quiries from the regional office examining staffs.

The branch also coordinates regional office efforts to respond to changes and events in the industry. For instance, the branch coordinated the regional offices' efforts to conduct a detailed review of the operational and trading practices activities of discount broker-dealers. The branch also worked with the various stock exchanges in order to prepare for and alleviate strains on the market created by the New York City transit strike.

In March 1980, the branch conducted a regulatory conference for the Commission's Assistant Regional Administrators for Regulation and Chief Broker-Dealer Examiners. At the conference, the regional office representatives discussed various regulatory developments and problems. The conference resulted in a number of projects relating specifically to areas of concern in the Commission's examination program.

In September 1980, the branch conducted the first of a new series of training sessions for the Commission's securities compliance examiners. Experts on various aspects of examination techniques and the securities laws, drawn primarily from the Commission's staff, served as instructors for examiners from all of the Commission's regional offices.

Municipal Securities Brokers and Dealers-On January 15, 1980, the Commission adopted amendments to Rule 15b10-12 under the Exchange Act. 29 The amended rule exempts the municipal securities transactions of all "Securities and Exchange Commission Only" (SECO) brokers and dealers from the Commission's fair practice rule, and makes the SECO fair practice rules applicable to transactions in government and other exempted securities by all SECO brokers and dealers.

On August 28, 1980, the Commission adopted amendments to Form MSD, the form used by municipal securities dealers that are banks or separately identifiable departments or divisions of banks.30 The amendments conform a definition in Form MSD to a definition in a rule of the Municipal Securities Rulemaking Board and allow, under certain circumstances, bank municipal securities dealers to substitute, for forms currently required to be filed with the Commission, forms required by the bank regulatory agencies containing similar information with respect to supervisory personnel.

During the fiscal year, the Commission, pursuant to Section 17(b) of the Exchange Act, jointly conducted with the appropriate bank regulatory agency one examination of a bank municipal securities dealer.

Lost and Stolen Securities — The Lost and Stolen Securities Program (the Program), which includes more than 17,000 Federally-insured banks, securities organizations and non-bank transfer agents as participants, uses a data bank to monitor missing securities. Participants use the system to seek assurance of the authenticity and ownership of the certificates they are processing. On June 10, 1980, the Commission released a staff report containing comprehensive general statistical information regarding the operation of the Program for calendar year 1979. As stated in that report, Securities Information Center, Inc., of Wellesley Hills, Massachusetts, the Commission's designee to operate and maintain the computerized data base of missing, lost, counterfeit and stolen securities, received reports of loss, theft or counterfeiting concerning approximately 280,000 certificates valued at approximately $1.3 billion. As of December 31, 1979, the aggregate net value of the data base since the incep

tion of the program was approximately $2.6 billion.

31

Transfer Agents-On September 2, 1980, the Commission published a comprehensive release 31 that sets forth staff interpretations regarding Rules 17Ad-1 through 17Ad-7 under the Exchange Act. These rules establish, among other things, minimum performance standards and record-keeping requirements for all registered transfer agents. The release (a) discusses many of the issues previously addressed by the staff in interpretive and no-action letters that are publicly available; (b) sets forth prior responses to many oral requests for interpretive assistance; (c) further clarifies previous written staff interpretations; and (d) provides illustrations of the practical operation of many of the provisions of these rules.

Securities Investor Protection Corporation - The Securities Investor Protection Act of 1970 (SIPA) 32 provides certain protections to customers of brokers and dealers that fail to meet their obligations to their customers. SIPA is administered principally by the Securities Investor Protection Corporation (SIPC), a non-profit membership corporation, the members of which are, with limited exceptions, registered brokers and dealers. SIPC is funded through assessments on its members, although it may borrow up to $1 billion from the United States Treasury under certain emergency conditions.

During fiscal year 1980, SIPC transmitted to Congress a recommendation, which was later endorsed by the Commission, that the level of customer protection provided by SIPA be raised to $500,000 (from the previous level of $100,000), not more than $100,000 (previously $40,000) of which may be for cash claims. A bill incorporating this recommendation was pending before Congress at the close of the fiscal year.

(Just subsequent to the end of the fiscal year, the bill was enacted into law.)

Oversight of Self-Regulatory
Organizations

National Securities Exchanges - As of September 30, 1980, ten exchanges were registered with the Commission as national securities exchanges pursuant to Section 6 of the Exchange Act: American Stock Exchange (Amex); Boston Stock Exchange (BSE); Chicago Board Options Exchange (CBOE); Cincinnati Stock Exchange (CSE); Intermountain Stock Exchange (ISE); Midwest Stock Exchange (MSE); New York Stock Exchange (NYSE); Pacific Stock Exchange (PSE); Philadelphia Stock Exchange (Phlx); and Spokane Stock Exchange (SSE). No exchange is currently operating under an exemption from registration as a national securities exchange.

During the fiscal year, the Commission completed a review of its policy concerning applications for unlisted trading privileges in listed securities. The Commission determined to grant applications for unlisted trading privileges where (a) transactions in the subject securities are required to be reported in the consolidated transaction reporting system and (b) the exchange has the capacity for executing trades in a fair and orderly manner. In addition, Rules 12f-1 and 12f-3, regarding information to be included in applications for the extension or termination of unlisted trading privileges, were amended to reflect the new standards set forth in the Securities Acts Amendments of 1975 (1975 Amendments).33

In connection with the Commission's oversight of the delisting of securities traded on national securities exchanges, pursuant to Section 12 of the Exchange Act, the Commission, during the fiscal year, granted applications by exchanges

to strike 65 equity issues and nine debt issues from listing and registration. The Commission also granted applications submitted by issuers requesting withdrawal from listing and registration for 25 equity issues and 12 debt issues.

The national securities exchanges reported to the Commission, pursuant to Section 19(d)(1) of the Exchange Act and Rule 19d-1 thereunder, 407 final disciplinary actions imposing a variety of sanctions upon member firms and their employees. On August 22, 1980, the Commission amended Rule 19d-1 to exempt from its reporting requirements uncontested summary sanctions imposed for violations of exchange regulations regarding floor decorum.34

During the fiscal year, the Commission received from the national exchanges 208 filings pursuant to Rule 19b-4 under the Exchange Act, including 177 proposed rule changes and 31 notices of a stated policy, practice or interpretation not constituting a rule change.

Among the significant exchange rule filings approved by the Commission during the fiscal year were: (a) adoption of the Uniform Code of Arbitration by ten self-regulatory organizations; 35 (b) establishment by the NYSE of an Opening Automated Report Service and trade comparison procedures for orders received before the opening of trading;36 (c) a rule change of the MSE requiring MSE specialists to guarantee execution of orders between 100-399 shares of issues traded in the Intermarket Trading System;38 and (e) an Amex rule recommending that Amex-listed companies have at least two independent directors and establish audit committees composed solely of independent directors.39

During the fiscal year, the Commission disapproved a NYSE proposed rule change to limit the number of physical access annual members to two because the Commission was unable to find that

the proposed rule change was consistent with Sections 6(b)(8) and 6(b)(5) of the Exchange Act. 40 The Commission also initiated proceedings to determine whether to disapprove proposed rule changes of the NYSE and Amex to make permanent their rules governing registered competitive market makers (RCMMS) and registered equity market makers (REMMs), respectively.41 The rules currently permit individual members to register as supplemental market makers in equity securities, thereby qualifying their on-floor proprietary trades for the market maker exemption from the general exchange member proprietary trading prohibitions of Section 11(a)(1) of the Exchange Act.

National Association of Securities Dealers, Inc. - The NASD is the only national securities association registered with the Commission. At the close of the fiscal year, 2,888 brokers and dealers were NASD members.

During the last nine months of the fiscal year, the NASD reported to the Commission the final disposition of 210 disciplinary actions. At the beginning of fiscal 1980, 16 proceedings for review of NASD disciplinary decisions were pending before the Commission, and during the year 12 additional cases were brought up for review. The Commission reviewed 22 of these cases.

During the year, the Commission continued to review an NASD proposed rule change submitted in 1978 to prohibit NASD members from giving discounts to customers in distributions of securities offered at a fixed price. The proposal would amend the NASD's Rules of Fair Practice to impose a more explicit prohibition on an NASD member's taking securities in trade (swap) at more than their fair market price and to limit the ability of members to grant or receive discounts in connection with fixed price offerings. The proposal was filed in response to a 1976 judicial deci

sion, Papilsky v. Berndt, 42 which held that certain discounts were not unlawful absent a contrary Commission or NASD ruling.

Between September and November 1979, the Commission held public hearings on the issues raised by the proposed rule. Based on the testimony of the 16 witnesses at the hearings and on the comment letters received, the Commission determined to send the NASD a letter requesting the NASD to consider amending the proposal in certain respects.43 The Commission suggested that the NASD broaden the circumstances under which a member could be compensated in connection with a fixed price offering for research provided to customers and revise the definition of fair market price as it relates to the practice of swapping securities in a fixed price offering. The NASD filed amendments to the proposal in September 1980 as suggested by the Commission.44 (Subsequent to the close of the fiscal year, the Commission approved the NASD's revised rules proposals.)

During the fiscal year, the Commission approved a proposed rule change of the NASD to create two new categories of registration for employees of NASD member firms.45 The proposal permits an individual whose activities are limited to either investment company and variable contracts products or tax shelter securities (direct participation programs) to register with the NASD as a "limited representative" in one of those areas after passing an appropriate specialized qualification examination.

In addition, the Commission approved a proposed rule change of the NASD to amend the procedures for the reporting of over-the-counter transactions in listed securities to the consolidated transaction reporting system. The rule change requires NASD mem

46

bers to report over-the-counter principal transactions on a "gross" basis, i.e., exclusive of any commission equivalent or differential, as well as any retail mark-up or mark-down. Previously, those transactions were reported inclusive of any mark-up or mark-down. Since transactions effected on exchanges are reported on a gross basis, the rule change should provide greater comparability of over-the-counter and exchange transaction information in listed securities.

The Commission also approved a rule that authorizes the NASD Board of Governors to adopt rules relating to the sponsorship and distribution to the public of tax shelter securities, or direct participation programs, by NASD members and their affiliates.47 Such rules adopted by the NASD Board of Governors must be submitted to the Commission for individual approval.

Allocation of Regulatory Responsibility -In fiscal 1980, the Commission approved four plans pursuant to Section 17(d)(1) of the Exchange Act and Rule 17d-2 thereunder, for the allocation of regulatory responsibility among the NASD and four stock exchanges-the BSE, the CSE, the MSE, and the PSE.48 Pursuant to these plans, the NASD is responsible for conducting all on-site examinations, both routine and special, and reviewing related reports of brokers and dealers that belong to both the NASD and one of the exchanges. Dual members designated to the NASD after the execution of the plans would be examined by the NASD for compliance with the NASD's rules and the exchange's regulatory rules. As a result of the allocation plans, a dual member which had previously been examined on a routine basis by the NASD and one of the participating exchanges would be subject to an examination by only the NASD. The adoption of the plans has therefore eliminated duplica

tive examining responsibilities between the NASD and each of the four exchanges that executed the plans.

Municipal Securities Rulemaking Board -As in the case of national securities exchanges and the NASD, the Commission reviews proposed rule changes of the Municipal Securities Rulemaking Board (MSRB). During the fiscal year, the MSRB filed 12 rule proposals. The Commission considered a number of those proposals and others which were pending from previous years.

49

On March 6, 1980, the Commission approved an MSRB rule that established standards of ethical conduct for municipal securities brokers and dealers that provide financial advisory services for compensation to municipal issuers.4 The rule requires a municipal securities broker or dealer, acting as a paid advisor with respect to a new issue of municipal securities, to satisfy certain conditions specified in the rule prior to purchasing the same issue. The rule also requires a municipal securities broker or dealer that establishes a "financial advisory relationship" with an issuer with respect to a new issue of municipal securities to enter into a written agreement that sets forth the basis of compensation to the municipal securities broker or dealer.

In addition, the Commission approved substantial changes in the MSRB's rules pertaining to customer and interdealer confirmations.50 The changes were designed to increase the amount of information available regarding prices, yields and call features on municipal bonds. The effective dates of the amendments were originally delayed for six months, to September 24, 1980, to allow time to plan for the orderly implementation of the new requirements. On September 12, 1980, the effective dates of the amendments were extended to December 1, 1980, to

allow additional time for implementation.51

Finally, the Commission approved amendments to the MSRB's arbitration code which established a simplified procedure for the resolution of intraindustry disputes involving $5000 or less. Such disputes can now be settled by a single arbitrator instead of the previously required three.52 The amendments were also designed to conform the MSRB rules with the uniform arbitration code developed by the Securities Industry Conference on Arbitration.53

Clearing Agencies-During the fiscal year, the Commission announced the publication of standards that the Division of Market Regulation will use in reviewing clearing agency registration applications.54 The standards represent the views of the Division regarding the manner in which clearing agencies should comply with the registration provisions of Section 17A(b)(3) of the Exchange Act. They deal with, among other things, requirements regarding participation in clearing agencies, fair representation of participants, disciplinary procedures, the safeguarding of securities and funds and the clearing agency's obligations to participants. The Division will apply the standards in making recommendations to the Commission regarding the granting or denial of registration to the 13 clearing agencies that currently are temporarily registered with the Commission, and those clearing agencies that may apply for registration in the future.

In December 1979, the Commission adopted Exchange Act Rule 17Ad-8, which requires registered clearing agencies to provide, upon request, securities position listings to issuers whose securities the clearing agency holds in its name or that of its nominee.55 A securities position listing is a list of (a) the participants in a clearing agency on whose behalf the clearing agency holds