the new employer. In view of the basic objective of improving standards, the Commission asked: "Would approval now give proper recognition to the nature of his violations? If standards are to be raised, can fraud once painfully established through extended proceedings be so swiftly ignored?" In remanding this case, the Commission stated that there should be a "penetrating review" of the employee's history by the prospective employer, the NASD and the Commission, and that the nature and activities of the firms with which he was associated could properly be taken into account in evaluating his training, experience and character.61 The other remanded case concerned an application filed by the Association seeking approval of the continuance of a member firm in NASD membership while employing Edgar R. D'Abre as a controlled person. D'Abre's registration with the NASD as a registered representative of another firm was revoked by the NASD in March 1961, because of certain irregularities, including "free-riding” and the "manufacture” of fictitious accounts and records in an effort to deceive his former employer and to conceal violations of NASD rules. "If we accept, as the NASD apparently did," the Commission stated, "the correctness of the original findings of the District Business Conduct Committee, it would follow that, insofar as the records reveal, D'Abre has never been candid with his former employer, his prospective employer, or the NASD. A securities firm must rely to a considerable extent on the willingness of responsible employees to disclose their activities accurately and forthrightly, if it is to properly discharge its important responsibilities of supervision. If D'Abre is unwilling to make such disclosures, even now, then it would appear doubtful that he fully appreciates the professional obligations to his employer and to the public that further participation in the securities field entails. If so, the necessary finding that it is in the 'public interest' to approve the continuance of a firm in membership with D'Abre as a controlled person can hardly be made. A much different record than the one now before us will be needed to warrant approval of the application." 62 Commission Review of NASD Disciplinary Action Section 15A (g) of the Act provides that disciplinary actions by the NASD are subject to review by the Commission on its own motion or on the timely application of any aggrieved person. This section also provides that the effectiveness of any penalty imposed by the NASD is automatically stayed pending determination in any matter which Securities Exchange Act Release No. 6798 (May 4, 1962). "Securities Exchange Act Release No. 6817 (June 8, 1962). comes before the Commission for review. Section 15A (h) of the Act defines the scope of the Commission's review in proceedings to review disciplinary action of the NASD. If the Commission finds that the disciplined person engaged in such acts or practices, or has omitted such acts, as found by the NASD and that such acts, practices, or omission to act are in violation of such rules of the Association as have been designated in the determination, and that such conduct was inconsistent with just and equitable principles of trade, the Commission must dismiss such proceedings unless it finds that the penalties imposed are excessive or oppressive, having due regard to the public interest, in which case the Commission must, by order, cancel or reduce the penalties. At the beginning of the fiscal year 15 such review cases were pending before the Commission. During the year 9 additional such petitions were filed, and decisions were issued in 9 cases, certain of which are discussed below, leaving 15 petitions pending at the year end. The Commission sustained disciplinary action by the NASD against First California Company. The NASD had found that First California had violated the Rules of Fair Practice, in that it had failed to make a bona fide public offering of shares of stock which it had acquired as a member of a selling group participating in a distribution of such stock. The NASD had fined the company $500 and assessed costs of $41.89 against it. The basic facts, which were not in dispute, showed that First California, as a selling group member participating in a public offering of Permanent Filter Corporation stock at $15 per share, was allotted 1,500 shares on May 7, 1959, and on that day sold 400 shares at the $15 offering price to its Employees Profit-Sharing Retirement Plan, an account in which its officers and employees had a beneficial interest. The stock was quoted on May 7 at 19 to 1912 and on the following day the high bid was 2012. Thus, on the basis of the low bid on May 7. there was a potential profit on the 400 shares of $1,600 exclusive of the price concession to members of the selling group. The shares were held in the account until August 10, when they were sold at prices of 1512 and 1534, representing a profit to the Plan of $22.50. The NASD rested its determination that its rules were violated solely on its finding that the amount of stock sold to the Plan. representing 26.6 percent of the 1,500-share allotment, was disproportionate to that sold to public investors. Thus, the sale was held to be in violation of the NASD's published interpretation with respect to "free-riding and withholding" in connection with public distributions of securities. This announced interpretation was to the effect that a member is obligated to make a bona fide public offering of securities acquired for distribution and that, among other things, sales to insiders, including accounts in which the member or its officers have an interest, in excess of their normal investment practice (unless otherwise provided in a prospectus), or withholding or refraining from making a public offering of all or any part of its participation to make an extra profit, are contrary to high standards of commercial honor and just and equitable principles of trade. With respect particularly to a practice of sales to such accounts primarily of new issues at a time when they are being quoted or sold above the offering price (so-called "hot issues"), and therefore may be resold at a profit, the NASD had pointed out that such a practice is questionable and should be the subject of careful consideration. A March 1959 clarification of the policy stated: ". . . it becomes apparent that allotments of a member's participation in a 'hot issue' to insider accounts (bona fide investments or other) in disproportionate amounts, as opposed to allotments to the public, would hardly indicate a genuine effort to sell such participation to public investors. Consideration should be given to the fairness of such ratios in the fulfillment of the member's obligation as a participant.” In its decision, representing its first ruling on the NASD's interpretation with respect to "free-riding" in connection with the distribution of a "hot issue," the Commission expressed agreement with the NASD position that the basic requirement under the NASD's "freeriding" interpretation that a bona fide public offering be made is violated, regardless of the investment history or normal investment practice of an insider account, if a sale of a "hot issue" is made to such an account in an amount which is disproportionate in comparison with the amount being offered to the public by the member. The effect of such withholding, the Commission observed, is "not only to give to the insiders the opportunity for a profit on the shares withheld, which appears highly likely under the circumstances, and thereby deprive public investors of such opportunity, but also to restrict the supply and tend to raise the market price further and enable the insiders to realize an increased profit upon subsequent sale of the shares retained by them." The Commission concluded that the NASD properly found that the sale by First California to its own Plan account of 26.6 percent of its allotment of Permanent Filter stock, at a time when the offering price of these shares was at least $1,600 less than the contemporaneous market price, was disproportionate in relation to the amount sold to public investors, and that the NASD rules had been violated.63 It "Securities Exchange Act Release No. 6586 (July 6, 1961). also found that the penalty imposed by the Association was not excessive or oppressive. The Commission sustained an order of the Association which suspended for 12 months the registration of Leonard H. Zigman as a registered representative. Zigman had appealed the action of the NASD, which found that he had engaged in a "serious breach" of his obligations to his employer and as a securities salesman, and that his conduct was inconsistent with just and equitable principles of trade. The violation of NASD rules involved the maintenance by Zigman of an account with his employer in a fictitious name so as to conceal its true identity and on two occasions allocating to such account portions of the employer's participation in public offerings being quoted at above the offering price and immediately thereafter disposing of the shares at a profit. The Commission rejected Zigman's explanation of his conduct as an "implausible excuse" and sustained the 12-month suspension as not excessive or oppressive." 64 Securities Exchange Act Release No. 6701 (January 5, 1962). PART VI ADMINISTRATION OF THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935 In administering the Public Utility Holding Company Act of 1935 the Commission regulates interstate public-utility holding company systems engaged in the electric utility business and/or in the retail distribution of gas. The Commission's jurisdiction also extends to natural gas pipeline companies and other nonutility companies which are subsidiaries of registered holding companies. Although the matters under the Act dealt with by the Commission and its staff embrace a variety of intricate and complex questions of law and fact generally involving more than one area of regulation, briefly there are three principal regulatory areas. The first covers those provisions of the Act, contained principally in Section 11(b) (1), which require the physical integration of public utility companies and functionally related properties of holding company systems and those provisions, contained principally in Section 11(b)(2), which require the simplification of intercorporate relationships and financial structures of holding company systems. The second covers the financing operations of registered holding companies and their subsidiaries, the acquisition and disposition of securities and properties, and certain accounting practices, servicing arrangements and intercompany transactions. The third includes the exemptive provisions of the Act, the provisions covering the status under the Act of persons and companies, and those regulating the right of a person affiliated with a public utility company to acquire securities resulting in a second such affiliation. Matters embraced within this area of regulation frequently come before the Commission and its staff. Many such matters do not result in formal proceedings and others are reflected in such proceedings only in an indirect manner when they are related to issues principally under one of the other areas of regulation. The Branch of Public Utility Regulation of the Commission's Division of Corporate Regulation performs the principal functions under the Act. It observes and examines problems which arise in 81 672175-63——7 |