Every registration statement filed under the Act is carefully examined by the Comission's staff.

Periodic Reports to the Commission and to Security Holders

Section 30 (a) of the Investment Company Act provides that registered investment companies must file with the Commission such information, documents and reports as companies having securities registered on a national securities exchange are required to file with the Commission pursuant to Section 13 (a) of the Securities Exchange Act of 1934. Section 30 (b) of the Investment Company Act authorizes the Commission to require registered investment companies to file reports on a semi-annual or quarterly basis so as to keep reasonably current the information contained in the registration statements of such companies. The Commission promulgated two periodic report forms applicable to management investment companies during the past fiscal year. The periodic report forms for the other classes of investment companies had not been promulgated at the close of the fiscal year.

All registered management investment companies which filed detailed registration statements on Form N-8B-1 are required to file annual reports on Form N-30A-1 within 120 days after the close of each fiscal year. The annual report form is designed to bring up to date as of the close of each fiscal year of the registrant, the information originally furnished by the registrant in its detailed registration statement. Form N-30A-1 is designed for use under both the Securities Exchange Act of 1934 and the Investment Company Act of 1940, and duplicate filings under these Acts are thereby eliminated.

All registered management investment companies which filed detailed registration statements on Form N-8B-1 are required to file quarterly reports on Form N-30B-1 within 30 days after the close of each fiscal quarter. The quarterly report form requires only the minimum information necessary to be kept current to aid the Commission in the administration of the Act. This form is also designed for use under both the Securities Exchange Act of 1934 and the Investment Company Act of 1940, and supplants Form 8-K, the current report form under the Securities Exchange Act of 1934, insofar as it is applicable to management investment companies having securities listed and registered on a national securities exchange.

One hundred ninety-six companies filed annual reports on Form N-30A-1 during the fiscal year ended June 30, 1942 and a like number filed quarterly reports on Form N-30B-1.

Section 30 (d) of the Act provides that every registered investment company shall transmit to its stockholders, and file with the Commission, at least semi-annually, reports containing certain prescribed information and financial statements. During the fiscal year ended June 30, 1942, 633 periodic reports to security holders were filed with the Commission.

Applications for Exemptions or Exceptions

Applications under Section 3 (b) (2) of the Act. A company which comes within the quantitative definition of an "investment company" as contained in Section 3 (a) (3) of the Act may apply to the Commission for an order pursuant to Section 3 (b) (2) of the Act, declaring it to be primarily engaged in a business other than that of an investment company. Such other business may be conducted either directly or through majority-owned subsidiaries or controlled companies conducting similar types of businesses. During the past fiscal year two such applications were denied, two other applications were denied under Section 3 (b) (2) although exemptions were granted under other sections of the Act, and four such appli cations were withdrawn. The Commission granted five applications pursuant to this section during the fiscal year, and at June 30, 1942, fourteen applications were pending.

Other Applications for Exemptions. Section 6 (c) of the Act confers upon the Commission general exemptive powers if and to the extent that such exemption is necessary or appropriate in the public interest and consistent with the protection of investors and the purposes fairly intended by the policy and provisions of this title.

Eighty-one applications under this section were pending before the Commission during the last fiscal year. Of these 81 applications, 49 were filed during the last fiscal year and 70 were disposed of by the Commission during that period.

Section 6 (d) of the Act authorizes the Commission to exempt small closed-end investment companies from any and all provisions of the Act if the securities of such companies are not sold outside the states of incorporation and provided the exemption is not contrary to the public interest or inconsistent with the protection of investors.

Five applications under this section were pending before the Commission during the past fiscal year. Of these 5 applications, one was filed during the year and 4 were disposed of by the Commission during that period. With respect to the 4 applications which were disposed of, one was withdrawn and 3 were granted to a limited extent.

Dissolution of Investment Companies and Withdrawal of Registration Statements

Approximately 44 registered investment companies filed applications with the Commission during the fiscal year seeking orders of the Commission declaring that such companies had ceased to be investment companies within the meaning of the Act. These applications were filed pursuant to Section 8 (f) of the Act which provides that whenever the Commission, on its own motion or upon application, finds that a registered investment company has ceased to be an investment company, it shall so declare by order, and upon the taking effect of such order the registration of such company shall cease to be in effect.

The Commission passed upon approximately 38 Section 8 (f) applications during the fiscal year. Of these 38 applications, 34 were granted, 2 were dismissed and 2 were denied. The applications that were granted involved companies which had formally dissolved and distributed all of their assets to their security holders, companies which had merged with other companies and transferred all of their assets to such other companies, and companies whose outstanding securities were owned by less than 100 persons and which were not making and did not presently propose to make a public offering of their securities. category of companies mentioned is excepted from the definition of "investment company" by the provisions of Section 3 (c) (1) of the Act.

Affiliated Persons of Investment Companies

Transactions Between Investment Companies and Their Affiliated Persons. Section 17 of the Act makes it unlawful for any affiliated person, promoter or principal underwriter for a registered investment company to sell to, or purchase securities or other property, or borrow money or other property from, the investment company or any company controlled by it. However, authority is given to the Commission to exempt, by order, any proposed transaction if evidence establishes that the terms of such transaction, including the consideration to be paid or received, are reasonable and fair and do not involve overreaching by any person concerned, and that it is consistent with the policies of the investment company as recited in its registration statement and with the general purposes of the Act.

For the fiscal year ending June 30, 1942, there were 16 applications filed to exempt proposed transactions between affiliated persons and investment companies, or companies controlled by them. The Commission disposed of 5 of such applications after hearings; 4 were withdrawn without hearing, 1 was withdrawn after hearing and 6 are still pending. While the applications ostensibly sought exemption of a proposed transaction involving the purchase and sale of securities, the disposition of such applications often included such matters as reorganizations and recapitalizations of investment companies, as well as affiliated non-investment companies.

PART VII

ADMINISTRATION OF THE INVESTMENT ADVISERS ACT OF 1940

Registration Statistics

As of June 30, 1941 there were registered with the Commission pursuant to the provisions of the Investment Advisers Act of 1940 753 investment advisers, consisting of 420 sole proprietors, 123 partnerships and 210 corporations. On June 30, 1942 there were 732 registered investment advisers consisting of 411 sole proprietors, 123 partnerships and 198 corporations.

The following table sets forth information with respect to the status of the registration of investment advisers under the Act as of the end of the fiscal year:

In order to maintain reasonably current the information contained in the applications for registration, the Commission requires semi-annual reports to be filed by all registered investment advisers. These reports must be filed with the Commission within ten days after June 30, and December 31, of each year. Each registered investment adviser is required to disclose in the semi-annual report that after an examination of his original application for registration he finds either that (1) no changes have been effected in his business so that no amendments are required to the application for registration or (2) that changes have been effected in his business so that amendments are necessary for certain items in the original application for registration. If changes have been effected in business, amendments to the items affected are included in the semi-annual report.

Section 203 (d) of the Act empowers the Commission to deny, revoke or suspend the registration of an investment adviser if certain conditions exist. grounds for denying, revoking or suspending the registration of an investment adviser is the fact that such investment adviser within ten years prior to the registration has been convicted of a crime in connection with securities transactions or has been enjoined by a court from acting as an investment adviser, underwriter, broker or dealer.

In the exercise of its power under this section, the Commission has revoked the registration of one investment adviser. In this case it was found that the investment adviser in question had been enjoined by an order of the United States District Court from engaging in certain conduct and practices in connection with the purchase and sale of securities. In addition to this it was found that the application for registration contained material misstatements. It was also found that the investment adviser in question had converted to his own benefit certain moneys sent to him by clients for the purchase of securities, that he had purchased securities contrary to the authority of his clients and had converted the remaining balances to his own use.

Absence of Power to Inspect Books and Records of Investment Advisers

Section 209 (a) of the Act provides that whenever it appears to the Commission that the provisions of this Act have been or are about to be violated the Commission

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can institute a formal investigation for the purpose of determining whether there has been or is about to be a violation of the Act. The Act, however, does not confer upon the Commission the authority or duty to make periodic inspections of the accounts and records of registered investment advisers such as is conferred upon the Commission by Section 17 (a) of the Securities Exchange Act of 1934 with respect to registered broker-dealers. This omission leaves entirely unsupervised and unprotected a broad field in the handling of investment funds of the general public. Unfortunate situations involving large losses to clients have occurred which might have been averted if the Commission had authority to make regular periodic inspections of the accounts of registered investment advisers. The details of these situations and a further report to the Congress will be made concerning this matter.

PART VIII

OTHER ACTIVITIES OF THE COMMISSION UNDER THE VARIOUS STATUTES

LITIGATION

Civil Proceedings

At the beginning of the fiscal year ended June 30, 1942, 10 1/ civil proceedings instituted by the Commission were pending; during the year, the Commission instituted 36 additional proceedings, including 33 injunctive actions brought against 91 persons to restrain them from fraudulent and otherwise illegal practices in the sale of securities. Of this total of 46 proceedings, 35 were disposed of during the fiscal year, including 28 cases which resulted in the entry of injunctions against 61 persons. 11 civil proceedings were pending at the end of the year.

Since its inception, the Commission has instituted a total of 440 civil proceedings and disposed of 429. Permanent injunctions have been obtained against 940 firms and individuals.

Data with respect to civil cases and appellate proceedings, including a brief description of all civil proceedings commenced or pending during the fiscal year and the status at the close of the year, are included among Appendix Tables 20 to 31. Some of the more important and interesting of these cases are described in more detail below.

In functive Actions Instituted by the Commission.

Typical of the ingenious schemes to secure public investment in business enterprises without complying with the registration provisions of the Securities Act of 1933 was that involved in Securities and Exchange Commission v. Bailey. 2/ In this case the defendants were enjoined from selling investment contracts camouflaged as sales of land upon which tung trees were to be developed.

Another unorthodox form of securities was involved in Securities and Exchange Commission v. George Washington Memorial Park Cemetery Association. 2/ The defendants in this case had acquired unimproved rural land which they divided into cemetery lots and sold to purchasers in large quantities on an investment basis representing that cemetery lots constituted a sound investment. A large portion of the purchase price was to be used by the Association to make a number of contemplated improvements. To facilitate resale, the Association maintained a resale department through which purchasers might dispose of their lots. The Commission took the position that the factor of setting aside a portion of the purchase price for improvements designed to enhance the value of the land, coupled with the sale of multiple units and the resale provision, made the scheme merely a form of investment contract.

In Securities and Exchange Commission v. Hugh B. Monjar, 4/ the Commission charged the defendants with selling securities to members of the Mantle Club in excess of $1,340,000 in connection with transactions described by the defendants as "personal

1/ Adjusted figure.

2/ 41 F. Supp. 647 (S.D. Fla. 1941). Consent judgment entered January 26, 1942.

2/ D. N.J. Consent judgment against eight defendants entered April 8, 1942.

4/ D. Mass. Pending at close of fiscal year.