamper future operations or compel another reorganization. The extent to which the difficulties of debtors now in reorganization are attributable to previous non-feasible plans is apparent from an examination of the 34 cases in which a notice of appearance was filed by the Commission during the fiscal 17 involved companies which had already undergone reorganization since 1930, most of them under Section 77B since 1935. The Commission's insistence that plans should comply with reasonable standards of feasibility is designed to avoid a similar record as to Chapter X cases five or ten years hence and its continuing efforts in this respect constitute probably the most important phase of its present activities in connection with plans. Advisory Reports on Plans Of Reorganization During the fiscal year the Commission prepared formal advisory reports with respect to plans of reorganization and supplemental reports with reference to amendments to such plans in the proceedings involving Sayre & Fisher Brick Company and Philadelphia and Reading Coal and Iron Company and also a third supplemental report in the proceedings involving Penn Timber Company in which an advisory report and two supplemental reports had previously been filled. Appeals Although the Commission may not appeal in a proceeding under Chapter X it participates in appeals taken by others. During the fiscal year the Commission took part in appeals in six proceedings. In In re Ulen and Company 5/ the Commission urged attorneys for debenture holders were not entitled to compensation in a Chapter X proceedings for services rendered in a prior Chapter XI proceedings which were not compensable under the rules prevailing in that type of proceeding. The District Court sustained this position and the Circuit Court of Appeals for the Second Circuit affirmed. In re Reynolds Investing Company 6/ involved the question whether a person who had violated Section 249 of the Bankruptcy Act by purchasing or selling claims against or stock of the debtor while acting in a representative capacity was barred from allowance of compensation for services in a different representative capacity which had been assumed after the transactions in the debtor's securities had terminated. The Circuit Court of Appeals held, as urged by the Commission, that Section 249 barred allowance of compensation for any services performed by the applicant. 5/ 130 F. (2d) 303 (C.C.A. 2d, August 3, 1942). Rehearing denied In re Ulen & Co.; Walker & Austin et al. v. Tyler et al. (C.C.A. 2d, August 29, 1942). 6/ 130 F. (2d) 60 (C.C.A. 3d, August 3, 1942). In Dana v. Securities and Exchange Commission 7/ the Circuit Court of Appeals for the Second Circuit sustained the position consistently taken by the Commission that a formal order of intervention is unnecessary to permit committees representing security holders to participate fully in proceedings under Chapter X. In re Marine Harbor Properties, Inc. involved the question of good faith in filing a petition by a debtor the property of which was subject to a certificated mortgage which had been reorganized in the New York State Courts pursuant to the provisions of the Shackno Act (New York Laws of 1933, C. 745) and the Mortgage Commission Act (New York Laws of 1935, C. 19). The Circuit Court of Appeals reversed the District Court's order approving the debtor's petition. Certiorari was granted by the Supreme Court, which upheld the Commission's contention that the debtor's participation in state court proceedings under the Shackno and Mortgage Commission Acts did not bar later resort to a proceeding under Chapter X, but affirmed the decision of the Circuit Court of Appeals upon the ground that the debtor had not sustained the burden of establishing its need for relief under Chapter X (Section 130) and the existence of good faith in filing the petition (Section 146). 8/ In re Paloma Estates, Inc. 9/ raised similar questions. Sims v. Fidelity Assurance Association 10/ involved the question whether the debtor was an insurance company eligible to file a petition under the Bankruptcy Act and questions as to whether the debtor's petition had been filed in good faith. The Commission urged approval of the debtor's petition and its position was sustained by the District Court. However, upon appeal the Circuit Court of Appeals reversed, holding that the debtor was an insurance company not eligible to seek relief under the provisions of the Bankruptcy Act and that the petition, had not been filed in good faith because the interests of creditors would be best subserved in the receivership proceeding pending in West Virginia and other states. Certiorari was granted by the United States Supreme Court which, without deciding whether the debtor was an insurance company, concluded 11/ that the petition had not been filed in good faith upon the ground stated by the Circuit Court of Appeals and upon the additional ground that it was unreasonable to expect that a plan of reorganization could be effected. 7/125 F. (2d) 296 (C.C.A. 2d, January 10, 1942). 8/ Marine Harbor Properties, Inc. v. Manufacturers Trust Co., 63 Sup. Ct. 93. 9/126 F. (2d) 72 (C.C.A. 2d, February 21, 1942). 10/ 123 F. (2d) 89 (C.C.A. 4th, October 21, 1941), 129 F. (2d) 442 (C.C.A. 4th, June 16, 1942). 11/ This was decided on April 5, 1943. PART V ADMINISTRATION OF THE TRUST INDENTURE ACT OF 1939 Information regarding the general purpose and scope of the requirements of the Trust Indenture Act of 1939, and the Commission's procedure in examining applications for qualification of indentures and trustee statements of eligibility and qualification for compliance with the statute, was set forth in the Sixth Annual Report of the Commission, pp. 133-135, inclusive. Since then a rule has been adopted 1/ permitting a prospective trustee to obtain a declaratory ruling of the Commission as to whether or not it is an affiliate of a specified underwriter. This procedure is to enable complex questions of conflicting interests to be tried and decided in advance of any particular security issue, to avoid delaying securities transactions when they arise. Under this rule J. P. Morgan & Co. Incorporated, a trust company, applied for a ruling as to its status in relation to Morgan Stanley & Co. Incorporated, an underwriting firm. The Commission held that the two houses were under common control within the meaning of the Act, and that J. P. Morgan & Co. Incorporated was therefore ineligible to act as trustee of securities issued by any company for which Morgan Stanley & Co. Incorporated was an underwriter. 2/ Statistics of Indentures Qualified The following tables show the number of indentures filed with the Commission for qualification under the Trust Indenture Act of 1939 together with the disposition thereof and the amounts of indenture securities involved. Indentures filed in connection with Registration Statements Refer to Seventh Annual Report, Page 182, for derivation of this figure and for the record from February 4, 1940 to June 30, 1941. Includes $8,000,000 added by amendment; total filed subsequently reduced to $882,097,800 and 56 indentures by amendments. Reduced to $1,021,636,900 by amendments. d/Reduced to $9,761,000 by amendments. 1/Rule T-10B-3. 2/ Trust Indenture Act Release No. 15. Applications filed for qualification of indentures covering Refer to Seventh Annual Report, Page 183, for derivation of this figure and for the record from February 4, 1940 to June 30, 1941. Additional Information Relating to Trust Indentures During the year the following additional material relating to trust indentures was filed and examined for compliance with the appropriate standards and requirements: 14 indentures exempt from the Trust Indenture Act of 1939 but subject to the Public Utility Holding Company Act of 1935. 98 trustee statements of eligibility and qualification under the Trust Indenture Act of 1939 (90 on Form T-1 for corporations, and 8 on Form T-2 for individuals). 3/ 107 amendments to trustee statements of eligibility and qualification (99 "preeffective," and 8 "post effective"). 54 Supplements S-T, covering special items of information concerning indenture securities registered under the Securities Act of 1933 1/. 17 applications for findings by the Commission pursuant to Sec. 310 (b) (1) (ii). 10 applications, on Form T-4, for exemption pursuant to Sec. 304 (c). 131 annual reports of indenture trustees pursuant to Sec. 313. 3/ Daring the period from February 4, 1940 to June 30, 1942, inclusive, an aggregate of 275 trustee statements (232 for corporations and 43 for individuals) and 155 Supplements S-T had been filed. PART VI ADMINISTRATION OF THE INVESTMENT COMPANY ACT OF 1940 The past fiscal year marked the first full fiscal year in the administration of the Investment Company Act of 1940. During the year the Commission concerned itself primarily with (1) the registration of companies subject to the Act; (2) the disposition of applications filed pursuant to the provisions of the Act seeking a determination of whether or not certain companies are investment companies within the meaning of the Act and applications requesting exemption from specific provisions of the Act; (3) the promulgation of rules prescribing the type of information and periodic reports to be filed with the Commission and the ty of information and reports required to be transmitted to security holders; and (4) the disposition of general administrative problems arising under the various sections of the Act. Registration of Investment Companies The first step in the regulation of investment companies provided by the Investment Company Act of 1940 is the requirement that all investment companies must register with the Commission. Registration is accomplished by filing a simple notification of registration with the Commission pursuant to Section 8 (a) of the Act. Most companies registered under the Act during the fiscal year ended June 30, 2941. However, 17 companies filed notifications of registration during the past fiscal year. Two of these 17 companies were organized during the fiscal year and the others had not registered previously, either because they claimed an exemption from the provisions of the Act or for some other reason. The next step in the registration process involves the filing with the Commission by every registered investment company of a detailed registration statement pursuant to Section 8 (b) of the Act. These registration statements are filed in accordance with rules, regulations and forms promulgated by the Commission which are specifically designed for investment companies. In addition to Form N-8B-1, which relates to management companies and was promulgated during the fiscal year ended June 30, 1941, the Commission has promulgated two new forms to be used for filing detailed registration statements. These forms are designated Form N-8B-2 and Form N-83-3. Form N-8B-2 is designed for use by unit investment trusts which are currently issuing securities, and Form N-8B-3 is designed for use by unincorporated management companies currently issuing periodic payment plan certificates. The detailed registration statements contain complete information regarding each company, including certified financial statements, information regarding the organization of the company, management personnel and affiliated persons, compensation to officers, directors and certain employees, capital structure, nature of assets, distribution and redemption of securities, information regarding the trustee and sponsor of the company and a recital of the policies of the company with respect to certain specified subjects. In connection with the adoption of forms to be used for filing registration statements under the Investment Company Act, the Commission also adopted rules which permit investment companies to file copies of information already filed under other Acts administered by the Commission in lieu of registration statements under the Investment Company Act, and thereby gave effect to the directive of the Congress as set forth in Section 8 (c) of the Act. These rules are designed to facilitate registration by companies which are subject to one or more of the other Acts administered by the Commission. Several companies have availed themselves of the privilege accorded by these rules. Two hundred forty-five registered investment companies filed detailed registration statements under the Act during the past fiscal year. Of these 245 registration statements, 89 were filed by management open-end diversified companies, 8 by management openend non-diversified companies, 62 by management closed-end diversified companies, 76 by management closed-end non-diversified companies, and 10 by unit investment trusts. |