CURRENT INFORMATION The Commission's rules promulgated under the Act require that the basic information contained in notifications of registration and in registration statements of investment companies be kept current, through periodic and other reports, except in cases of certain inactive unit trusts and face-amount companies. The following reports and documents were filed during the 1963 fiscal year: Annual reports---- Quarterly reports--- 530 300 Periodic reports to stockholders (containing financial statements) ------- 1,568 Copies of sales literature_--- 2,180 The foregoing statistics do not reflect the numerous filings of revised prospectuses by open-end mutual funds and unit investment trusts making a continuous offering of their securities. These prospectuses, which must be checked for compliance with the Act, are required to show material changes which have occurred in the operations of the companies since the last effective date of the prospectuses on file. In this respect registration statements under the Securities Act of 1933 covering securities of such companies are essentially different from registration statements relating to the usual type of corporate securities. APPLICATIONS AND PROCEEDINGS Under Section 6(c) of the Act, the Commission, by rules and regulations, upon its own motion or by order upon application, may exempt any person, security, or transaction from any provision of the Act if and to the extent that such exemption is necessary or appropriate in the public interest and consistent with the protection of investors and the purposes fairly intended by the policy and provisions of the Act. Other Sections, such as 6(d), 9(b), 10(f), 17(b), and 23(c), contain specific provisions and standards pursuant to which the Commission may grant exemptions from particular Sections of the Act or may approve certain types of transactions. Also, under certain provisions of Sections 2, 3, and 8 the Commission may determine the status of persons and companies under the Act. One of the principal activities of the Commission in its regulation of investment companies is the consideration of applications for orders under the Sections referred to. During the fiscal year, 238 applications filed under various Sections of the Investment Company Act were before the Commission. The Sections of the Act with which these applications were concerned and their disposition are shown in the following table: Applications filed with or acted upon by the Commission under the Investment Company Act of 1940 during the fiscal year ended June 30, 1963 Status and exemption 7(d). 8(1). 9, 10, 16... Registration of foreign investment companies. Regulation of affiliations of directors, officers, em- 12, 13, 14(a), 15... Regulation of functions and activities of investment 11, 25. 17. companies... Regulation of security exchange offers and reorgani- Regulation of transactions with affiliated persons.. 18, 19, 21, 22, 23. Requirements as to capital structures, loans, distri20, 30.. 28. butions and redemptions, and related matters.-Proxies, reports, and other documents reviewed for compliance.. Regulation of face-amount certificate companies... Total.. 12 18390 7625 4222 5 6 9 1 48 34 Some of the more significant matters in which applications were considered are summarized below: 3 The Commission's Annual Report for fiscal 1962 referred to applications pursuant to Section 2(a) (9) filed by shareholders of Fundamental Investors, Inc., Investors Mutual, Inc., and TelevisionElectronics Fund, Inc., registered open-end investment companies, alleging that certain directors of these companies who were represented to be unaffiliated with the respective investment advisers in fact had been and were now controlled by such investment advisers. Prior to ordering a hearing on the factual questions raised by the applications, the Commission directed that the parties and other interested persons file briefs with respect to certain specified common legal issues raised by the applications. Following oral argument on these issues, the Commission held that a shareholder of a registered investment company is an "interested person" within the meaning of Section 2(a) (9) with standing to file an application seeking a determination under that Section, that the Commission is empowered to determine whether or not a natural person is controlled even though control of a company is not at issue, and that a determination of status by the Commission pursuant to Section 2(a) (9) is not limited in application to the period of time subsequent to such a determination. However, since the same issues and parties were before courts of competent jurisdiction in pending suits brought prior to the filing of the instant applications, and there were no policy reasons why the Commission should decide these issues first, the Commission applied 3 28th Annual Report, p. 115. • Investment Company Act Release No. 3468 (April 13, 1962). the doctrine of comity and dismissed the applications without prejudice. On December 19, 1962, Randolph Phillips, a stockholder of Investors Mutual, Inc. and other registered mutual funds for which Investors Diversified Services, Inc. ("IDS"), also a registered investment company, serves as investment adviser, filed an application under Section 2(a) (9) of the Act requesting a determination that Bertin C. Gamble, Gamble-Skogmo, Inc. and General Outdoor Advertising Company, acting collectively (referred to in the application as the "Gamble Group"), either alone or in concert with John D. Murchison, Clint W. Murchison, Jr. and others (referred to as the "Murchison Group"), had acquired control of Alleghany Corporation and of IDS, about 47.5% of whose voting securities are owned by Alleghany. On January 2, 1963, the Commission ordered that a hearing be held with respect to these questions of control. On February 15, 1963, the Commission, upon the applications of IDS and Gamble-Skogmo, issued an order pursuant to Section 6(c) of the Act exempting all persons named in the application of Phillips from that part of Section 2(a) (9) of the Act which provides that if an application is not granted or denied within 60 days, the determination sought shall be deemed to have been temporarily granted pending final determination. The exemption was to remain in effect until May 18, 1963, subject to earlier termination. On February 15, 1963, IDS filed an application under Section 2(a) (9) seeking determinations that (a) Murchison Brothers; (b) Allan P. Kirby; (c) Kirby and certain associates; and (d) Murray D. Lincoln and/or companies controlled by or associated with him, controlled Alleghany and that Alleghany controlled IDS. This application was consolidated for purposes of hearing with the Phillips application.R On May 17, 1963, the Commission granted applications filed pursuant to Section 6 (c) of the Act by certain of the persons named in the IDS application seeking exemptions from the operation of the "60-day provision" of Section 2(a) (9). These exemptions were to remain in effect until final determination, subject to earlier modification or termination. The exemptions with respect to the Phillips application were extended so as to be co-extensive. The hearings in these consolidated proceedings were concluded after the close of the fiscal year. Investment Company Act Release No. 3596 (December 27, 1962). • Investment Company Act Release No. 3604. 7 Investment Company Act Release No. 3635. * Investment Company Act Release No. 3637 (February 20, 1963). • Investment Company Act Release No. 3699. On January 22, 1963, the Commission issued its opinion and order denying an application by The Prudential Life Insurance Company of America for exemption from the Act or, in the alternative, for exemption from certain provisions thereof.10 In its opinion the Commission found that Prudential established a separate fund to be invested in securities exclusively for the benefit and at the risk of purchasers of the variable annuity contracts Prudential proposes to sell. The Commission held that such fund was an investment company, required to be registered under the Act. The Commission granted in part and denied in part Prudential's alternative application requesting exemptions from various specific provisions of the Act. Prudential filed a petition in the Court of Appeals for the Third Circuit for review of the Commission's order, insofar as it held the separate fund to be an investment company required to be registered under the Act." Following the end of the fiscal year, the Court affirmed the order. The Commission granted an application by American Manufacturing Company, Inc., for an order under Section 3(b)(2) of the Act declaring that it was primarily engaged in a business or businesses other than that of investing in securities, either directly or (A) through majority-owned subsidiaries or (B) through controlled companies conducting similar types of businesses.12 In its decision, the Commission held that in determining primary business engagement under the statute, it could add to businesses in which the applicant engaged directly and through its majority-owned subsidiaries, the businesses engaged in through controlled companies conducting, as among themselves, similar types of businesses, irrespective of whether or not such businesses were of types similar to those engaged in by the applicant or its majority-owned subsidiaries, or to those of any controlled companies which it was not necessary to add in order to arrive at the primary business engagement. Pursuant to the Commission's order of April 12, 1962,13 hearings continued on an application filed by Growth Capital, Inc., a small business investment company, seeking to exempt conditionally C. B. McDonald, a director of Growth Capital and also the managing partner of McDonald & Company, an investment banking firm, from the provisions of Section 30 (f) of the Act which makes applicable to directors of closed-end investment companies the provisions of Section 16 of the Securities Exchange Act of 1934 with respect to insiders' transactions. The application was opposed by the Commission's Division of Corporate Regulation. 10 Investment Company Act Release No. 3620. 11 C.A. 3, No. 14,730. 12 Investment Company Act Release No. 3649 (March 11, 1963). 13 Investment Company Act Release No. 3467. PART X ADMINISTRATION OF THE INVESTMENT ADVISERS ACT OF 1940 The Investment Advisers Act of 1940 requires the registration of persons engaged for compensation in the business of advising others with respect to securities. Certain advisers are exempt from the requirement of registration, including those who advise only investment companies or insurance companies and those who, within the last 12 months, had fewer than 15 clients and who do not hold themselves out generally to the public as investment advisers. Furthermore, the registration requirements do not apply to an adviser whose investment advice is given only to persons resident in the state in which he maintains his principal place of business, as long as the advice does not concern securities listed on a national securities exchange or admitted to unlisted trading privileges on such an exchange. Section 206 of the Act, as amended in September 1960, prohibits an investment adviser from engaging in fraudulent, deceptive or manipulative acts or practices and gives the Commission authority, by rules and regulations, to define and to prescribe means reasonably designed to prevent such acts and practices.1 In accordance with this provision. the Commission, during the 1962 fiscal year, adopted Rule 206 (4)−1, effective January 1, 1962, which defines certain advertisements by investment advisers as fraudulent, deceptive or manipulative. During the 1963 fiscal year an informal program was instituted to secure compliance with Rule 206 (4)-1 by those investment advisers whose advertising continued to be objectionable. The cooperation of the investment advisers who were contacted has resulted in a marked reduction in the publication and distribution of advertising material violative of Rule 206 (4)-1. Investment advisers who also effect transactions as brokers and dealers must disclose any interest they may have in transactions effected for clients if acting as an investment adviser with regard to such transactions. The Act prohibits any investment adviser not exempt from registration from basing his compensation upon a share 1 In S.E.C. v. Capital Gains Research Bureau, Inc., an important action under the antifraud provisions of the Act as in effect prior to its amendment, the Supreme Court in December 1963 reversed lower court decisions denying the Commission's motion for a preliminary injunction. See pp. 112-113, infra. |