these files is kept current through the cooperation of the U.S. Post Office Department, the Federal Bureau of Investigation, parole and probation officials, state securities authorities, Federal and state prosecuting attorneys, police officers, better business bureaus, chambers of commerce and other agencies. At the end of the fiscal year these records contained information concerning 79,000 persons against whom Federal or state action had been taken in connection with securities violations. In keeping these records current, there were added during the fiscal year items of information concerning 8,761 persons, including 2,601 persons not previously identified in these records.

The Section issues and distributes quarterly a securities violations bulletin containing information received during the period concerning violators and showing new charges and developments in pending cases. The bulletin includes a "wanted" section listing the names and references to bulletins containing descriptive information as to persons wanted on securities violations charges. The bulletin is distributed to a limited number of officials of cooperating law enforcement and other agencies in the United States and Canada.

Extensive use is made of the information available in these records by regulatory and law enforcing officials. Numerous requests are received each year for special reports on individuals in addition to the information supplied by regular distribution of the quarterly = bulletin. All available information is supplied in response to inquiries from law enforcement agencies. During the fiscal year the Commission received and disposed of 1,920 "securities violations" letters or reports and dispatched 450 communications to cooperating agencies.

APPLICATION FOR NONDISCLOSURE OF CERTAIN INFORMATION The Commission is authorized under the various Acts administered by it to grant requests for nondisclosure of certain types of information which would otherwise be disclosed to the public in applications, reports or other documents filed pursuant to these statutes. Thus, under paragraph (30) of Schedule A of the Securities Act of 1933, disclosure of any portion of a material contract is not required if the Commission determines that such disclosure would impair the value of the contract and is not necessary for the protection of investors. Under Section 24 (a) of the Securities Exchange Act of 1934, trade secrets or processes need not be disclosed in any material filed with the Commission. Under Section 24(b) of that Act, written objection to public disclosure of information contained in any material filed with the Commission may be made to the Commission which is then

authorized to make public disclosure of such information only if in its judgment such disclosure is in the public interest. Similar provisions are contained in Section 22 of the Public Utility Holding Company Act of 1935 and in Section 45 of the Investment Company Act of 1940. These statutory provisions have been implemented by rules specifying the procedure to be followed by applicants seeking determination that public disclosure is not necessary in a particular

case.

The number of applications granted, denied or otherwise acted upon during the year are set forth in the following table:

ACTIVITIES OF THE COMMMISSION IN ACCOUNTING AND AUDITING The several Acts administered by the Commission recognize the importance of dependable informative financial statements which disclose the financial status and earnings history of a corporation or other commercial entity. These statements, whether filed in compliance with the requirements under those statutes or included in other material available to stockholders or prospective investors, are indispensable to investors as a basis for investment decisions. The Congress, cognizant of the fact that such statements lend themselves readily to misleading inferences or even deception, whether or not intended, included express provisions with respect to disclosure requirements. Thus, for example, the Securities Act requires the inclusion in the prospectus of balance sheets and profit and loss statements "in such form as the Commission shall prescribe" 59 and authorizes the Commission to prescribe the "items or details to be shown in the balance sheet and earnings statement, and the methods to be followed in the preparation of accounts. .. "60 Similar authority is contained in the Securities Exchange Act, and even more compre

61

hensive power is embodied in the Investment Company Act 62 and the Public Utility Holding Company Act.63

66

Pursuant to the broad rule-making power thus conferred with respect to the preparation and presentation of financial statements, the Commission has prescribed uniform systems of accounts for companies subject to the Holding Company Act; 6 has adopted rules under the Securities Exchange Act governing accounting and auditing of securities brokers and dealers; 65 and has promulgated rules contained in a single comprehensive regulation, identified as Regulation S-X, which govern the form and content of financial statements filed in compliance with the several Acts. This regulation is supplemented by the Commission's Accounting Series Releases, of which 93 have so far been issued. These releases were inaugurated in 1937 and were designed as a program for making public, from time to time, opinions on accounting principles for the purpose of contributing to the development of uniform standards and practice in major accounting questions. The rules and regulations thus established, except for the uniform systems of accounts which are regulatory reports, prescribe accounting principles to be followed only in certain limited areas. In the large area of financial reporting not covered by such rules, the Commission's principal means of providing investors protection from inadequate financial reporting, fraudulent practices and over-reaching by management is by requiring a certificate of an independent public accountant based on an audit performed in accordance with generally accepted auditing standards which expresses an opinion as to whether the financial statements are presented fairly in conformity with accounting principles and practices which are recognized as sound and which have attained general acceptance.

The Securities Act provides, that the financial statements required to be made available to the public through filing with the Commission shall be certified by "an independent public or certified accountant." 67 The other three statutes permit the Commission to require that such statements be accompanied by a certificate of an independent public accountant, and the Commission's rules require, with minor excep

Sections 30, 31.

63 Sections 14, 15.

84 Uniform System of Accounts for Mutual Service Companies and Subsidiary Service Companies (effective August 1, 1936); Uniform System of Accounts for Public Utility Holding Companies (effective January 1, 1937; amended effective January 1, 1943; revised November 24, 1959). (Accounting Series Release No. 84).

Rule 17a-5 and Form X-17A-5 thereunder.

Adopted February 21, 1940 (Accounting Series Release No. 12); revised December 20, 1950 (Accounting Series Release No. 70).

e: Sections 7 and 10 (a) (Schedule A, pars. 25, 26).

es Securities Exchange Act, Section 13(a) (2); Investment Company Act, Section 30 (e); Holding Company Act, Section 14.

tions, that they be so certified. The value of certification by qualified accountants has been conceded for many years, but the requirement as to independence, long recognized and adhered to by some individual accountants, was for the first time authoritatively and explicitly introduced into law in 1933. The Commission's rules accept an accountant who is qualified to practice in his own state as qualified to practice before the Commission unless he has entered into disqualifying relationships with a particular client, such as becoming a promoter, underwriter, voting trustee, director, officer, employee, or stockholder; or, in rare cases, has demonstrated incompetence, subservience to the management, or has engaged in unethical or improper professional conduct. The Commission endeavors to encourage and foster the independence of the accountant in his relationships with his client so that he may better be able to perform the service to the public contemplated by the Congress in the various Acts.

The Commission had occasion during the year to issue for the first time an opinion " regarding the independence of a certifying accountant who also acts as counsel for the registrant. The Commission's opinion included the following statements:

Though owing a public responsibility, an attorney in acting as the client's advisor, defender, advocate and confidant enters into a personal relationship in which his principal concern is with the interests and rights of his client. The requirement of the Act of certification by an independent accountant, on the other hand, is intended to secure for the benefit of public investors the detached objectivity of a disinterested person. The certifying accountant must be one who is in no way connected with the business or its management and who does not have any relationship that might affect the independence which at times may require him to voice public criticisms of his client's accounting practices. In our opinion, the partner's relationship as attorney for the registrant here during the same period covered by his firm's certification disqualified him and the firm of which he was a partner from certifying registrant's financial statements as independent accountants.

The Commission is vigilant in its efforts to assure itself that the audits which it requires are performed by independent accountants; that the information contained in the financial reports represents full and fair disclosure and that appropriate auditing and accounting practices and standards have been followed in their preparation. In addition it recognizes that changes and new developments in financial and economic conditions affect the operations and financial status of the several thousand commercial and industrial companies required

6 See, for example, Rule 2-01 of Regulation S-X.

To See, for example, Securities Exchange Act Release No. 3073 (1941); 10 S.E.C. 982 (1942); Accounting Series Release No. 68 (1949); Accounting Series Release No. 82 (1959); and Accounting Series Release No. 88 (1961). See also Accounting Series Release Nos. 91 and 92 (1962) which are discussed at page 154, infra.

American Finance Company, Inc., Securities Act Release No. 4465 (March 19, 1962).

to file statements with the Commission and that accounting and auditing procedures cannot remain static and continue to serve well a dynamic economy. The Commission's accounting staff, therefore, studies the changes and new developments for the purpose of establishing and maintaining appropriate accounting and auditing policies, procedures and practices for the protection of investors. The primary responsibility for this program rests with the Chief Accountant of the Commission, who has general supervision with respect to accounting and auditing policies and their application.

Progress in these activities requires continuing contact and consultation between the staff and accountants both individually and through such representative groups as, among others, the American Accounting Association, the American Institute of Certified Public Accountants, the American Petroleum Institute, the Financial Analysts Federation, the Financial Executives Institute, and the National Association of Railroad and Utilities Commissioners, as well as many Government agencies. Recognizing the importance of cooperation in the formulation of accounting principles and practices, adequate disclosure and auditing procedures which will best serve the interests of investors, the American Institute of Certified Public Accountants, the Financial Analysts Federation and the Financial Executives Institute appoint committees which maintain liaison with the Commission's staff. The Commission on its part has authorized its Chief Accountant to continue to serve as a member of an advisory committee to the accounting principles board of the American Institute of Certified Public Accountants.

The many daily decisions to be made require the attention of some of the Chief Accountant's staff. These include questions raised by each of the operating divisions of the Commission, the regional offices, and the Commission. As a result of this day-to-day activity of the Commission and the need to keep abreast of current accounting problems, the Chief Accountant's staff continually reexamines accounting and auditing principles and practices. From time to time members of the staff are called upon to assist in field investigations, to participate in hearings and to review opinions insofar as they pertain to accounting matters.

Prefiling and other conferences, in person or by telephone, with officials of corporations, practicing accountants and others are also an important part of the work of the staff. Resolution of questions and problems in this manner saves registrants and their representatives both time and expense.

Many specific accounting and auditing problems are disclosed in the examination of financial statements required to be filed with the