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[S.J. Res. 160]

[Public Law 90-438, approved July 29, 1968]

To mend the Securities Exchange Act of 1934 to authorize an investigation of the effect on the securities markets of the operation of institutional investors


Senate Joint Resolution 160 was introduced by Senator Sparkman on April 18, 1968. Hearings were held by the Senate Banking and Currency Committee on May 16, 1968. The resolution was reported to the Senate by Senator Sparkman with an amendment on June 17, 1968 (S. Rept. 1237). The resolution passed the Senate on June 18, 1968. A hearing was held on similar legislation by the House Committee on Interstate and Foreign Commerce on June 21, 1968. House Joint Resolution 946, a similar resolution, was reported with an amendment on July 10, 1968, by the House Committee on Interstate and Foreign Commerce (H. Rept. 1665). H.J. Res. 946 was passed by the House on July 15, 1968. S.J. Res. 160 with the amendments made by the House was then passed in lieu of the House resolution. On July 17, 1968, the Senate concurred in the amendments made by the House to S.J. Res. 160. The resolution was signed by the President on July 29, 1968, becoming Public Law 90-438.


Public Law 96-438 authorizes and directs the Securities and Exchange Commission to study the purchase, sale, and holdings of securities by all institutional investors in order to determine the effects of such transactions upon the maintenance of orderly securities markets. The Commission also is to study what effects these transactions have upon the interests of issuers of securities, upon the interests of the public, and what effect the economic concentration of these holdings may have upon our economy in general.

This resolution grants to the Commission, for the purposes of this study, the full range of investigative and subpena powers which it presently has under section 21 of the Securities Exchange Act of 1934, so that all necessary information may be obtained. As in prior studies, conducted by the Commission the authorization to appoint necessary personnel outside of the general restrictions of the civil service laws has been granted. The Commission also is to consult with representatives of various classes of institutional investors, members of the securities industry, representatives of other Government agencies and other interested persons, so that all points of view and relevant information may be obtained and evaluated. An advisory committee consisting of representatives of these groups is to be established for the purpose of advising and consulting with the Commission on a regular basis concerning all matters pertinent to the study.

Public Law 90-438 directs the Commission to report the results of its study to the Congress on or before September 1, 1969, and authorizes an appropriation of $875,000.


[S. 1299]

[Public Law 90-437, approved July 29, 1968]

To amend the Securities Exchange Act of 1934 to permit regulation of the amount of credit that may be extended and maintained with respect to securities that are not registered on a national securities exchange


S. 1299 was introduced by Senator Sparkman on March 15, 1967. Hearings were held by the Senate Banking and Currency Committee on May 16, 1968. The bill was reported to the Senate by Senator Williams of New Jersey with amendments on June 18, 1968 (S. Rept. 1264). The bill passed the Senate on June 19, 1968.

A hearing was held on similar legislation by the House Committee on Interstate and Foreign Commerce on June 21, 1968. H.R. 7696, a similar bill, was reported by the House Committee on Interstate and Foreign Commerce on July 10, 1968 (H. Rept. 1663). H.R. 7696 was passed by the House on July 15, 1968. S. 1299 with amendments made by the House was then passed in lieu of the House bill. On July 17, 1968, the Senate concurred in the amendments made by the House to S. 1299. The bill was signed by the President on July 29, 1968, becoming Public Law 90-437.


Public Law 90-437 amends section 7 of the Securities Exchange Act of 1934 so as to extend margin requirements to over-the-counter securities.

This legislation permits the Board to issue regulations extending margin requirements to those OTC securities which are actively traded and where there is sufficient market liquidity. For these actively traded OTC securities, the effect of this proposed legislation would be to enable brokers and dealers to extend credit subject to the Board's margin requirements (whereas now they are prohibited from extending credit at all) and to limit the amount of credit that banks may extend on such securities (because the margin requirements would at the same time be applied to loans by banks). There are, however, a large number of OTC securities which do not meet these criteria. This legislation does not, in any way, change current law respecting these securities.


[S. 3724]

To amend the Investment Company Act of 1940, as amended, and the Investment Advisers Act of 1940, as amended, to define the equitable standards governing relationships between investment companies and their investment advisers and principal underwriters, and for other purposes


S. 1659, the predecessor bill to S. 3724, was introduced by Senator Sparkman on May 1, 1967. Hearings were held by the Senate Banking

and Currency Committee on July 31, August 1, 2, 3 4, 14, 15, and November 16, 1967. A clean bill, S. 3724, was reported to the Senate by Senator Sparkman on July 1, 1968 (S. Rept 1351). The bill passed the Senate on July 26, 1968. No further action was taken on the bill.


Part A-Costs of Mutual Fund Investment



This section provides a method through which a judicial determination can be made as to whether a particular fee is reasonable. While the ultimate finding as to whether a fee is reasonable is for the court, a determination by the board of directors or the shareholders is not to be ignored. This section specifically provides that a determinat on by the directors is to be given "substantial weight." Shareholder approval is also to be given such weight as is deemed appropriate in the circumstances of a particular case. Compensation is to be presumed reasonable if it is ratified by the affirmative vote of a majority of the fund's outstanding voting securities and by a vote of a majority of the fund's uninterested directors. Such presumption may, however, be rebutted by a preponderance of the evidence.

These provisions stress the fact that the section is not designed to ignore concepts developed by the courts as to the authority and responsibility of directors in managing and controlling the everyday affairs of a corporation. The section is designed, however, to strengthen the ability of the unaffiliated directors to deal with management compensation, which raises serious conflict-of-interest problems, and to provide a method through which the Federal courts can effectively enforce the statutory provision that management compensation be reasonable. The section is in no way intended to shift the responsibility for managing a corporate enterprise from the directors of a corporation to the judiciary.

Existing law places on the directors of a fund the responsibility for approving investment advisory contracts, and in any action a determination by the directors that compensation is reasonable shall be given substantial weight. These requirements are implemented by the amendments to sections 15 (a) and (c) of the act requiring that the investment advisory contract separately describe compensation for investment advisory service and for other services. It also requires that the directors be provided with information necessary to enable them to determine the reasonableness of the compensation paid to the investment adviser.

This section places the burden on the Commission, and on any other plaintiff, of proving to the satisfaction of a court that any fee challenged is in fact unreasonable. The court may order a reduction in the rate of compensation in any case in which it finds that the compensation is unreasonable, but it may not order the recovery of any compensation paid or accrued prior to the date on which the action was instituted or the date of termination or renewal of the management contract if it finds that the directors of the fund determined in the exercise of due care that such compensation was reasonable.

A judgment under this provision may be obtained only against the person who received the compensation, and recovery of past compensation is limited to the unreasonable portion of compensation paid or accrued within 1 year prior to the date the action was instituted, plus interest.

This section also provides that shareholder suits to enforce the standard of reasonableness may be brought only if the Commission has refused or failed to bring such suit within 6 months after a request by a shareholder.


This proposed section provides that a registered securities association may by rule prohibit its members from offering redeemable securities at a price which includes an "excessive" sales load and that the Commission may by its rules alter or supplement the rules of such association in the manner provided for by section 15A(k)(2) of the Securities Exchange Act. An underwriter of these type securities who is not a member of an association may elect to be governed either by the rules of an association or by rules prescribed by the Commission with respect to excessive sales loads.

The association and the Commission, in formulating rules as to excessive sales loads, "shal allow for reasonable compensation for sales personnel, broker-dealers, and underwriters, and for reasonable sales loads to investors." This does not mean that such rules must preserve the current level of profitability of every salesman, brokerdealer, or underwriter in the business, irrespective of efficiency. It does mean, however, that consideration must be given to the nature and quantity of services necessary to effect the proper distribution of fund shares to the public.

The provision for "reasonable loads to investors" is intended to assure that the sales loads fixed by the principal underwriters (which continue to be protected against price competition by section 22(d) of the act) will be established at levels which recognize the interests of investors. These provisions also contemplate that, if warranted, the rules might include provisions for higher sales loads in situations where relatively more selling effort is required. They will also permit flexible treatment of the problem of sales loads on automatic investment of dividends, which involve little or no new selling effort.

It is contemplated that the adoption of rules defining and prohibiting excessive sales loads will be based on a prompt study by the National Association of Securities Dealers, Inc., of all relevant factors. For this reason, the authority of the Commission to alter or supplement the rules of a securities association commences 18 months after the effective date of the act.

The provisions of this proposed section shall prevail over any conflicting provision of Federal law. This provision, which is identical to section 15A(n) of the Securities Exchange Act, is designed to make it clear that no other provision of Federal law, including the antitrust laws, prevents a registered securities association from adopting rules consistent with, and necessary to effectuate, the purposes and provisions of this section.


This proposed section provides that not more than 20 per centum of any 1 year's payments may be deducted for sales load, and the entire deduction during the first 4 years may not exceed 64 per centum. This change would permit the seller of a plan to continue to collect approximately the same amount of sales load over the first 3 or 4 years (at the seller's election) as he does under present law. However, the load would be spread out more evenly over that period. For example, instead of the present situation in which typical deductions might be 50 per centum in the first year and 4.5 per centum in each of the next 3 years (averaging 15.9 per centum) a seller would be permitted to deduct 16 per centum over the entire 4-year period or 20 per centum in each of the first 3 years and 4 per centum in the fourth year (in each case averaging 16 per centum).

Under the bill, it would not be necessary that the same sales load be imposed during each of the first 4 years of the plan, but the sales load deductions from all of the monthly payments within any one of those years would have to be uniform, as would the sales load on all payments after the 48th monthly payment. This provision which. corresponds to a provision found in present law, is designed to discourage unduly complicated sales load schedules which investors might have difficulty in understanding.

This proposed section does not change the provision of present law which limits the sales load on the entire plan to 9 per centum of the total payments to be made.

This section would also provide that the sales load on the excess paid by an investor in any month over the minimum monthly payment called for by the plan may not exceed the sales load applicable to payments subsequent to the first 48 monthly payments under the plan. For example, if an investor bought a 10-year $50-a-month plan with a sales load of 16 per centum on the first 48 monthly payments and 4 per centum on subsequent payments, and made an initial payment of $600, the sales load would be $30, obtained by adding $8, or 16 per centum of the first $50, to $22, or 4 per centum. of the remaining $550. Of course, plan sellers are not required to accept prepayments.

This provision is not intended to apply to normal and minor variations, such as payment on a quarterly, rather than monthly, basis, or the payment of arrears by an investor who is delinquent in his scheduled payments.

Section 16(b) of this bill would repeal subsection (b) of section 27 of the Investment Company Act. That subsection authorizes the Commission to "relax" the requirements of section 27(a) for "smaller companies subjected to higher operating costs." Applications for relief under this subsection have been extremely rare, and the Commission has never granted any of them. Many years have elapsed since the last such application was made. Since there is no evidence that the operating costs of the smaller contractual plan sponsors are any higher than those of their larger competitors, it is hard to see how the Commission could ever properly grant a 27(b) application for permission to charge higher loads. If in an unusual case such an application were to be supported by a substantial showing of merit,

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