Registration of Brokers and Dealers.

The following tables denote the principal facts with regard to the registration of brokers and dealers pursuant to Section 15 (b) of the Securities Exchange Act of 1934. Table 1 is a record showing the disposition of all applications received since May 28, 1935, the date when the registration program was inaugurated. Table 2 shows similar figures pertaining to the work covered during the past fiscal year.

TABLE 1.-Registration of brokers and dealers under Section 15 (b) of the Securities Exchange Act of 1934-Cumulative from May 28, 1935 a

•The registration program was inaugurated in May 1935, and the first applications were received on May 28, 1935. The cumulative record therefore dates from May 28, 1935.

When the amendment to Section 15 of the Securities Exchange Act of 1934 became effective (May 27, 1936) brokers and dealers whose applications were pending on that date and registrants whose registrations were under suspension were afforded opportunity to bring their applications under the amended Act. The figure shown here includes 13 applications and 4 suspended registrations which were cancelled by operation of the amendment because of the failure of such applicants and registrants to request that their applications be considered as applications filed under the amended Act.

TABLE 2.--Registration of Brokers and Dealers Under Section 15 (b)—Fiscal

Year Ended June 30, 1939

*Actually 963 withdrawals during year plus 1 withdrawal in 1937 and 1 withdrawal in 1938 not heretofore reflected.

SOLICITATION OF PROXIES, CONSENTS, AND AUTHORIZATIONS UNDER THE SECURITIES EXCHANGE ACT OF 1934

On August 11, 1938, the Commission published a complete revision of its rules and regulations under Section 14 (a) of the Securities Exchange Act of 1934, relating to the solicitation of proxies, consents, and authorizations in respect of securities registered on national securities exchanges. These revised rules and regulations, designated as "Regulation X-14," became effective October 1, 1938, and supplanted the LA proxy rules under which the Commission operated for approximately 3 years.

Regulation X-14, like the LA rules, is a "disclosure" regulation and requires that persons from whom proxies, consents, or authorizations are solicited be furnished with information pertinent to the matters in respect of which the solicitation is made and to the interest of the persons who make it. Whereas the LA rules, in addition to certain items of general information, merely called for a brief description of the matters in respect of which the proxy, consent, or authorization was solicited, Regulation X-14 specifies in some detail the types of information to be furnished the persons solicited, the specifications varying according to the character of the matters involved. During the fiscal year, 1,595 original filings and 557 supplemental filings of proxy, consent or authorization soliciting material were examined for compliance with Regulation X-14 and the LA rules. On innumerable occasions, the staff considered drafts of soliciting material and had conferences with persons proposing to solicit proxies, consents, or authorizations, or with counsel for such persons. In cases in which definitive soliciting literature was materially deficient (in failing to respond to the express requirements of Regulation X-14, or to respond adequately, or in containing false or misleading statements), supplemental corrective material was, at the suggestion of the Commission, sent to security holders. In such cases, depending upon the nature of the Commission's objections to the soliciting material, action pursuant to the proxies, consents, or authorizations obtained. from the use of the deficient soliciting material was deferred until the proxies, consents, or authorizations had been confirmed by the security holders on the basis of literature complying with Regulation X-14, or until, on the basis of similar literature, the security holders had been afforded a reasonable opportunity to revoke the proxies, consents, or authorizations which they had given.

In one case, the management of an investment company solicited proxies for the reelection of directors, two of whom were originally selected by persons who later became involved in lawsuits based upon alleged fraudulent transactions with the company. It was charged

that the proxy soliciting material falsely stated that the original designation of the two candidates for reelection to the directorate originated with the board of directors. It was further alleged that the annual report to stockholders which accompanied the proxy soliciting material was designed to mislead the stockholders as to the true condition of the company. It labelled the company's deficit as "earned surplus," and then relied upon scarcely distinguishable italicized figures to correct the misnomer. Moreover, the balance sheet on its face stated a "Quoted Market Value" for the company's securities, whereas approximately 70 percent of the amount shown as quoted market value represented the cost of a security which had no quoted market value and which had been acquired otherwise than in an arm's length transaction; furthermore, the right of the issuer of such security in the underlying assets appeared to be precarious. There was also included in the proxy soliciting material a message by the president of the company which dealt in part with the above mentioned lawsuits, but which omitted to state that he and one other candidate for reelection to the directorate were defendants in one of the suits. As a result of the position of the Commission that by reason of these deficiencies the proxy soliciting material failed to comply with Regulation X-14, the management agreed to defer use of the proxies obtained from the solicitation until they had been confirmed on the basis of a further communication to stockholders fully complying with Regulation X-14. Upon the filing of revised soliciting material, it was noted that the two directors, concerning whose original designation objectionable statements had appeared in the original soliciting material, had resigned as directors and officers and had been replaced by other persons having the approval of a State court, which, as of a date prior to the original solicitation, had appointed a custodial receiver of the company's assets.

In another case, the management of a corporation submitted to the Commission a draft of the material proposed to be used by it in soliciting proxies for a special meeting of common stockholders to amend the by-laws of the corporation so that 33% percent (rather than 50 percent) of the stock entitled to vote would constitute a quorum at any meeting of stockholders. After examination of its files, the Commission found that the president of the corporation, who was also a director thereof, owned approximately 38 percent of the common. stock. The management was requested by the Commission to state these facts in its proxy soliciting material and to indicate therein that the president of the corporation could, if the proposed by-law amendment were adopted, assure a quorum solely by use of his own stock at any meeting at which the preferred stock of the corporation had no vote. The management agreed to make these disclosures but, at a later date, gave up the proposed plan as not being feasible.

In a further case, the management of a corporation filed with the Commission proxy soliciting material containing the following statement: "One of the purposes of said Meeting is the election of five directors, each for a term of 3 years. Other matters may properly be brought before said Meeting by stockholders, but proxies in such form will confer authority only with respect to the election of directors and will not confer any authority with respect to any such other matters." Prior to the preparation of the management's proxy soliciting material, a stockholder of the corporation had advised the president that he proposed to offer at the annual meeting certain amendments to the by-laws of the corporation, one of which would change the place of the stockholders' meeting and another of which provided for the election of independent auditors by the stockholders instead of their being appointed by the management. The Commission took the view that, since the proposed amendments pertained to matters to which the stockholders might properly address themselves, and since the management was advised of the proposed amendments prior to the time its proxy soliciting material was prepared and sent to stockholders, and since the proxies were apparently to be used for purposes of a quorum supporting action upon the proposed amendments, the omission from the proxy soliciting material of information concerning such amendments rendered the above quoted statement of the management misleading within the meaning of Regulation X-14. Thereupon, the management of the corporation sent to stockholders a further communication fully apprising them of the two proposed amendments, in the meantime adjourning the meeting two weeks in order to give the stockholders an opportunity on the basis of the supplemental information, to revoke the proxies which they had given. The Commission has received the support of a Federal court in its administration of Regulation X-14. An injunction was granted in the United States District Court for the District of Massachusetts against one party to a proxy contest who, it was alleged, had violated the provisions of such regulation by the use of false and misleading statements and otherwise. The injunction restrained the defendants from using those proxies which the court determined were obtained in contravention of the Commission's proxy regulations, and further restrained them, in future solicitations of proxies in respect of the common stock of the corporation, from using false and misleading statements, particularly in specified respects. The complaint in the case was the first one filed by the Commission to enjoin violation of its proxy rules.

Part IV

ADMINISTRATION OF THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935

The Public Utility Holding Company Act of 1935 is designed to eliminate abuses and to provide a greater degree of protection for investors and consumers in the field of public utility holding company finance and operation. In addition to requiring full and fair disclosure of financial transactions, the Act provides for Commission supervision of security transactions by holding companies and subsidiaries; supervision of acquisitions of securities, utility assets, and other interests by holding companies and their subsidiaries; and supervision of dividends, proxies, intercompany loans, and service, sales, and construction contracts. The Act also calls for simplification of uneconomic holding company structures.

REGISTERED HOLDING COMPANIES

The past fiscal year has been the first full year in the administration of the Public Utility Holding Company Act of 1935. It will be recalled that a substantial percentage of holding companies delayed registration under the Act until after the decision of the Supreme Court of the United States on March 28, 1938, upholding the constitutionality of the registration provisions of the Act. Thereupon, however, all companies affected by the Act, with the exception of such companies as claimed exemption, registered and are now subject to the regulatory provisions of the Act. At the end of this fiscal year, the registered holding companies represented 51 separate public utility systems, comprising 142 registered holding companies 1 and including 1,524 individual holding, subholding and operating companies. The total approximate consolidated assets of these companies "at book" amount to approximately $14,097,000,000.

1

During the time the Act has been in effect, the Commission has had before it applications, declarations, and proceedings under almost all of the provisions of the Act. In both numbers and amounts involved, those relating to the issuance of securities lead the rest.

SECURITY ISSUES

Since the effective date of the Act approximately $2,637,718,000 of securities have been issued in accordance with the provisions thereof, all of them complying sufficiently with the statutory standards to permit their issuance. Of this amount, $1,449,810,000 of securities Appendix VII contains a complete list of the holding companies which were registered as of June 30, 1939.