Rules X-15B-8 promulgated and effective June 9, 1942 provides that withdrawal of registration of a broker or dealer becomes effective on the thirtieth day after the filing of a notice, unless prior to its effective date the Commission has instituted a proceeding to revoke or suspend registration or to impose terms and conditions on such withdrawal. If the Commission institutes such proceeding, or if a notice of withdrawal is filed after the Commission has ordered proceedings to revoke or suspend registration, the withdrawal, during the pendency of such proceedings, becomes effective only at such time and on such conditions as the Commission may appropriately order.

The following table contains statistics relating to administrative proceedings under Section 15 (b) of the Securities Exchange Act, which Section governs registration of brokers and dealers:

The Commission's experience during the year ended June 30, 1942 with broker-dealer registrations is shown in the tabulations accompanying this report. Briefly, there was a net decline of 508 registrants to 5,557 as of the end of the period. It is clear that the war effort is a basic cause of at least part of this shrinkage.

The National Association of Securities Dealers, Inc.

The Commission's efforts in regulating the over-the-counter industry have been aided by the cooperation of National Association of Securities Dealers, Inc. (N.A.S.D) pursuant to Section 15A of the Securities Exchange Act of 1934, otherwise known as the Maloney Act. During the year under review N.A.S.D. continued as the only national s0curities association registered as such with the Commission.

Due largely to diversion of personnel of its membership into war activities, membership in that Association suffered a 12.8% decline from 2,974 members as of July 1, 1941 to 2,593 as of June 30, 1942.

Examination program

As of June 30, 1942 the Association had completed, largely through questionnaires, its initial examination of more than 2,200 members. Less than 700 members then remained uninspected. These examinations, conducted by each of the fourteen District Business Conduct Committees, under the general supervision of the main office of the Association,

delve into the business practices of members with emphasis upon the compliance with the Rules of Fair Practice. Reports of examination which indicate violations of the

Association's rules result in the filing of either formal or informal complaints by the appropriate District Business Conduct Committee. The scope and results of these disciplinary actions are discussed subsequently.

Cases referred by the Commission to the NASD

The Association's examination program outlined above is not the only source of disciplinary action against members. The Commission, as a matter of policy, frequently refers to the Association information uncovered in its own inspection which appears to concern either unfair prices or other violations of the Association's rules.

On July 1, 1941 there were before the Association 11 cases which had previously been referred to it by the Commission and, in the ensuing year, 46 other cases were referred. In that time the Association disposed of 46 cases and it held pending 11 cases on June 30, 1942. Of the cases disposed of 23 were handled informally and in the remaining cases 23 formal complaints were filed which resulted in five expulsions, two suspensions, three fines and censures, six fines, four censures, and no action or penalty in three instances.

Disciplinary proceedings by NASD

In disciplinary matters, minor or technical infractions of the Association's rules are generally handled informally and usually result in no more than a formal censure, but in more serious matters formal complaints are filed by the Association which may have as their consequence expulsion, suspension, fine or censure or any combination of those penalties.

On July 1, 1941 there were pending before the Association 19 formal complaints and 132 additional complaints were filed in the following year. Of these 151 cases, 130 were disposed of in the year and 21 remained in process on June 30, 1942.

Formal complaints were withdrawn or dismissed without penalty in 25 instances; 32 respondents were censured; 47 were fined, in amounts ranging from $25 to $2000; 12 were suspended for periods of from thirty days to one year; and 24 respondents were expelled. Cases referred by the Commission are included in this summary.

In 20 cases decisions of District Business Conduct Committees came before the Board of Governors for review. The Board affirmed three decisions; dismissed one complaint in which a Business Conduct Committee had censured and imposed a $250 fine; modified a decision of suspension, censure and $1500 fine to censure and $300 fine; and modified a decision of "strong censure" and $100 fine to eliminate the censure. One appeal for review was withdrawn and 12 cases were pending June 30, 1942.

A District Business Conduct Committee decision of censure and $250 fine, affirmed by the Board of Governors was brought by the respondent to the Commission for review but by June 30, 1942 no action had been taken.

Amendments to Rules

Uniform Practice Code. The Commission not disapproving, a Uniform Practice Code covering "Settlement of Contracts and Trading Practice in Over-the-Counter Transactions in Securities" became effective August 1, 1941 after membership approval. This code is technical in substance and codifies on a national scale what was generally recognized as sound practice in the securities business.

Amendments to By-Laws and Rules of Fair Practice. On June 15, 1942 the Association forwarded to the membership for approval or disapproval an elaborate revision of the byLaws and Rules of Fair Practice after the Board of Governors on May 18 and 19, 1942 had recommended its adoption. Many of the proposed changes only eliminated from the rules of the Association reference to a predecessor organization or material which was of value only in the original organization and registration of the Association. Other changes involved language or detail in which some ambiguity existed or in which experience indicate: the necessity for alteration to make the material consistent with the statutes or rules d the Cowdssion.

of paramount importance was an amendment which would require, as a condition to membership, minimum net capital, exclusive of fixed assets of $5000 for "clearing fires" or $2500 for non-clearing firms." 11/ Other changes included authority to assess a disciplined member some part of the cost of the proceedings in which he was involved and a requirement that members should diligently supervise the activities of salesmen.

The following tabulation relates to broker-dealer registration under Section 15 (b) of the Securities Exchange Act:

Registrations denied during year..............................

affective registrations at close of preceding fiscal year.... Applications pending at close of preceding fiscal year......... Applications filed during fiscal year...

Total......

Applications withdrawn during year....

Registrations withdram during year.........

Registrations cancelled during year.

6,065 37

572

6.676

18

919

97

2

Registrations suspended during year.

2

Registrations revoked during year...

29

Registrations made inactive during year (a)........

11

Registrations effective at end of year (except those put on inactive status as

explained in footnote (a))...

5,557

Applications pending at end of year.....................................

39

6.674

Total...

The registration of 11 brokers and dealers, whose whereabouts, despite careful inquiry, could not be ascertained, have been placed on inactive status.

11/ Balloting, which resulted in membership approval of these changes, was completed on July 15, 1942. Subsequently, in Securities Exchange Act Release No. 3322, the Commission, after extensive hearings and argument, disapproved the minimum net capital requirement.

PART III

ADMINISTRATION OF THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935

Integration and Corporate Simplification of Public Utility Holding Company Systems

In the past fiscal year, the major activities of the Commission in its administration of the Public Utility Holding Company Act of 1935 revolved around the enforcement of the integration and simplification provisions of the Act. In several important cases we have entered orders prescribing most of the action which must be taken ultimately to comply with the requirements of Section 11, particularly Section 11 (b) (1). As to the remaining cases, a majority of the proceedings have reached the stage where such orders may be expected in the near future. In the course of these proceedings the Commission has had occasion to pass upon many of the disputed questions of interpretation of the Act, and the managements of most of the holding company systems are now either substantially advised as to, or in a position to judge the scope of, the action which we will order to be taken to bring about compliance with Section 11. A number of companies have appealed our orders to the courts and the cases now pending in the courts should settle most of the legal questions still in dispute. We are therefore moving toward completion of the first stage of entering orders and getting the legal formalities behind us, especially with respect to procedure and interpretation. When that stage is completed with respect to the various holding company systems, each will know definitely where it stands in relation to the requirements of Section 11. How and when such orders shall be enforced, is a matter for future determination in most of the cases.

We have not proceeded as yet under Section 11 (d) for enforcement of our Section 11 (b) orders by the courts. A significant result of the progress that we have made in nearing the completion of the first stage of the administration of Section 11 is that many of the major systems have now evidenced a willingness to proceed with the task of carrying out our orders. To that end several of the systems have filed voluntary plans and others are engaged in doing so and in discussing their proposals with us. In fact, with few exceptions we are finding an increasing tendency on the part of the holding company systems to facilitate either the entering of orders, or the trial of cases instituted by us, or compliance with the Act. In view of the progress already made, or in prospect, the Commission's major administrative concern today relates to the final steps in achieving the objectives of the statute, namely, the choice between the various alternative methods available under the Act for bringing about compliance with the requirements of Section 11 (b), and the determination of what treatment of the various claims of security holders is fair and equitable.

During the 1942 fiscal year, the Commission instituted 26 new proceedings looking to orders requiring registered public utility holding companies to comply with Section 11 of the Act and at the close of the fiscal year, 48 such proceedings were pending. These 48 proceedings involve substantially all of the public utility holding company systems registered under the Act although they do not encompass all of the Section 11 problems existing in such systems. In this connection, it may be noted that as of June 30, 1942, there were registered with the Commission 134 public utility holding companies, the total consolidated book assets of which amount to approximately $16,000,000,000, or about 68 percent of the private electric and gas utility industry of the United States. Those 134 registered holding companies constitute 53 public utility holding company systems, which include 1,342 holding, subholding and operating companies. However, about 14 of them control total consolidated assets of $12,195,000,000 and approximately 52% of the privately owned electric generating capacity of the country. The holding company systems involved in Section 11 proceedings as of June 30, 1942 had consolidated assets which aggregated $14,237,000,000.

Section 11 (b) (1) - Geographic Simplification

The past fiscal year has seen rapid strides toward ultimate compliance by all holding company systems with the geographic integration provisions of the Act. As related in last year's annual report, the previous year was chiefly noted for the holding of public hearings as to the major holding company systems and the entry of initial orders as to some of them. At the close of that year, however, the records in most of those proceedings had not been completed, and there remained to be instituted additional proceedings as to several systems constituting a minor portion of the industry subject to the Act.

The more significant developments in the administration of Section 11 (b) (1) of the Act in the past fiscal year may be summarized as follows:

(1) Hearings were completed in most of the integration proceedings instituted prior thereto and substantially completed in all others, including a number begun during the year. The Section 11 (b) (1) records were completed with respect to the following systems: Cities Service Power & Light Company, Consolidated Electrie and Gas Company, Engineers Public Service Company, Great Lakes Utilities Company, Lone Star Gas Corporation, The Middle West Corporation, North American Gas and Electric Company, Southern Union Gas Company, Standard Gas and Electric Company, United Public Utilities Corporation and Utilities Stock & Bond Corporation. The record in the Associated Gas and Electric Corporation proceeding was completed on substantially all of the issues.

(2)

Important, far-reaching orders were entered by the Commission prescribing most of the steps which certain of the major systems must take to comply with Section 11 (b) (1). Attention is directed to the Commission's orders in the following cases:

(3) Two of the largest holding company systems, The United Gas Improvement Company and The North American Company, filed petitions to review the Commission's orders in United States Circuit Court of Appeals. 3/

(4) Proceedings were instituted with respect to most of the holding company systems as to which Section 11 (b) (1) cases were not already pending. The new proceedings included the following:

On December 24, 1942, without waiting for a decision on its appeal, U.G.I. filed a plan for the divestment of its principal assets (consisting of common stock of Philadelphia Electric Company and Public Service Corporation of New Jersey) by a distribution of such assets among its stockholders. We approved the plan on March 18, 1943 (Holding Company Act Release No. 4173). A petition for review of our order of approval has been filed by stockholders of U.G.I. Our order in the North American case was affirmed by the U.S. Circuit Court of Appeals, Second Circuit, on January 12, 1943; 133F. (2d) 148.