for determining the availability of that exemption. In Gilligan, Will & Co. et al. v. S.E.C., the Court of Appeals for the Second Circuit further held that even if a numerical test did exist, persons claiming the exemption would have the burden of establishing a reasonable and bona fide belief that the total number of individuals involved in the placement would remain within that limit. The Court also concluded that the private offering exemption was not available to a dealer who assertedly acquired securities for "investment" where the dealer speculatively purchased unregistered securities in the hope that the financially weak issuer had "turned the corner" and then unloaded the securities on an unadvised public when he later determined that their purchase was an unsound investment.

The third case dealt with the exemption under section 4(1) of the act for trading transactions-an exemption frequently claimed by boiler rooms. In S.E.C. v. Culpepper et al.,5 the Court of Appeals for the Second Circuit held that a broker-dealer who engages in steps necessary to consummate a public distribution is an "underwriter" within the meaning of the act even though the broker-dealer has no privity with the issuer or a control group.

Another area of evasion of the registration requirements is the use of publicity with respect to an issuer or its securities prior to the filing of a registration statement. In two cases coming before it last year, the Commission undertook to set forth the precise limitations on prefiling publicity under section 5(c) of the Securities Act of 1933. In these opinions, the Commission pointed out that the statutory procedure for disseminating information about the issue prior to the time of sale is exclusive and that it "cannot be nullified by recourse to public relations techniques to set in motion or further the machinery of distribution before the statutory disclosures have been made and upon the basis of whatever information the distributor deems it expedient to supply.""

Regulation of the Exchanges

During the fiscal year 1959, the Commission took a more active regulatory role with respect to exchange activities. A Commission investigation found, for example, that on the American Stock Exchange floor trading activities were accentuating market swings particularly in issues susceptible to extreme price fluctuations because of a small floating supply. At the suggestion of the Commission that Exchange adopted a rule designed to prevent floor traders from making purchases of stock at successively higher prices and to restrict the impact

C.A. 2 No. 25171 (June 3, 1959).

5 C.A. 2 No. 25242 (Sept. 10, 1959).

• Carl M. Loeb, Rhoades & Co. and Dominick & Dominick, Securities Exchange Act Release No. 5870 (Feb. 9, 1959); First Maine Corporation, Securities Exchange Act Release No. 5898 (Mar. 2, 1959).

Carl M. Loeb, Rhoades & Co. et al., Id., at p. 11.

The

of their trading upon the market for active and volatile issues. Commission also questioned the activities of certain specialists on that Exchange, particularly off-floor transactions by specialists in securities in which they were registered. At the suggestion of the Commission, that Exchange adopted a number of additional rules relating to specialists for the purpose of restricting their dealings so far as practicable to those reasonably necessary to permit them to maintain a fair and orderly market in the securities in which they are registered. The regulation of commission rates on the exchanges was the subject of the Commission's attention during fiscal 1959. In line with the suggestions of the Commission, the New York Stock Exchange in March 1959 reduced minimum commissions on small value transactions and instituted a broad study in consultation with the staff of the Commission into the costs of effecting exchange transactions."

Regulation of the Over-the-Counter Markets

The increase in new offerings traded over-the-counter and the phenomenal growth in the number of broker-dealers registered with the Commission and of representatives registered with the National Association of Securities Dealers, Inc., evidence the growing interest in over-the-counter securities. The Commission is seeking to ascertain what changes, if any, may be occurring in the distribution and trading practices of the over-the-counter market as a result of this growth. In recent securities markets, there has been a strong underlying public demand for so-called "glamor" stocks. These securities often sell at a substantial premium on the first day of trading. Most of these issues are low-priced, have no public market prior to the offering and often involve companies in the electronics, missile and related defense fields. In some instances, promoters have changed the name of the company and its operating divisions to suggest some connection with these activities.

The Commission, after the end of the fiscal year, instituted a broad inquiry into the genesis and distribution of some of these issues to determine, among other things, whether some of these issues have been generated primarily to enrich the promoters, underwriters and others; whether artificial restraints have been imposed upon the floating supply of these issues in order to raise the market price; and whether certain practices have developed in connection with the distribution and marketing arrangements for these issues which violate provisions of the federal securities laws.10

* Securities Exchange Act Release No. 5981 (June 5, 1959). *Securities Exchange Act Release No. 5889 (Feb. 20, 1959).

"During the course of the inquiry the Commission, on October 23, 1959, issued Securities Act Release No. 4150 calling to the attention of the financial community certain practices disclosed by the inquiry which, in view of its staff, may involve violations of federal securities laws.

Inspection of Investment Companies

The rise in the number of new investment companies and the tremendous growth of the industry led the Commission several years ago to develop a program for the routine inspection of investment companies. Since there has been no additional staff available for this purpose and in view of the increased workload of regular administrative business, the Commission has been able to conduct inspections only on a pilot basis for the past few years. It is hoped, however, that additional personnel will be made available so that the inspection program will move forward more rapidly in the future and that a realistic cycle of inspections can be instituted and maintained.

The inspections made by the Commission to date, limited in number though they have been, have shown the urgent need for this method of assuring compliance with the Investment Company Act. In some cases failures to comply with the act or improper practices were discovered and corrective action requested and taken. In one case, the violations were serious in nature and resulted in a stop-order proceeding under the Securities Act and the issuance of an opinion and stop-order. Apart from bringing to light improprieties or fraudulent conduct, the institution of routine inspections should prove to be particularly beneficial to the newly organized or smaller investment company in complying with the requirements of the Investment Company Act.

Other Factors in the Securities Markets

Under the statutes which it administers, the Commission has the duty to conduct inquiries into the securities markets not only for the purpose of enforcement but also to ascertain facts to aid in the adoption of rules and regulations and for making appropriate legislative recommendations. In dynamic and changing markets, the Commission must continually reassess the statutes and the rules and regulations which it administers in light of new knowledge. For example, the Commission has instituted an inquiry into the problems created by the growth in the size of investment companies for the purpose of determining whether the increased size of investment companies has created problems requiring remedial legislation." Another inquiry of somewhat less importance but of interest to the public is one into the "put" and "call" market. This little known and little explored area of the securities market is now being studied by the Commission to ascertain, among other things, who writes these options, how they are marketed and who purchases them.

11 See 23d Annual Report, p. 159.

PART II

LEGISLATIVE ACTIVITIES

Statutory Amendments Proposed by the Commission

Proposals to amend 87 provisions of the Federal securities laws were submitted by the Commission to the 85th Congress in July and August 1957. These proposals were introduced in both the Senate and the House of Representatives, and the bills were referred to committee, but no action was taken on the bills during the 85th Congress.1

During the latter part of 1958 the Commission reexamined these recommendations for legislation and made some modifications, deleting certain proposals and adding others. The modified proposals, which would amend the Securities Act of 1933, The Securities Exchange Act of 1934, the Trust Indenture Act of 1939, the Investment Company Act of 1940 and the Investment Advisers Act of 1940, were then submitted in the 86th Congress to the Committee on Banking and Currency, United States Senate, and the Committee on Interstate and Foreign Commerce, House of Representatives. These Committees have the duty of exercising watchfulness over the execution of the securities laws under section 136 of the Legislative Reorganization Act of 1946.

The Commission's proposals were introduced in the Senate by Senator A. Willis Robertson, Chairman of the Committee on Banking and Currency, for himself and for Senator Homer E. Capehart, as S. 1178, S. 1179, S. 1180, S. 1181, and S. 1182. In the House of Representatives, Representative Oren Harris, Chairman of the Committee on Interstate and Foreign Commerce, introduced companion bills, H.R. 5001, H.R. 2480, H.R. 5002, H.R. 2481, and H.R. 2482.2 Basically the Commission's proposals, the more significant of which are briefly described below, are intended to strengthen the safeguards and protections afforded the public by tightening jurisdictional provisions, correcting certain inadequacies revealed through administrative experience and facilitating criminal prosecutions and other enforcement activities.

The proposed amendments to the Securities Act of 1933 would clarify the jurisdictional basis of the civil liability provisions of the

1 For a detailed discussion of the Commission's legislative program during the 85th Congress, see pages 10-12 of the Commission's 23d Annual Report and page 9 of the Commission's 24th Annual Report.

H.R. 5001 and H.R. 5002, proposing amendments to the Securities Act of 1933 and the Trust Indenture Act of 1939, respectively, are substitutes for H.R. 2488 and H.R. 2483, respectively, which included earlier recommendations that the Commission decided to withdraw on further consideration.

statute; extend existing civil liabilities and provide criminal liability with respect to documents filed with the Commission pursuant to Commission rules in connection with exempt offerings; increase from $300,000 to $500,000 the size of offerings which may be exempted from registration under section 3 (b) of the statute; and make it clear that a showing of past violations is a sufficient basis for injunctive relief and that aiders and abettors may be responsible in civil and administrative proceedings.3

The proposed amendments to the Securities Exchange Act of 1934 would make comparable changes with respect to injunctive relief and liability of aiders and abettors. In addition, changes proposed in that statute would make it a violation of the act to embezzle monies or securities entrusted to the care of an exchange member or a registered broker or dealer; clarify and strengthen the statutory provisions relating to manipulation and to the financial responsibility of brokers and dealers; authorize the Commission by rule to regulate the borrowing, holding or lending of customers' securities by a broker or dealer; make it clear that attempts to purchase or sell securities are covered by the antifraud provisions of the statute; revise the provisions relating to broker and dealer registration with respect to (a) the basis on which action for denial or revocation may be taken, (b) the sanctions which may be imposed by the Commission, (c) the conditions under which an application for registration may be withdrawn, and (d) the postponement of the effectiveness of an application for registration; authorize the Commission to suspend or withdraw the regis tration of a securities exchange when the exchange has ceased to meet the requirements of its original registration; clarify the Commission's authority to suspend a security from exchange trading where there has been a failure to comply with the act and where otherwise necessary in the public interest; prohibit trading in the over-the-counter market for limited periods where the public interest and the protection of investors so requires; provide that an insolvent broker or dealer may be adjudicated a bankrupt in an injunctive proceeding instituted by the Commission; and provide for a monetary forfeiture for each day that certain reports required under the act are delinquent.

The changes proposed in the Trust Indenture act of 1939 are designed primarily to conform this statute to recommendations made under the Securities Act.

The proposed amendments to the Investment Company Act of 1940 would require an investment company to state as matters of fundamental policy, which generally could not be changed without the consent of its stockholders, the extent to which it intends to invest in particular types of securities and such other basic investment objectives as it represents it will emphasize; strengthen the provi

3 See p. 13, infra.