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55 issuers reporting as fully as though they were listed, by reason of registrations under the Securities Act, the Public Utility Holding Company Act, the Investment Company Act, or because the issuers in some cases had other securities listed on registered exchanges. The residue in public hands of such unlisted stocks accordingly amounted to only about $6.5 billion, and of this amount, about $4.2 billion was of 70 Canadian and other foreign stocks and American depositary receipts for foreign shares. The reported volume of trading on the exchanges in stock admitted to unlisted trading only, for the calendar year 1958, was about 32.3 million shares or about 2.5 percent of the total share volume on all the exchanges. Over 90 percent of this 32.3 million share volume was on the American Stock Exchange.
Unlisted trading privileges on exchanges in issues listed and reg. istered on other exchanges, granted under clause (1), are for the life of the issue, while those granted under clause (2) are only for the duration of the issue's listing and registration on another exchange. 23 The number of unlisted trading privileges 24 granted under clause (1), in issues listed on other exchanges, were 991 in stocks and 75 in bonds on December 31, 1935. Similar privileges were thereafter granted under clause (2) for 1,410 stock issues and 8 bond issues. Mergers of exchanges, mergers of issuers, etc., have reduced the number of such privileges, which as of June 30, 1959, comprised 1,492 in stocks and 1 in bonds. The reported volume of trading on the exchanges pursuant to these unlisted trading privileges for the calendar year 1958 was about 38.7 million shares or about 3 percent of the total share volume on all the exchanges. About 15 percent of this 38.7 million share volume was on the American Stock Exchange and 85 percent was on the regional exchanges.
On June 30, 1959, unlisted trading privileges existed pursuant to clause (3) of section 12(f) in only 12 bond and 4 stock issues, and 2 of the stock issues have also become listed on other exchanges. There have been no applications under clause (3) since 1949. Applications for Unlisted Trading Privileges
Applications by exchanges for unlisted trading privileges in stocks listed on other exchanges, made pursuant to clause (2) of section 12(f) of the Securities Exchange Act, were granted by the Commission during the fiscal year ended June 30, 1959 as follows:
23 Ordinarily, delisting occurs upon termination of the existence of an issue, and so the unlisted trading privileges therein, whether under clause (1) or clause (2), also end, Occasionally, however, an unlisted trading privilege on one exchange granted under clause (1) has continued after the issue has been delisted from another exchange upon application by the issuer or by the exchange or because a listing was dropped upon merger of exchanges. Currently, 4 such unlisted trading privileges continue in stocks which were formerly listed on other exchanges.
24 The number of trading privileges is greater than the number of Issues because there may be trading privileges in an Issue on more than one exchange.
Number of stocks
2 20 1
1 7 27 1
Rule 12f-2 under section 12(f) of the Securities Exchange Act provides that when a security admitted to unlisted trading on an exchange is changed in more than certain stipulated minor respects, the exchange may apply for Commission determination that the unlisted trading privileges may continue on the ground that the changed security is substantially equivalent to the security theretofore admitted to unlisted trading privileges. During the fiscal year the Commission granted applications by the American Stock Exchange for continuance of unlisted trading under this rule in three stock issues and two bond issues.
BLOCK DISTRIBUTIONS REPORTED BY EXCHANGES
Rule 10b-2 under the Securities Exchange Act of 1934 in substance prohibits any person participating or otherwise financially interested in the primary or secondary distribution of a security from paying any other person for soliciting a third person to buy any security of the same issuer on a national securities exchange. This rule is an antimanipulative rule adopted under section 10(b) of the act which makes it unlawful for any person to use any manipulative or deceptive device or contrivance in contravention of Commission rules prescribed in the public interest or for the protection of investors. Paragraph (d) of rule 10b-2 exempts transactions where compensation is paid pursuant to the terms of a plan, filed by a national securities exchange and declared effective by the Commission, authorizing the payment of such compensation in connection with the distribution. The Commission in its declaration may impose such terms and conditions upon such plan as it deems necessary or appropriate in the public interest or for the protection of investors.
At the present time two types of plans are in effect to permit a block of securities to be distributed through the facilities of a national securities exchange when it has been determined by the exchange that the regular market on the floor of the exchange cannot absorb the particular block within a reasonable time and at a reasonable price or prices. These plans have been designated the “Special Offering Plan,” essentially a fixed price offering based on the market price,
and the “Exchange Distribution Plan,” which is a distribution “at the market.” Both plans contemplate that orders will be solicited off the floor but executed on the floor. Each plan contains certain antimanipulative controls and requires specified disclosures concerning the distribution to be made to prospective purchasers.
In addition to these two methods of distributing large blocks of securities on national securities exchanges, blocks of listed securities may be distributed to the public by a “Secondary Distribution” on the over-the-counter market, after the close of exchange trading. The exchanges generally require members to obtain the approval of the exchange before participating in such secondary distributions.
The following table shows the number and volume of special offerings and exchange distributions reported by the exchanges having such plans in effect, as well as similar figures for secondary distributions which exchanges have approved for member participation and reported to the Commission:
MANIPULATION AND STABILIZATION Manipulation
The Exchange Act describes and prohibits certain forms of manipulative activity in any security registered on a national securities exchange. The prohibited activities include wash sales and matched orders effected for the purpose of creating a false or misleading appearance of trading activity in, or with respect to the market for, any such security; a series of transactions in which the price of such security is raised or depressed, or in which actual or apparent active trading is created for the purpose of inducing purchases or sales of such security by others; circulation by a broker, dealer, seller, or buyer, or by a person who receives consideration from a broker, dealer, seller or buyer, of information concerning market operations conducted for a rise or a decline in the price of such security; and the making of any false and misleading statement of material information by a broker, dealer, seller, or buyer regarding such security for the purpose of inducing purchases or sales. The act also empowers the
25 Details of these distributions appear in the Commission's monthly statistical bulletin. For data for prior years see appendix table.
Commission to adopt rules and regulations to define and prohibit the use of these and other forms of manipulative activity in any security registered on an exchange or traded over the counter.
The Commission's market surveillance staff in its Division of Trading and Exchanges in Washington and in its New York Regional Office and other field offices studies the tickertape quotations of securities listed on the New York Stock Exchange and on the American Stock Exchange, the sales and quotation sheets of the various regional exchanges, and the bid and asked prices published by the National Daily Quotation Service for about 6,000 unlisted securities for any unusual or unexplained price variations or market activity. The financial news ticker, leading newspapers, and various financial publications and statistical services are also closely followed.
When unusual or unexplained market activity in a security is observed, all known information regarding the security is examined and a decision made as to the necessity for an investigation. Most investigations are not made public so that no unfair reflection will be cast on any persons or securities and the trading markets will not be upset. These investigations, which are conducted by the Commission's regional offices, take two forms. A preliminary investigation or “quiz" is designed to discover rapidly evidence of unlawful activity. If no violations are found, the preliminary investigation is closed. If it appears that more intensive investigation is necessary, a formal order of investigation, which carries with it the right to issue subpoenas and to take testimony under oath, is issued by the Commission. If violations by a broker-dealer are discovered, the Commission may institute administrative proceedings to determine whether or not to revoke his registration or to suspend or expel him from membership in the National Association of Securities Dealers, Inc., or from a national securities exchange. The Commission may also seek an injunction against any person violating the act and it may refer information obtained in its investigation to the Department of Justice recommending that persons violating the act be criminally prosecuted. In some cases, where State action seems likely to bring quick results in preventing fraud or where Federal jurisdiction may be doubtful, the information obtained may be referred to State agencies for State injunction or criminal prosecution.
The Commission is much concerned with indications of increased manipulative activity in present securities markets. Accordingly, the Commission has placed greater emphasis in its enforcement work upon the detection and prevention of manipulation and a substantial number of investigations are now in progress in this area.26
Active securities markets are particularly susceptible to manipulation because of the ease with which public interest can be generated.
Securities Exchange Act Release No. 6927.
Devious schemes may be employed to take advantage of this public interest. These include schemes to increase the quoted over-thecounter prices for relatively obscure issues being distributed without registration in asserted reliance upon some exemption, or the creation of fictitious markets for such issues. Such schemes are not uncommon in connection with distributions effected by "boiler rooms." These activities when conducted with ingenuity through numerous intermediaries are difficult to detect. Persons engaged in, or proposing distribution of a security not outstanding in the hands of the public may place orders for the purchase and sale of small amounts of a security with numerous brokers and dealers, or arrange to have others do this, with the result that such brokers and dealers will publish quotations for the security at prices specified in the orders, thus creating the appearance of an active over-the-counter market for the security, when in fact no such market exists except as generated by the distributors. When the distribution is completed, the orders are withdrawn and the market" disappears.
The investigation and prosecution of a manipulation case requires careful and painstaking work usually over a period of many months. Investors must be identified and interviewed, books and records of brokers, dealers and others must be examined and analyzed, and the information thus obtained then has to be developed in a form which would permit its introduction in evidence in legal proceedings.
The following table shows the number of quizzes and formal investigations pending at the beginning of fiscal 1959, the number initiated in fiscal 1959, the number closed or completed during the same period, and the number pending at the end of the fiscal year:
When securities are to be offered to the public, their markets are watched very closely to make sure that the price is not unlawfully raised prior to or during the distribution. One thousand and fifty-five registered offerings having a value of $15,657 million and 854 offerings exempt under section 3(b) of the Securities Act, having a value of about $170 million were so observed during the fiscal year. Two hundred and seventy-four other offerings, such as secondary distri