Annual reports--- Periodic reports to stockholders (containing financial statements) - 349 179 1, 003 2,722 The foregoing statistics do not reflect the numerous filings of revised prospectuses by open-end mutual funds making a continuous offering of their securities. These prospectuses, which must be checked for compliance with the act, are required to show material changes which have occurred in the operations of the companies since the effective date of the prospectuses on file. In this respect the registration of the securities of such companies is essentially different from the registration of the usual corporate securities. In addition to these recurring activities, the Commission in the past year has performed other duties in connection with the Small Business Investment Act of 1958. Pursuant to an arrangement with the Small Business Administration, the staff of the Commission examines a copy of each Proposal to Operate as a small business investment company, filed on SBA Form 414, to determine the status of the Proposed Operator under the Investment Company Act and the other statutes administered by this Commission. Both the Proposed Operator and the SBA are notified as to the staff's conclusion in each case. APPLICATIONS AND PROCEEDINGS The Investment Company Act prohibits certain types of transactions, in the absence of an exemptive order by the Commission issued upon a determination that specified statutory standards have been met. For this reason one of the principal activities of the Commission in its regulation of investment companies is the processing of applications for such exemptive orders. Under section 6(c) the Commission, by rules and regulations, upon its own motion or by order upon application, may exempt any person, security or transaction from any provision of the act if and to the extent that such exemption is necessary or appropriate in the public interest and consistent with the protection of investors and the purposes fairly intended by the policy and provisions of the act. Other sections, such as 6(d), 9(b), 10(f), 11(a), 17(b), and 23(c), contain specific provisions and standards pursuant to which the Commission may grant exemptions from particular sections of the act or may approve certain types of transactions. Also, under certain provisions of sections 2, 3, and 8 the Commission may determine the status of persons and companies under the act. There were 145 applications under various sections of the Investment Company Act pending before the Commission during the fiscal year 1959. The various sections of the act with which these applica tions were concerned and their disposition during the fiscal year are shown in the following table: Applications filed with and acted upon by the Commission under the Investment Company Act of 1940 during the fiscal year ended June 30, 1959 *Includes only those section 6(c) cases in which exemption is requested from all provisions of the act. Although, as a rule, the applications for exemptions under the act are processed without holding formal hearings, there are occasions when the applicant will request a hearing, or the Commission feels that the relief sought is such that a hearing should be held. Two hearings resulted from applications pursuant to section 17(b) of the act, requesting exemptions from the statutory prohibition against dealings between investment companies and their affiliates or between persons controlled by an investment company. In Atlas Corporation, the applicant, a closed-end investment company, requested an exemption for certain transactions incident to a merger of five companies engaged in uranium mining. Four of the five companies involved are affiliates of, and presumed to be controlled by, the investment company under the act. Consequently, they are prohibited by section 17(a) from dealing with each other in connection with the merger in the absence of an exemptive order. The Commission before granting an exemptive order in such a case must determine whether the terms of the proposed transactions, including the considerations to be paid or received, are reasonable and fair and do not involve overreaching on the part of any person concerned. In addition, it must decide whether the proposed transactions are consistent with the policies of the investment company, Atlas Corporation, as recited in its registration statement and reports filed pursuant 1 Investment Company Act Release No. 2778 (Oct. 21, 1958). The notice of and order for hearing on the application contains a summary of the proposed transactions and other pertinent details of the case. to the act, and are consistent with the general purposes of the act. Hearings were held and the Commission is considering the record to determine whether there has been compliance with the above-listed statutory requirements. Another hearing, involving an application under section 17(b), in which the Commission determined that the terms of a merger of an investment company with its affiliate were in compliance with the statutory standards was held in New York Dock Company. In that case New York Dock Company, a closed-end investment company, requested the order in connection with its merger into its affiliate, Dunhill International, Inc. After considering the record the Commission granted the exemption. Another hearing held pursuant to an application filed during the past fiscal year involved Dunhill International, the surviving corporation of the above merger. After acquiring New York Dock Company's securities portfolio as a result of the merger, the surviving company conceded that it came within the statutory definition of an investment company in that it owned investment securities valued at more than 40 percent of its total assets. However, it filed an application pursuant to section 3 (b) (2) of the act for an order declaring it to be primarily engaged in a business other than that of an investment company. A public hearing was held, but before its completion, Dunhill International registered under the act and withdrew the application it had filed under section 3 (b) (2).3 Another hearing resulted from an application by Investors Diversified Services, Inc. and others for an order of exemption permitting sale of their shares on the basis of a reduced sales load to certain associations for the account of the individual members of the associations.* A decision is pending. 5 Other hearings held during the year which resulted from applications filed in prior years included cases involving National Department Stores Corporation and Civil and Military Investors Mutual Fund, Inc. In National Department Stores Corporation the hearings were concluded and the Commission handed down its findings and opinion during the past year. The company, which previously had engaged directly and through wholly-owned subsidiaries in the retail department store business, had disposed of most of such interests and invested the proceeds so that directly and through a controlled subsidiary it engaged primarily in the mining and oil business. The Commission held that the company was primarily engaged directly or through a controlled company in business other than that of an investment company. Investment Company Act Release No. 2811 (Dec. 23, 1958). 529523-59 -14 In Civil and Military Investors Mutual Fund, Inc. a hearing was held pursuant to the application of the investment company for modification of the Commission's order finding and declaring that the above name was deceptive and misleading in violation of section 35 (d) of the act. Exceptions have been field to the decision of the hearing examiner and it is expected that the case will be argued before the Commission some time next year. In The Great American Life Underwriters, Inc., where the applicant is seeking an order pursuant to section 6 (c) or in the alternative an order under sections 8(f) and 6(c) 8, the hearing examiner filed his recommendations shortly before the end of the last fiscal year. Exceptions have been filed to the recommended decision and the matter was pending before the Commission at the end of the fiscal year. LITIGATION UNDER THE INVESTMENT COMPANY ACT Variable Annuities In S.E.C. v. Variable Annuity Life Insurance Company of America, et al., 359 U.S. 65 (1959), the Supreme Court reversed the Court of Appeals for the District of Columbia which had upheld the district court's dismissal of the Commission's complaint charging violation of the registration provisions of the Investment Company Act and the Securities Act of 1933. The district court had held that the McCarran-Ferguson Act placed exclusive regulatory jurisdiction over the defendant's sale of variable annuity contracts in the insurance authorities of the State and the District of Columbia. The Court of Appeals had affirmed the district court's decision on the ground that the variable annuity contracts sold by the defendants are exempt from registration by section 3(a) (8) of the Securities Act, which excludes the ordinary annuity contracts issued by insurance companies. In addition, the Court of Appeals had held that defendants were insurance companies within the provision of section 3(c)(3) of the Investment Company Act. The Supreme Court held that the defendants were not issuing contracts of insurance within the exemption provisions of the Securities Act, Investment Company Act and the McCarran-Ferguson Act. In so holding the court concluded that insurance involved some investment risk-taking on the part of the insurer and noted the absence here of such an assumption by the companies, since in these contracts they guarantee essentially only an interest in a portfolio of common stock which interest "may be a lot, a little or nothing" depending on the investment results of the company. In a concurring opinion, Justice Brennan added that • Investment Company Act Release No. 2858 (Apr. 3, 1959). See pages 154-155 in 24th Annual Report for further details. "Investment Company Act Release No. 2723 (June 9, 1958). 8 The 24th Annual Report, page 154, contains a discussion of the case. See 23d Annual Report at page 164. he considered the contracts as containing elements of both insurance and investment contracts and since they raise regulatory problems of the sort contemplated by the Congress when it passed the Securities Act and the Investment Company Act, he concluded that Congress did not intend to exclude these contracts by reason of the insurance exemption. Four dissenting judges viewed the contracts as a bona fide experiment in the insurance field, and even though this particular development has securities aspects, felt that regulation should be left to the states as contemplated by the exemptions in the federal legislation. The effect of the Supreme Court decision is to make the defendants subject to registration as investment companies under the Investment Company Act. Prior to the close of the fiscal year extensive staff conferences were held with these entirely new kinds of investment companies to consider proposals for changing their methods of operation so as to bring them into compliance with the underlying purposes and provisions of the Investment Company Act. Administrative proceedings were instituted after the close of the year, and are pending, in connection with applications of these companies to exempt them from literal compliance with certain provisions of the act. Other Litigation During the year, the American-Hawaiian Steamship Company filed a notification of registration under the Investment Company Act, and thereby became a registered company under the terms of the act. Previously the Commission had filed suit to enjoin the company from engaging in any securities transactions until it had registered.10 Prior to 1953 the company either directly or through subsidiaries, was engaged in intercoastal shipping operations. Thereafter the company sold its vessels, suspended its intercoastal shipping services, closed its branch offices, and cancelled its intercoast tariffs on file with the Interstate Commerce Commission. It engaged in no shipping whatever in 1957 or 1958. In the years prior, it had incurred operating deficits from shipping, while its principal income was obtained from dividends and interest on its investments. As of December 31, 1957, the company and its two wholly-owned subsidiaries had consolidated assets of about $30 million, of which 95 percent was in cash and securities, the rest in office and other equipment. The object of the Commission having been achieved, a stipulation was entered into, discontinuing the action. In S.E.C. v. McPhail (S.D.N.Y.) the Commission brought suit under section 36 of the Investment Company Act against the directors and officers of the McPhail Candy Corporation, a registered invest 8.E.C. v. American-Hawaiian Steamship Company, S.D.N.Y., No. 139–351. |