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issuer; that the shares surrendered and the shares received are freely transferable and entitle the holders thereof to participate equally per share in all distributions of earnings and assets; that the shares received must be registered upon issuance in the name of a person or persons other than the holder of the shares surrendered and may be required to be issued as of right only in connection with the public offering, sale, and distribution or gift of such shares; and that no shares of the class surrendered or any other shares of the class received are acquired by the person effecting the transaction within six months before or after the date of the transaction.

Amendment of Form 8-K

The Commission during the fiscal year adopted certain amendments to Form 8-K, which is the form prescribed for current reports filed pursuant to sections 13 and 15(d) of the Securities Exchange Act of 1934.16 The amendments relate to the item of the form which requires information in regard to matters submitted to a vote of security holders, either at a meeting of such security holders or otherwise. The purpose of the amendments was to clarify the item with respect to the circumstances under which the information specified in the item is required to be furnished.

The Commission also invited public comments on certain other proposed amendments to Form 8-K designed to bring to the attention of investors promptly information regarding material changes affecting the company or its affairs where it appears that the changes are of such importance that they should be reported promptly and not deferred to the end of the fiscal year." The amendments relate to matters such as the pledging of securities of the issuer or its affiliates, changes in the board of directors otherwise than by stockholder action, the acquisition or disposition of significant amounts of assets and transactions with insiders. Shortly after the end of the fiscal year the time for submitting comments on these proposed changes was extended to August 15, 1959.18

THE INVESTMENT COMPANY ACT OF 1940

Adoption of Rule 3c-1

In connection with the adoption of rule 151 under the Securities Act, 19 the Commission also adopted a new rule 3c-1 under the Investment Company Act of 1940 defining the term "public offering", for the purposes of section 3 (c) (1) of that act, to exclude under certain conditions, the offering of stock of small business investment companies to small business concerns pursuant to the requirements of the

16 Securities Exchange Act Release No. 5734 (July 16, 1958). 17 Securities Exchange Act Release No. 5979 (June 9, 1959). 1 Securities Exchange Act Release No. 6018 (July 14, 1959). 12 Supra, p. 18.

Small Business Investment Act of 1958.20 Section 3(c) (1) of the Investment Company Act provides that any issuer whose outstanding securities (other than short term paper) are beneficially owned by not more than 100 persons and which is not making and does not presently propose to make a public offering of its securities is not an investment company within the meaning of the act. Since the requirements of the Small Business Investment Act and the rules and regulations thereunder require that a small business investment company in its role as a provider of capital continually stand ready to sell its stock to small business concerns, a continuous disposition of stock by such investment companies may possibly be interpreted to be a "public offering." The Commission, therefore, adopted rule 3c-1 to effectuate the purposes and objectives of the Small Business Investment Act without adversely affecting the public investor interest. The terms and conditions of the rule 3c-1 definition are substantially the same as those contained in rule 151.

Adoption of Rule 10f-3-Permitting Acquisition of Securities of Underwriting Syndicates

To alleviate the problems and administrative burdens involved in processing individual applications for relief pursuant to section 10(f) of the act, the Commission, in December 1958, adopted rule 10f-3 exempting certain limited acquisitions of securities by registered investment companies during the existence of an underwriting syndicate where such acquisitions are not made from affiliated underwriters.21 Notice of the proposed rule was issued in July 1958 22 and the comments received were unanimously in favor of the adoption of the rule, although a number of suggestions for its modification were included.

Section 10(f) of the act provides that an investment company, unless exempted by rule, regulation or order, is prohibited from purchasing a security during the existence of an underwriting syndicate, if any of the principal underwriters are affiliated persons of the investment company. Before the adoption of rule 10f-3, investment companies were required in all such cases to obtain an exemptive ruling by the Commission prior to the purchase of such securities or to purchase them conditioned on obtaining an exemptive order within such periods of time as a particular underwriter might be willing to grant even though extending beyond the date of the public offering. The new rule permits the investment company to make such purchases under certain conditions without the necessity of obtaining an order of exemption.

Through its experience in considering the many applications for

20 Investment Company Act Release No. 2828 (Feb. 13, 1959). 21 Investment Company Act Release No. 2797 (Dec. 2, 1958). Investment Company Act Release No. 2744.

relief filed pursuant to section 10 (f) over the years, the Commission was in a position to determine what conditions and safeguards should be imposed in such situations to insure the protection of investors. These include limitations with respect to the consideration paid, as related both to the amount of the offering and the assets of the investment company. In addition, underwriters' commissions may not exceed stated amounts, no purchase may be made from an affiliated underwriter, and the offering must be effectively registered under the Securities Act of 1933. These conditions are designed to permit purchases where the circumstances are such as to make it likely that the purchases would be consistent with the protection of investors. Purchases that do not meet the strict conditions of the rule may, nevertheless, be exempted by order upon application where the statutory standards are satisfied.

Adoption of Rule 22d-1-Relating to Variations in Sales Load of Redeemable Securities

Section 22(d) prohibits a registered investment company, its principal underwriter, or a dealer from selling redeemable securities of the company to any person except at a current public offering price described in the prospectus. Rule 22d-1 was adopted by the Commission in order to settle and codify administrative interpretations of the provisions of section 22(d) and to provide by rule exemptions from its provisions which would obviate the necessity for numerous individual applications.23 Thus, the burden is removed from the industry of preparing applications under section 6(c), and the Commission need not process such exemptions, in cases identical to those where such relief had previously been granted. The result of the rule is to ensure uniform compliance with the provisions of section 22(d).

The rule was the product of a comprehensive review of the legislative history of section 22(d) of the act, and all past administrative interpretations and exemptive orders issued under that section. One of the most important objectives of the rule was to determine the question of the availability of a quantity discount (i.e., a reduced sales charge for sales exceeding an established amount) for persons who were banded together for the purpose of making purchases as a group. The rule permits the granting of quantity discounts and does not insist that the amount of securities must be determined as of a single point of time. In this respect the rule follows previous Commission decisions which had permitted a sales load discount to be based upon shares previously acquired and then owned plus the shares being purchased. Purchases made within a period of not more than 13 months pursuant to a "letter of intent" may also be aggregated for ascertaining the quantity entitled to a discount but the agreement

"Investment Company Act Release No. 2798 (Dec. 2, 1958).

under which such purchases are made must assure that the lower price is justified by the quantity actually purchased and that adjustments will be made if required. In each of these instances, the inclusion of shares of other mutual funds is permitted if the same principal underwriter is involved.

The rule, however, requires uniform prices to individual investors and prohibits quantity discounts to groups of individuals, except in the case of a family unit. A trustee or other fiduciary may obtain a quantity discount for a single trust estate of which there are more than one beneficiary, but quantity discounts may not be allowed on the aggregate of sales to a trustee or representative acting for more than one account or more than one trust. The rule specifically provides that the term "any person" shall not include a group of individuals whose funds are combined directly or indirectly for the purchase of shares, whether jointly or through a representative or agent of the group. The rule in this respect reflects a stricter interpretation than prior Commission views under which quantity discounts had been extended to trustees, custodians, or agents acting on behalf of members of an organization.

The rule permits sales at reduced prices to tax exempt organizations, following Commission decisions in the past granting such exemptive treatment. Sales at net asset value or with a lower load are also permitted to be made to officers, directors, and employees of the investment company, its underwriter and investment adviser, but written assurance must be given that the purchases are for investment purposes and that the securities will not be resold except through the usual redemption or repurchase procedure. Sales to employee pension or benefit plans are included within the exemption afforded by the rule.

With respect to the reinvestment of distributions the rule permits the limitation of reinvestment privileges to participants in a systematic investment or dividend reinvestment plan provided all shareholders are offered the opportunity to participate in the dividend reinvestment plan at any time. All stockholders must be notified of the availability of the dividend reinvestment privilege once each year by a statement in the annual report or other document.

The rule has been helpful in stabilizing the pricing methods of the mutual funds. The need for individual exemptive orders has been substantially eliminated, thus lightening the burdens on the companies and the Commission to that extent. The provisions of the rule are, of course, subject to review by the Commission, and specific applications for relief may still be submitted.

Adoption of Form N-5-Registration Form for Small Business Investment Companies

As previously indicated," the new Form N-5 is a combination form which enables a small business investment company to register under the Investment Company Act pursuant to section 8(b) and at the same time to register securities for a public offering under the Securities Act of 1933 by means of a single registration statement. If a company has already registered under the Investment Company Act the form may be used for subsequent registration under the Securities Act. If a company desires to register under the Investment Company Act prior to registering securities under the Securities Act, the form may also be used for that purpose.

24 Supra, p. 19.

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