(The document is as follows:)

[For immediate release Friday, February 25, 1938)

SECURITIES AND EXCHANGE COMMISSION,

(Securities Act of 1933, Release No. 1689)

Washington.

UNITED STATES OF AMERICA, BEFORE THE SECURITIES AND EXCHANGE COM

MISSION

In the Matter of T. I. S. Management Corporation. File Nos. 2-1303, 2-2316, and 2-3485

FINDINGS AND OPINION OF THE COMMISSION

This is a proceeding under section 8 (d) of the Securities Act of 1933 to determine whether stop orders should issue suspending the effectiveness of three registration statements on Form C-1 filed by the T. I. S. Management Corporation, hereafter referred to as the "registrant". These covered blocks of 862,069 shares, 3,000,000 shares and 18,000,000 shares of "Trusteed Industry Shares," an unincorporated investment trust of the restricted management type. registrant acts as depositor and sponsor of the trust and hence is the "issuer" of the trust shares. The registration statements became effective on April 20, 1935, as of April 15, 1935, August 8, 1936, as of August 5, 1936, and November 29, 1937, respectively.

The

These proceedings were commenced through confirmed telegraphic notices to the registrant on December 4, and December 6, 1937, citing misstatements or omissions in items 28, 36, and 38, exhibit D, and the prospectus of each registration statement. The principal deficiencies are alleged to result from the registrant's failure to disclose its practice of trading for its own account in the registered shares in connection with their distribution and the full extent of the profits which it had thus realized at the expense of the trust and the shareholders. In accordance with the notices a hearing was held before a trial examiner on December 14, 1937, at which it was stipulated that the evidence introduced should be applicable to all three registration statements.

At the hearing the alleged omissions were admitted and consent was given to the entry of stop orders. However, the registrant specifically denied the materiality of the omitted information.

On December 2, and December 10, 1937--that is, before the commencement of the hearing-the registrant filed proposed amendments to all three statements in an attempt to correct the alleged omissions. Under section 8 (c) of the act these amendments become effective only upon declaration by the Commission. The trial examiner has filed an advisory report in which he found that the registration statements omitted to state material facts as alleged. Although registrant has filed exceptions to this report, it subsequently stated in a letter to the Commission dated January 12, 1938, that instead of pressing its exceptions it desired to petition the Commission:

"1 To declare effective forthwith the amendments filed by the registrant after the effective date of the latest registration statement, and (2) to exercise its discretion in favor of a dismissal of the stop order proceedings.'

In support of this petition, the registrant argued that the omissions were not material; that there is no evidence of an attempt to mislead or defraud investors but only, at most, mistakes as to matters concerning which reasonable men might differ. that in sympathy with the purposes of the Securities Act the registrant has attempted to cooperate with the Commission and to correct promptly the alleged omissions: that the registrant will promptly supply all its shareholders with copies of the post-effective amendments if they are declared effective; that the issuance of stop orders would in this case cause an irreparable injury to the registrant; and, finally, that niether the public interest nor the protection of investors would be served by stop orders.

Therefore, as the case now stands, we need only determine whether the admitted omissions are material, and, if so, whether we should consider the post-effective amendments in reaching a decision on whether stop orders should be issued.

: Section 2 (4) of the Securities Act of 1933. See In the Matter of Underwriters Group, Inc., 2 S. E. C.(1938); Securities Act Release No. 1653.

The registrant is engaged in distributing Trusteed Industry Shares through dealers or to subordinate investment trusts which, in turn, sell monthly deposit plans to the public using the proceeds to buy Trusteed Industry Shares. The trust agreement provides that the trust shares are to be sold only to the registrant. Although this agreement fixes the terms as between the trust and the registrant, the price and conditions of resale by the registrant are not determined by the trust agreement. However, full description of the terms and conditions upon which registrant may resell the shares is required by the Securities Act of 1933.

The admitted cmissions are the same in each of the three registration statements except for a minor difference in figures. A discussion of cne registration statement will suffice for all. We shall refer particularly to the representations made in the latest registration statement.

Item 36 requires disclosure of

"the method by which the price of the certificates to be sold is calculated, giving a full statement of all of the component parts thereof, including the so-called service or leading charge."

In order to understand the full lead involved in the distribution of the securities here considered, it is necessary to discuss the price at which these shares are created and issued by the trust to the registrant, and then compare this with the price at which the registrant passes them on to purchasers.

By the terms of the trust agreement the price paid by the registrant for Trusteed Industry Shares on any particular day is based on the bid prices on the portfolio securities held by the trust as of the close of the previous day's securities markets. To the aggregate of the securities, valued at their bid prices, and the cash in the trust, certain brokerage fees, taxes, and accumulated dividends are added, and this total is divided by the number of shares of the trust outstanding in order to determine the price to the registrant of each share. On the other hand, the registrant itself bases the price at which it resells the shares, not on the bid prices, but on the previous day's closing sale prices of the trust's portfolio. To the total of this valuation plus brokerage and tax charges the registrant adds 91⁄2 percent thereof as its premium. If a fractional cent results from this computation of the resale price of the trust shares, the registrant charges the next full cent and retains this so-called breakage as part of its profits.

Furthermore, the registrant purports to act as a principal rather than as an agent, not only in selling shares to others but also in purchasing shares from the trust. Because of this fact, registrant can buy shares from the trust in such quantities as it desires and thus can take long or short positions in the shares to its own profit. It has been its practice to make delivery approximately 4 days after orders are received. Since it has also been its practice to buy new shares from the trust only after the close of the market on each day at a price fixed by the market on the preceding day, it has been able to determine with precision the following day's sale and resale prices and has been able to use this knowledge to its own advantage. Thus, if it has taken orders during today for a certain number of shares (the prices of which orders are fixed by yesterday's markets), it can determine at the time set for its purchases from the trust whether tomorrow's prices will be lower or higher, since tomorrow's sale and resale prices are fixed by the close of today's market. These short positions can be maintained for a period of 4 days until delivery is required. Consequently, it has been customary for the registrant to buy less shares than its orders call for, when the next day's price will be lower, and, conversely, to buy in anticipation of the next day's sales when the price will be higher.

The evils of this practice are graphically illustrated by the fact that on or about October 21 or 22, 1937, immediately after the severe market break of October 19, registrant bought 190,000 shares from the trust at depressed prices with which it covered its existing short position at a substantial profit. Thus the misfortunes of the trust and its shareholders were turned to registrant's advantage. Registrant's trading positions have in fact resulted in a profit of approximately $25,000 for the 9 months ended September 30, 1937. Dealers can also take similar positions and similar profits as a result of information on next day's prices supplied by the registrant. Necessarily, the positions taken by the registrant, and by others in distributing the shares diminish the dollar amounts being paid into the trust, since, in effect, investors pay the current prices whereas the trust receives the lowest prices, the registrant keeping the difference. Indeed registrant admits that this practice, to the extent that it produces profits to it results in the trust's being deprived of funds which would otherwise flow to it. In answering item 36, the registrant disclosed only the method of computing the offering prices and the fixed 91⁄2-percent premium charged by it in selling the

Counsel for the Commission contended that the terms "service" or "loadmg charge" as used in item 36 included the gross profit accruing to the registrant, that is, the difference between the amount purchasers paid it and the amount which the trust received. On this theory it was contended and admitted that the rexistrant should have disclosed: (1) the profits made by taking long and short positions; (2) the difference in the original sale price to it of the trust shares figured on bid prices on the underlying securities and the offering price figured on their closing sales prices; (3) the fact that registrant also receives 91⁄2 percent on the difference between the bid price and the last sale-price valuations of the trust shares; and (4) that a profit resulted to the registrant from fixing the price at the next full cent when fractions were involved.

We believe that all of these factors are material in determining the load and should have been disclosed.

The registrant argued that the long and short positions taken by it were immaterial in their effect on the trust, since when it took a long position on a rising market the trust received the funds earlier than it otherwise would, and could invest the receipts in securities which would rise in direct proportion to the registrant's gains. Likewise, it was contended, when the registrant took a short position, the trust did not have the funds to invest in the falling market and could invest them later at the lower prices when payment was made. This argument does not take into consideration the fact that the registrant buys the shares after the close of the market on the basis of the market for the previous day, and that the trust cannot invest the funds at the same prior market prices which determined the amount paid by the registrant. Furthermore, the argument disregards the time lag between payment to the trust and subsequent purchases by the trust for its portfolio, as well as the inability of the trust to take advantage of the daily market fluctuations.

The registrant also argued that under the terms of the trust agreement it has the right to take positions. If the registrant's argument is that the mere fact that it has the right to trade in the shares is due notice to shareholders that it is exercising the right, we cannot agree. The power to buy and sell the shares is necessary in order that the registrant may meet its orders, but certificate holders are given no notice that the right would be exercised in order to make trading profits in addition to the 91⁄2-percent premium specifically set forth. Nor do we believe that the registrant's balance sheets, which show that it was taking positions in the securities, can cure the failure fully to disclose the information as to its profits required in the answer to item 36.

It may be noted that the short positions taken by the registrant involved no risk and perfect assurance of gain. The long positions involved only the slight risk that the relatively even demand for shares in the trust would not materialize before the market turned down.

With respect to the omission to state that the methods of calculating prices for the creation and issuance of the shares to the registrant and for the price at which it resells them were different, the registrant asserted that both the trust agreement and the sample make-up sheet included as exhibit D to the registration statement gave notice of the difference. We recognize that it may be possible for an investor to deduce from the trust agreement and exhibit D that this differential between the sale and resale prices is a further source of profit to the registrant. However, this disclosure in the exhibits is more than offset by the fact that the answer to item 36 does not refer to the trust agreement at all. We have often held, and we now reassert, that items must be answered in such a way that a reasonable examination of the particular item of the registration statement will disclose either by inclusion or appropriate reference the material facts. (In the Matter of Income Estates of America, Inc., 2 S. E. C. (1937); Securities Act Release No. 1480: In the Matter of Underwriters Group, Inc., 2 S. E. C. (1938); Securities Act Release No. 1653; In the Matter of Ypres Cadillac Mines, Ltd., 2 S. E. C. (1939); Securities Act Release No. 1652. Moreover the answer to item 36, although it does refer to exhibit D, gives no notice that it contains information showing a difference in the offering and creation prices. Finally, the computation of the creation price in exhibit D is labeled "For Trustee's Fees and Deposits." Thus even a close examination of exhibit D might not disclose to an investor the method of computation by which the price to the registrant was fixed.

If an investor is not made aware of the difference between the creation and offering prices, he could hardly be expected to understand that the registrant has been receiving not only a premium equal to 91⁄2 percent of the amount paid into the trust but also 91⁄2 percent of the difference between the bid price and the last sale price valuations for the trust shares.

As to the profits from the "breakage” on fractional cents resulting from the computation of the offering price per share, the registrant asserts that its answer to item 36 gives notice that the price is set at the next highest cent when fractions of a cent are involved. The answer to item 37 also makes the same disclosure. However, this is not notice to buyers that the fraction involved is in fact retained by the registrant as distributor of the shares. A reader of the registration statement or prospectus might equally well believe that the trust rather than the registrant received the benefit of the "breakage." The investor is entitled to have this ambiguity expressly resolved.

In addition, the registration statement does not show that the offering price is arbitrarily determined by the registrant without any limitations being imposed by the trust agreement.

Finally, the materiality of these practices is amply demonstrated by the fact that the gross profit from these four sources of registrant's income approximated $37,000 for the first 9 months of 1937. We, therefore, conclude that the answer to item 36 is deficient. The discussion under item 36 applies equally to the omissions alleged and admitted in the answer to item 38, which requires a statement of the "service" or "loading" charge in terms of a percentage. We, therefore, find the omissions in item 38 to be material.2

It is alleged and admitted that the various omissions in answer to all the above items and in exhibit D are carried over into the prospectus. However, the registrant appears to argue that these omissions are not material, since notice was given of additional profits through the statement on page 7 of the prospectus dated November 29, 1937:

"There are or may be additional sources of profit. The difference between the last sales price of the underlying securities (which establishes the offering price) and the bid prices of the underlying securities (which is the basis upon which new shares are issued by the trustee): The difference that results when in computing the daily price a fractional result makes it necessary to set the price at the next higher cent: In the event and to the extent that fees collected by the trustee under the trust agreement exceed fees that are guaranteed and payable to the trustee by the depositor."

This statement, of course, gives no notice of the portion of the load caused by the depositor's taking long or short positions. Insofar as it gives notice of the other omitted portions of the load, it states them as a possibility rather than as a certainty.

Moreover, a further misleading statement in the prospectus is alleged and admitted, namely, the statement that "estimated net proceeds accruing to the investor (are) approximately 91.3 percent." This figure is reached by the estimat that the 91⁄2 percent premium when added to the basic selling price amounts to 8.7 percent of the total selling price, leaving 91.3 percent to accrue to the trust.3 This is not an accurate estimate of the proportion of the selling price which accrues to the trust, since it gives no weight to the profits realized by the trustee on the differences in computing the creation and offering prices or from the "breakage" or from the long and short positions. As a matter of fact, the percentage of registrant's gross profits from the distribution of these shares amounted to approximately 12 percent for the first 9 months of 1937. Hence, but approximately 88 percent of the investors' funds actually accrued to the trust. In our opinion the statement that 91.8 percent of the investors' funds are estimated to accrue to the trust is materially misleading. The registrant argues that the statement was inadvertently carried over from the prospectus of its predecessor. This contention carries no weight in a stop order proceeding, since we are merely seeking to determine whether the prospectus is deficient in fact and not whether it was purposely made deficient.

Finally, it is alleged and admitted that there is no specific disclosure in the prospectus that the fact that new shares are created on the basis of bid quotations rather than closing sales prices results in a diminution of the equity of existing holders of trust shares. Actually it is true that funds are paid into the trust on the basis of figures which are consistently lower than the prices at which the equity of each existing shareholder in the trust's investments could be dupli

* It is also alleged and admitted that exhibit D omits some of the factors discussed above. We, therefore, find that for the reasons heretofore stated, the exhibit is likewise deficient. The descriptive titles with which registrant has preceded certain of the price computations are particularly confusing and do not give any real notice of the margin of registrant's profits.

3 In the other 2 prospectuses the percentages are stated to be 90.5 percent and 91.5 percent.

cated. The registrant claims that the diminution is so slight that it is immaterial. It is our opinion that though the dilution is slight it occurs in the case of the creation of each and every share in the trust and should have been disclosed."

Since we have found material deficiencies in the registration statement and in the prospectus, stop orders must issue unless we exercise our discretion to consider the post-effective amendments in this proceeding. The registrant's reasons for asking that we consider these amendments, declare them effective and dismiss these proceedings were summarized at the outset of this opinion. We should further note that according to the post-effective amendments registrant now proposes to forego the profit which resulted from computing the resale price of the shares upon the basis of the closing prices on the previous day's securities markets. On the other hand, registrant does not state that it will desist from trading in the trust shares in connection with their distribution. Although it does propose in the future to buy shares from the trust only prior to the close of the securities markets on the day of purchase, it will nevertheless continue to be in a position to determine with substantial, if not the former precise accuracy what the following day's sale and resale prices will be.

Under the Securities Act of 1933 this Commission is not authorized to prevent the sale of securities to the public merely because the prices of the securities or the profits incident to their distribution may be unreasonable or even extortionate. Nor is the power to issue stop orders dependent upon the Commission's view of the merits or demerits of registered securities. On the contrary, the statute requires no more than full and honest disclosure by the registrant of material information on the basis of which the investor may form his own judgment of the registered securities. Hence, assuming full disclosure of the facts, neither the claimed right of the registrant to trade in the trust shares in a manner adverse to the trust and its shareholders nor its ethics in taking profits at their expense is material to the finding of untrue or misleading representations, or the omission of required information, upon which alone a stop order must be based. notwithstanding this limitation upon the Commission's power to issue stop orders, section 8 (c) governing the amendments which registrant now asks us to consider does confer a broader duty upon the Commission to permit such amendments to become effective only if apparently accurate and only when consistent with the public interest and the protection of investors."

But

The discretion here conferred must be exercised so as to afford a real protection to investors through the fullest possible notice of the deficiencies which we have found to exist in this case. The registrant's undertaking to furnish copies of the post-effective amendments, when and if declared effective, and of the amended prospectus to its shareholders would not, in our opinion, be comparable to the notice that would be afforded by stop orders-notice to which the investing public is entitled under the Act. In the Matter of National Boston Montana Mines Corp., 1 S. E. C. 639, 646 (1936). No assurance has been given that copies of the posteffective amendments and the amended prospectus would be furnished to those persons who by reason of their interests in the subordinate investment trusts referred to above, and more fully described in In the Matter of Income Estates of America, Inc., are indirectly owners of the Trusteed Industry Shares held in the portfolios of these subordinate trusts. Since these persons purchased their certificates on the basis of the prospectus involved in this decision and since the security covered by the registration statement here considered constitutes the sole asset underlying their certificates, they are directly concerned with the deficiencies in the statement and prospectus and in the amendments thereto.

A material deficiency also exists in item 28 as a result of registrant's failure to disclose in answer to that item that it holds and is now exercising an option to buy for its own account outstanding shares tendered to the trustee for liquidation. Item 28 requires a statement of the terms and conditions upon which holders of the trust shares may terminate their interests. Failure to state the practice of buying the shares so tendered for liquidation operated, as it admittedly was intended to do, to prevent the trust assets from showing reductions as a result of shareholders' liquidations. Concomitantly this practice has concealed the actual extent of liquidation by shareholders--information which they would be led to believe from the registration statement would be disclosed in the trust's periodic financial statements.

Compare sec. 32, which provides that "Neither the fact that a registration statement for a security has been filed or is in effect nor the fact that a stop order is not in effect with respect thereto shall be held to mean that the Commission has in any way passed upon the merits of, or given approval to, such security."

See also S. Rept. No. 47, 73d Cong., 1st sess., p. 2: "It has been deemed essential to refrain from placing upon any Federal agency the duty of passing judgment upon the soundness of any security." H. Rept. No. 85, 73d Cong., 1st sess., p. 4.

Section 8 (c) provides: "An amendment filed after the effective date of the registration statement, if such amendment, upon its face, appears to the Commission not to be incomplete or inaccurate in any material respect, shall become effective on such date as the Commission may determine, having due regard to the public interest and the protection of investors."

72 S. E. C.; (1937) Securities Act Release No. 1480.