every financial report filed must be certified by a certified public accountant or a public accountant who is in fact independent, with certain limited exemptions applicable to situations where certification does not appear necessary for customer protection. Thus, under certain conditions, a member of a national securities exchange need not file such a certified report. Also, if since his previous report a broker has limited his securities business to soliciting subscriptions as an agent for issuers, transmitted funds and securities promptly, and has not otherwise held funds or securities for or owed monies or securities to customers, he is exempt from the certification requirement. An exemption from the certification requirements is also given a brokerdealer who, from the date of his last report, has only bought and sold evidences of indebtedness secured by liens on real estate and has not carried margin accounts, credit balances, or securities for securities

customers.

The requirements for filing financial reports enable the Commission and the public to determine the financial responsibility of brokerdealers and enable the staff to analyze the reports in order to determine whether the registrant is in compliance with the Commission's net capital rule. Revocation proceedings are instituted against registrants who fail to make the necessary filing. However, it is the practice of the Commission to first inform a registrant of his obligations under rule 17a-5 prior to taking such action against him. During the past fiscal year, 4,560 reports of financial condition were filed, an increase of 87 over fiscal 1958.

Broker-Dealer Inspections

Section 17(a) of the Securities Exchange Act provides for regular and periodic inspections of registered broker-dealers. The Commission has continued to place emphasis on this program to insure a more adequate protection of investors. Inspection serves to assure compliance by broker-dealers with the securities acts and the rules and regulations promulgated by the Commission. The inspection device is one of the most useful instruments at the Commission's disposal in protecting investors and preventing and detecting violations of the Federal securities laws.

Generally, inspections involve, among other things: (1) review of a broker-dealer's pricing practices; (2) a determination of financial condition; (3) a review of the safeguards used in handling customers' funds and securities; and (4) a determination of whether adequate disclosures relating to transactions are made to customers.

In addition, the inspectors also determine whether brokers and dealers keep their books and records in compliance with the Federal securities laws and conform to the margin and other requirements of Regulation T as prescribed by the Federal Reserve Board. Furthermore, a check is made to see if excessive trading in customers' accounts

involving "churning" or "switching" has occurred. Inspections often turn up evidence of sale of unregistered securities or the use of fraudulent practices, including the use of improper sales literature or sales methods. Frequently, the inspections enable the Commission to nip in the bud situations which if not corrected, could result in loss to customers.

In 1956, the Commission inaugurated a policy of increasing the number of inspections over that of previous years. The same policy has been followed in the past fiscal year. Inspections completed during the year numbered 1,471.

In determining whether to institute action against a broker-dealer found to be in violation of the statutes or rules as a result of an inspection, consideration is given to the nature of the violations and to the effect such violations may have upon members of the public. It is not the Commission's policy to take formal action against brokerdealers for every violation. For example, inspections frequently reveal various inadvertent violations which are discovered before becoming serious and before customers' funds or securities are endangered. Where no harm has come to the public in such situations, the matter is usually brought to the attention of the registrant and suggestions made to correct the improper practices. If the violation appears to be willful and the public interest or the protection of investors is best served by formal action, the Commission promptly institutes the appropriate proceedings.

The following table shows the various types of violation disclosed as a result of the inspection program during the fiscal year 1959:

The principal stock exchanges, the National Association of Securities Dealers, Inc. and some of the States each have somewhat similar but not identical inspection programs to that of the Commission. Each agency conducts its inspections, examinations or audits in accordance with its own procedures and with particular reference to its own regulations and jurisdiction. Inspections by other agencies cannot be adequate substitutes for Commission inspections since they are not primarily concerned with the detection and prevention of violations of the Federal securities laws and the Commission's regula

tions thereunder. However, the inspection programs of these other organizations do afford added protection to the public. For this reason, the Commission and certain other inspecting agencies maintain a program of coordinating inspection activities to obtain the widest possible coverage of brokers and dealers and to avoid unnecessary duplications of inspection. By this program, each inspecting agency makes available to all such agencies advice that it has started a particular inspection but the reports or findings of such an inspection are not exchanged between the parties. Information discovered in the course of such inspections or examinations indicating serious violations of regulations administered by another agency may, however, be called to the attention of such other agency. The program does not prevent the Commission from inspecting any firm recently inspected by another agency and such inspections are made whenever there exists good cause.

Agencies now participating in this coordination program include the American Stock Exchange, the Boston Stock Exchange, the Midwest Stock Exchange, the National Association of Securities Dealers, Inc., the New York Stock Exchange, the Pacific Coast Stock Exchange, the Philadelphia-Baltimore Stock Exchange, and the Pittsburgh Stock Exchange.

SUPERVISION OF ACTIVITIES OF NATIONAL ASSOCIATION OF

SECURITIES DEALERS, INC.

Section 15A of the Securities Exchange Act of 1934 ("the Maloney Act") provides for the registration with the Commission of national securities associations and establishes standards for such associations. The rules of such associations must be designed to promote just and equitable principles of trade, to prevent fraudulent and manipulative acts and practices and to meet other statutory requirements. Such associations serve as a medium for the cooperative self-regulation of over-the-counter brokers and dealers. They operate under the general supervision of this Commission which is authorized to review disciplinary actions and decisions which affect the membership of members, or of applicants for membership, and to consider all changes in the rules of associations. The National Association of Securities Dealers, Inc. ("NASD") is the only Association registered under the act.

In adopting legislation permitting the formation and registration of such associations, Congress provided an incentive to membership by permitting such associations to adopt rules which preclude a member from dealing with a nonmember, except on the same terms and conditions as the member affords the investing public. The NASD has adopted such rules. Accordingly, membership is necessary to the profitable participation in underwritings and over-the-counter

trading since members may properly grant price concessions, discounts and similar allowances only to other members. Loss or denial of membership due to expulsion or suspension or other ineligibility due to a statutory disqualification, or to failure to meet standards of qualification established in NASD rules, thus imposes a severe economic sanction.

At June 30, 1959, there were 4,018 NASD members, an increase of 198 during the year, as a result of 542 admissions to and 344 terminations of membership. At the same time, there were registered with the NASD as registered representatives 77,917 individuals, including generally all partners, officers, traders, salesmen and other persons employed by or affiliated with member firms in capacities which involved their doing business directly with the public. The number of registered representatives increased by 12,603 during the year as a result of 19,071 initial registrations, 11,043 re-registrations and 17,511 terminations of registrations. The membership and registered representative figures as of June 30, 1959, both represent all-time high marks.

NASD Disciplinary Actions

The NASD furnishes the Commission summaries of decisions on all disciplinary actions against members and registered representatives of members. Each such decision is considered by the Commission's staff to determine whether the underlying facts indicate conduct in violation of the statutes administered by the Commission or the rules thereunder and whether the Commission should, on its own motion, call up a particular case for review. This staff consideration often. includes an examination of the Association's complete file on a particular case. Where such action appears warranted by the available facts, independent Commission inquiry or action is initiated through the appropriate regional office.

During the fiscal year the NASD forwarded to the Commission 248 disciplinary decisions on 209 formal complaint cases. It is not unusual for there to be more than one decision on a particular case for all decisions of District Business Conduct Committees are appealable to or reviewable by the Board of Governors which may affirm, modify, or reverse such decisions or remand them for reconsideration. Final Association decisions were reported to the Commission during the year in 175 formal complaint cases.

Each formal complaint must rest on allegations that a member firm had violated specified provisions of the NASD Rules of Fair Practice, although registered representatives of members and other persons controlling or controlled by members may also be cited for violations or for having been the cause of violations. Of the 175 decided cases, 103 were based on complaints solely against members. Eight such complaints were dismissed on findings that the allegations had not

been sustained, whereas in 95 cases it was found that the alleged violations had occurred, and a penalty was imposed on the member. The remaining 72 cases involved allegations of violations against the member firms concerned and 108 of their registered representatives or associates. Two such complaints were dismissed as to the two members and three individuals concerned and 21 others were dismissed as to the members involved, while 11 other individuals were found not to have been guilty of the alleged violations. Violations were found and a penalty was imposed on 49 members and 94 individual associates of members involved in this category of complaints. In all, there were disciplinary decisions adverse to 144 members and to 94 registered representatives.

The penalties imposed included censure, fine, suspension or expulsion of the member or suspension or revocation of the registration of a registered representative and in some cases a finding that an individual had been a cause of an expulsion, suspension or revocation. In many instances more than a single penalty was imposed and in a substantial majority of the cases some or all of the costs of the proceedings were assessed against those found to have acted improperly.

Thus 31 members were expelled; 4 were suspended for periods ranging from 1 week to 18 months; the registrations of 28 registered representatives were revoked and 9 were suspended, also from 1 week to 18 months; and 16 individuals were held to have been the cause of an expulsion, suspension, or revocation. Moreover, 88 members were assessed fines as were 10 registered representatives, in amounts varying in each category from $25 to $5,000. The minimum penalty of censure was imposed on 18 members and 18 registered representatives. In the fiscal year the Association collected a total of $77,658.66 as a result of fines and costs imposed in disciplinary actions. In some cases, of course, fines or costs imposed on an expelled member or a revoked representative are never paid.

In addition to disciplinary action by formal complaint procedure, as described above, action was also taken against members pursuant to the Minor Violation Procedure, provided in the Association's Code of Procedure for Handling Trade Practice Complaints, for the disposition of disciplinary cases where the facts are not in dispute and where the matter involves minor or technical violations of the rules with no significant damage to customers or other parties. Under this procedure a member charged with violation of the rules may waive a hearing, admit the violations as alleged and accept a penalty not in excess of censure and a fine of $100. A member's rights of appeal are preserved as is the right of the Board of Governors to review action by a District Business Conduct Committee. A member, however, is not required to follow the Minor Violation Procedure and may elect to face formal charges and to require a hearing.