Market Manipulation-On March 16, 1982, the Commission published for comment amendments to Exchange Act Rule 10b-6 which governs trading in securities.66 If adopted, these amendments would define the term "distribution" for purposes of the rule, codify existing staff positions concerning some of the exceptions to the rule, and relax the prohibitions of the rule to permit participants in a distribution of securities to continue trading such securities until three business days before the commencement of the sale of the securities being distributed.

Stabilization Reports-On August 31, 1982, the Commission published for comment proposed amendments to Rules 17a-2 and 10b-7 under the Exchange Act and rescission of related Form X-17A-1.67 The Commission is proposing that the requirement for reporting certain transactions, under Rule 17a-2, be rescinded and that the rule be amended to require only that a manager of an underwriting syndicate retain, in a separate file, records of all stabilizing transactions.

Exemptions from Short Sale Rule-On June 1, 1982, the Commission granted, on a one-year trial basis, an exepmtion from the "tick test" provisions of Rule 10a-1, the short sale rule. The exemption permits a broker-dealer that has acquired a security while acting in the capacity of a"block positioner" to disregard a short position in that security in computing its net long position if and to the extend that such short position is and has been for at least five business days the subject of one or more offsetting positions created in the course of "bona fide arbitrage," "risk arbitrage" or "bona fide hedge" activities.

Regulation of Brokers, Dealers, Municipal Securities Dealers and Transfer Agents

Broker-Dealer Reporting Requirements-On December 10, 1981, the Commission adopted new Rule 17a-8 under the Exchange Act, which enables SROs to enforce existing regulations of the U.S. Department of the Treasury promulgated under the Currency and Foreign Transactions Reporting Act of 1970.68 These regulations, among other things, require broker-dealers to make reports and maintain records on domestic currency transactions of more than $10,000 and the import and export of currency and monetary instruments of $5,000

or more.

Financial Responsibility Requirements-During the fiscal year, the Commission adopted major revisions to the uniform net capital and the customer protection rules, Rules 15c3-1 and 15c3-3, respectively.69 These revisions included the lowering of the ratio of minimum required net capital for those brokerdealers electing the alternative method of computing net capital, from 4% of aggregate debit items to 2%. The early warning and capital lock-in levels were also reduced from 7% and 6%, respectively, to 5%. 70

These changes were predicated on the industry's improved financial and operational condition, and were intended to enable securities firms to use these funds to make better markets and improve services to the investing public.

It is estimated that over $500 million of securities industry capital was freed-up as a result of these changes.

Broker-Dealers' Carrying Agreements-On February 19, 1982, the Commission approved a rule change to amend NYSE Rules 382 and 405." This rule change sets forth the responsibilities of member broker-dealers when handling customer accounts that are introduced on a fully disclosed basis by one brokerdealer to another under a carrying agreement. The amended rule requires all "fully disclosed" carrying agreements between introducing and carrying organizations to identify specifically, allocate between the parties and, at a minimum, address their respective functions and responsibilities for seven particular areas.

Broker-Dealer and Transfer Agent Examinations-During fiscal year 1982, there was increased emphasis on improving the efficiency, thoroughness, and overall quality of regional office examinations, particularly oversight examinations of SRO member firms. During the fiscal year, the staff developed sophisticated computer programs for the analysis of information and conducted several educational programs for regional office regulatory staff. In addition, the staff reviewed approximately 230 transfer agent examination reports and 900 regional office broker-dealer examination reports in order to identify national concerns and assist the regions. The Commission also adopted Rule 15b2-2, under which SROS examine newly registered broker-dealers, thereby avoiding duplication of Commissioin and SRO resources.

Such efforts to improve the Commission's broker-dealer examination program are necessary in order that the Commission's limited resources can meet its considerable ongoing responsibilities, and respond to extraordinary problem areas, such as the collapse this last year of the Denver “hot issue" or penny stock market.

Administration of the SECO Program-Pursuant to the Exchange Act, brokerdealers who do not join the NASD are subject to direct regulation by the Commission through its SECO program with respect to professional qualifications and just and equitable principles of trade. Following a Division study of this program the Commission, in May, transmitted draft legislation to Congress to abolish the SECO program and require all broker-dealers transacting an OTC securities business to join a registered national securities association. The proposed legislation was under consideration by Congress at the close of the fiscal year.

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Self-Underwriting by SECO Broker-Dealers-On January 7, 1982, the Commission approved an amendment to Rule 15b10-9, the so-called "selfunderwriting" rule;73 the amendment created a conditional exception to the rule for SECO broker-dealers that limit their business to participation in the offer and sale of securities issued by an affiliate which is not a broker-dealer.

Securities Confirmations-On August 19, 1982, the Commission withdrew proposed Rule 15c2-12 and a proposed amendment to Rule 10b-10, the customer confirmation rule, that would have required disclosure on confirmations of the amount of any mark-up, mark-down, or similar remuneration received by any

broker-dealer effecting a "riskless" principal transaction in a debt security.74 At the same time, the Commission proposed to amend Rule 10b-10 by: (1) providing a limited exception from the immediate delivery requiements of the rule for certain "account management plans" offered by broker-dealers; and (2) requiring disclosures pertaining to yield and call features in transactions in debt securities, except municipal securities.75

Municipal Securities Brokers and Dealers-The Commission continued to consult with the bank regulatory agencies with respect to bank municipal securities activities. In addition, the Commission staff issued several no-action and interpretive letters with respect to securities activities by municipal broker-dealers. Fingerprinting-The Commission proposed amendments to Rule 17f-2 that would simplify the process for and reduce the cost of, claiming exemptions for certain personnel from the fingerprinting requirement under the Exchange Act. 76

Transfer Agent Regulation-The Commission proposed rules establishing minimum standards for registered transfer agents. The proposed rules would ensure: (1) the prompt and accurate creation and maintenance of issuer securityholder records; and (2) the safeguarding of funds and securities used in connection with transfer activities when those funds and securities are in the possession or control of transfer agents."

Oversight of Self-Regulatory Organizations

National Securities Exchanges-As of September 30, 1982, ten exchanges were registered with the Commission as national securities exchanges. During the fiscal year the Commission granted applications by exchanges to delist 90 equity and 38 debt issues, and granted applications by issuers requesting withdrawal from listing and registration for 20 equity issues and ten debt issues. In addition, during the fiscal year the Commission granted 272 applications by exchanges for unlisted trading privileges.

The exchanges reported to the Commission 334 final disciplinary actions imposing a variety of sanctions upon member firms and their employees. This contrasts to 309 actions reported in fiscal 1981.

During the fiscal year, the Commission received from the exchanges 116 findings of proposed rule changes under Rule 19b-4 under the Exchange Act. Among the significant rule filings aproved by the Commission, in addition to rules designed to implement trading in new options products, were: (1) a Philadelphia Stock Exchange pilot program relating to the allocation of new listings to specialists and the reallocation of listings due to substandard specialist performance;78 and (2) the creation of the Midwest Stock Exchanges' automated execution system and the revision of the Boston Stock Exchanges' guaranteed execution system.79

During the fiscal year, the Commission modified the exemptions provided to regional stock exchanges from Rule 11b-1 under the Exchange Act so that each exchange now has rules imposing certain specific obligations on its

specialists with respect to any security that is listed on its exchange but is not listed on either the Amex or the NYSE.80

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, the NASD, which has 3,577 members, reported to the Commission the disposition of 429 significant disciplinary actions and 248 summary actions by the NASDAQ Trading Committee, as compared with approximately 500 and 336 a year earlier. In addition, the Commission received from the NASD 18 filings of proposed rule changes, down 11 from 1981.

One of the significant NASD rules approved by the Commission during the fiscal year adopted standards for NASD members and their associated persons who participate in a public offering of a direct participation program (DPP),81 The rule change adds an appendix to the NASD's Rules of Fair Practice to prescribe standards for the offering of DPPs in the areas of investor suitability, disclosure of material information, and underwriter compensation. Adoption of the rule change culminates several years of effort by the NASD and the Commission to establish written standards for the sale of DPPs.

Surveillance and Compliance Inspections—During the fiscal year, the staff conducted 22 inspections of self-regulatory organization (SRO) market surveillance, disciplinary, compliance and operational programs. In all of these inspections, upon notice of the inspection findings, each SRO has taken steps to respond to the staff recommendation.

Specifically, inspections of the PSE's equity and options trading programs disclosed only one major concern, a failure to institute disciplinary proceedings against members in certain cases. Inspections of the Amex Stockwatch and Market Surveillance units and disciplinary program disclosd that an audit trail would enhance surveillance and that the exchange did not always bring charges against members in appropriate cases. An inspection of the CBOE disclosed certain deficiencies in the automated trading information collected by the exchange.

A special inspection of the NYSE's stockwatch surveillance program disclosed that the NYSE failed to recognize a major manipulation in one of its listed stocks. Other NYSE inspections reviewed the NYSE's efforts to develop a complete transaction audit trail. An audit trail would not only enable the NYSE to conduct adequate surveillance of trading on its floor but would also result in a reduction of its member firms' transaction reconciliation costs. In August 1982, the NYSE proposed that an audit trail be implemented in stages in conjunction with the development and expansion of various automated systems at the exchange, which are scheduled to be completed in January 1985 and that in the interim, existing exchange and member firm systems and procedures be modified to provide an effective audit trail in early 1983.

During 1982, the staff conducted comprehensive inspections of the Phlx's equities and options trading programs. The inspections disclosed that the Phlx had taken commendable steps to remedy deficiencies noted in previous inspections.

At the end of the fiscal year, surveillance inspections that were in progress included the NYSE Stockwatch Department, CSE market operations and surveillance, and the NASD surveillance programs for OTC trading in stocks quoted in the NASDAQ system.

The staff conducted inspections of four NASD District Offices concerning investigations of customer complaints and terminations of registered representatives from employment for cause. In addition, the staff inspected the NASD Denver District Office to evaluate, in particular, the officer's financial surveillance of member broker-dealers active in the Denver penny stock market. The staff also inspected the NASD Central Registration Depository. The staff also conducted two inspections focusing on the role of self-regulators in the prevention or detection of major alleged frauds. These inspections were still in progress at the end of the fiscal year.

The staff worked with a joint SRO task force, the Intermarket Surveillance Group (ISG), in its efforts to develop an effective intermarket surveillance system. The staff also conducted limited inspections of SRO intermarket surveillance programs.

Clearing Agencies-Significant progress was made in the review of applications for full registration of clearing agencies under Section 17A(b) of the Exchange Act in accordance with the Division's standards for registered clearing agencies.82 In connection with its review, the Commission cancelled the clearing registration of Bradford Securities Processing Services, Inc. and TAD Depository Corporationa3 and extended until September 30, 1983, the temporary registrations of, and registration proceedings regarding, the 11 active clearing agencies. 84

The Commission also approved several proposed rule changes to enhance clearing agencies' systems for controlling financial exposure, particularly from participant insolvencies. For example, the National Securities Clearing Corporation increased its clearing fund to reflect variable use of its Envelope Settlement System,85 and established comprehensive admission and continuance standards, together with an enhanced surveillance program.

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Market Oversight and Surveillance System-The Market Oversight and Surveillance System (MOSS) was initiated on a pilot basis in 1980. It is designed to automate the Commission's surveillance and oversight capabilities. In August 1981, at the Commission's initiative, the SROS submitted a proposal for an SRO intermarket surveillance program, to which the Commission would have ready access. The SRO program, when fully implemented, should result in significantly enhanced SRO surveillance and provide an alternative to the surveillance capabilities of MOSS. In the interest of avoiding unnecessary costs and duplication, the Commission has therefore deferred significant enhancement of the MOSS project, pending implementation and evaluation of the SRO program.

During fiscal year 1982, the MOSS project continued on a pilot basis. It was moderately refined and expanded from 31 percent to 50 percent coverage of