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The Commission also conducted several special studies during the fiscal year which have contributed to a better understanding of financial problems and aided in the protection of investors. Further reports were submitted to the Congress on the study of investment trusts and investment companies conducted under express authority contained in the Public Utility Holding Company Act of 1935. These and previous reports led to the unanimous enactment by both houses of Congress of the Investment Company Act of 1940 and the Investment Advisers Act of 1940, which were signed by President Roosevelt on August 22, 1940. In addition, hearings held on special studies of legal reserve life insurance companies and investment banking activities, undertaken in cooperation with the Temporary National Economic Committee pursuant to Public Resolution No. 113 of the 75th Congress, were completed and the special unit set up to carry out this work was discontinued. Testimony in the accounting study of the McKesson & Robbins matter was published during the fiscal year and in December of 1940 the Commission's report on its findings was released. During the year convictions of several defendants were obtained in the United States District Court for the Southern District of New York for violations of the mail fraud statute disclosed as a result of the inquest into the McKesson matter which the Commission made in cooperation with other authorities.

Significant statistics concerning the work of the Commission and its activities during the fiscal year are set forth on the opposite page. On July 3, 1940, Commissioner Jerome N. Frank was reelected Chairman of the Commission for the period ending June 30, 1941. Commissioner Edward C. Eicher, of Iowa, was reappointed Commissioner on June 11, 1940, for the term ending June 5, 1945. Commissioner Eicher was originally appointed Commissioner on December 1, 1939, for the term ended June 5, 1940.

Sumner T. Pike, of Maine, was appointed Commissioner on June 1, 1940, for the term ending June 5, 1943, vice George C. Mathews, who resigned as Commissioner on April 15, 1940.

On May 31, 1940, the S. E. C. Monopoly Study Division was dissolved; and the Investment Trust Study Division was abolished on June 30, 1940.

Significant statistics concerning the work of the Securities and Exchange Commission

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Assets of registered holding companies and subsidiaries..

New security issues offered by registered holding companies and subsidiaries

Number of orders issued to initiate formal proceedings for integration and corporate simplification..

Number of corporate reorganizations in which the Commission has become a party under Chapter X of the Bankruptcy Act, as amended.

Number of trust indentures qualified under the Trust Indenture Act
of 1939 (Period February 4, 1940 to June 30, 1940).

Face amount of securities covered by trust indentures
February 4, 1940 to June 30, 1940).

Number of persons visiting the public reference rooms

Fees received from sale of photo duplications of material in Commission's public files.

Number of public hearings held under Acts administered by the Com

mission...

Number of formal opinions and reports.

Number of members of the Commission's staff at the end of the fiscal

year.

Petitions for judicial review of Commission's orders.

⚫ Many defendants are still awaiting trial or are fugitives.

Number of holding companies registered under the Public Utility
Holding Company Act of 1935.

Number of defendants convicted for violation of Acts administered by the Commission.

Number of defendants indicted for violation of Acts administered by the Commission.

Number of firms and individuals enjoined for violation of Acts administered by the Commission..

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Number of broker-dealers registered under the Securities Exchange
Act of 1934-net.

Number of broker-dealer registrations revoked, suspended and denied.
Number of preliminary, informal and formal investigations under
Acts administered by the Commission.

Number of flying quizzes made to check trading activity..

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$11, 661, 419, 000
$1,801, 052, 000

$91,097, 260, 000 $15, 170, 076, 000

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(Period

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The Commissioners, staff officers, and regional administrators, as of the close of the past fiscal year, were as follows:

Commissioners:

Frank, Jerome N., Chairman.

Healy, Robert E.

Eicher, Edward C.
Henderson, Leon.
Pike, Sumner T.

Staff Officers:

Allen, James, Supervisor of Information Research.

Bane, Baldwin B., Director of the Registration Division.
Brassor, Francis P., Secretary of the Commission, Director of
Personnel, and Director of the Administrative Division.
Burke, Edmund, Jr., Director of the Reorganization Division.
Davis, Sherlock, Technical Adviser to the Commission.
Lane, Chester T., General Counsel.

Neff, Harold H., Foreign Expert.

Purcell, Ganson, Director of the Trading and Exchange
Division.

Schenker, David, Chief of the Investment Trust Study."
Sheridan, Edwin A., Executive Assistant to the Chairman.
Weiner, Joseph L., Director of the Public Utilities Division.
Werntz, William W., Chief Accountant.

Regional Administrators:

Allred, Oran H., Fort Worth Regional Office.
Caffrey, James J., New York Regional Office.
Green, William, Atlanta Regional Office.
Judy, Howard A., San Francisco Regional Office.
Karr, Day, Seattle Regional Office.
Kennedy, W. McNeill, Chicago Regional Office.
Lary, Howard N., Denver Regional Office.
Malone, William M., Washington Field Office.
Moore, Dan Tyler, Cleveland Regional Office.
Rooney, Joseph P., Boston Regional Office.

On September 21, 1940, the Commission established the Investment Company Division and appointed Mr. Schenker as Director of that division.

Part I

THE ADMINISTRATION OF THE PUBLIC UTILITY HOLDING
COMPANY ACT OF 1935

The Public Utility Holding Company Act of 1935 deals with hold-
ing companies having subsidiaries which are electric utility companies
or which are engaged in the retail distribution of natural or manu-
factured gas. The Act was passed for the express purpose of elimi-
nating certain evils and abuses which the Congress had found to exist
in connection with the activities of such companies, and was in-
tended for the protection of both investors and consumers.
It pro-
vides for the registration of holding companies; elimination of un-
economic holding company structures; supervision of security trans-
actions of holding companies and their subsidiaries; supervision of
acquisitions of securities and utility assets by holding companies
and their subsidiaries; and the supervision of payment of dividends,
solicitation of proxies, inter-company loans, and service, sales, and
construction contracts. The Commission must pass upon plans for
the reorganization of registered holding companies or their subsidi-
aries, and must require the geographic and corporate simplification
of public utility holding company systems. The Commission does
not have the power to regulate public utility rates.

SUMMARY OF ACTIVITIES

Pursuant to the provisions of the Public Utility Holding Company Act of 1935, there were registered with the Commission as of June 30, 1940, 144 public utility holding companies, the total consolidated assets of which amount to nearly 14%1⁄2 billions of dollars. These 144 registered holding companies constitute 55 public utility holding company systems, which include 1493 holding, subholding, and operating companies.

1

During the past fiscal year, the Commission concentrated on the administration of the integration and simplification provisions of the Act. Efforts to encourage the filing of voluntary plans for compliance with these provisions were unsuccessful, and the Commission found it necessary to begin formal proceedings in order to carry out the administration of the law. Integration proceedings were launched with respect to nine major utility systems, comprising, roughly, 58 percent of the total consolidated assets of all the systems registered under the Act. Simplification proceedings were begun in three

instances.

Appendix VII, page 329, contains a complete list of the registered public utility holding companies, as of

June 30, 1940.

Several of the holding companies requested a tentative outline of the Commission's views as to what steps would be necessary in order to comply with the integration requirements set forth in the Act. These views were in the process of preparation at the end of the fiscal year. Several others took a contrary position. Other cases were delayed by petitions for additional time to prepare evidence or by motions for dismissal. Such motions were denied. Despite the delays resulting from these motions and petitions, the Commission feels that definite progress has been made in carrying out the integration and simplification provisions of the statute. Every effort is being made to expedite the proceedings.

Of particular importance to the industry and to the Commission were steps taken during the year to save time and expense in the handling of declarations and applications involving financial transactions. This was accomplished through the adoption by the Commission of a new procedure making hearings and findings unnecessary on the majority of such applications and declarations filed under the Act. except in cases where substantial difficulties are presented.'

Three former officials of the Union Electric Company were indicted for having testified falsely before an officer of the Commission, in connection with the Commission's inquiry into business practices and the financial condition of Union Electric and certain associated companies. Two of those indicted pleaded guilty, while the third stood trial and was convicted. Evidence developed by the Commission's investigators and produced during the trial tended to show that over a period of years the company had built up a cash fund of more than half a million dollars by means of "kick-backs" or rebates from attorneys and contractors, cash refunds on insurance policies, and fictitious or "padded" expense accounts of employees. Following the disclosures at the trial the matter was referred to the Department of Justice. Shortly after the close of the fiscal year, the Department of Justice announced the institution of a grand jury proceeding to investigate information that these companies had violated Federal statutes in making political contributions from this cash fund.

The Commission continued its scrutiny of the financial structure of utility companies floating new issues of securities in its endeavor to insure the development of sound capital structures based upon a substantial amount of common stock equity. Wherever the existence of special conditions precluded the raising of new capital through the sale of common stock, the Commission insisted that the issuers of senior securities include provisions designed to increase the protective fea

? Commissioner Healy opposed this procedure on both legal and policy grounds. He proposed an alternstive procedure which he argued would be equally saving of time and expense and more closely related to good procedure. His views and those of a majority of the Commissioners to the contrary are set forth in detail in public memoranda dated April 1 and June 24, 1940, respectively.

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