of cash, some bank stock, an oil property, and over 30 percent of the securities of the other consolidating company. Western New York Securities Corporation, beside cash and some stock of Liberty Share Corporation, held securities in over 35 different companies. The chief problems in this case were (1) the determination as to the reasonableness of the method of computing the relative interests the security holders of the respective companies were to receive in the consolidated company and (2) the determination as to the propriety of the appraised value on the oil property owned by Liberty Share Corporation. These problems were pointed out to the security holders in the report of the Commission, which report contained an analysis of the assets and capitalization of each of the companies, the plan, and its effect on the rights and privileges of the outstanding securities. The function of the Commission in preparing advisory reports for the assistance of security holders of reorganizing investment companies fills a long-felt need. It enables security holders who often do not possess great financial knowledge to obtain an impartial analysis of the effects of a plan of reorganization on their securities, thus enabling them to arrive at an informed judgment as to the merits of the plan. Although the Commission has authority to submit advisory reports only when requested by the reorganizing company's management or by 25 percent of its security holders, the existence of its power to seek an injunction restraining any grossly unfair plan of reorganization has resulted in the submission of several plans for informal consideration as to fairness before solicitation of security holder approval. The need for this type of analysis is particularly acute in the case of voluntary reorganizations which are at present substantially unsupervised by any governmental agency, administrative or judicial. PERIODIC PAYMENT PLAN CERTIFICATES AND UNIT INVESTMENT TRUSTS Many investment companies issue periodic payment plan certificates, that is, a type of investment contract whereby the holder makes payments on an installment basis and obtains an undivided interest in certain specified securities or in a unit or fund of securities." One of the main problems in relation to the sale of such securities is the cost to the purchaser, namely, the "sales load". Since these periodic payment certificates are sold to persons of small means, who frequently default in their payments, the sales load, if it is deducted in This type of security, representing as it does a participating or equity interest in specified assets should not be confused with the face amount certificate which represents an unconditional promise of its issuer to pay a specified sum at a specified or ascertainable future date and is thus a claim by the holder of the security. 424232-42-3 22 ite entirety from the early payments, will result in subeundis those investors whose payments lapse early in the period tfu tract. The Act copes with this problem by providing that the sus on such certificates shall not be more than 9 percent of the Not more than one-half of this sum may be dedu the first year and the balance must be spread propomitant the entire period of the contract. However, the Commer authorized, upon application or otherwise, to grant qualified tions from the sales load requirements to smaller companiis operating costs are relatively higher than those of larger p Fourteen applications have been received requesting sub th Seven of them have been joined in one proceeding. In re those seven, the Investment Company Division is contesting relief sought on the grounds either that the companies involve not smaller companies within the meaning of the Act or th does not appear they are subjected to higher costs on that ac that in either case it is not consistent with the protection of investi and the purposes of the Act to grant the applications. Briefs Lany been filed and the Commission has heard oral argument or e cases, 12 At the present time the certificates of unit investment trusts a sold almost entirely to investment companies issuing periodic ps ment plan certificates and form the underlying security which the investor purchases through his periodic payments. The Act depon nates the types of financial institutions which may act as trustee of t such trusts, prevents the charging of expenses against such tra the before they are incurred, and seeks to insure that all of the securitate w and other assets of the trusts will be held intact for the benefit in a investors. FACE-AMOUNT CERTIFICATE COMPANIES ant e icate Year ply licate In discussing above the different types of investment compa under the Investment Company Act of 1940 it was indicated t among the chief problems presented under the Act by face-amo certificate companies were those of certificate reserves and of sell methods. Since January 1, 1941 (the effective date of the Act) this type of investment company), the efforts of the Commission relation to this type of company have been directed mainly to enforcement of the reserve requirements and certain related provis of the Act pertaining to eligibility of assets, custody of assets, certain provisions relating to cash surrender and loan values. l, no requ te of 12 On November 6, 1941, the Commission issued its findings and opinion in these proceedings, denysed to applications on the ground that the applicants had failed to show that exemption was necessary or an priate in the public interest and consistent with the protection of investors. American Participations, and i et al, Investment Company Act Release No. 249. Probably the most important of these provisions are those requiring e establishment of reserve liabilities on an actuarial basis and the aintenance of eligible assets against such reserves. As the basic serve requirement the Act requires a reserve be set up from each stallment payment in an amount which, improved at the rate of percent compounded annually, will, together with similar amounts om all other such payments, equal the face amount of the certificate its maturity. Any face-amount certificate company in business. fore the effective date of the Act which continues to issue faceaount certificates thereafter is required to maintain these reserves it only on the newly issued certificates but on all certificates issued d outstanding. Additional reserve requirements embrace deficiency serves in the case of companies whose effective reserve rate is less nservative than that required by the Act and reserves against rious kinds of special contract provisions. The Investment Company Act of 1940 in its application to facenount certificate companies thus differs somewhat in concept from e Act in its application to the more common types of investment mpany. A very close resemblance to State statutes regulating life surance companies may be noted. It is obvious, therefore, that in Iministering these sections of the Act important actuarial questions ise in addition to the usual legal, accounting, financial, and selling oblems. In its efforts to obtain compliance with these requireents the Commission has devoted much time to conferences and rrespondence, much of it of a highly technical nature. As of the end of the fiscal year there were 11 companies registered ader the Act as face-amount certificate companies. It is impossible state with accuracy how many of these companies intend to connue in active operation, that is to say, to continue selling their facenount certificates. The largest company in this field is Investors yndicate which had assets on a consolidated basis at the end of the scal year of approximately $176,000,000. This company discontind the sale of its certificates at or prior to the effective date of the et, although it registered and has otherwise indicated its intention comply with all the applicable sections of the Act. Thus, Investors yndicate is not required to maintain the reserves previously menoned, nor is it required to comply with certain other provisions since ose requirements pertain only to companies which have engaged in e public distribution of its securities after the effective date of the et. In lieu of offering its own securities, Investors Syndicate organed a subsidiary face-amount certificate company-Investors Synrate of America, Inc.-whose structure and securities were expressly vised to meet the requirements of the Investment Company Act of 40 and in particular the provisions of Section 28. Investors Syn dicate acts as the underwriter for its subsidiary in the distribution of its face-amount certificates and as the manager of its assets. Fidelity Assurance Association, formerly known as Fidelity Investment Association, likewise discontinued the sale of its face-amount certificates prior to January 1, 1941, and at the end of the fiscal year was in reorganization proceedings in the United States District Court at Charleston, W. Va., under Chapter X of the Bankruptcy Act. The future activities of this company are, of course, largely dependent upon the outcome of these proceedings. A number of companies somewhat smaller than the foregoing companies have registered under the Investment Company Act of 1940 and have also filed registration statements under the Securities Act of 1933, thus indicating their intention of going forward with their selling program as soon as they have worked out the technical details of compliance with the Investment Company Act of 1940 and the other applicable statutes. An interesting variant of the face-amount certificate company was found in a number of States. An insurance company (usually a fire or casualty company) is organized under State laws and an affiliated company organized by the promoters of the insurance company. The affiliated company then offers to the public a face-amount certificate under the terms of which the purchaser is to pay to the issuing company $1,200 over a 10-year period in monthly or other periodic installments, on the representation that at the end of the period the purchaser will receive back in cash the total of his payments to the company plus a specified number of shares of stock in the insurance company. These shares, under the plan, are purchased by the faceamount certificate company out of the earnings on the payments of the installment purchasers to the face-amount certificate company which are to be invested in various media. It is urged by these enterprises that the plan not only returns all the principal to the investor but finances the insurance company and secures a wide distribution of its stock which promotes good will. While 4 such companies registered under the Act during the fiscal year, no company of this type has yet revised its structure so that it could comply fully with the provisions of the Act and proceed with its selling program. The sales of the securities of all the companies of this type had been discontinued pending compliance with the Act. In addition to the 11 face-amount certificate companies registered, there were perhaps 10 or 15 other companies throughout the country which had corresponded with or had been discovered by the Commission. With respect to these companies, disposition is being made of the questions as to their status and compliance. The assets of the registered face-amount companies amounted approximately to $215,000,000 at June 30, 1941. RULES, REGULATIONS, AND FORMS Pursuant to the provisions of the Investment Company Act of 1940 the Commission, during the past fiscal year, promulgated general rules and regulations, together with appropriate forms, as described below: Rule N-1. Sets out definition of terms__ Effective Date General requirements of papers and applica- Nov. 1, 1940 tions; authorizations and verifications with Rule N-2A-1. Pursuant to Section 2 (a) (39), this rule pro- Nov. 1, 1940 Rule N-2A-2. In connection with the valuation of securities Aug. 6, 1941 under Section 2 (a) (39), this rule provides alternative bases of computation with respect Rule N-3. to the elimination of securities from the Formal requirements of amendments to regis- Aug. 6, 1941 Rule N-5B-1 Defines the term "total assets" when used in Aug. 6, 1941 computing the valuation of securities for the purposes of Sections 5 and 12 of the Act. The Rule N-6C-1---- Provides a temporary exemption from the re- Nov. 1, 1940 quirements of Sections 26 and 27 upon specified conditions for certain companies issuing periodic payment plan certificates. exemption terminates on February 15, 1941, or on disposition of an application filed prior to that date for an order pursuant to Section 27 (b), whichever is later. Rule N-6C-2----- Provides a temporary exemption for any man- Nov. 1, 1940 agement company which filed, prior to November 15, 1940, an application for an order pursuant to Section 17 (f) (3) permitting it to maintain in its own custody its securities and similar investments. The exemption ceases upon final determination of any particular application. Rule N-6C-3---- Provides a temporary exemption for any em- Nov. 1, 1940 ployees' securities company which applied prior to November 15, 1940, for an order Rule N-6C-4. Provides a temporary exemption for any com- Nov. 1, 1940 pany which applied prior to November 15, 1941, for an order pursuant to Section 6 (d) |