ment company." The Commission's complaint, which sought to enjoin the defendants from serving as directors or officers of the corporation, as well as an accounting and the appointment of a receiver, charged Russell McPhail, the president and controlling stockholder of the corporation with the fradulent diversion, waste and misuse of corporate assets, and charged the other defendants with failure to discharge their obligations to enforce the corporation's rights against McPhail. The complaint also stated that the corporation had been an investment company since 1953 but had failed to register under the act until 1957 in violation of section 7. In October 1957, the defendants moved to dismiss the complaint on the ground that the acts complained of by the Commission had occurred prior to registration, but the motion was denied. Thereafter the defendants offered to settle the Commission's action on the basis of (1) the entry of a consent decree enjoining the defendants from acting as officers or directors of any investment company; (2) the payment by McPhail to the Corporation of $325,000; (3) the extension by McPhail of an offer to purchase publicly held common shares of the corporation at their net asset value, and publicly held preferred shares of the corporation at their redemption price, including all unpaid dividends. The settlement was accepted by the Commission and approved by the Court subject to the acceptance of the purchase offer by a sufficient number of stockholders to cause the corporation to fall outside the scope of the Investment Company Act 12 and the compromise of a stockholder's suit now pending in the Delaware Chancery Court. 11 S.D.N.Y. Civil Action No. 135-203. Pages 157-158 of the 24th Annual Report also contain a discussion of this case. 12 Section 3(c)(1) of the act provides an exception to the statutory definition of an investment company if the outstanding securities of an issuer are beneficially owned by not more than 100 persons and it is not making and does not propose to make a public offering of its securities. PART X ADMINISTRATION OF THE INVESTMENT ADVISERS ACT OF 1940 The Investment Advisers Act of 1940 requires persons engaging for compensation in the business of advising others concerning securities to register as investment advisers. The registration requirements, however, do not apply in certain limited situations. For example, an investment adviser is not required to register when he furnishes investment advice only to persons who are residents of the state in which he maintains his principal place of business and he does not provide advice or analysis concerning securities listed on a national securities exchange or admitted to unlisted trading privileges on such an exchange. The act also provides an exemption for any investment adviser whose only clients are investment companies and insurance companies. An investment adviser who in the last 12 months had fewer than 15 clients and does not hold himself out generally to the public as an investment adviser, is likewise exempt from registration. It is unlawful for registered investment advisers to engage in practices which constitute fraud or deceit upon clients or prospective clients. Registered investment advisers violating any of the various provisions of the act are subject to appropriate administrative, civil or criminal remedies. Investment advisers who also effect transactions as brokers or dealers, are required to disclose any interest they may have in transactions effected for clients, if acting as an investment adviser in regard to such transaction. In addition, the act prohibits a registered investment adviser from entering into an agreement with his clients, under which his compensation is based on a share of capital gains or appreciation, and also prevents him from assigning an investment advisory contract without the consent of the client involved. Likewise, a registered investment adviser partnership which changes its membership must notify clients of such an occurrence. The Investment Advisers Act does not empower the Commission to inspect the books and records of an investment adviser. Nor, under the act, may the Commission deny or revoke the registration of an investment adviser unless: (1) he has been enjoined by a court of competent jurisdiction from activities in connection with his conduct as an investment adviser or from action involving securities or certain other activities; (2) he has been convicted in the past ten years of a crime involving securities, the securities business or certain related activities; or (3) has falsified his application for registration. During the past fiscal year, the number of registered investment advisers increased substantially, reaching a total of 1,671, an increase of 7 percent over the previous year. The following table contains statistics concerning registration of investment advisers and applications for such registration during the fiscal year: Statistics of Investment Adviser Registrations—1959 Fiscal Year Effective registrations at close of preceding fiscal year__. Total. Registrations cancelled or withdrawn during year. Registrations denied or revoked during year___ Applications withdrawn during year----. Registrations effective at end of year__. Applications pending at end of year.. Total____ 1, 562 22 278 1,862 156 3 2 1, 671 30 1, 862 ADMINISTRATIVE PROCEEDINGS Security Forecaster Co., Inc.-Registrant, publisher of a weekly investment letter known as Financial Forecaster, devoted an entire issue of the latter to an article on Anacon Lead Mines, Ltd. (Anacon). This article recommended the purchase of Anacon stock in extravagant and enthusiastic terms, stating that for several weeks registrant had been conducting an extensive research program on Anacon which showed beyond a shadow of a doubt that, among other things, Anacon was the "sleeper" of the year among Canadian mining stocks. It also projected a potential recovery of gold in Anacon properties of some $50 million or more, stated that Anacon had paid more than a million dollars in dividends, and that Anacon's investments had a value of more than $16 million as of December 31, 1957. The report failed to disclose that Anacon had no proven gold deposits on these properties, that no dividends had been paid since 1952, and also failed to disclose that in contrast with the reported $16 million estimated value of Anacon Investments in shares of a mining corporation, the same shares had a value as indicated by a then existing market price of only $2,212,000. Registrant was also found to have willfully filed an application for registration incorrectly listing an individual as a director. In an action brought by the Commission, a permanent injunction was issued by the United States District Court for the Southern District of New York against registrant and Melvin A. Johnson, its 1 president, director and sole stockholder. The decree barred them from using false and misleading statements concerning the potential recovery from Anacon's investments, profits realized in stock of other companies managed by the president of Anacon, profits that could be realized from investing in Anacon, and the present financial condition of Anacon and its history of dividend payments. Registrant consented to entry of the decree without admitting any of the allegations of violations contained in the complaint. In the revocation proceeding, which followed the injunction, registrant urged that Johnson was the subject of a continuing investigation and had properly, and on advice of counsel, refrained from testifying in the revocation proceeding in order to avoid the possibility of waiver of his constitutional privilege against self-incrimination. Accordingly, it was contended registrant was deprived of the testimony of the person most qualified to present registrant's defense. The Commission rejected this argument, holding that registrant was given due notice of the hearing on the charges against it and at that hearing registrant had participated with counsel. Based on the injunction, finding of a willful violation and substantial departure from the standards of care and responsibility and fair and impartial analysis expected of a registered investment adviser, the Commission revoked the investment adviser registration of Security Forecaster Co., Inc.2 William H. Keller, Jr., doing business as Insurance Stock Information Service.-Keller's investment adviser registration was revoked based on an injunction issued by the United States District Court for the Southern District of Indiana, Indianapolis Division 3 permanently enjoining him from violations of the Commission's net capital rule in connection with his activities as a broker-dealer. The Commission also revoked Keller's broker-dealer registration based on the injunction and violations of the antifraud, record keeping, and other provisions of the federal securities laws. That action is described in a prior portion of this report. Albert J. Gould, doing business as Gould Investment Service.The Commission revoked the Investment Adviser registration of Gould based on a finding that he was permanently enjoined by the United States District Court for the Southern District of New York from effecting transactions in securities at a time when A. J. Gould & Co., Inc. was in violation of the Commission's net capital rule. In 1S.D.N.Y., No. 130–239 (Feb. 28, 1958). * Investment Advisers Act Release No. 103 (May 20, 1959); petition for review of Commission order filed May 26, 1959; Civil No. 25, 693, United States Court of Appeals (2 Cir.); pending at close of fiscal year. S.D. Ind., No. I P 58-c-46 (Mar. 20, 1958). 'Investment Advisers Act Release No. 101 (Mar. 18, 1959). Securities Exchange Act Release No. 5909 (Mar. 18, 1959). S.D.N.Y., No. 113-87 (Sept. 18, 1956). |