The Mono-Kearsage Consolidated Mining Company case, supra, was an action by the Commission to enjoin sales of that company's stock without registration by broker-dealers and others who had received the stock from transferees of the company who were in control of the company. The defendants contended that they did not know of the control relationship. The Court, in granting an injunction, held that defendants were underwriters within the meaning of the Securities Act of 1933, that the term "underwriter" includes anyone who purchases from a person directly or indirectly controlling an issuer, or in common control with the issuer, with a view to public distribution of the securities of the issuer, that the defendants were to be held to have knowledge of those facts which they could obtain upon reasonable inquiry. The Court said further: Probably the facts directly known by them were sufficient to acquaint them with the true situation. If not, they were sufficient to impose upon them the duty of making further inquiry. Under the circumstances, they were not entitled to rely solely on the self-serving statements of Pennington and the other Canadians denying those facts which would have indicated that they were representing controlling persons, or were under common control with an issuer. With all these red flags warning the dealer to go slowly, he cannot with impunity ignore them and rush blindly on to reap a quick profit. He cannot close his eyes to obvious signals which if reasonably heeded would convince him of, or lead him to, the facts and thereafter succeed on the claim that no express notice of those facts was served upon him. 167 F. Supp. 248, 259 (D. Utah, 1958). Litigation Relating to Stop Order Proceedings In Columbia General Investment Co. v. S.E.C.,58 the Court of Appeals for the Fifth Circuit affirmed a Commission stop order pursuant to section 8 (d) of the Securities Act suspending the effectiveness of Columbia's registration statement and denying Columbia's application for withdrawal prior to the effective date of the registration statement. Relying on Jones v. S.E.C., 298 U.S. 1 (1936), Columbia contended that the request for withdrawal divested the Commission of jurisdiction to issue the stop order. In upholding the Commission's order, the Court distinguished the Jones case on the fact that in the instant case 1,800 members of the public held 63,000 shares of the same class of securities covered by the registration statement. The Court noted that these stockholders and members of the investing public who might trade in these securities are proper subject of the official concern of the Commission. Moreover, the Court stated that since Jones a significant change in the law had taken place and it could no longer be said, as it was in Jones, that withdrawal was the concern of the registrant alone. Under the 1954 amendments to the act a registrant may now make offers to sell after filing but before registration. The 58265 F. 2d 559 (C.A. 5, 1959). Court ruled that, if a registrant has an unfettered right to withdraw under these conditions, then the machinery of the Commission could easily be employed as an instrument of fraud. The Court rejected Columbia's contentions that the filing of a substantive amendment terminates, for the purposes of stop order proceedings, the legal significance of the original registration statement. Participation as Amicus Curiae In Woodward v. Wright, 266 F. 2d 108 (C.A. 10, 1959), the Commission filed a brief amicus curiae in an appeal from a judgment for the defendant-sellers of an undivided interest in oil and gas rights. The action was based on the civil liability provisions of section 12 of the Securities Act, and while the lower court found that the sellers' prospectus contained a material false statement, it barred recovery since the purchasers had failed to show their reliance on the misrepresentation. After concluding that the contract of sale conveyed fractional undivided interests in oil and gas and hence securities, the Court of Appeals reversed and remanded the case to the district court on the ground that the evidence brought the appellants within the liability provisions of section 12(2). The court rejected the district court's ruling and agreed with the Commission's position that Congress did not impose upon a plaintiff the burden of proving reliance as a condition of recovery under section 12(2). The court refused to permit recovery under section 12(1) holding on the particular facts that a public offering had not been made. In Creswell-Keith, Inc. v. Willingham, 264 F. 2d 76 (C.A. 8, 1959), the Commission also filed a brief as amicus curiae. This was a private suit wherein the plaintiff involved section 12 (2) of the act to rescind a commitment for securities claiming fraudulent misrepresentations were made. The defendants filed motions for dismissal for want of jurisdiction stating that neither the misrepresentations nor the delivery of the securities was made by use of the mails or interstate commerce. The trial court upheld this contention; however this holding was overruled on appeal where the court held, as urged by the Commission, that the section 12 (2) "remedy is available if the mails or interstate commerce is used in any manner in consummating the sale" and that "payment of the consideration is part of the consummation of the sale." PART V ADMINISTRATION OF THE SECURITIES EXCHANGE ACT OF 1934 The Securities Exchange Act of 1934 provides for the registration and regulation of securities exchanges and the registration of securities listed on such exchanges, and it establishes, for issuers of securities so registered, financial and other reporting requirements, regulation of proxy solicitations and requirements with respect to trading by directors, officers and principal security holders. The act also provides for the registration and regulation of brokers and dealers doing business in the over-the-counter market, contains provisions designed to prevent fraudulent, deceptive and manipulative acts and practices on the exchanges and in the over-the-counter markets and authorizes the Federal Reserve Board to regulate the use of credit in securities transactions. The purpose of these statutory requirements is to ensure the maintenance of fair and honest markets in securities. REGULATION OF EXCHANGES AND EXCHANGE TRADING Registration and Exemption of Exchanges As of June 30, 1959, 14 stock exchanges were registered under the Exchange Act as national securities exchanges: American Stock Exchange Boston Stock Exchange Cincinnati Stock Exchange Detroit Stock Exchange Midwest Stock Exchange New Orleans Stock Exchange New York Stock Exchange Pacific Coast Stock Exchange Salt Lake Stock Exchange San Francisco Mining Exchange Spokane Stock Exchange Four exchanges have been exempted from registration by the Commission pursuant to section 5 of the act: Colorado Springs Stock Exchange Honolulu Stock Exchange Disciplinary Actions Richmond Stock Exchange Wheeling Stock Exchange Each national securities exchange reports to the Commission disciplinary actions taken against its members for violation of the Securities Exchange Act of 1934 or of exchange rules. During the year 4 exchanges reported 23 cases of such disciplinary action, including imposition of fines aggregating $27,550 in 14 cases, the sus pension of two individuals from allied exchange membership, and censure of a number of individuals and firms. Commission Rate Study On February 20, 1959, the Commission announced the completion by its staff of a study of commission rates charged by members of the New York Stock Exchange undertaken as a result of an increase in commission rates adopted by the Exchange on May 1, 1958.1 The study was made in view of the responsibilities and duties imposed upon the Commission by section 19 (b) of the Securities Exchange Act of 1934 with respect to the rules of national securities exchanges including rules relating to the fixing of reasonable commission rates.2 In line with suggestions of the Commission, the Exchange took steps falling into three general areas. First, the Exchange reduced commission rates on transactions ranging from $100 to $2,400 by approximately 5 percent. These modifications were suggested in view of the fact that the May 1958 percentage increases on transactions from $100 to $2,400 were relatively greater than the average percentage increase. The Exchange also eliminated the so-called "round turn" commission rate under which a reduced rate was granted to persons whose purchase and sale of the security was completed within 14 days. It was the view of the Commission that this type of transaction was not entitled to a special discount and the Exchange felt this rate had not achieved its desired objective. Following the action of the New York Stock Exchange other registered national securities exchanges, including the American Stock Exchange, adopted a schedule of commission rates identical with that of the New York Stock Exchange. Second, it was decided that an Exchange committee would study the use of a so-called volume or block discount for transactions involving multiple round lot units. The Exchange also agreed to study the possibility of further developing its income and expense survey of member firms as a source of data in connection with commission rates and to work with the staff of the Commission and consultants employed by the Exchange to prepare an outline for the basis of a cost study being made by the Exchange. Third, the Exchange amended its rules to provide that any proposed constitutional amendment to change commission rates or other charges would be announced 30 days in advance of action by the Board of Governors of the Exchange. Also, it was agreed that the Commission would be advised of any steps taken by the Exchange looking toward changes in commission rates or other charges. 1 Securities Exchange Act Release No. 5889. 'Securities Exchange Act Release No. 5678. Activities of Floor Traders and Specialists As a result of a study made by the staff of the Commission of the activities of floor traders and specialists on the American Stock Exchange, certain steps have been taken by that Exchange to impose further controls upon the activities of these members. The Commission concluded from the study that further restrictions were necessary upon floor trading activities on that Exchange; that these restrictions should prevent floor traders from stimulating public interest in a stock by active and concerted buying; and that floor traders should be restricted from aggravating demand in present markets where many issues on the Exchange are peculiarly susceptible to extreme fluctuations because of a small floating supply. The Commission permitted the Exchange to put into effect on an experimental basis for six months a rule which the Exchange believes will minimize the undesirable features of floor trading, yet preserve certain asserted benefits. The effect of the rule is to impose restrictions upon floor trading purchases in a rising market. In line with suggestions of the Commission, the Exchange has also taken certain steps to regulate further the activities of specialists. Several new rules relating to specialists have been adopted, the most important of which makes subject to Exchange approval all off-floor transactions, with certain limited exceptions, by specialists in securities in which they are registered. The Exchange also has instituted a program for making periodic inspections of specialist dealer transactions in the securities in which they are registered. Under the program specialists will be required to report to the Exchange several times each year the details of their dealings for unannounced periods selected at random by the Exchange. REGISTRATION OF SECURITIES ON EXCHANGES A member of a national securities exchange or a broker or dealer may not effect any transaction in a security on an exchange unless the security is registered on that exchange under the Securities Exchange Act or is exempt from such registration. In general, the act exempts from registration obligations issued or guaranteed by a State or the Federal Government or by certain subdivisions or agencies thereof and authorizes the Commission to adopt rules and regulations exempting such other securities as the Commission may find necessary or appropriate to exempt in the public interest or for the protection of investors. Under this authority the Commission has exempted securities of certain banks, certain securities secured by property or leasehold interests, certain warrants and, on a temporary basis, certain securities issued in substitution for or in addition to listed securities. 'Securities Exchange Act Release No. 5981. |