sions requiring a minimum number of independent or nonmanagement directors; limit the extent to which a face-amount investment company can include preferred and common stock in its "qualified investments"; make clear the application of the statute to an "advisory board"; and modify the exception for companies subject to regulation by the Interstate Commerce Commission and clarify the exceptions applicable to companies engaged in banking, insurance, small loan, factoring, discount or real estate businesses. The proposed changes in the Investment Advisers Act of 1940 would expand the basis for disqualification of a registrant because of prior misconduct; authorize the Commission by rule to require the keeping of books and records and the filing of reports; permit periodic examinations of a registrant's books and records; empower the Commission by rule to define and prescribe means reasonably designed to prevent fraudulent practices; extend criminal liability for willful violation of a rule or order of the Commission; and revise the provisions relating to the postponement of effectiveness and the withdrawal of applications for registration. Many minor amendments of these statutes are also proposed. Hearings on the bills were held before the Subcommittee on Securities of the Banking and Currency Committee of the Senate, on June 15, 16, 17, 18, 23, 24, and 25, 1959, and before the Subcommittee on Commerce and Finance of the Committee on Interstate and Foreign Commerce of the House of Representatives on June 3, July 8 and 9 and August 4, 1959. The Commission and staff members presented testimony at the beginning of the hearings before each committee, and again after interested industry representatives and others had been heard. As a result of conferences with industry representatives, similar to those held in connection with the formulation of the legislative recommendations in the 85th Congress, and as a consequence of comments and suggestions made during the course of the hearings by members of Congress and witnesses, the Commission made certain modifications in its proposals. These modifications did not represent abandonment of the original proposals, but essentially constituted clarification and statutory specification of matters in conformity with the original intention of the Commission. The Commission also advised the Committees that it had no objection to three amendments to the Investment Advisers Act proposed during the hearings by certain investment advisers and their representatives. One would modify the definition of the term "control" in the statute, the second would grant the Commission authority to provide exemptions from the statute, and the third would modify the conditions under which an investment adviser may call himself an "investment counsel." Other Legislative Proposals Various other bills to amend the securities laws were introduced, and the Commission submitted comments to the committees of Congress. These bills, except for H.R. 4025 and H.R. 5543, renewed proposals made in previous sessions of the Congress. No hearings were held on the bills, which are discussed briefly below. 1. Proposal to Increase Registration Fees.-On January 28, 1959, Senator Homer E. Capehart for himself and for Senator Frank J. Lausche introduced S. 737, and on April 13, 1959, Representative John B. Bennett introduced an identical bill, H.R. 6294. Both bills would amend section 31 of the Securities Exchange Act of 1934, which now provides an annual fee for registration of exchanges of one fivehundredths of 1 percent of the aggregate dollar amount of stock exchange transactions, equal to 2 cents per $1,000. Under the bills this exchange registration fee would be increased to a rate of 5 cents per $1,000 and there would be a similar registration fee for brokers and dealers of 5 cents per $1,000 on transactions effected otherwise than on a national securities exchange.* 2. Disclosure of Beneficial Ownership of Registered Securities in Election Contests.-On January 9, 1958, Senator Homer E. Capehart introduced S. 132, a bill directed to identifying beneficial owners of securities in proxy contests. The bill would add to section 14 of the Securities Exchange Act of 1934 a provision making it unlawful for any person to give or to attempt to give a proxy to vote a registered security at any annual or special meeting for the election or removal of directors, with respect to which proxies are solicited by opposing nominees, unless (1) such person is the beneficial owner of the security, or (2) the name and last known address of the beneficial owner appears on the proxy. In addition, the bill would make it unlawful for any person knowingly to exercise or attempt to exercise any proxy in violation of this provision." 3. Reporting Requirement of Beneficial Owners of Registered Securities and Officers and Directors of Issuers Thereof.-On January 28, 1959, Senator Homer E. Capehart introduced S. 736, which would amend section 16 of the Securities Exchange Act of 1934 to require every beneficial owner of more than 5 percent (instead of 10 percent as now provided) of any class of any equity security which is registered on a national securities exchange to file reports of his securities holdings and transactions with the Commission." See the Commission's 23d Annual Report, pp. 12-13, for a discussion of similar proposals in the 85th Congress. See the Commission's 23d Annual Report, p. 16, for discussion of a similar proposal in the 85th Congress. See the Commission's 23d Annual Report, pp. 15-16, for a discussion of a similar proposal in the 85th Congress. H.R. 1028 was introduced by Representative Abraham Multer on January 7, 1959. This bill would amend section 16(a) of the Securities Exchange Act of 1934 to require officers and directors of any issuer of registered securities to report periodically the extent to which, and the purposes for which, their holdings of such securities are pledged. 4. Proposals Relating to Exempt Offerings and Civil Liabilities in Connection Therewith.-Two bills designed to impose additional civil liabilities in connection with exempt offerings under section 3(b) of the Securities Act of 1933 were introduced in the first session of the 86th Congress. On January 7, 1959, Representative Leonard Farbstein introduced H.R. 93, a bill which would augment existing provisions for civil liabilities by providing for specific liability on the part of those responsible for untrue statements of material facts or omissions to state material facts in any statements or document filed with the Commission in connection with an exempt offering under section 3(b). This bill is identical with the proposal embodied in the Commission's legislative program, except that the Commission proposal also encompasses false filings pursuant to section 3(c) of the statute. On February 17, 1959, Representative John R. Bennett introduced H.R. 4568, a bill which would raise the exemptive ceiling under section 3(b) from $300,000 to $500,000 and would make applicable to such exempt offerings the strict civil liabilities now pertaining solely to registered offerings. 5. Repeal of Exemption for Intrastate Offering.-H.R. 884, introduced by Representative Abraham Multer of New York, would remove the exemption provided by section 3(a) (11) of the Securities Act for a security offering confined to the residents of the state within which the issuer is both incorporated and doing business. The Commission has not submitted its views on this proposal. 6. Reduced Sales Load for Certain Purchases of Investment Company Shares.-As a consequence of the Commission's promulgation on December 2, 1958, of rule 22d-1 under the Investment Company Act, Representative Edward W. Hiestand introduced H.R. 4025 and H.R. 5543, both of which would amend section 22(d) of the statute to authorize quantity purchases of investment company shares by certain retirement associations at reduced sales loads. Prior to the adoption of rule 22d-1 several associations of individuals, which would not be exempted under the provisions of the rule, had received the benefit of a smaller sales load in connection with certain quantity See p. 10, supra. H.R. 93 and H.R. 4568, insofar as they relate to civil liabilities, are identical with H.R. 173 and H.R. 4744, 85th Congress, respectively, and H.R. 11308 and H.R. 9319, 84th Congress, respectively. The background of the latter bills is discussed in the 22d Annual Report of the Commission, pp. 11-12. 'See p. 23, infra. purchases and had been advised by the Commission's staff that it would not recommend that any action be taken in respect of such purchases. Both H.R. 4025 and H.R. 5543 are designed to restore the earlier interpretation. A substantial amount of time was directed to matters pertaining to other legislative proposals referred to the Commission for comment and to congressional inquiries. During the fiscal year 1959 a total of 76 legislative proposals were analyzed. In comparison, 58 proposals were analyzed during fiscal 1958 and 33 during fiscal 1957. In addition, numerous congressional inquiries relating to matters other than specific legislative proposals were received and answered. Congressional Hearings In addition to the hearings in connection with the Commission's legislative program discussed above, the Commission presented to the House Committee on Interstate and Foreign Commerce a general discussion of the Commission's activities and the particular problems currently facing the Commission. The Commission appeared before the Subcommittee on Legislative Oversight of the House Committee on Interstate and Foreign Commerce in September and November 1958 and again in June 1959.10 The Commission also appeared on May 13, 1959, before the House Select Committee on Small Business to testify concerning the Commission's role in administering the laws governing the operation of small business investment companies. 10 See the Commission's 24th Annual Report, pp. 12-13. PART III REVISION OF RULES, REGULATIONS AND FORMS The Commission made a number of changes during the 1959 fiscal year in its rules, regulations and forms under the various statutes administered by it. Other changes which the Commission published in preliminary form for the purpose of obtaining public comments thereon were pending at the end of the fiscal year. The changes made during the fiscal year and those pending at the end of the year are described below.1 Changing conditions, methods and procedures in business and in the financial practices of business make it necessary for the Commission to maintain a continuing review of its rules, regulations and forms. Certain members of its staff are assigned to this task. Changes are also suggested, from time to time, by other members of the staff engaged in the examination of material filed with the Commission, and by persons outside of the Commission who are subject to the Commission's requirements or who have occasion to work with those requirements in a professional capacity such as underwriters, attorneys, accountants, and other representatives. With relatively few exceptions, provided for by the Administrative Procedure Act, proposed changes in rules, regulations and forms are announced to the public and interested persons are invited to submit their views and comments thereon. These views and comments are carefully reviewed by the staff and by the Commission and are very helpful in connection with the Commission's consideration of proposed changes. THE SECURITIES ACT OF 1933 Amendment of Rule 133 Shortly after the end of the fiscal year the Commission adopted certain amendments to rule 133.2 The modification of this rule has been under consideration for some time and has been mentioned in 1The rules and regulations of the Commission are published in the Code of Federal Regulations, the rules adopted under the various Acts administered by the Commission appearing in the following parts of title 17 of that Code: Securities Act of 1933, part 230. Securities Exchange Act of 1934, part 240. Public Utility Holding Company Act of 1935, part 250. Investment Company Act of 1940, part 270. 2 Securities Act Release No. 4115 (July 16, 1959). |