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viewed. Books and records of brokers, dealers and others must be examined and analyzed. The information thus obtained then has to be developed in a form permitting its introduction into evidence in legal proceedings.
Emphasis upon developing criminal cases means that the Commission with its limited resources has had to utilize staff personnel who would otherwise devote their full attention to other urgent enforcement and regulatory problems. The Commission believes, however, that its policy of pressing for criminal prosecution of violators of the Federal securities laws is the most effective deterrent to fraud in the sale of securities and must be vigorously pursued.
In addition to its enforcement program against boiler rooms, the Commission has sought through a broad publicity campaign to alert investors to the risks involved in the purchase of securities from unknown high-pressure salesmen. Posters warning investors of boiler room operators have been widely distributed, spot radio and television announcements carrying similar warnings have been prepared to be broadcast in cooperation with The Advertising Council, and brochures listing protective measures that an investor should take before making a purchase have been prepared for wide public distribution. Manipulation in the Securities Markets
In April 1959 the Commission issued a statement warning investors to exercise extreme caution and self-restraint when considering the purchase of securities upon the basis of tips and rumors.' Price fluctuations were occurring in certain securities on the exchanges and in the over-the-counter markets without apparent economic reason. Also there appeared to be a considerable amount of speculation on the part of public investors. These conditions facilitated the manipulation of securities prices and boded eventual losses to investors. Officials of the leading exchanges also joined in warning investors, and brokerage houses urged their customers to exercise caution in purchasing unknown securities.
In volatile markets where prices are susceptible to swift and wide changes on the basis of rumors, manipulation is facilitated and the task of enforcement becomes increasingly difficult. The Commission has therefore had to place greater emphasis upon the detection and prevention of manipulation and a substantial number of investigations are now in progress. Some of these investigations have resulted in indictments and it is anticipated that certain other cases now under investigation will also lead to criminal prosecution. Exemptions From Registration and Prefiling Publicity
One of the areas of evasion of the registration and prospectus requirements of the Securities Act of 1933 is the claiming of exemp
1 Securities Exchange Act Release No. 5927 (Apr. 7, 1959).
tions which, in fact, are not available. The attempt to use these exemptions to evade registration requirements usually occurs where the issue, or the sales procedure to be employed, would not stand the light of the full disclosure requirements of registration. In order to narrow this area of evasion, the Commission has consistently sought through its participation in litigation involving claimed exemptions, through its own decisions and through its rule-making power, to define and clarify the proper limits of certain of these exemptions. One of the significant developments in this area has been the recent amendment by the Commission of Rule 133.
Under Rule 133, which embodies an interpretation of long standing, the issue of securities in connection with certain types of corporate mergers, consolidations, reclassifications of securities and acquisitions of corporate assets is not deemed to constitute a "sale" of securities to stockholders of corporate parties to the transactions. This rule has the effect of exempting these transactions from the registration requirements, but not from the anti-fraud provisions, of the Securities Act. The rule provides no exemption for subsequent distribution of such securities. Because of the substantial number of transactions ostensibly effected in reliance upon the rule but which involved violation of the registration requirements, the Commission amended Rule 133 to restate the purpose and effect of that rule and to clarify its application and limitations. In addition, the Commission adopted a new registration form to provide an expeditious registration procedure for securities issued in a transaction within Rule 133 where such registration is required and where the issuer has solicited proxies under the Commission's proxy rule with respect to such transaction.”
In three significant cases the courts have further delineated the boundaries of exemptions from the registration requirements of the Securities Act. A frequently used device for evasion has been the abuse of the intrastate exemption under section 3(a) (11) of the act. The issuer may attempt to use a resident of the state as a nominee for non-resident beneficial owners or the alleged sales to residents may be merely a step in a planned interstate distribution. In S.E.C. v. Hillsborough Investment Corporation, et al.: the Court upheld the limitation on the scope of that exemption, long viewed as applicable by the Commission, that a single sale to a non-resident, directly or indirectly, destroys the intrastate exemption for the entire issue, including the securities sold only to residents.
Various devices have been used in an attempt to avoid registration on the claim that a distribution is within the “private offering” exemption under section 4(1) of the act. The Commission and the courts have consistently rejected a numerical test as a conclusive basis
2 Securities Act Release No. 4115 (July 6, 1959). * D. New Hampshire No. 1965 (Dec. 11, 1958).
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., 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 1933.6 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 of their trading upon the market for active and volatile issues. The 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.
*C.A. 2 No. 25171 (June 3, 1959).
• Carl M. Loeb, Rhoades de Co. and Dominick & Dominick, Securities Exchange Act Release No. 5870 (Feb. 9, 1959); First Maine Corporation, Securities Exchange Act Release No. 6898 (Mar. 2, 1969).
• Carl I. Loeb, Rhoades de Oo. et al., Id., at p. 11.
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 Com
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.