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:

Total sales-12 months ended December 31, 1958 25

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. 5927.

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

butions and distributions of securities under special plans filed by the exchanges, having a total value of $715 million, were also kept under surveillance.

Stabilization

When, in 1934, the provisions of the Securities Exchange Act were being drafted, Congress concluded that at times it would be necessary to stabilize offerings of securities in order to raise funds for industry and to protect existing investors while doing so. But rather than set stabilizing standards as a matter of law, Congress delegated to the Commission the authority to adopt rules to govern this little-understood function.

When the Commission was organized, one of its first tasks was to study the subject of stabilizing, decide what was improper and consider the adoption of rules. The principal difficulty has been that stabilizing is a form of market manipulation. The problem was to retain the benefits while removing those antisocial practices which might cause loss to investors. The Commission proceeded slowly, as many new facets of the problem were revealed, and it was difficult to devise a simple formula which had the particularity required in a rule binding on all who dealt in securities, without literally strangling the business.

Until it gained more expertise in the field, the Commission encouraged issuers, underwriters and their counsel to consult with it and the staff concerning problems which might arise in this area. Each such problem was judged on its own merits in the light of whether or not the interests of investors might be adversely affected. As the Commission gained experience, general principles were laid down. It was held, among other things, that stabilizing was not improper if it did no more than prevent or retard a price decline during an offering; that stabilizing purchases should be confined to the fewest transactions necessary to accomplish such a purpose; that stabilizing levels must be based on an existing independent market and not some level believed desirable by the person stabilizing; and that it was improper for a stabilizer to follow a rise in price too closely. Releases were issued from time to time to publicize the Commission's viewpoint with regard to stabilizing. In addition, the Commission expressed its viewpoint in its decisions and opinions.

From time to time it was suggested that what had now become a rather extensive list of settled practices be codified in specific rules, but in various conferences, the industry claimed that any code must necessarily be too rigid to allow for changing conditions.

However, on December 30, 1952, the Committee on Interstate and Foreign Commerce of the House of Representatives recommended that the "Commission should earnestly and expeditiously grapple with the problem of stabilization with the view of either the early

promulgation of rules publicly covering these operations, or of recommending to the Congress such changes in legislation as its experience and study show now to be desirable." The Commission therefore undertook to codify the stabilizing practices which had been developed over the years.

The Commission requested and obtained the assistance of the securities industry in formulating its stabilizing rules. An ad hoc committee of the public was formed. This committee conferred with and submitted proposals to the staff, which were considered by the Commission together with the recommendations of the staff and views obtained in a public hearing held prior to the adoption of the rules.

The rules as finally adopted are extremely technical. They have, however, served well their purpose of facilitating distributions and preventing unlawful manipulations. Rule 10b-6 restricts the trading activities of those who issue or participate in the distribution of securities. Rule 10b-7 governs the times, methods and prices at which stabilizing transactions are permissible. Rule 10b-8 deals with the peculiar problems arising in an offering of securities through rights. The Commission is continuously reexamining the effect of these rules and if it appears necessary, it will amend them to conform to any developing practice of the industry which appears to be in the public interest.

During 1959 stabilizing was effected in connection with stock offerings aggregating 32,097,212 shares having an aggregate public offering price of $770,503,662 and bond offerings having a total offering price of $129,038,300. In these offerings, stabilizing transactions resulted in the purchase of 710,015 shares of stock at a cost of $18,146,077 and bonds at a cost of $2,938,340, and 4,461 stabilizing reports showing purchases and sales of securities effected by persons conducting the distribution were received and examined during the fiscal year.

INSIDERS' SECURITY HOLDINGS AND TRANSACTIONS

Section 16 of the act is designed to prevent the unfair use of confidential information by directors, officers and principal stockholders by giving publicity to their security holdings and transactions and by removing the profit incentive in short term trading by them in equity securities of their company. Such persons by virtue of their position may have knowledge of the company's condition and prospects which is unavailable to the general public and may be able to use such information to their personal advantage in transactions in the company's securities. Provisions similar to those contained in section 16 of the act are also contained in section 17 of the Public Utility Holding Company Act of 1935 and section 30 of the Investment Company Act of 1940.