securities regulation which the Commission and the private sector administer, or to provide the necessary sensitivity and continuity of action that are required if he is to have a significant impact on the diverse regulatory relationships which exist between the Commission and the private sector. Since I took office in April, 1977, the Commission has been engaged in a comprehensive effort to reexamine- and, where appropriate, to rebalance-its relationships to those segments of the private sector with which we interface in a variety of regulatory contexts. The past year has been characterized by a continuation of these same kinds of efforts.

Thanks to the unique disclosure and self-regulatory framework established by the Federal securities laws, the Commission's relationship with the private sector has traditionally been more one of oversight than prescription-more cooperative than adversarial. The high esteem in which the Commission has been held is at least in part attributable, in my view, to the fact that its traditional regulatory objectives—that is, its corporate disclosure and self-regulatory oversight programs — are rational and achievable ones. Historically, we have been largely uninvolved in substantive economic regulation or in balancing competitive interests.

The Commission's reputation as a model agency can also be traced, in part, to the fact that it has understood the importance of a healthy private sector and appreciated government's limitations, as well as its responsibilities. Too often, debate about an issue centers on whether to address the real or perceived problem through enhanced governmental regulation and, if so, what degree of externallyapplied governmental restraint should be brought to bear on the matter. Little thought is given to refocusing the debate: The issue should not be framed solely as one involving the appropriateness or degree of governmental involvement. Rather, we should first focus on the legitimate needs and expectations of the American public, as well as the respective roles which both the private sector and government could usefully play in meeting them, ever mindful of our broader interests in fostering and maintaining those philosophies and institutions which underpin our free and democratic society.

Thus, the Commission has been committed to being a judicious and balanced agency-or, in other terms, an accountable regulator. It has recognized the need for private sector diversity, encouraging considerable discretion for those who, in good faith, seek to comply with the spirit of the law.

Such a regulatory sensitivity and balance has fostered an atmosphere in which private institutions respond meaningfully and constructively to societal interests within a broad self-regulatory framework, and with a minimum of Commission or Congressional involvement. For example, rather than seeking a legislative remedy to concerns about the accounting profession that were raised during the late 1970s, the Commission counseled the Congress instead to encourage and support the accounting profession's own constructive efforts towards effective self-regulation. To further this objective, the Commission accepted the responsibility to monitor and evaluate the profession's efforts and undertook to report to the Congress on the progress being made. Similarly, rather than call for new legislation, or adopt a host of new rules and regulations itself, in response to various concerns raised about corporate accountability in this Country, the Commission has left the initiative to resolving fundamental questions regarding the structuring and functioning of business enterprises, including their boards of directors, where it best

belongs-within the domains of private-sector responsibility and decisionmaking.

Further, the Commission has appreciated that the broader interests of society and the economy are at issue. The ultimate purpose of the Federal securities laws is, after all, to ensure the confident, efficient, and fair securities markets that foster the capital formation process which underpins our prosperity and our democracy. In this light, while the Federal securities laws speak specifically only to the need for investor protection and the maintenance of fair and orderly markets, achieving those objectives and fostering capital formation are not inconsistent ends. On the contrary, when they are properly balanced, they go hand-in-hand. Adequate investor protection and fair and orderly markets enhance the confidence and willingness of the public to invest, while healthy and active capital markets provide the fuel for a growing economy and offer investors a fair and efficient marketplace for a broad range of investment media.

To achieve this regulatory balance, the Commission has been dedicated to improving those of its traditional core activities—such as its inspection, market surveillance, and enforcement programs-which are central to ensuring honest and healthy securities markets. At the same time, however, the Commission recognizes its responsibility to accept regulatory risks and balance competing interests so as not to seriously discourage legitimate investment and commerce in the name of investor protection. The Commission's adoption of Rule 242, as well as its amendments relaxing the requirements of Rule 144, are two examples. A third is the Commission's recent adoption of the Rule 19c-3 experiment.

Nor has the Commission been reluctant to reexamine long-standing views or administrative practices when such a course seemed indicated. For example, in reviewing its disclosure requirements, the Commission has emphasized the most useful information, even if it is so-called "soft" information such as projections, value-based disclosures, and management's discussion and analysis. Often, that has meant fostering private-sector innovation and allowing experimentation - even, when necessary, establishing safe harbors from exposure to liability under the Federal securities laws. In that regard, Financial Accounting Standards Board Statement No. 33, concerning the effects of changing prices, is an example of such an innovative private-sector approach to disclosure.

Similarly, the growth of two similar but separate corporate disclosure systems over 46 years, with requirements added or deleted in an almost ad hoc manner, had resulted in a crazy-quilt disclosure pattern difficult for registrants and the Commission to deal with and not as useful as it could be to the investing public, the intended beneficiaries. The Commission's integrated disclosure response has been a highlight of my term as Chairman and is now nearly complete.

A third example of the Commission's willingness to reexamine long-held views can be seen in its recent efforts to reform its regulation of investment companies. The nearly 40 years of Commission administration of the Investment Company Act of 1940 had produced a pervasive regulatory pattern that had subtly shifted responsibility for business decisions from the private to the public sector. Yet, the Commission's response, these last four years, has been to refashion this regulatory system to remove the Federal government from such routine business decisions and to place the authority—and the responsibility-for these matters where they belong-on investment company managers and directors, especially independent directors.

In addition to these philosophical reasons calling for Commission sensitivity and critical self-examination, budgetary and personnel restraints during the period also

made it imperative that the Commission consider seriously reordering its priorities and reallocating its resources. The securities markets themselves had grown enormously, becoming infinitely more complex and outstripping the Commission's facilities to understand, surveil, and oversee their operation by the self-regulatory organizations. Similarly, the number and complexity of filings by issuers and others had grown tremendously over the past few years. The inability of the Commission to increase staff or budget at a time of such explosive growth in the private sector, as well as in the responsibilities assigned to us by the Congress, made it essential that we reassess how well we were discharging our responsibilities, and that we find better ways to do our job, including a greater degree of reliance on private-sector initiative and good faith.

In summary, I believe that the Commission has more than satisfactorily met the needs of the present, while at the same time preparing itself—as well as the private sector-to confront the challenges of the future. Moreover, it has done so in ways which have enhanced the cost-effectiveness of the Commission's many programs, improved the sensitivity and stability of the Commission's relationships with the private sector, and allowed that sector to begin to meet the American public's growing expectations.

I will now touch on a few highlights of the Commission's recent efforts to be a fully successful-and accountable-regulator:

The Full Disclosure System

When the Congress enacted requirements for public disclosure of corporate information in connection with new offerings of securities as part of the Securities Act of 1933, and then added requirements for continuous disclosure of corporate information as part of the Securities Exchange Act of 1934, it sowed the seeds of two, largely uncoordinated, systems of disclosure. The earliest members of the Commission recognized the potential problem. When William O. Douglas resigned as Chairman of the Commission to join the Supreme Court in 1939, he wrote to President Roosevelt that integrating those two disclosure systems was one task which he regretted he had not had the opportunity to accomplish. It was a task that remained undone until this past year, when the Commission finally took steps which should lead us very shortly to a complete rationalization and full integration of the disclosure systems of the Securities Act and the Securities Exchange Act.

In a series of related actions at the end of August, 1980, the Commission moved to make the yearly report on Form 10-K the centerpiece of corporate disclosure for both the registration of new offerings, as well as the Commission's continuous reporting requirements. Furthermore, the Form 10-K was revised and streamlined, eliminating requirements that had led to "boilerplate" disclosure, while at the same time placing new emphasis on such useful data as cash flow and the impact of inflation. As a part of this same integration effort, requirements for information that appears in both the 10-K and the less formal annual report to shareholders were made uniform, facilitating the ability of companies to use their shareholder reports, if they so choose, to meet significant portions of their 10-K filing obligation. The final major piece of the integration program should fall into place some time this year when the Commission considers adoption of a new, three-tiered system of registration for offerings based on the minimum information package contained in the new Form 10-K.

The results of this major integration initiative will be to reduce costs, delays, and other burdens associated with corporate filings, while at the same time making the disclosure system more useful to investors. For example, given the current unsettled state of the securities markets-especially the market for corporate debt as a result of rapidly fluctuating interest rates-it is extremely important that the regulatory scheme allow an offering to be brought to market in a timely fashion once the business decision to proceed with the offering is reached. Reliance on an issuer's continuous disclosure filings, as well as the availability of the technique of incorporation by reference from such filings to satisfy 1933 Act registration requirements, should aid immeasurably in that regard. The ultimate objective-which I believe we are well on the way towards achieving—is, of course, to facilitate the Nation's capital formation process.

In order to administer the new integrated disclosure system in a cost-effective manner, the Division of Corporation Finance undertook its first major reorganization in almost 20 years. Reorganized now along lines that concentrate review of companies from the same industry in the same branch, the Division is developing both reservoirs of experience in particular industries, as well as continuity in its comments on the filings of a given company. In addition, the Division has also implemented a "selective review" procedure. This allows increasingly-strained Commission resources to be focused on review of the most critical registration and continuous disclosure documents, while placing examination of other documents on an audit, or sample, basis. In some instances, registration statements of established, seasoned companies will be allowed to go effective with no staff review, with issuers reminded that adequate disclosure remains their responsibility.

At the same time as we were engaged in implementing the integrated disclosure program, and the organizational and administrative changes necessary to make it work during a period of budgetary restraint, the Commission continued its widelyacclaimed efforts to facilitate capital formation by small businesses. The focal point for these efforts is the Office of Small Business Policy, established in 1979 in the Division of Corporation Finance to spearhead and coordinate the Commission's efforts to assist smaller issuers. During the past four years, the Commission has eased registration and disclosure burdens on such issuers to the greatest extent consistent with investor protection and sound administrative practice.

A few examples should suffice: Prior to fiscal 1980, the Commission had adopted a new, abbreviated Form S-18 for registered offerings of up to $5 million. A study of the use of the streamlined Form S-18 during the first 15 months following its adoption in April, 1979 showed that it had been used to raise more than $286 million in capital, mostly by companies which had never before sought financing through the public securities markets.

As a further step in this area, the Commission, on January 17, 1980, adopted Rule 242. That Rule allows qualifying companies to raise up to $2 million in any sixmonth period through securities offerings totally exempt from Commission registration. The effects of this Rule were assessed in a monitoring report issued late last year, and consideration is presently being given to increasing the dollar limit of the exemption.

Significant changes have also been made to Rule 144, governing resales of securities held by affiliates of the issuer and other restricted securities. Over the past three years, the much-criticized requirements of the Rule have been relaxed considerably. After some of the initial changes, the Commission's staff undertook an

empirical study to determine the impact on the markets of this deregulatory effort. Finding no significant adverse impact from the earlier changes, the Commission continued to relax its regulation of the area, with some of the most significant changes coming just after the close of the last fiscal year.

Also during fiscal 1980, the Commission announced that it was considering the advisability of defining classes of securities issuers by size in order to make possible modified reporting requirements for smaller issuers. Public comment was sought on the various questions involved, and the Commission is considering this initiative in coordination with its efforts to implement the recently-enacted Regulatory Flexibility Act.

In a related matter, the Commission actively participated, during the fiscal year, in the development of The Small Business Investment Incentive Act of 1980. Signed into law on October 21, 1980, the Act effects a number of statutory changes which should have a beneficial impact on the ability of small business to raise needed capital.

On another front, during the past fiscal year, the Commission authorized publication of its Staff Report on Corporate Accountability, the product of a threeyear study of mechanisms of corporate accountability, shareholder communication, and corporate governance generally. In view of the significant progress being made voluntarily by the private sector, the staff recommended against legislation, as suggested by some, to set standards for the composition and performance of corporate boards. In addition, however, to the changes in the Commission's proxy rules previously adopted as an outgrowth of the study, the staff did recommend a number of other actions for the Commission to consider, many of which may be pursued during the present fiscal year. Finally, the Commission will continue monitoring information furnished in proxy statements in order to track developments in this important and dynamic area.

The Securities Markets

The past year saw record trading volume in the Nation's securities markets, placing unprecedented demands upon the industry's trading, clearing, and back office capabilities. For example, volume on the New York Stock Exchange alone totaled 11.4 billion shares during calendar year 1980, a figure 40 percent greater than the year before, and close to four times what it was only 10 years ago. The other exchanges and the over-the-counter markets have experienced similar dramatic increases in volume.

The orderly and generally very satisfactory manner in which these demands were accommodated by the securities industry is a measure of the progress which the industry and the Commission have achieved during the past decade in modernizing and strengthening mechanisms for communication, execution, and processing. It is also testimony to the wisdom of the evolutionary approach which the Commission has followed towards facilitating the establishment of a national market system. Undoubtedly, the single most important action in that regard was the Commission's initiative to increase market maker competition in exchange-traded securities by prohibiting application of exchange off-board trading restrictions to newly-listed securities. In adopting Rule 19c-3 last June, the Commission hoped to foster, among other things, a valuable experiment in competition between exchange and over-the-counter market makers. In order to be in a position to assess this experience - and to take appropriate regulatory action in response to trading